S-1/A 1 y88230a1sv1za.htm S-1/A sv1za
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As filed with the Securities and Exchange Commission on January 28, 2011
Registration No. 333-171270
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
 
 
 
CVR PARTNERS, LP
(Exact Name of Registrant as Specified in Its Charter)
 
         
Delaware
  2873   56-2677689
(State or Other Jurisdiction of
Incorporation or Organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)
 
2277 Plaza Drive, Suite 500
Sugar Land, Texas 77479
(281) 207-3200
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)
 
John J. Lipinski
2277 Plaza Drive, Suite 500
Sugar Land, Texas 77479
(281) 207-3200
(Name, Address, Including Zip Code, and Telephone Number, Including Area Code, of Agent for Service)
 
With a copy to:
 
             
Stuart H. Gelfond
Michael A. Levitt
Fried, Frank, Harris,
Shriver & Jacobson LLP
One New York Plaza
New York, New York 10004
(212) 859-8000
  Michael Rosenwasser
E. Ramey Layne
Vinson & Elkins L.L.P.
666 Fifth Avenue, 26th Floor
New York, New York 10103
(212) 237-0000
  Peter J. Loughran
Debevoise & Plimpton LLP
919 Third Avenue
New York, New York 10022
(212) 909-6000
  G. Michael O’Leary
Gislar R. Donnenberg
Andrews Kurth LLP
600 Travis, Suite 4200
Houston, Texas 77002
(713) 220-4200
 
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this Registration Statement.
 
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 (the “Securities Act”), check the following box.  o
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One):
 
             
Large accelerated filer o
  Accelerated filer o   Non-accelerated filer þ
(Do not check if a smaller reporting company)
  Smaller reporting company o
 
CALCULATION OF REGISTRATION FEE
 
             
      Proposed Maximum
     
Title of Each Class of
    Aggregate
    Amount of
Securities to be Registered     Offering Price(1)(2)     Registration Fee
Common units representing limited partner interests
    $200,000,000     $14,260(3)
             
 
(1) Includes offering price of common units which the underwriters have the option to purchase.
 
(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) of the Securities Act.
 
(3) Previously paid.
 
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
 


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The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
 
PROSPECTUS (Subject to Completion)
Dated January 28, 2011
 
Common Units
Representing Limited Partner Interests
 
(CVR PARTNERS LP LOGO)
 
CVR Partners, LP
 
 
This is the initial public offering of our common units representing limited partner interests.
 
Prior to this offering, there has been no public market for our common units. We anticipate that the initial public offering price for our common units will be between $      and $      per unit. We intend to apply to list our common units on the New York Stock Exchange under the symbol “UAN.”
 
 
 
We have granted the underwriters an option to purchase up to an additional      common units from us to cover over-allotments, if any, at the initial public offering price, less underwriting discounts and commissions, within 30 days from the date of this prospectus.
 
 
 
 
Investing in our common units involves risks. Please read “Risk Factors” beginning on page 19. These risks include the following:
 
  •  We may not have sufficient available cash to pay any quarterly distribution on our common units.
 
  •  The nitrogen fertilizer business is, and nitrogen fertilizer prices are, cyclical and highly volatile and have experienced substantial downturns in the past. Cycles in demand and pricing could potentially expose us to substantial fluctuations in our operating and financial results, and expose you to substantial volatility in our quarterly cash distributions and potential material reductions in the trading price of our common units.
 
  •  The amount of our quarterly cash distributions will be directly dependent on the performance of our business and will vary significantly both quarterly and annually. Unlike most publicly traded partnerships, we will not have a minimum quarterly distribution or employ structures intended to consistently maintain or increase distributions over time.
 
  •  We depend on CVR Energy, Inc., or CVR Energy, for the majority of our supply of petroleum coke, or pet coke, an essential raw material used in our operations. Any significant disruption in the supply of pet coke from CVR Energy could negatively impact our results of operations to the extent third-party pet coke is unavailable or available only at higher prices.
 
  •  We depend to a significant extent on CVR Energy and its senior management team to manage our business.
 
  •  Our general partner, an indirect wholly-owned subsidiary of CVR Energy, has fiduciary duties to its owner, CVR Energy, and the interests of CVR Energy may differ significantly from, or conflict with, the interests of our public common unitholders.
 
  •  Our unitholders have limited voting rights, are not entitled to elect our general partner or its directors, and cannot, at initial ownership levels, remove our general partner without the consent of CVR Energy.
 
  •  You will experience immediate and substantial dilution of $      per common unit in the net tangible book value of your common units.
 
  •  If we were treated as a corporation for U.S. federal income tax purposes, or if we were to become subject to entity-level taxation for state tax purposes, cash available for distribution to you would be substantially reduced.
 
  •  You will be required to pay taxes on your share of our income even if you do not receive any cash distributions from us.
 
 
 
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
 
 
 
 
         
   
Per Common Unit
 
Total
Initial Public Offering Price
  $   $
Underwriting Discounts and Commissions
  $   $
Proceeds Before Expenses to Us
  $   $
 
 
 
 
The underwriters expect to deliver the common units to purchasers on or about          , 2011.
 
 
 
 
Morgan Stanley Barclays Capital
 
 
 
 
The date of this prospectus is          , 2011.
 
 
 


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[pictures of nitrogen
fertilizer plant]


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Unaudited Pro Forma Condensed Consolidated Financial Statements
    P-1  
Audited Consolidated Financial Statements
    F-1  
Unaudited Condensed Consolidated Financial Statements
    F-33  
 EX-10.1
 EX-10.2
 EX-10.15
 EX-10.16
 EX-10.17
 EX-10.18
 EX-10.19
 EX-23.1
 EX-23.4
 
 
You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized anyone to provide you with additional or different information. If anyone provides you with additional, different or inconsistent information you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where an offer or sale is not permitted. You should assume the information appearing in this prospectus is accurate as of the date on the front cover page of this prospectus only. Our business, financial condition, results of operations and prospects may have changed since that date.
 
For investors outside the United States: We have not, and the underwriters have not, done anything that would permit this offering, or possession or distribution of this prospectus, in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of the common units and the distribution of this prospectus outside of the United States.
 
Industry and Market Data
 
The data included in this prospectus regarding the nitrogen fertilizer industry, including trends in the market and our position and the position of our competitors within the nitrogen fertilizer industry, is based on a variety of sources, including independent industry publications, government publications and other published independent sources, information obtained from customers, distributors, suppliers, trade and business organizations and publicly available information (including the reports and other information our competitors file with the SEC, which we did not participate in preparing and as to which we make no representation), as well as our good faith estimates, which have been derived from management’s knowledge and experience in the areas in which our business operates. Estimates of market size and relative positions in a market are difficult to develop and inherently uncertain. Accordingly, investors should not place undue weight on the industry and market share data presented in this prospectus. Any data sourced from Pike & Fischer’s ‘‘Green Markets’’ newsletter has been approved by BNA Subsidiaries, LLC and is re-used here with the express written permission of BNA Subsidiaries, LLC.


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PROSPECTUS SUMMARY
 
This summary highlights selected information contained elsewhere in this prospectus. You should carefully read the entire prospectus, including “Risk Factors” and the consolidated historical and unaudited pro forma financial statements and related notes included elsewhere in this prospectus, before making an investment decision. Unless otherwise indicated, the information in this prospectus assumes (i) an initial public offering price of $      per common unit (the mid-point of the price range set forth on the cover page of this prospectus) and (ii) that the underwriters do not exercise their option to purchase additional common units. References in this prospectus to “CVR Partners,” “we,” “our,” “us” or like terms refer to CVR Partners, LP and its consolidated subsidiary unless the context otherwise requires or where otherwise indicated. References in this prospectus to “CVR Energy” refer to CVR Energy, Inc. and its consolidated subsidiaries other than CVR Partners unless the context otherwise requires or where otherwise indicated, and references to “CVR GP” or “our general partner” refer to CVR GP, LLC, which, following the closing of this offering, will be an indirect wholly-owned subsidiary of CVR Energy. The transactions being entered into in connection with this offering are referred to herein as the “Transactions” and are described on page 50 of this prospectus. You should also see the “Glossary of Selected Terms” contained in Appendix B for definitions of some of the terms we use to describe our business and industry and other terms used in this prospectus.
 
CVR Partners, LP
 
Overview
 
We are a Delaware limited partnership formed by CVR Energy to own, operate and grow our nitrogen fertilizer business. Strategically located adjacent to CVR Energy’s refinery in Coffeyville, Kansas, our nitrogen fertilizer manufacturing facility is the only operation in North America that utilizes a petroleum coke, or pet coke, gasification process to produce nitrogen fertilizer (based on data provided by Blue, Johnson & Associates, Inc., or Blue Johnson). Our facility includes a 1,225 ton-per-day ammonia unit, a 2,025 ton-per-day urea ammonium nitrate, or UAN, unit, and a gasifier complex with built-in redundancy having a capacity of 84 million standard cubic feet per day. We upgrade a majority of the ammonia we produce to higher margin UAN fertilizer, an aqueous solution of urea and ammonium nitrate which has historically commanded a premium price over ammonia. In 2009, we produced 435,184 tons of ammonia, of which approximately 64% was upgraded into 677,739 tons of UAN.
 
We intend to expand our existing asset base and utilize the experience of CVR Energy’s management team to execute our growth strategy. Following completion of this offering, we intend to move forward with a significant two-year plant expansion designed to increase our UAN production capacity by 400,000 tons, or approximately 50%, per year. CVR Energy, a New York Stock Exchange listed company, will indirectly own our general partner and approximately     % of our outstanding common units following this offering.
 
The primary raw material feedstock utilized in our nitrogen fertilizer production process is pet coke, which is produced during the crude oil refining process. In contrast, substantially all of our nitrogen fertilizer competitors use natural gas as their primary raw material feedstock. Historically, pet coke has been significantly less expensive than natural gas on a per ton of fertilizer produced basis and pet coke prices have been more stable when compared to natural gas prices. As a result, our nitrogen fertilizer business has historically been the lowest cost producer and marketer of ammonia and UAN fertilizers in North America. During the past five years, over 70% of the pet coke utilized by our plant was produced and supplied by CVR Energy’s crude oil refinery pursuant to a renewable long-term agreement.
 
We generated net sales of $141.1 million, net income of $39.5 million and EBITDA of $43.8 million for the nine months ended September 30, 2010. We generated net sales of $187.4 million, $263.0 million and $208.4 million, net income of $24.1 million, $118.9 million and $57.9 million and EBITDA of $65.0 million, $134.9 million and $67.6 million, for the years ended December 31, 2007, 2008 and 2009, respectively. For a reconciliation of EBITDA to net income, see footnote 6 under “— Summary Historical and Pro Forma Consolidated Financial Information.”


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Our Competitive Strengths
 
Pure-Play Nitrogen Fertilizer Company.  We believe that as a pure-play nitrogen fertilizer company we are well positioned to benefit from positive trends in the nitrogen fertilizer market in general and the UAN market in particular. We derive substantially all of our revenue from the production and sale of nitrogen fertilizers, primarily in the agricultural market, whereas most of our competitors are meaningfully diversified into other crop nutrients, such as phosphate and potassium, and make significant sales into the lower-margin industrial market. For example, our largest public competitors, Agrium, Potash Corporation, Yara (excluding blended fertilizers) and CF Industries (after giving effect to its acquisition of Terra Industries) derived 90%, 88%, 46% and 30% of their sales in 2009, respectively, from the sale of products other than nitrogen fertilizer used in the agricultural market. Nitrogen is an essential element for plant growth because it is the primary determinant of crop yield. Nitrogen fertilizer production is a higher margin, growing business with more stable demand compared to the production of the two other essential crop nutrients, potassium and phosphate, because nitrogen must be reapplied annually. During the last five years, ammonia and UAN prices averaged $457 and $284 per ton, respectively, which is a substantial increase from the average prices of $273 and $157 per ton, respectively, during the prior five-year period.
 
The following chart shows the consolidated impact of a $25 per ton change in UAN pricing and a $50 per ton change in ammonia pricing on our EBITDA based on the assumptions described herein:
 
Illustrative EBITDA Sensitivity to UAN and Ammonia Prices(1)
 
 
(1) The price sensitivity analysis in this table is based on the assumptions described in our forecast of EBITDA for the year ended December 31, 2011, including 158,024 ammonia tons sold, 671,400 UAN tons sold, cost of product sold of $45.5 million, direct operating expenses of $84.0 million and selling, general and administrative expenses of $12.8 million. This table is presented to show the sensitivity of our 2011 EBITDA forecast of $129.7 million to specified changes in ammonia and UAN prices. Spot ammonia and UAN prices were $625 and $333, respectively, per ton as of December 9, 2010. There can be no assurance that we will achieve our 2011 EBITDA forecast or any of the specified levels of EBITDA indicated above, or that UAN and ammonia pricing will achieve any of the levels specified above. See “Our Cash Distribution Policy and Restrictions on Distribution — Forecasted Available Cash” for a reconciliation of our 2011 EBITDA forecast to our 2011 net income forecast and a discussion of the assumptions underlying our forecast.
 
(2) Actual pricing for the last twelve months ended September 30, 2010.
 
(3) Actual pricing for the year ended December 31, 2009.
 
(4) Forecasted pricing for the year ended December 31, 2011.


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High Margin Nitrogen Fertilizer Producer.  Our unique combination of pet coke raw material usage, premium product focus and transportation cost advantage has helped to keep our costs low and has enabled us to generate high margins. In 2008, 2009 and the first nine months of 2010, our operating margins were 44%, 23% and 21%, respectively. Over the last five years, U.S. natural gas prices at the Henry Hub pricing point have averaged $6.30 per MMbtu. The following chart shows our cost advantage for the year ended December 31, 2009 as compared to an illustrative natural gas-based competitor in the U.S. Gulf Coast:
 
CVR Partners Cost Advantage over an Illustrative U.S. Gulf Coast Natural Gas-Based Competitor
 
                                                                       
    ($ per ton, unless otherwise noted)
    CVR Partners’ Ammonia Cost Advantage     CVR Partners’ UAN Cost Advantage
Illustrative
  Illustrative Competitor   CVR Partners     Illustrative Competitor   CVR Partners
Natural Gas
      Total
            Competitor
           
Delivered
      Competitor
      Ammonia
    Ammonia
  Total
      UAN
Price
  Gas
  Ammonia
  Ammonia
  Cost
    cost per ton
  Competitor
  UAN
  Cost
($/MMbtu)   Cost(a)   Costs(b)(c)(e)   Costs(d)(e)   Advantage     UAN(f)   UAN Costs(c)(e)(g)   Costs(e)(f)(h)   Advantage
                                                                       
$ 4.00     $ 132     $ 193     $ 189     $ 4       $ 65     $ 98     $ 87     $ 11  
                                                                       
  4.50       149       210       189       21         72       105       87       18  
                                                                       
  5.50       182       243       189       54         85       118       87       31  
                                                                       
  6.50       215       276       189       87         99       132       87       45  
                                                                       
  7.50       248       309       189       120         113       146       87       58  
                                                                       
                                                                       
 
(a) Assumes 33 MMbtu of natural gas to produce a ton of ammonia, based on Blue Johnson.
(b) Assumes $27 per ton operating cost for ammonia, based on Blue Johnson.
(c) Assumes incremental $34 per ton transportation cost from the U.S. Gulf Coast to the mid-continent for ammonia and $15 per ton for UAN, based on recently published rail and pipeline tariffs.
(d) CVR Partners’ ammonia cost consists of $30 per ton of ammonia in pet coke costs and $159 per ton of ammonia in operating costs for the year ended December 31, 2009.
(e) The cost data included in this chart for an illustrative competitor assumes property taxes, whereas the cost data included for CVR Partners includes the cost of our property taxes other than property taxes currently in dispute. CVR Partners is currently disputing the amount of property taxes which it has been required to pay in recent years. For information on the effect of disputed property taxes on our actual production costs, see product production cost data and footnote 8 under “— Summary Historical and Pro Forma Consolidated Financial Information.” See also “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors Affecting Comparability — Fertilizer Plant Property Taxes.”
(f) Each ton of UAN contains approximately 0.41 tons of ammonia. Illustrative competitor UAN cost per ton data removes $34 per ton in transportation costs for ammonia.
(g) Assumes $18 per ton cash conversion cost to UAN, based on Blue Johnson.
(h) CVR Partners’ UAN conversion cost was $13 per ton for the year ended December 31, 2009. $7.80 per ton of ammonia production costs are not transferable to UAN costs.
 
  •  Cost Advantage.  We operate the only nitrogen fertilizer production facility in North America that uses pet coke gasification to produce nitrogen fertilizer, which has historically given us a cost advantage over competitors that use natural gas-based production methods. Our costs are approximately 72% fixed and relatively stable, which allows us to benefit directly from increases in nitrogen fertilizer prices. Our variable costs consist primarily of pet coke. Our pet coke costs have historically remained relatively stable, averaging $26 per ton since we began operating under our current structure in October 2007, with a high of $31 per ton for 2008 and a low of $19 per ton for the nine months ended September 30, 2010. Third-party pet coke is readily available to us, and we have paid an average cost of $41 per ton over the last five years. Substantially all of our nitrogen fertilizer competitors use natural gas as their primary raw material feedstock (with natural gas constituting approximately 85-90% of their production costs based on historical data) and are therefore heavily impacted by changes in natural gas prices.
 
  •  Premium Product Focus.  We focus on producing higher margin, higher growth UAN nitrogen fertilizer. Historically, UAN has accounted for over 80% of our product tons sold. UAN commands a price premium over ammonia and urea on a nutrient ton basis. Unlike ammonia and urea, UAN is easier to apply and can be applied throughout the growing season to crops directly or mixed with crop protection products, which reduces energy and labor costs for farmers. In addition, UAN is safer to handle than ammonia. The convenience of UAN fertilizer has led to an 8.5% increase in its consumption from 2000 through 2010


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  (estimated) on a nitrogen content basis, whereas ammonia fertilizer consumption decreased by 2.4% for the same period, according to data supplied by Blue Johnson. We plan to expand our UAN upgrading capacity so that we have the flexibility to upgrade all of our ammonia production into UAN.
 
  •  Strategically Located Asset.  We and other competitors located in the U.S. farm belt share a transportation cost advantage when compared to our out-of-region competitors in serving the U.S. farm belt agricultural market. We are therefore able to cost-effectively sell substantially all of our products in the higher margin agricultural market, whereas, according to publicly available information prepared by our competitors, a significant portion of our competitors’ revenues are derived from the lower margin industrial market. Because the U.S. farm belt consumes more nitrogen fertilizer than is produced in the region, it must import nitrogen fertilizer from the U.S. Gulf Coast as well as from international producers. Accordingly, U.S. farm belt producers may offer nitrogen fertilizers at prices that factor in the transportation costs of out-of-region producers without having incurred such costs. We estimate that our plant enjoys a transportation cost advantage of approximately $25 per ton over competitors located in the U.S. Gulf Coast, based on a comparison of our actual transportation costs and recently published rail and pipeline tariffs. Our location on Union Pacific’s main line increases our transportation cost advantage. Our products leave the plant either in trucks for direct shipment to customers (in which case we incur no transportation cost) or in railcars for destinations located principally on the Union Pacific Railroad. We do not incur any intermediate transfer, storage, barge freight or pipeline freight charges.
 
Highly Reliable Pet Coke Gasification Fertilizer Plant with Low Capital Requirements.  Our nitrogen fertilizer plant was completed in 2000 and, based on data supplied by Blue Johnson, is the newest nitrogen fertilizer plant built in North America. Our nitrogen fertilizer facility was built with the dual objectives of being low cost and reliable. Our facility has low maintenance costs, with maintenance capital expenditures ranging between approximately $4 million and $7 million per year from 2006 through 2009. We have configured the plant to have a dual-train gasifier complex to provide redundancy and improve our reliability. In 2009, our gasifier had an on-stream factor, which is defined as the total number of hours operated divided by the total number of hours in the reporting period, in excess of 97%. Prior to our plant’s construction in 2000, the last ammonia plant built in the United States was constructed in 1977.
 
Experienced Management Team.  We are managed by CVR Energy’s management pursuant to a services agreement. Mr. John J. Lipinski, Chief Executive Officer, has over 38 years of experience in the refining and chemicals industries. Mr. Stanley A. Riemann, Chief Operating Officer, has over 37 years of experience in the fertilizer and energy industries. Mr. Edward A. Morgan, Chief Financial Officer, has over 18 years of finance experience. Mr. Kevan Vick, Executive Vice President and Fertilizer General Manager, has over 34 years of experience in the nitrogen fertilizer industry. Mr. Vick leads a senior operations team whose members have an average of 22 years of experience in the fertilizer industry. Most of the members of our senior operations team were on-site during the construction and startup of our nitrogen fertilizer plant in 2000. CVR Energy’s management team will spend a portion of its time managing CVR Energy and a portion of its time managing our business. See “Management — Executive Officers and Directors.”
 
Our Business Strategy
 
Our objective is to maximize quarterly distributions to our unitholders by operating our nitrogen fertilizer facility in an efficient manner, maximizing production time and growing profitably within the nitrogen fertilizer industry. We intend to accomplish this objective through the following strategies:
 
  •  Pay Out All of the Available Cash We Generate Each Quarter.  Our strategy is to pay out all of the available cash we generate each quarter. We expect that holders of our common units will receive a greater percentage of our operating cash flow when compared to our publicly traded corporate competitors across the broader fertilizer sector, such as Agrium, CF Industries, Potash Corporation and Yara. These companies have provided an average dividend yield of 0.1%, 0.3%, 0.3% and 1.6%, respectively, as of November 30, 2010, compared to our expected distribution yield of     % (calculated by dividing our forecasted distribution for the year ending December 31, 2011 of $      per common unit by the mid-point of the price range on the cover page of this prospectus). The board of directors of our general partner will adopt a policy under which


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we will distribute all of the available cash we generate each quarter, as described in “Our Cash Distribution Policy and Restrictions On Distributions” on page 56. We do not intend to maintain excess distribution coverage for the purpose of maintaining stability or growth in our quarterly distributions or otherwise to reserve cash for future distributions. Unlike many publicly traded partnerships that have economic general partner interests and incentive distribution rights that entitle the general partner to receive disproportionate percentages of cash distributions as distributions increase (often up to 50%), our general partner will have a non-economic interest and no incentive distribution rights, and will therefore not be entitled to receive cash distributions. Our common unitholders will receive 100% of our cash distributions.
 
  •  Pursue Growth Opportunities.  We are well positioned to grow organically, through acquisitions, or both.
 
  •  Expand UAN Capacity.  We intend to move forward with an expansion of our nitrogen fertilizer plant that is designed to increase our UAN production capacity by 400,000 tons, or approximately 50%, per year. This approximately $135 million expansion, for which approximately $31 million had been spent as of December 31, 2010, will allow us the flexibility to upgrade all of our ammonia production when market conditions favor UAN. We expect that this additional UAN production capacity will improve our margins, as UAN has historically been a higher margin product than ammonia. We expect that the UAN expansion will take 18 to 24 months to complete and will be funded with approximately $      million of the net proceeds from this offering and $     million of term loan borrowings.
 
  •  Selectively Pursue Accretive Acquisitions.  We intend to evaluate strategic acquisitions within the nitrogen fertilizer industry and to focus on disciplined and accretive investments that leverage our core strengths. We have no agreements, understandings or financings with respect to any acquisitions at the present time.
 
  •  Continue to Focus on Safety and Training.  We intend to continue our focus on safety and training in order to increase our facility’s reliability and maintain our facility’s high on-stream availability. In 2009, our nitrogen fertilizer plant had a recordable incident rate of 1.76, which was our lowest recordable incident rate in over five years. The recordable incident rate reflects the number of recordable incidents per 200,000 hours worked.
 
  •  Continue to Enhance Efficiency and Reduce Operating Costs.  We are currently engaged in certain projects that will reduce overall operating costs, increase efficiency and utilize byproducts to generate incremental revenue. For example, we have built a low btu gas recovery pipeline between our nitrogen fertilizer plant and CVR Energy’s crude oil refinery, which will allow us to sell off-gas, a byproduct produced by our fertilizer plant, to the refinery. We expect to start up this pipeline no later than the first quarter of 2011. In addition, we have formulated a plan and signed a letter of intent to sell up to 850,000 tons per year of high purity carbon dioxide, or CO2, produced by our nitrogen fertilizer plant to oil and gas exploration and production companies or pursue an economic means of geologically sequestering such CO2.
 
  •  Provide High Level of Customer Service.  We focus on providing our customers with the highest level of service. The nitrogen fertilizer plant has demonstrated consistent levels of production while operating at close to full capacity. Substantially all of our product shipments are targeted to freight advantaged destinations located in the U.S. farm belt, allowing us to quickly and reliably service customer demand. Furthermore, we maintain our own fleet of railcars, which helps us ensure prompt delivery. As a result of these efforts, many of our largest customers have been our customers since the plant came online in 2000. We believe a continued focus on customer service will allow us to maintain relationships with existing customers and grow our business.
 
Industry Overview
 
Nitrogen, phosphate and potassium are the three essential nutrients plants need to grow for which there are no substitutes. Nitrogen is the primary determinant of crop yield. Nutrients are depleted in soil over time and therefore must be replenished through fertilizer use. Nitrogen is the most quickly depleted nutrient and so must be replenished every year, whereas phosphate and potassium can be retained in soil for up to three years.
 
Global demand for fertilizers is driven primarily by population growth, dietary changes in the developing world and increased consumption of bio-fuels. According to the International Fertilizer Industry Association, or


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IFA, from 1972 to 2010, global fertilizer demand grew 2.1% annually. Fertilizer use is projected to increase by 45% between 2005 and 2030 to meet global food demand, according to a study funded by the Food and Agriculture Organization of the United Nations. Currently, the developed world uses fertilizer more intensively than the developing world, but sustained economic growth in emerging markets is increasing food demand and fertilizer use. As an example, China’s grain production increased 31% between September 2001 and September 2009, but still failed to keep pace with increases in demand, prompting China to double its grain imports over the same period, according to the United States Department of Agriculture, or USDA.
 
World grain demand has increased 11% over the last five years leading to a tight grain supply environment and significant increases in grain prices, which is highly supportive of fertilizer prices. During the last five years, corn prices in Illinois have averaged $3.63 per bushel, an increase of 72% above the average price of $2.11 per bushel during the preceding five years. Recently, this trend has continued as U.S. 30-day corn and wheat futures increased 48% and 49%, respectively, from June 1, 2010 to December 9, 2010. During this same time period, Southern Plains ammonia prices increased 74% from $360 per ton to $625 per ton and corn belt UAN prices increased 32% from $252 per ton to $333 per ton. At existing grain prices and prices implied by futures markets, farmers are expected to generate substantial profits, leading to relatively inelastic demand for fertilizers. Nitrogen fertilizer prices have decoupled from their historical correlation with natural gas prices and are now driven primarily by demand dynamics. Nitrogen fertilizer prices in the U.S. farm belt are typically higher than U.S. Gulf Coast prices because it is costly to transport nitrogen fertilizer.
 
The United States is the world’s largest exporter of coarse grains, accounting for 46% of world exports and 31% of total world production, according to the USDA. The United States is also the world’s third largest consumer of nitrogen fertilizer and historically the world’s largest importer of nitrogen fertilizer, importing approximately 46% of its nitrogen fertilizer needs. North American producers have a significant and sustainable cost advantage over European producers that export to the U.S. market. Over the last decade, the North American nitrogen fertilizer market has experienced significant consolidation through plant closures and corporate consolidation.
 
The convenience of UAN fertilizer has led to an 8.5% increase in its consumption from 2000 through 2010 (estimated) on a nitrogen content basis, whereas ammonia fertilizer consumption decreased by 2.4% for the same period, according to data supplied by Blue Johnson. Unlike ammonia and urea, UAN can be applied throughout the growing season and can be applied in tandem with pesticides and fungicides, providing farmers with flexibility and cost savings. UAN is not widely traded globally because it is costly to transport (it is approximately 65% water), therefore there is little risk to U.S. UAN producers of an influx of UAN from foreign imports. As a result of these factors, UAN commands a premium price to urea and ammonia, on a nitrogen equivalent basis.
 
For more information about the nitrogen fertilizer industry, see “Industry Overview.”
 
About Us
 
CVR Partners, LP was formed in Delaware in June 2007. Our principal executive offices are located at 2277 Plaza Drive, Suite 500, Sugar Land, Texas 77479, and our telephone number is (281) 207-3200. Upon completion of this offering, our website address will be www.cvrpartners.com. Information contained on our website or CVR Energy’s website is not incorporated by reference into this prospectus and does not constitute a part of this prospectus. We expect to make our periodic reports and other information filed with or furnished to the Securities and Exchange Commission, or SEC, available, free of charge, through our website, as soon as reasonably practicable after those reports and other information are electronically filed with or furnished to the SEC.
 
Risk Factors
 
An investment in our common units involves risks associated with our business, our partnership structure and the tax characteristics of our common units. These risks are described under “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.” You should carefully consider these risk factors together with all other information included in this prospectus.
 
In particular, due to our relationship with CVR Energy, adverse developments or announcements concerning CVR Energy could materially adversely affect our business. The ratings assigned to CVR Energy’s senior secured indebtedness are below investment grade.


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THE OFFERING
 
Issuer CVR Partners, LP, a Delaware limited partnership.
 
Common units offered to the public            common units.
 
Option to purchase additional common units from us
If the underwriters exercise their option to purchase additional common units in full, we will issue           common units to the public.
 
Units outstanding after this offering            common units (excluding           common units which are subject to issuance under our long-term incentive plan). If the underwriters do not exercise their option to purchase additional common units, we will issue           common units to Coffeyville Resources upon the option’s expiration. If and to the extent the underwriters exercise their option to purchase additional common units, the number of common units purchased by the underwriters pursuant to such exercise will be issued to the public and the remainder, if any, will be issued to Coffeyville Resources. Accordingly, the exercise of the underwriters’ option will not affect the total number of common units outstanding.
 
In addition, our general partner will own a non-economic general partner interest in us which will not entitle it to receive distributions.
 
Use of Proceeds We estimate that the net proceeds to us in this offering, after deducting underwriting discounts and commissions and the estimated expenses of this offering, will be approximately $      million (based on an assumed initial public offering price of $      per common unit, the mid-point of the price range set forth on the cover page of this prospectus). We intend to use:
 
 • approximately $      million to make a special distribution to Coffeyville Resources in order to, among other things, fund the offer to purchase Coffeyville Resources’ senior secured notes required upon consummation of this offering;
 
 • approximately $26.0 million to purchase (and subsequently extinguish) the incentive distribution rights, or IDRs, currently owned by our general partner;
 
 • approximately $      million to pay financing fees resulting from our new credit facility; and
 
 • the balance for general partnership purposes, including approximately $      million to fund the intended UAN expansion.
 
If the underwriters exercise their option to purchase           additional common units in full, the additional net proceeds would be approximately $      million (based upon the mid-point of the price range set forth on the cover page of this prospectus). The net proceeds from any exercise of such option will be paid as a special distribution to Coffeyville Resources. See “Use of Proceeds.”
 
Cash Distributions Within 45 days after the end of each quarter, beginning with the first full quarter following the closing date of this offering, we expect to make cash distributions to unitholders of record on the applicable record date.


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The board of directors of our general partner will adopt a policy pursuant to which we will distribute all of the available cash we generate each quarter. Available cash for each quarter will be determined by the board of directors of our general partner following the end of such quarter. We expect that available cash for each quarter will generally equal our cash flow from operations for the quarter, less cash needed for maintenance capital expenditures, debt service and other contractual obligations, and reserves for future operating or capital needs that the board of directors of our general partner deems necessary or appropriate. We do not intend to maintain excess distribution coverage for the purpose of maintaining stability or growth in our quarterly distribution or otherwise to reserve cash for distributions, and we do not intend to incur debt to pay quarterly distributions. We expect to finance substantially all of our growth externally, either by debt issuances or additional issuances of equity.
 
Because our policy will be to distribute all the available cash we generate each quarter, without reserving cash for future distributions or borrowing to pay distributions during periods of low cash flow from operations, our unitholders will have direct exposure to fluctuations in the amount of cash generated by our business. We expect that the amount of our quarterly distributions, if any, will vary based on our operating cash flow during such quarter. Our quarterly cash distributions, if any, will not be stable and will vary from quarter to quarter as a direct result of variations in our operating performance and cash flow caused by fluctuations in the price of nitrogen fertilizers and in the amount of forward and prepaid sales we have in any given quarter. Such variations in the amount of our quarterly distributions may be significant. Unlike most publicly traded partnerships, we will not have a minimum quarterly distribution or employ structures intended to consistently maintain or increase distributions over time. The board of directors of our general partner may change our distribution policy at any time and from time to time. Our partnership agreement does not require us to pay cash distributions on a quarterly or other basis.
 
Based upon our forecast for the year ending December 31, 2011, and assuming the board of directors of our general partner declares distributions in accordance with our cash distribution policy, we expect that our aggregate distributions for the year ending December 31, 2011 will be approximately $115.5 million. See “Our Cash Distribution Policy and Restrictions on Distributions — Forecasted Available Cash.” Unanticipated events may occur which could materially adversely affect the actual results we achieve during the forecast period. Consequently, our actual results of operations, cash flows, need for reserves and financial condition during the forecast period may vary from the forecast, and such variations may be material. Prospective investors are cautioned not to place undue reliance on our forecast and should make their own independent assessment of our future results of operations, cash flows and financial condition. In addition, the board of directors of our general partner may be required to or elect to eliminate our distributions at any time during periods of reduced prices or demand for our nitrogen fertilizer products, among other reasons. Please see “Risk Factors.”


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From time to time we make prepaid sales, whereby we receive cash during one quarter in respect of product to be produced and sold in a future quarter but we do not record revenue in respect of the related product sales until the quarter when product is delivered. All cash on our balance sheet in respect of prepaid sales on the date of the closing of this offering will not be distributed to Coffeyville Resources at the closing of this offering but will be reserved for distribution to holders of common units.
 
For a calculation of our ability to make distributions to unitholders based on our pro forma results of operations for the twelve months ended September 30, 2010, please read “Our Cash Distribution Policy and Restrictions on Distributions” on page 56. Our pro forma available cash generated during the four quarter period ended September 30, 2010 would have been $39.3 million. See “Our Cash Distribution Policy and Restrictions on Distributions — Pro Forma Available Cash.”
 
Incentive Distribution Rights None.
 
Subordination Period None.
 
Issuance of additional units Our partnership agreement authorizes us to issue an unlimited number of additional units and rights to buy units for the consideration and on the terms and conditions determined by the board of directors of our general partner without the approval of our unitholders. See “Common Units Eligible for Future Sale” and “The Partnership Agreement — Issuance of Additional Partnership Interests.”
 
Limited voting rights Our general partner manages and operates us. Unlike the holders of common stock in a corporation, you will have only limited voting rights on matters affecting our business. You will have no right to elect our general partner or our general partner’s directors on an annual or other continuing basis. Our general partner may be removed by a vote of the holders of at least 662/3% of the outstanding common units, including any common units owned by our general partner and its affiliates (including Coffeyville Resources, a wholly-owned subsidiary of CVR Energy), voting together as a single class. Upon completion of this offering, our general partner and its affiliates, through Coffeyville Resources, will own an aggregate of approximately     % of our outstanding common units (approximately  % if the underwriters exercise their option to purchase additional common units in full). This will give Coffeyville Resources the ability to prevent removal of our general partner. See “The Partnership Agreement — Voting Rights.”
 
Call right If at any time our general partner and its affiliates (including Coffeyville Resources) own more than  % of the common units, our general partner will have the right, but not the obligation, to purchase all, but not less than all, of the common units held by public unitholders at a price not less than their then-current market price, as calculated pursuant to the terms of our Partnership Agreement. See “The Partnership Agreement — Call Right.”
 
Estimated ratio of taxable income to distributions
We estimate that if you own the common units you purchase in this offering through the record date for distributions for the period


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ending          , you will be allocated, on a cumulative basis, an amount of U.S. federal taxable income for that period that will be     % or less of the cash distributed to you with respect to that period. For example, if you receive an annual distribution of $      per common unit, we estimate that your average allocable U.S. federal taxable income per year will be no more than $      per common unit. See “Material U.S. Federal Income Tax Consequences — Tax Consequences of Common Unit Ownership — Ratio of Taxable Income to Distributions.”
 
Material U.S. Federal Income Tax Consequences
For a discussion of material U.S. federal income tax consequences that may be relevant to prospective unitholders, see “Material U.S. Federal Income Tax Consequences.”
 
Exchange Listing We intend to apply to list our common units on the New York Stock Exchange under the symbol “UAN.”
 
Risk Factors See “Risk Factors” beginning on page 19 of this prospectus for a discussion of factors that you should carefully consider before deciding to invest in our common units.
 
Depending on market conditions at the time of pricing of this offering and other considerations, we may sell fewer or more common units than the number set forth on the cover page of this prospectus.


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Organizational Structure
 
The following chart provides a simplified overview of our organizational structure after giving effect to the completion of the Transactions, as defined under “The Transactions and Our Structure and Organization” on page 50:
 
(ORGANIZATIONAL STRUCTURE)
 
 
(1)  Assumes the underwriters do not exercise their option to purchase additional common units, which would instead be issued to Coffeyville Resources upon the option’s expiration. If and to the extent the underwriters exercise their option to purchase additional common units, the units purchased pursuant to such exercise will be issued to the public and the remainder, if any, will be issued to Coffeyville Resources. Accordingly, the exercise of the underwriters’ option will not affect the total number of units outstanding.


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Summary Historical and Pro Forma Consolidated Financial Information
 
The summary consolidated financial information presented below under the caption Statement of Operations Data for the years ended December 31, 2007, 2008 and 2009, and the summary consolidated financial information presented below under the caption Balance Sheet Data as of December 31, 2008 and 2009, have been derived from our audited consolidated financial statements included elsewhere in this prospectus, which consolidated financial statements have been audited by KPMG LLP, independent registered public accounting firm. The summary consolidated financial information presented below under the caption Statement of Operations Data for the nine months ended September 30, 2009 and 2010 and the summary consolidated financial information presented below under the caption Balance Sheet Data as of September 30, 2010 are derived from our unaudited consolidated financial statements included elsewhere in this prospectus which, in the opinion of management, include all adjustments consisting only of normal, recurring adjustments necessary for a fair presentation of the results for the unaudited interim period.
 
Our consolidated financial statements included elsewhere in this prospectus include certain costs of CVR Energy that were incurred on our behalf. These costs, which are reflected in selling, general and administrative expenses (exclusive of depreciation and amortization) and direct operating expenses (exclusive of depreciation and amortization), are billed to us pursuant to a services agreement entered into in October 2007 that is a related party transaction. For the period of time prior to the services agreement, the consolidated financial statements include an allocation of costs and certain other amounts in order to account for a reasonable share of expenses, so that the accompanying consolidated financial statements reflect substantially all of our costs of doing business. The amounts charged or allocated to us are not necessarily indicative of the costs that we would have incurred had we operated as a stand-alone company for all periods presented.
 
The summary unaudited pro forma consolidated financial information presented below under the caption Statement of Operations Data for the year ended December 31, 2009 and for the nine months ended September 30, 2010 and the summary unaudited pro forma consolidated financial information presented below under the caption Balance Sheet Data as of September 30, 2010 have been derived from our unaudited pro forma condensed consolidated financial statements included elsewhere in this prospectus. The pro forma consolidated statement of operations data for the year ended December 31, 2009 and the nine months ended September 30, 2010 assumes that we were in existence as a separate entity throughout this period and that the Transactions (as defined on page 50) occurred on January 1, 2009 and that the due from affiliate balance was distributed to Coffeyville Resources on January 1, 2009. The unaudited pro forma balance sheet data for the nine months ended September 30, 2010 assumes that the Transactions occurred on September 30, 2010 and that the due from affiliate balance was distributed to Coffeyville Resources on January 1, 2009. The pro forma financial data is not comparable to our historical financial data. A more complete explanation of the pro forma data can be found in our unaudited pro forma condensed consolidated financial statements and accompanying notes included elsewhere in this prospectus.
 
The historical data presented below has been derived from financial statements that have been prepared using accounting principles generally accepted in the United States, or GAAP, and the pro forma data presented below has been derived from the “Unaudited Pro Forma Condensed Consolidated Financial Statements” included elsewhere in this prospectus. This data should be read in conjunction with, and is qualified in its entirety by reference to, the financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included elsewhere in this prospectus.


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    Historical       Pro Forma  
    Nine Months Ended
      Nine Months Ended
 
    September 30,       September 30,  
    2009     2010       2010  
    (unaudited)       (unaudited)  
    (dollars in millions, except per unit data and as otherwise indicated)  
Statement of Operations Data:
                         
Net sales
  $ 169.0     $ 141.1       $ 141.1  
Cost of product sold(1)
    34.6       27.7         27.7  
Direct operating expenses(1)(2)
    64.4       60.7         60.7  
Selling, general and administrative expenses(1)(2)
    14.1       8.8         8.8  
Depreciation and amortization(4)
    14.0       13.9         13.9  
                           
Operating income
  $ 41.9     $ 30.0       $ 30.0  
Other income (expense)(5)
    6.2       9.5         (0.1 )
Interest (expense) and other financing costs
                  (5.3 )
                           
Income before income taxes
  $ 48.1     $ 39.5       $ 24.6  
Income tax expense
                   
                           
Net income
  $ 48.1     $ 39.5       $ 24.6  
Pro forma net income per common unit, basic and diluted
                             
Pro forma number of common units, basic and diluted
                                 
Financial and Other Data:
                         
Cash flows provided by operating activities
    75.1       56.6            
Cash flows (used in) investing activities
    (11.7 )     (3.8 )          
Cash flows (used in) financing activities
    (60.8 )     (29.5 )          
EBITDA(6)
    55.9       43.8         43.8  
Capital expenditures for property, plant and equipment
    11.7       3.8         3.8  
Key Operating Data:
                         
Product pricing (plant gate) (dollars per ton)(7):
                         
Ammonia
  $ 318     $ 305       $ 305  
UAN
    221       180         180  
Product production cost (exclusive of depreciation expense) (dollars per ton)(8):
                         
Ammonia
  $ 214.45     $ 196.80            
UAN
    97.76       96.03            
Pet coke cost (dollars per ton)(9):
                         
Third party
  $ 37     $ 40       $ 40  
CVR Energy
    28       12         12  
Production (thousand tons):
                         
Ammonia (gross produced)(10)
    323.4       322.9         322.9  
Ammonia (net available for sale)(10)
    117.3       117.9         117.9  
UAN
    501.2       500.5         500.5  
On-stream factors(11):
                         
Gasifier
    96.8 %     95.8 %       95.8 %
Ammonia
    95.9 %     94.6 %       94.6 %
UAN
    93.3 %     92.2 %       92.2 %
 


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    Historical       Pro Forma  
    Year Ended
    Year Ended
    Year Ended
      Year Ended
 
    December 31,     December 31,     December 31,       December 31,  
    2007     2008     2009       2009  
                        (unaudited)  
    (dollars in millions, except per unit data and as otherwise indicated)  
Statement of Operations Data:
                                 
Net sales
  $ 187.4     $ 263.0     $ 208.4       $ 208.4  
Cost of product sold(1)
    33.1       32.6       42.2         42.2  
Direct operating expenses (exclusive of depreciation and amortization)(1)(2)
    66.7       86.1       84.5         84.5  
Selling, general and administrative expenses (exclusive of depreciation and amortization)(1)(2)
    20.4       9.5       14.1         14.1  
Net costs associated with flood(3)
    2.4                      
Depreciation and amortization(4)
    16.8       18.0       18.7         18.7  
                                   
Operating income
  $ 48.0     $ 116.8     $ 48.9       $ 48.9  
Other income (expense)(5)
    0.2       2.1       9.0          
Interest (expense) and other financing costs
    (23.6 )                   (7.1 )
Gain (loss) on derivatives
    (0.5 )                    
                                   
Income before income taxes
  $ 24.1     $ 118.9     $ 57.9       $ 41.8  
Income tax expense
                         
                                   
Net income
  $ 24.1     $ 118.9     $ 57.9       $ 41.8  
Pro forma net income per common unit, basic and diluted
                                 
Pro forma number of common units, basic and diluted
                                 
Financial and Other Data:
                                 
Cash flows provided by operating activities
    46.5       123.5       85.5            
Cash flows (used in) investing activities
    (6.5 )     (23.5 )     (13.4 )          
Cash flows (used in) financing activities
    (25.5 )     (105.3 )     (75.8 )          
EBITDA(6)
    65.0       134.9       67.6         67.6  
Capital expenditures for property, plant and equipment
    6.5       23.5       13.4         13.4  
Key Operating Data:
                                 
Product pricing (plant gate) (dollars per ton)(7):
                                 
Ammonia
  $ 376     $ 557     $ 314       $ 314  
UAN
    209       303       198         198  
Product production cost (exclusive of depreciation expense) (dollars per ton)(8):
                                 
Ammonia
  $ 170.74     $ 246.39     $ 206.92            
UAN
    76.97       96.78       94.92            
Pet coke cost (dollars per ton)(9):
                                 
Third party
    49       39       37         37  
CVR Energy
    17       30       22         22  
Production (thousand tons):
                                 
Ammonia (gross produced)(10)
    326.7       359.1       435.2         435.2  
Ammonia (net available for sale)(10)
    91.8       112.5       156.6         156.6  
UAN
    576.9       599.2       677.7         677.7  
On-stream factors(11):
                                 
Gasifier
    90.0 %     87.8 %     97.4 %       97.4 %
Ammonia
    87.7 %     86.2 %     96.5 %       96.5 %
UAN
    78.7 %     83.4 %     94.1 %       94.1 %

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    Historical       Pro Forma  
                Nine Months
      Nine Months
 
    Year Ended
    Year Ended
    Ended
      Ended
 
    December 31,     December 31,     September 30,       September 30,  
    2008     2009     2010       2010  
                (unaudited)       (unaudited)  
    (in millions)  
Balance Sheet Data:
                                 
Cash and cash equivalents
  $ 9.1     $ 5.4     $ 28.8       $ 132.9  
Working capital
    60.4       135.5       187.2         130.3  
Total assets
    499.9       551.5       595.7         541.8  
Total debt including current portion
                        125.0  
Partners’ capital
    458.8       519.9       560.7         381.7  
 
(1) Amounts shown are exclusive of depreciation and amortization
(2) Our direct operating expenses (exclusive of depreciation and amortization) and selling, general and administrative expenses (exclusive of depreciation and amortization) for the nine months ended September 30, 2009 and 2010 and for the years ended December 31, 2007, 2008 and 2009 include a charge related to CVR Energy’s share-based compensation expense allocated to us by CVR Energy for financial reporting purposes in accordance with Financial Accounting Standards Board, or FASB, Accounting Standards Codification, or ASC, 718 Compensation — Stock Compensation, or ASC 718. These charges will continue to be attributed to us following the closing of this offering. We are not responsible for the payment of cash related to any share-based compensation allocated to us by CVR Energy. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies — Share-Based Compensation.” The charges were:
 
                                                           
    Historical       Pro Forma  
                      Nine Months
            Nine Months
 
    Year Ended
    Year Ended
    Year Ended
    Ended
      Year Ended
    Ended
 
    December 31,     December 31,     December 31,     September 30,       December 31,     September 30,  
    2007     2008     2009     2009     2010       2009     2010  
                      (unaudited)       (unaudited)  
    (in millions)                      
Direct operating expenses (exclusive of depreciation and amortization)
  $ 1.2     $ (1.6 )   $ 0.2     $ 0.6     $ 0.2       $ 0.2     $ 0.2  
Selling, general and administrative expenses (exclusive of depreciation and amortization)
    9.7       (9.0 )     3.0       5.2       1.1         3.0       1.1  
                                                           
Total
  $ 10.9     $ (10.6 )   $ 3.2     $ 5.8     $ 1.3       $ 3.2     $ 1.3  
                                                           
 
(3) Total gross costs recorded as a result of the flood damage to our nitrogen fertilizer plant for the year ended December 31, 2007 were approximately $5.8 million, including approximately $0.8 million recorded for depreciation for temporarily idle facilities, $0.7 million for internal salaries and $4.3 million for other repairs and related costs. An insurance receivable of approximately $3.3 million was also recorded for the year ended December 31, 2007 for the probable recovery of such costs under CVR Energy’s insurance policies.
 
(4) Depreciation and amortization is comprised of the following components as excluded from direct operating expenses and selling, general and administrative expenses and as included in net costs associated with flood:
 


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    Historical       Pro Forma  
                      Nine Months
            Nine Months
 
    Year Ended
    Year Ended
    Year Ended
    Ended
      Year Ended
    Ended
 
    December 31,     December 31,     December 31,     September 30,       December 31,     September 30,  
    2007     2008     2009     2009     2010       2009     2010  
                      (unaudited)       (unaudited)  
    (in millions)                
Depreciation and amortization excluded from direct operating expenses
  $ 16.8     $ 18.0     $ 18.7     $ 14.0     $ 13.9       $ 18.7     $ 13.9  
Depreciation and amortization excluded from selling, general and administrative expenses
                                           
Depreciation included in net costs associated with flood
    0.8                                        
                                                           
Total depreciation
and amortization
  $ 17.6     $ 18.0     $ 18.7     $ 14.0     $ 13.9       $ 18.7     $ 13.9  
                                                           
 
(5) Other income (expense) is comprised of the following components included in our consolidated statement of operations:
 
                                                           
    Historical       Pro Forma  
    Year
    Year
    Year
    Nine Months
            Nine Months
 
    Ended
    Ended
    Ended
    Ended
      Year Ended
    Ended
 
    December 31,     December 31,     December 31,     September 30,       December 31,     September 30,  
    2007     2008     2009     2009     2010       2009     2010  
                      (unaudited)       (unaudited)  
    (in millions)                
Interest income(a)
  $ 0.3     $ 2.0     $ 9.0     $ 6.2     $ 9.6       $      —     $  
Loss on extinguishment of debt
    (0.2 )                                      
Other income (expense)
    0.1       0.1                   (0.1 )             (0.1 )
                                                           
Other income (expense)
  $ 0.2     $ 2.1     $ 9.0     $ 6.2     $ 9.5       $     $ (0.1 )
                                                           
  ­ ­
 
(a) Interest income for the years ended December 31, 2008 and 2009 and the nine months ended September 30, 2009 and 2010 is primarily attributable to a due from affiliate balance owed to us by Coffeyville Resources as a result of affiliate loans. Prior to the closing of this offering, the due from affiliate balance will be distributed to Coffeyville Resources. Accordingly, such amounts will no longer be owed to us.

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(6) EBITDA is defined as net income plus interest expense and other financing costs, income tax expense and depreciation and amortization, net of interest income.
 
We present EBITDA because it is a material component in our calculation of available cash. In addition, EBITDA is used as a supplemental financial measure by management and by external users of our financial statements, such as investors and commercial banks, to assess:
 
   •  the financial performance of our assets without regard to financing methods, capital structure or historical cost basis; and
 
   •  our operating performance and return on invested capital compared to those of other publicly traded limited partnerships, without regard to financing methods and capital structure.
 
EBITDA should not be considered an alternative to net income, operating income, net cash provided by operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP. EBITDA may have material limitations as a performance measure because it excludes items that are necessary elements of our costs and operations. In addition, EBITDA presented by other companies may not be comparable to our presentation, since each company may define these terms differently.
 
 A reconciliation of our net income to EBITDA is as follows:
 
                                                         
    Historical     Pro Forma  
    Year
    Year
    Year
                Nine Months
 
    Ended
    Ended
    Ended
    Nine Months Ended
    Year Ended
    Ended
 
    December 31,     December 31,     December 31,     September 30,     December 31,     September 30,  
    2007     2008     2009     2009     2010     2009     2010  
                      (unaudited)     (unaudited)  
    (in millions)  
 
Net income
  $ 24.1     $ 118.9     $ 57.9     $ 48.1     $ 39.5     $ 41.8     $ 24.6  
Add:
                                                       
Interest expense and other financing costs
    23.6                               7.1       5.3  
Interest income
    (0.3 )     (2.0 )     (9.0 )     (6.2 )     (9.6 )            
Income tax expense
                                         
Depreciation and amortization
    17.6       18.0       18.7       14.0       13.9       18.7       13.9  
                                                         
EBITDA
  $ 65.0     $ 134.9     $ 67.6     $ 55.9     $ 43.8     $ 67.6     $ 43.8  
                                                         
 
(7) Plant gate price per ton represents net sales less freight costs and hydrogen revenue (from hydrogen sales to CVR Energy’s refinery) divided by product sales volume in tons in the reporting period. Plant gate price per ton is shown in order to provide a pricing measure that is comparable across the fertilizer industry.
 
 
(8) Product production cost per ton (exclusive of depreciation expense) includes the total amount of operating expenses incurred during the production process (including raw material costs) in dollars per product ton divided by the total number of tons produced. This amount includes the full amount of property taxes paid in each period. CVR Partners is currently disputing the amount of property taxes which it has been required to pay in recent years. Excluding the amount of property tax which CVR Partners is disputing, (i) for the nine months ended September 30, 2009 and 2010, the product production cost per ton (exclusive of depreciation expense) for ammonia would have been $194.82 and $170.88, respectively, and for UAN would have been $89.69 and $85.42, respectively, (ii) for the year ended December 31, 2009, the product production cost per ton (exclusive of depreciation expense) for ammonia would have been $188.70 and for UAN would have been $87.44, and (iii) for the year ended December 31, 2008, the product production cost per ton (exclusive of depreciation expense) for ammonia would have been $222.37 and for UAN would have been $86.89. For a discussion of the property tax dispute, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Factors Affecting Comparability — Fertilizer Plant Property Taxes.” We have not included product production costs for the year ended December 31, 2007, as the costs are not comparable and therefore we do not believe the information is meaningful to an investor.
 
 
(9) We use 1.1 tons of pet coke to produce 1.0 ton of ammonia.


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(10) The gross tons produced for ammonia represent the total ammonia produced, including ammonia produced that was upgraded into UAN. The net tons available for sale represent the ammonia available for sale that was not upgraded into UAN.
 
(11) On-stream factor is the total number of hours operated divided by the total number of hours in the reporting period. Excluding the impact of the Linde, Inc., or Linde, air separation unit outage in 2009, the on-stream factors for the nine months ended September 30, 2009 would have been 99.4% for gasifier, 98.5% for ammonia and 95.8% for UAN. Excluding the impact of the Linde air separation unit outage in 2010, the on-stream factors for the nine months ended September 30, 2010 would have been 97.7% for gasifier, 96.7% for ammonia and 94.3% for UAN. Excluding the Linde air separation unit outage in 2009, the on-stream factors would have been 99.3% for gasifier, 98.4% for ammonia and 96.1% for UAN for the year ended December 31, 2009. Excluding the turnaround performed in 2008 the on-stream factors would have been 91.7% for gasifier, 90.2% for ammonia and 87.4% for UAN for the year ended December 31, 2008. Excluding the impact of the flood in 2007 the on-stream factors would have been 94.6% for gasifier, 92.4% for ammonia and 83.9% for UAN for the year ended December 31, 2007.


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RISK FACTORS
 
You should carefully consider each of the following risks and all of the information set forth in this prospectus before deciding to invest in our common units. If any of the following risks and uncertainties develops into an actual event, our business, financial condition, cash flows or results of operations could be materially adversely affected. In that case, we might not be able to pay distributions on our common units, the trading price of our common units could decline, and you could lose all or part of your investment. Although many of our business risks are comparable to those faced by a corporation engaged in a similar business, limited partner interests are inherently different from the capital stock of a corporation and involve additional risks described below.
 
Risks Related to Our Business
 
We may not have sufficient available cash to pay any quarterly distribution on our common units. For the twelve months ended September 30, 2010, on a pro forma basis, our annual distribution would have been $      per unit, significantly less than the $      per unit distribution we project that we will be able to pay for the year ended December 31, 2011.
 
We may not have sufficient available cash each quarter to enable us to pay any distributions to our common unitholders. Furthermore, our partnership agreement does not require us to pay distributions on a quarterly basis or otherwise. For the twelve months ended September 30, 2010, on a pro forma basis, our annual distribution would have been $      per unit, significantly less than the $      per unit distribution we project that we will to be able to pay for the year ended December 31, 2011. Our expected aggregate annual distribution amount for the year 2011 is based on an assumed increase in the average sales prices of ammonia and UAN for the year 2011 over September 2010 prices of 72% and 50%, respectively. If our price assumptions prove to be inaccurate, our actual annual distribution for 2011 will be significantly lower than our expected 2011 annual distribution, or we may not be able to pay a distribution at all. The amount of cash we will be able to distribute on our common units principally depends on the amount of cash we generate from our operations, which is directly dependent upon the operating margins we generate, which have been volatile historically. Our operating margins are significantly affected by the market-driven UAN and ammonia prices we are able to charge our customers and our pet coke-based gasification production costs, as well as seasonality, weather conditions, governmental regulation, unscheduled maintenance or downtime at our facilities and global and domestic demand for nitrogen fertilizer products, among other factors. In addition:
 
  •  Our partnership agreement will not provide for any minimum quarterly distribution and our quarterly distributions, if any, will be subject to significant fluctuations directly related to the cash we generate after payment of our fixed and variable expenses due to the nature of our business.
 
  •  The amount of distributions we make, if any, and the decision to make any distribution at all will be determined by the board of directors of our general partner, whose interests may differ from those of our common unitholders. Our general partner has limited fiduciary and contractual duties, which may permit it to favor its own interests or the interests of CVR Energy to the detriment of our common unitholders.
 
  •  The new credit facility that we expect to enter into upon the closing of this offering, and any credit facility or other debt instruments we enter into in the future, may limit the distributions that we can make. In addition, we expect that our new credit facility will, and any future credit facility may, contain financial tests and covenants that we must satisfy. Any failure to comply with these tests and covenants could result in the lenders prohibiting distributions by us.
 
  •  The amount of available cash for distribution to our unitholders depends primarily on our cash flow, and not solely on our profitability, which is affected by non-cash items. As a result, we may make distributions during periods when we record losses and may not make distributions during periods when we record net income.
 
  •  The actual amount of available cash will depend on numerous factors, some of which are beyond our control, including UAN and ammonia prices, our operating costs, global and domestic demand for nitrogen fertilizer products, fluctuations in our working capital needs, and the amount of fees and expenses incurred by us.


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  •  Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, or Delaware Act, we may not make a distribution to our limited partners if the distribution would cause our liabilities to exceed the fair value of our assets.
 
For a description of additional restrictions and factors that may affect our ability to make cash distributions, see “Our Cash Distribution Policy and Restrictions on Distributions.”
 
The amount of our quarterly cash distributions, if any, will vary significantly both quarterly and annually and will be directly dependent on the performance of our business. Unlike most publicly traded partnerships, we will not have a minimum quarterly distribution or employ structures intended to consistently maintain or increase distributions over time.
 
Investors who are looking for an investment that will pay regular and predictable quarterly distributions should not invest in our common units. We expect our business performance will be more seasonal and volatile, and our cash flows will be less stable, than the business performance and cash flows of most publicly traded partnerships. As a result, our quarterly cash distributions will be volatile and are expected to vary quarterly and annually. Unlike most publicly traded partnerships, we will not have a minimum quarterly distribution or employ structures intended to consistently maintain or increase distributions over time. The amount of our quarterly cash distributions will be directly dependent on the performance of our business, which has been volatile historically as a result of volatile nitrogen fertilizer and natural gas prices, and seasonal and global fluctuations in demand for nitrogen fertilizer products. Because our quarterly distributions will be subject to significant fluctuations directly related to the cash we generate after payment of our fixed and variable expenses, future quarterly distributions paid to our unitholders will vary significantly from quarter to quarter and may be zero. Given the seasonal nature of our business, we expect that our unitholders will have direct exposure to fluctuations in the price of nitrogen fertilizers. In addition, from time to time we make prepaid sales, whereby we receive cash in respect of product to be delivered in a future quarter but do not record revenue in respect of such sales until product is delivered. The cash from prepaid sales increases our operating cash flow in the quarter when the cash is received.
 
The board of directors of our general partner may modify or revoke our cash distribution policy at any time at its discretion.
 
The board of directors of our general partner will adopt a cash distribution policy pursuant to which we will distribute all of the available cash we generate each quarter to unitholders of record on a pro rata basis. However, the board may change such policy at any time at its discretion and could elect not to make distributions for one or more quarters. Our partnership agreement does not require us to make any distributions at all. Accordingly, investors are cautioned not to place undue reliance on the permanence of such a policy in making an investment decision. Any modification or revocation of our cash distribution policy could substantially reduce or eliminate the amounts of distributions to our unitholders.
 
None of the proceeds of this offering will be available to pay distributions.
 
We will pay a substantial portion of the proceeds from this offering, including all proceeds from the exercise of the underwriters’ over-allotment option, after deducting underwriting discounts and commissions, to our direct parent, Coffeyville Resources. In addition, we intend to use net proceeds from this offering that we retain to fund our planned UAN expansion. Consequently, none of the proceeds from this offering will be available to pay distributions to the public unitholders. See “Use of Proceeds.”
 
The assumptions underlying the forecast of available cash that we include in “Our Cash Distribution Policy and Restrictions on Distributions — Forecasted Available Cash” are inherently uncertain and are subject to significant business, economic, regulatory and competitive risks and uncertainties that could cause actual results to differ materially from those forecasted.
 
Our forecast of available cash set forth in “Our Cash Distribution Policy and Restrictions on Distributions — Forecasted Available Cash” includes our forecast of results of operations and available cash for the year ending December 31, 2011. The forecast has been prepared by the management of CVR Energy on our behalf. Neither our


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independent registered public accounting firm nor any other independent accountants have examined, compiled or performed any procedures with respect to the forecast, nor have they expressed any opinion or any other form of assurance on such information or its achievability, and they assume no responsibility for the forecast. The assumptions underlying the forecast are inherently uncertain and are subject to significant business, economic, regulatory and competitive risks and uncertainties, including those discussed in this section, that could cause actual results to differ materially from those forecasted. If the forecasted results are not achieved, we would not be able to pay the forecasted annual distribution, in which event the market price of the common units may decline materially. Our actual results may differ materially from the forecasted results presented in this prospectus. In addition, based on our historical results of operations, which have been volatile, our annual distribution for the twelve months ended September 30, 2010, on a pro forma basis, would have been significantly less than the annual distribution we project that we will be able to pay for the year ended December 31, 2011. Investors should review the 2011 forecast of our results of operations together with the other information included elsewhere in this prospectus, including “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
The pro forma available cash information for the twelve months ended September 30, 2010 which we include in this prospectus does not necessarily reflect the actual cash that would have been available.
 
We have included in this prospectus pro forma available cash information for the twelve months ended September 30, 2010, which indicates the amount of cash that we would have had available for distribution during that period on a pro forma basis. This pro forma information is based on numerous estimates and assumptions, but our financial performance, had the Transactions (as defined on page 50 of this prospectus) occurred at the beginning of such twelve-month period, could have been materially different from the pro forma results. Accordingly, investors should review the unaudited pro forma information, including the related footnotes, together with the other information included elsewhere in this prospectus, including “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Our actual results may differ, possibly materially, from those presented in the pro forma available cash information.
 
The nitrogen fertilizer business is, and nitrogen fertilizer prices are, cyclical and highly volatile and have experienced substantial downturns in the past. Cycles in demand and pricing could potentially expose us to significant fluctuations in our operating and financial results, and expose you to substantial volatility in our quarterly cash distributions and potential material reductions in the trading price of our common units.
 
We are exposed to fluctuations in nitrogen fertilizer demand in the agricultural industry. These fluctuations historically have had and could in the future have significant effects on prices across all nitrogen fertilizer products and, in turn, our financial condition, cash flows and results of operations, which could result in significant volatility or material reductions in the price of our common units or an inability to make quarterly cash distributions on our common units.
 
Nitrogen fertilizer products are commodities, the price of which can be highly volatile. The prices of nitrogen fertilizer products depend on a number of factors, including general economic conditions, cyclical trends in end-user markets, supply and demand imbalances, and weather conditions, which have a greater relevance because of the seasonal nature of fertilizer application. If seasonal demand exceeds our projections, our customers may acquire nitrogen fertilizer products from our competitors, and our profitability will be negatively impacted. If seasonal demand is less than we expect, we will be left with excess inventory that will have to be stored or liquidated.
 
Demand for nitrogen fertilizer products is dependent on demand for crop nutrients by the global agricultural industry. Nitrogen-based fertilizers are currently in high demand, driven by a growing world population, changes in dietary habits and an expanded use of corn for the production of ethanol. Supply is affected by available capacity and operating rates, raw material costs, government policies and global trade. A decrease in nitrogen fertilizer prices would have a material adverse effect on our business, cash flow and ability to make distributions.


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The costs associated with operating our nitrogen fertilizer plant are largely fixed. If nitrogen fertilizer prices fall below a certain level, we may not generate sufficient revenue to operate profitably or cover our costs and our ability to make distributions will be adversely impacted.
 
Our nitrogen fertilizer plant has largely fixed costs compared to natural gas-based nitrogen fertilizer plants. As a result, downtime, interruptions or low productivity due to reduced demand, adverse weather conditions, equipment failure, a decrease in nitrogen fertilizer prices or other causes can result in significant operating losses. Declines in the price of nitrogen fertilizer products could have a material adverse effect on our results of operation and financial condition. Declines in the price of nitrogen fertilizer products could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions. Unlike our competitors, whose primary costs are related to the purchase of natural gas and whose costs are therefore largely variable, we have largely fixed costs that are not dependent on the price of natural gas because we use pet coke as the primary feedstock in our nitrogen fertilizer plant.
 
A decline in natural gas prices could impact our relative competitive position when compared to other nitrogen fertilizer producers.
 
Most nitrogen fertilizer manufacturers rely on natural gas as their primary feedstock, and the cost of natural gas is a large component of the total production cost for natural gas-based nitrogen fertilizer manufacturers. The dramatic increase in nitrogen fertilizer prices in recent years was not the direct result of an increase in natural gas prices, but rather the result of increased demand for nitrogen-based fertilizers due to historically low stocks of global grains and a surge in the prices of corn and wheat, the primary crops in our region. This increase in demand for nitrogen-based fertilizers has created an environment in which nitrogen fertilizer prices have disconnected from their traditional correlation with natural gas prices. A decrease in natural gas prices would benefit our competitors and could disproportionately impact our operations by making us less competitive with natural gas-based nitrogen fertilizer manufacturers. A decline in natural gas prices could impair our ability to compete with other nitrogen fertilizer producers who utilize natural gas as their primary feedstock, and therefore have a material adverse impact on the trading price of our common units. In addition, if natural gas prices in the United States were to decline to a level that prompts those U.S. producers who have permanently or temporarily closed production facilities to resume fertilizer production, this would likely contribute to a global supply/demand imbalance that could negatively affect nitrogen fertilizer prices and therefore have a material adverse effect on our results of operations, financial condition, cash flows, and ability to make cash distributions.
 
Any decline in U.S. agricultural production or limitations on the use of nitrogen fertilizer for agricultural purposes could have a material adverse effect on the market for nitrogen fertilizer, and on our results of operations, financial condition and ability to make cash distributions.
 
Conditions in the U.S. agricultural industry significantly impact our operating results. The U.S. agricultural industry can be affected by a number of factors, including weather patterns and field conditions, current and projected grain inventories and prices, domestic and international demand for U.S. agricultural products and U.S. and foreign policies regarding trade in agricultural products.
 
State and federal governmental policies, including farm and biofuel subsidies and commodity support programs, as well as the prices of fertilizer products, may also directly or indirectly influence the number of acres planted, the mix of crops planted and the use of fertilizers for particular agricultural applications. Developments in crop technology, such as nitrogen fixation, the conversion of atmospheric nitrogen into compounds that plants can assimilate, could also reduce the use of chemical fertilizers and adversely affect the demand for nitrogen fertilizer. In addition, from time to time various state legislatures have considered limitations on the use and application of chemical fertilizers due to concerns about the impact of these products on the environment.


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A major factor underlying the current high level of demand for our nitrogen-based fertilizer products is the expanding production of ethanol. A decrease in ethanol production, an increase in ethanol imports or a shift away from corn as a principal raw material used to produce ethanol could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions.
 
A major factor underlying the current high level of demand for our nitrogen-based fertilizer products is the expanding production of ethanol in the United States and the expanded use of corn in ethanol production. Ethanol production in the United States is highly dependent upon a myriad of federal and state legislation and regulations, and is made significantly more competitive by various federal and state incentives. Such incentive programs may not be renewed, or if renewed, they may be renewed on terms significantly less favorable to ethanol producers than current incentive programs. Studies showing that expanded ethanol production may increase the level of greenhouse gases in the environment may reduce political support for ethanol production. The elimination or significant reduction in ethanol incentive programs, such as the 45 cents per gallon ethanol tax credit and the 54 cents per gallon ethanol import tariff, could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions.
 
Further, most ethanol is currently produced from corn and other raw grains, such as milo or sorghum — especially in the Midwest. The current trend in ethanol production research is to develop an efficient method of producing ethanol from cellulose-based biomass, such as agricultural waste, forest residue, municipal solid waste and energy crops (plants grown for use to make biofuels or directly exploited for their energy content). This trend is driven by the fact that cellulose-based biomass is generally cheaper than corn, and producing ethanol from cellulose-based biomass would create opportunities to produce ethanol in areas that are unable to grow corn. Although current technology is not sufficiently efficient to be competitive, new conversion technologies may be developed in the future. If an efficient method of producing ethanol from cellulose-based biomass is developed, the demand for corn may decrease significantly, which could reduce demand for our nitrogen fertilizer products and have a material adverse effect on our results of operations, financial condition and ability to make cash distributions.
 
Nitrogen fertilizer products are global commodities, and we face intense competition from other nitrogen fertilizer producers.
 
Our business is subject to intense price competition from both U.S. and foreign sources, including competitors operating in the Persian Gulf, the Asia-Pacific region, the Caribbean, Russia and the Ukraine. Fertilizers are global commodities, with little or no product differentiation, and customers make their purchasing decisions principally on the basis of delivered price and availability of the product. Furthermore, in recent years the price of nitrogen fertilizer in the United States has been substantially driven by pricing in the global fertilizer market. We compete with a number of U.S. producers and producers in other countries, including state-owned and government-subsidized entities. Some competitors have greater total resources and are less dependent on earnings from fertilizer sales, which makes them less vulnerable to industry downturns and better positioned to pursue new expansion and development opportunities. Competitors utilizing different corporate structures may be better able to withstand lower cash flows than we can as a limited partnership. Our competitive position could suffer to the extent we are not able to expand our own resources either through investments in new or existing operations or through acquisitions, joint ventures or partnerships. An inability to compete successfully could result in the loss of customers, which could adversely affect our sales and profitability, and our ability to make cash distributions.
 
Adverse weather conditions during peak fertilizer application periods may have a material adverse effect on our results of operations, financial condition and ability to make cash distributions, because our agricultural customers are geographically concentrated.
 
Our sales of nitrogen fertilizer products to agricultural customers are concentrated in the Great Plains and Midwest states and are seasonal in nature. For example, we generate greater net sales and operating income in the first half of the year, which we refer to as the planting season, compared to the second half of the year. Accordingly, an adverse weather pattern affecting agriculture in these regions or during the planting season could have a negative effect on fertilizer demand, which could, in turn, result in a material decline in our net sales and margins and otherwise have a material adverse effect on our results of operations, financial condition and ability to make cash


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distributions. Our quarterly results may vary significantly from one year to the next due largely to weather-related shifts in planting schedules and purchase patterns. In addition, given the seasonal nature of our business, we expect that our distributions will be volatile and will vary quarterly and annually.
 
Our business is seasonal, which may result in our carrying significant amounts of inventory and seasonal variations in working capital. Our inability to predict future seasonal nitrogen fertilizer demand accurately may result in excess inventory or product shortages.
 
Our business is seasonal. Farmers tend to apply nitrogen fertilizer during two short application periods, one in the spring and the other in the fall. The strongest demand for our products typically occurs during the planting season. In contrast, we and other nitrogen fertilizer producers generally produce our products throughout the year. As a result, we and our customers generally build inventories during the low demand periods of the year in order to ensure timely product availability during the peak sales seasons. The seasonality of nitrogen fertilizer demand results in our sales volumes and net sales being highest during the North American spring season and our working capital requirements typically being highest just prior to the start of the spring season.
 
If seasonal demand exceeds our projections, we will not have enough product and our customers may acquire products from our competitors, which would negatively impact our profitability. If seasonal demand is less than we expect, we will be left with excess inventory and higher working capital and liquidity requirements.
 
The degree of seasonality of our business can change significantly from year to year due to conditions in the agricultural industry and other factors. As a consequence of our seasonality, we expect that our distributions will be volatile and will vary quarterly and annually.
 
Our operations are dependent on third-party suppliers, including Linde, which owns an air separation plant that provides oxygen, nitrogen and compressed dry air to our gasifiers, and the City of Coffeyville, which supplies us with electricity. A deterioration in the financial condition of a third-party supplier, a mechanical problem with the air separation plant, or the inability of a third-party supplier to perform in accordance with its contractual obligations could have a material adverse effect on our results of operations, financial condition and our ability to make cash distributions.
 
Our operations depend in large part on the performance of third-party suppliers, including Linde for the supply of oxygen, nitrogen and compressed dry air, and the City of Coffeyville for the supply of electricity. With respect to Linde, our operations could be adversely affected if there were a deterioration in Linde’s financial condition such that the operation of the air separation plant located adjacent to our nitrogen fertilizer plant was disrupted. Additionally, this air separation plant in the past has experienced numerous short-term interruptions, causing interruptions in our gasifier operations. With respect to electricity, we recently settled litigation with the City of Coffeyville regarding the price they sought to charge us for electricity and entered into an amended and restated electric services agreement which gives us an option to extend the term of such agreement through June 30, 2024. Should Linde, the City of Coffeyville or any of our other third-party suppliers fail to perform in accordance with existing contractual arrangements, our operation could be forced to halt. Alternative sources of supply could be difficult to obtain. Any shutdown of our operations, even for a limited period, could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions.
 
Our results of operations, financial condition and ability to make cash distributions may be adversely affected by the supply and price levels of pet coke. Failure by CVR Energy to continue to supply us with pet coke (to the extent third-party pet coke is unavailable or available only at higher prices), or CVR Energy’s imposition of an obligation to provide it with security for our payment obligations, could negatively impact our results of operations.
 
Our profitability is directly affected by the price and availability of pet coke obtained from CVR Energy’s crude oil refinery pursuant to a long-term agreement and pet coke purchased from third parties, both of which vary based on market prices. Pet coke is a key raw material used by us in the manufacture of nitrogen fertilizer products. If pet coke costs increase, we may not be able to increase our prices to recover these increased costs, because market prices for our nitrogen fertilizer products are not correlated with pet coke prices.


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Based on our current output, we obtain most (over 70% on average during the last five years) of the pet coke we need from CVR Energy’s adjacent crude oil refinery, and procure the remainder on the open market. The price that we pay CVR Energy for pet coke is based on the lesser of a pet coke price derived from the price we receive for UAN (subject to a UAN-based price ceiling and floor) and a pet coke index price. In most cases, the price we pay CVR Energy will be lower than the price which we would otherwise pay to third parties. Pet coke prices could significantly increase in the future. Should CVR Energy fail to perform in accordance with our existing agreement, we would need to purchase pet coke from third parties on the open market, which could negatively impact our results of operations to the extent third-party pet coke is unavailable or available only at higher prices. For the year ended December 31, 2009, if we had been forced to obtain 100% of our pet coke supply from third parties, our pet coke expense would have increased by approximately $5.3 million.
 
We may not be able to maintain an adequate supply of pet coke. In addition, we could experience production delays or cost increases if alternative sources of supply prove to be more expensive or difficult to obtain. We currently purchase 100% of the pet coke CVR Energy produces. Accordingly, if we increase our production, we will be more dependent on pet coke purchases from third-party suppliers at open market prices. There is no assurance that we would be able to purchase pet coke on comparable terms from third parties or at all.
 
Under our pet coke agreement with CVR Energy, we may become obligated to provide security for our payment obligations if, in CVR Energy’s sole judgment, there is a material adverse change in our financial condition or liquidity position or in our ability to pay for our pet coke purchases. See “Certain Relationships and Related Party Transactions — Agreements with CVR Energy — Coke Supply Agreement.”
 
We rely on third-party providers of transportation services and equipment, which subjects us to risks and uncertainties beyond our control that may have a material adverse effect on our results of operations, financial condition and ability to make distributions.
 
We rely on railroad and trucking companies to ship finished products to our customers. We also lease railcars from railcar owners in order to ship our finished products. These transportation operations, equipment and services are subject to various hazards, including extreme weather conditions, work stoppages, delays, spills, derailments and other accidents and other operating hazards.
 
These transportation operations, equipment and services are also subject to environmental, safety and other regulatory oversight. Due to concerns related to terrorism or accidents, local, state and federal governments could implement new regulations affecting the transportation of our finished products. In addition, new regulations could be implemented affecting the equipment used to ship our finished products.
 
Any delay in our ability to ship our finished products as a result of these transportation companies’ failure to operate properly, the implementation of new and more stringent regulatory requirements affecting transportation operations or equipment, or significant increases in the cost of these services or equipment could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions.
 
Our facility faces operating hazards and interruptions, including unscheduled maintenance or downtime. We could face potentially significant costs to the extent these hazards or interruptions cause a material decline in production and are not fully covered by our existing insurance coverage. Insurance companies that currently insure companies in our industry may cease to do so, may change the coverage provided or may substantially increase premiums in the future.
 
Our operations, located at a single location, are subject to significant operating hazards and interruptions. Any significant curtailing of production at our nitrogen fertilizer plant or individual units within our plant could result in materially lower levels of revenues and cash flow for the duration of any shutdown and materially adversely impact our ability to make cash distributions. Operations at our nitrogen fertilizer plant could be curtailed or partially or completely shut down, temporarily or permanently, as the result of a number of circumstances, most of which are not within our control, such as:
 
  •  unscheduled maintenance or catastrophic events such as a major accident or fire, damage by severe weather, flooding or other natural disaster;


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  •  labor difficulties that result in a work stoppage or slowdown;
 
  •  environmental proceedings or other litigation that compel the cessation of all or a portion of the operations at our nitrogen fertilizer plant;
 
  •  increasingly stringent environmental regulations;
 
  •  a disruption in the supply of pet coke to our nitrogen fertilizer plant; and
 
  •  a governmental ban or other limitation on the use of nitrogen fertilizer products, either generally or specifically those manufactured at our plant.
 
The magnitude of the effect on us of any shutdown will depend on the length of the shutdown and the extent of the plant operations affected by the shutdown. Our plant requires a scheduled maintenance turnaround every two years, which generally lasts up to three weeks and may have a material impact on our cash flows and ability to make cash distributions in the quarter or quarters in which it occurs. A major accident, fire, flood, or other event could damage our facility or the environment and the surrounding community or result in injuries or loss of life. For example, the flood that occurred during the weekend of June 30, 2007 shut down our facility for approximately two weeks and required significant expenditures to repair damaged equipment, and our UAN plant was out of service for approximately six weeks after the rupture of a high pressure vessel in September 2010, which is expected to have a significant impact on our revenues and cash flows for the fourth quarter of 2010. Based upon an internal review and investigation, we currently estimate that the costs to repair the damage caused by the incident are expected to be in the range of $8.0 million to $11.0 million and repairs are expected to be substantially complete prior to the end of December 2010. To the extent additional damage is discovered during the completion of repairs, the costs of repairs could increase or repairs could take longer to complete. Moreover, our facility is located adjacent to CVR Energy’s refining operations and a major accident or disaster at CVR Energy’s operations could adversely affect our operations. Scheduled and unscheduled maintenance could reduce our net income, cash flow and ability to make cash distributions during the period of time that any of our units is not operating. Any unscheduled future downtime could have a material adverse effect on our ability to make cash distributions to our unitholders.
 
If we experience significant property damage, business interruption, environmental claims or other liabilities, our business could be materially adversely affected to the extent the damages or claims exceed the amount of valid and collectible insurance available to us. We are currently insured under CVR Energy’s casualty, environmental, property and business interruption insurance policies. The property and business interruption insurance policies have a $1.0 billion limit, with a $2.5 million deductible for physical damage and a 45-day waiting period before losses resulting from business interruptions are recoverable. The policies also contain exclusions and conditions that could have a materially adverse impact on our ability to receive indemnification thereunder, as well as customary sub-limits for particular types of losses. For example, the current property policy contains a specific sub-limit of $150.0 million for damage caused by flooding. We are fully exposed to all losses in excess of the applicable limits and sub-limits and for losses due to business interruptions of fewer than 45 days.
 
Our management believes that we will continue to be covered under CVR Energy’s insurance policies following this offering. CVR Energy’s casualty insurance policy, which includes our environmental insurance coverage for sudden and accidental pollution events, expires on July 1, 2011, and its current property and business interruption insurance policies expire on November 1, 2011. We do not know whether we will be able to continue to be covered under CVR Energy’s insurance policies when these policies come up for renewal in 2011 or whether we will need to obtain separate insurance policies, or the terms or cost of insurance that CVR Energy or we will be able to obtain at such time. Market factors, including but not limited to catastrophic perils that impact our industry, significant changes in the investment returns of insurance companies, insurance company solvency trends and industry loss ratios and loss trends, can negatively impact the future cost and availability of insurance. There can be no assurance that CVR Energy or we will be able to buy and maintain insurance with adequate limits, reasonable pricing terms and conditions.


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Our results of operations are highly dependent upon and fluctuate based upon business and economic conditions and governmental policies affecting the agricultural industry. These factors are outside of our control and may significantly affect our profitability.
 
Our results of operations are highly dependent upon business and economic conditions and governmental policies affecting the agricultural industry, which we cannot control. The agricultural products business can be affected by a number of factors. The most important of these factors, for U.S. markets, are:
 
  •  weather patterns and field conditions (particularly during periods of traditionally high nitrogen fertilizer consumption);
 
  •  quantities of nitrogen fertilizers imported to and exported from North America;
 
  •  current and projected grain inventories and prices, which are heavily influenced by U.S. exports and world-wide grain markets; and
 
  •  U.S. governmental policies, including farm and biofuel policies, which may directly or indirectly influence the number of acres planted, the level of grain inventories, the mix of crops planted or crop prices.
 
International market conditions, which are also outside of our control, may also significantly influence our operating results. The international market for nitrogen fertilizers is influenced by such factors as the relative value of the U.S. dollar and its impact upon the cost of importing nitrogen fertilizers, foreign agricultural policies, the existence of, or changes in, import or foreign currency exchange barriers in certain foreign markets, changes in the hard currency demands of certain countries and other regulatory policies of foreign governments, as well as the laws and policies of the United States affecting foreign trade and investment.
 
Ammonia can be very volatile and extremely hazardous. Any liability for accidents involving ammonia that cause severe damage to property or injury to the environment and human health could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions. In addition, the costs of transporting ammonia could increase significantly in the future.
 
We manufacture, process, store, handle, distribute and transport ammonia, which can be very volatile and extremely hazardous. Major accidents or releases involving ammonia could cause severe damage or injury to property, the environment and human health, as well as a possible disruption of supplies and markets. Such an event could result in civil lawsuits, fines, penalties and regulatory enforcement proceedings, all of which could lead to significant liabilities. Any damage to persons, equipment or property or other disruption of our ability to produce or distribute our products could result in a significant decrease in operating revenues and significant additional cost to replace or repair and insure our assets, which could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions. We periodically experience minor releases of ammonia related to leaks from heat exchangers and other equipment. We experienced more significant ammonia releases in August 2007 due to the failure of a high-pressure pump and in September 2010 due to a UAN vessel rupture. Similar events may occur in the future.
 
In addition, we may incur significant losses or costs relating to the operation of our railcars used for the purpose of carrying various products, including ammonia. Due to the dangerous and potentially toxic nature of the cargo, in particular ammonia, on board railcars, a railcar accident may result in fires, explosions and pollution. These circumstances may result in sudden, severe damage or injury to property, the environment and human health. In the event of pollution, we may be held responsible even if we are not at fault and we complied with the laws and regulations in effect at the time of the accident. Litigation arising from accidents involving ammonia may result in our being named as a defendant in lawsuits asserting claims for large amounts of damages, which could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions.
 
Given the risks inherent in transporting ammonia, the costs of transporting ammonia could increase significantly in the future. Ammonia is most typically transported by railcar. A number of initiatives are underway in the railroad and chemical industries that may result in changes to railcar design in order to minimize railway accidents involving hazardous materials. If any such design changes are implemented, or if accidents involving hazardous freight increase the insurance and other costs of railcars, our freight costs could significantly increase.


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Environmental laws and regulations could require us to make substantial capital expenditures to remain in compliance or to remediate current or future contamination that could give rise to material liabilities.
 
Our operations are subject to a variety of federal, state and local environmental laws and regulations relating to the protection of the environment, including those governing the emission or discharge of pollutants into the environment, product specifications and the generation, treatment, storage, transportation, disposal and remediation of solid and hazardous waste and materials. Violations of these laws and regulations or permit conditions can result in substantial penalties, injunctive orders compelling installation of additional controls, civil and criminal sanctions, permit revocations or facility shutdowns.
 
In addition, new environmental laws and regulations, new interpretations of existing laws and regulations, increased governmental enforcement of laws and regulations or other developments could require us to make additional unforeseen expenditures. Many of these laws and regulations are becoming increasingly stringent, and the cost of compliance with these requirements can be expected to increase over time. The requirements to be met, as well as the technology and length of time available to meet those requirements, continue to develop and change. These expenditures or costs for environmental compliance could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions.
 
Our facility operates under a number of federal and state permits, licenses and approvals with terms and conditions containing a significant number of prescriptive limits and performance standards in order to operate. Our facility is also required to comply with prescriptive limits and meet performance standards specific to chemical facilities as well as to general manufacturing facilities. All of these permits, licenses, approvals and standards require a significant amount of monitoring, record keeping and reporting in order to demonstrate compliance with the underlying permit, license, approval or standard. Incomplete documentation of compliance status may result in the imposition of fines, penalties and injunctive relief. Additionally, due to the nature of our manufacturing processes, there may be times when we are unable to meet the standards and terms and conditions of these permits and licenses due to operational upsets or malfunctions, which may lead to the imposition of fines and penalties or operating restrictions that may have a material adverse effect on our ability to operate our facilities and accordingly our financial performance.
 
Our business is subject to accidental spills, discharges or other releases of hazardous substances into the environment. Past or future spills related to our nitrogen fertilizer plant or transportation of products or hazardous substances from our facility may give rise to liability (including strict liability, or liability without fault, and potential cleanup responsibility) to governmental entities or private parties under federal, state or local environmental laws, as well as under common law. For example, we could be held strictly liable under the Comprehensive Environmental Response, Compensation and Liability Act, or CERCLA, for past or future spills without regard to fault or whether our actions were in compliance with the law at the time of the spills. Pursuant to CERCLA and similar state statutes, we could be held liable for contamination associated with the facility we currently own and operate, facilities we formerly owned or operated (if any) and facilities to which we transported or arranged for the transportation of wastes or by-products containing hazardous substances for treatment, storage, or disposal. The potential penalties and cleanup costs for past or future releases or spills, liability to third parties for damage to their property or exposure to hazardous substances, or the need to address newly discovered information or conditions that may require response actions could be significant and could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions.
 
In addition, we may incur liability for alleged personal injury or property damage due to exposure to chemicals or other hazardous substances located at or released from our facility. We may also face liability for personal injury, property damage, natural resource damage or for cleanup costs for the alleged migration of contamination or other hazardous substances from our facility to adjacent and other nearby properties.
 
We may incur future costs relating to the off-site disposal of hazardous wastes. Companies that dispose of, or arrange for the transportation or disposal of, hazardous substances at off-site locations may be held jointly and severally liable for the costs of investigation and remediation of contamination at those off-site locations, regardless of fault. We could become involved in litigation or other proceedings involving off-site waste disposal and the damages or costs in any such proceedings could be material.


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We may be unable to obtain or renew permits necessary for our operations, which could inhibit our ability to do business.
 
We hold numerous environmental and other governmental permits and approvals authorizing operations at our nitrogen fertilizer facility. Expansion of our operations is also predicated upon securing the necessary environmental or other permits or approvals. A decision by a government agency to deny or delay issuing a new or renewed material permit or approval, or to revoke or substantially modify an existing permit or approval, could have a material adverse effect on our ability to continue operations and on our business, financial condition, results of operations and ability to make cash distributions.
 
Environmental laws and regulations on fertilizer end-use and application and numeric nutrient water quality criteria could have a material adverse impact on fertilizer demand in the future.
 
Future environmental laws and regulations on the end-use and application of fertilizers could cause changes in demand for our products. In addition, future environmental laws and regulations, or new interpretations of existing laws or regulations, could limit our ability to market and sell our products to end users. From time to time, various state legislatures have proposed bans or other limitations on fertilizer products. In addition, a number of states have adopted or proposed numeric nutrient water quality criteria that could result in decreased demand for our fertilizer products in those states. Similarly, a new final Environmental Protection Agency, or EPA, rule establishing numeric nutrient criteria for certain Florida water bodies may require farmers to implement best management practices, including the reduction of fertilizer use, to reduce the impact of fertilizer on water quality. Any such laws, regulations or interpretations could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions.
 
Climate change laws and regulations could have a material adverse effect on our results of operations, financial condition, and ability to make cash distributions.
 
Currently, various legislative and regulatory measures to address greenhouse gas emissions (including CO2, methane and nitrous oxides) are in various phases of discussion or implementation. At the federal legislative level, Congress could adopt some form of federal mandatory greenhouse gas emission reduction laws, although the specific requirements and timing of any such laws are uncertain at this time. In June 2009, the U.S. House of Representatives passed a bill that would create a nationwide cap-and-trade program designed to regulate emissions of CO2, methane and other greenhouse gases. A similar bill was introduced in the U.S. Senate, but was not voted upon. Congressional passage of such legislation does not appear likely at this time, though it could be adopted at a future date. It is also possible that Congress may pass alternative climate change bills that do not mandate a nationwide cap-and-trade program and instead focus on promoting renewable energy and energy efficiency.
 
In the absence of congressional legislation curbing greenhouse gas emissions, the EPA is moving ahead administratively under its federal Clean Air Act authority. In October 2009, the EPA finalized a rule requiring certain large emitters of greenhouse gases to inventory and report their greenhouse gas emissions to the EPA. In accordance with the rule, we have begun monitoring our greenhouse gas emissions from our nitrogen fertilizer plant and will report the emissions to the EPA beginning in 2011. On December 7, 2009, the EPA finalized its “endangerment finding” that greenhouse gas emissions, including CO2, pose a threat to human health and welfare. The finding allows the EPA to regulate greenhouse gas emissions as air pollutants under the federal Clean Air Act. In May 2010, the EPA finalized the “Greenhouse Gas Tailoring Rule,” which establishes new greenhouse gas emissions thresholds that determine when stationary sources, such as our nitrogen fertilizer plant, must obtain permits under the Prevention of Significant Deterioration, or PSD, and Title V programs of the federal Clean Air Act. The significance of the permitting requirement is that, in cases where a new source is constructed or an existing source undergoes a major modification, the facility would need to evaluate and install best available control technology, or BACT, for its greenhouse gas emissions. Phase-in permit requirements will begin for the largest stationary sources in 2011. We do not currently anticipate that our UAN expansion project will result in a significant increase in greenhouse gas emissions triggering the need to install BACT. However, beginning in July 2011, a major modification resulting in a significant expansion of production at our nitrogen fertilizer plant resulting in a


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significant increase in greenhouse gas emissions may require us to install BACT for our greenhouse gas emissions. The EPA’s endangerment finding, the Greenhouse Gas Tailoring Rule and certain other greenhouse gas emission rules have been challenged and will likely be subject to extensive litigation. In addition, a number of Congressional bills to overturn the endangerment finding and bar the EPA from regulating greenhouse gas emissions, or at least to defer such action by the EPA under the federal Clean Air Act, have been proposed in the past, although President Obama has announced his intention to veto any such bills if passed.
 
In addition to federal regulations, a number of states have adopted regional greenhouse gas initiatives to reduce CO2 and other greenhouse gas emissions. In 2007, a group of Midwest states, including Kansas (where our nitrogen fertilizer facility is located), formed the Midwestern Greenhouse Gas Reduction Accord, which calls for the development of a cap-and-trade system to control greenhouse gas emissions and for the inventory of such emissions. However, the individual states that have signed on to the accord must adopt laws or regulations implementing the trading scheme before it becomes effective, and the timing and specific requirements of any such laws or regulations in Kansas are uncertain at this time.
 
The implementation of EPA regulations and/or the passage of federal or state climate change legislation will likely result in increased costs to (i) operate and maintain our facilities, (ii) install new emission controls on our facilities and (iii) administer and manage any greenhouse gas emissions program. Increased costs associated with compliance with any future legislation or regulation of greenhouse gas emissions, if it occurs, may have a material adverse effect on our results of operations, financial condition and ability to make cash distributions.
 
In addition, climate change legislation and regulations may result in increased costs not only for our business but also for agricultural producers that utilize our fertilizer products, thereby potentially decreasing demand for our fertilizer products. Decreased demand for our fertilizer products may have a material adverse effect on our results of operations, financial condition and ability to make cash distributions.
 
New regulations concerning the transportation of hazardous chemicals, risks of terrorism and the security of chemical manufacturing facilities could result in higher operating costs.
 
The costs of complying with regulations relating to the transportation of hazardous chemicals and security associated with our nitrogen fertilizer facility may have a material adverse effect on our results of operations, financial condition and ability to make cash distributions. Targets such as chemical manufacturing facilities may be at greater risk of future terrorist attacks than other targets in the United States. The chemical industry has responded to the issues that arose in response to the terrorist attacks on September 11, 2001 by starting new initiatives relating to the security of chemical industry facilities and the transportation of hazardous chemicals in the United States. Future terrorist attacks could lead to even stronger, more costly initiatives. Simultaneously, local, state and federal governments have begun a regulatory process that could lead to new regulations impacting the security of chemical plant locations and the transportation of hazardous chemicals. Our business could be materially adversely affected by the cost of complying with new regulations.
 
Our plans to address our CO2production may not be successful.
 
We have signed a letter of intent with a third party with expertise in CO2 capture and storage systems to develop plans whereby we may, in the future, either sell up to 850,000 tons per year of high purity CO2 produced by our nitrogen fertilizer plant to oil and gas exploration and production companies to enhance oil recovery or pursue an economic means of geologically sequestering such CO2. We cannot guarantee that this proposed CO2 capture and storage system will be constructed successfully or at all or, if constructed, that it will provide an economic benefit and will not result in economic losses or additional costs that may have a material adverse effect on our results of operations, financial condition and ability to make cash distributions.


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Due to our lack of asset diversification, adverse developments in the nitrogen fertilizer industry could adversely affect our results of operations and our ability to make distributions to our unitholders.
 
We rely exclusively on the revenues generated from our nitrogen fertilizer business. An adverse development in the nitrogen fertilizer industry would have a significantly greater impact on our operations and cash available for distribution to holders of common units than it will on other companies with a more diverse asset and product base. The largest publicly traded companies with which we compete sell a more varied range of fertilizer products.
 
Our business depends on significant customers, and the loss of one or several significant customers may have a material adverse effect on our results of operations, financial condition and ability to make cash distributions.
 
Our business has a high concentration of customers. In the aggregate, our top five ammonia customers represented 62.1%, 54.7%, and 43.9%, respectively, of our ammonia sales, and our top five UAN customers represented 38.7%, 37.2%, and 44.2%, respectively, of our UAN sales, for the years ended December 31, 2007, 2008 and 2009. Given the nature of our business, and consistent with industry practice, we do not have long-term minimum purchase contracts with any of our customers. The loss of one or several of these significant customers, or a significant reduction in purchase volume by any of them, could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions.
 
There is no assurance that the transportation costs of our competitors will not decline.
 
Our nitrogen fertilizer plant is located within the U.S. farm belt, where the majority of the end users of our nitrogen fertilizers grow their crops. Many of our competitors produce fertilizer outside this region and incur greater costs in transporting their products over longer distances via rail, ships and pipelines. There can be no assurance that our competitors’ transportation costs will not decline or that additional pipelines will not be built, lowering the price at which our competitors can sell their products, which could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions.
 
We are subject to strict laws and regulations regarding employee and process safety, and failure to comply with these laws and regulations could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions.
 
Our facility is subject to the requirements of the federal Occupational Safety and Health Act, or OSHA, and comparable state statutes that regulate the protection of the health and safety of workers. In addition, OSHA requires that we maintain information about hazardous materials used or produced in our operations and that we provide this information to employees, state and local governmental authorities, and local residents. Failure to comply with OSHA requirements, including general industry standards, record keeping requirements and monitoring and control of occupational exposure to regulated substances, could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions if we are subjected to significant fines or compliance costs.
 
Instability and volatility in the global capital and credit markets could negatively impact our business, financial condition, results of operations and cash flows.
 
The global capital and credit markets have experienced extreme volatility and disruption over the past two years. Our results of operations, financial condition and ability to make cash distributions could be negatively impacted by the difficult conditions and extreme volatility in the capital, credit and commodities markets and in the global economy. These factors, combined with declining business and consumer confidence and increased unemployment, precipitated an economic recession in the United States and globally during 2009 and 2010. The difficult conditions in these markets and the overall economy affect us in a number of ways. For example:
 
  •  Although we believe we will have sufficient liquidity under our new credit facility to run our business, under extreme market conditions there can be no assurance that such funds would be available or sufficient, and in such a case, we may not be able to successfully obtain additional financing on favorable terms, or at all.


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  •  Market volatility could exert downward pressure on the price of our common units, which may make it more difficult for us to raise additional capital and thereby limit our ability to grow.
 
  •  Market conditions could result in our significant customers experiencing financial difficulties. We are exposed to the credit risk of our customers, and their failure to meet their financial obligations when due because of bankruptcy, lack of liquidity, operational failure or other reasons could result in decreased sales and earnings for us.
 
Our acquisition and expansion strategy involves significant risks.
 
One of our business strategies is to pursue acquisitions and expansion projects (including expanding our UAN capacity). However, acquisitions and expansions involve numerous risks and uncertainties, including intense competition for suitable acquisition targets, the potential unavailability of financial resources necessary to consummate acquisitions and expansions, difficulties in identifying suitable acquisition targets and expansion projects or in completing any transactions identified on sufficiently favorable terms; and the need to obtain regulatory or other governmental approvals that may be necessary to complete acquisitions and expansions. In addition, any future acquisitions and expansions may entail significant transaction costs, tax consequences and risks associated with entry into new markets and lines of business.
 
We intend to move forward with an expansion of our nitrogen fertilizer plant, which will allow us the flexibility to upgrade all of our ammonia production to UAN. This expansion is premised in large part on the historically higher margin that we have received for UAN compared to ammonia. If the premium that UAN currently earns over ammonia decreases, this expansion project may not yield the economic benefits and accretive effects that we currently anticipate.
 
In addition to the risks involved in identifying and completing acquisitions described above, even when acquisitions are completed, integration of acquired entities can involve significant difficulties, such as:
 
  •  unforeseen difficulties in the acquired operations and disruption of the ongoing operations of our business;
 
  •  failure to achieve cost savings or other financial or operating objectives with respect to an acquisition;
 
  •  strain on the operational and managerial controls and procedures of our business, and the need to modify systems or to add management resources;
 
  •  difficulties in the integration and retention of customers or personnel and the integration and effective deployment of operations or technologies;
 
  •  assumption of unknown material liabilities or regulatory non-compliance issues;
 
  •  amortization of acquired assets, which would reduce future reported earnings;
 
  •  possible adverse short-term effects on our cash flows or operating results; and
 
  •  diversion of management’s attention from the ongoing operations of our business.
 
In addition, in connection with any potential acquisition or expansion project, we will need to consider whether the business we intend to acquire or expansion project we intend to pursue (including the project relating to CO2 sequestration or sale) could affect our tax treatment as a partnership for U.S. federal income tax purposes. If we are otherwise unable to conclude that the activities of the business being acquired or the expansion project would not affect our treatment as a partnership for U.S. federal income tax purposes, we could seek a ruling from the Internal Revenue Service, or IRS. Seeking such a ruling could be costly or, in the case of competitive acquisitions, place us in a competitive disadvantage compared to other potential acquirers who do not seek such a ruling. If we are unable to conclude that an activity would not affect our treatment as a partnership for U.S. federal income tax purposes, we could choose to acquire such business or develop such expansion project in a corporate subsidiary, which would subject the income related to such activity to entity-level taxation. See “— Tax Risks — Our tax treatment depends on our status as a partnership for U.S. federal income tax purposes, as well as our not being subject to a material amount of entity-level taxation by individual states. If the IRS were to treat us as a corporation for U.S. federal income tax purposes or if we were to become subject to additional amounts of entity-level taxation for state tax


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purposes, then our cash available for distribution to our unitholders would be substantially reduced” and “Material U.S. Federal Income Tax Consequences — Partnership Status.”
 
Failure to manage acquisition and expansion growth risks could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions. There can be no assurance that we will be able to consummate any acquisitions or expansions, successfully integrate acquired entities, or generate positive cash flow at any acquired company or expansion project.
 
We rely primarily on the executive officers of CVR Energy to manage most aspects of our business and affairs pursuant to a services agreement, which CVR Energy can terminate at any time following the one year anniversary of this offering.
 
Our future performance depends to a significant degree upon the continued contributions of CVR Energy’s senior management team. We have entered into a services agreement with our general partner and CVR Energy whereby CVR Energy has agreed to provide us with the services of its senior management team as well as accounting, business operations, legal, finance and other key back-office and mid-office personnel. Following the one year anniversary of this offering, CVR Energy can terminate this agreement at any time, subject to a 180-day notice period. The loss or unavailability to us of any member of CVR Energy’s senior management team could negatively affect our ability to operate our business and pursue our business strategies. We do not have employment agreements with any of CVR Energy’s officers and we do not maintain any key person insurance. We can provide no assurance that CVR Energy will continue to provide us the officers that are necessary for the conduct of our business nor that such provision will be on terms that are acceptable. If CVR Energy elected to terminate the agreement on 180 days’ notice following the one year anniversary of this offering, we might not be able to find qualified individuals to serve as our executive officers within such 180-day period.
 
In addition, pursuant to the services agreement we are responsible for a portion of the compensation expense of such executive officers according to the percentage of time such executive officers spent working for us. However, the compensation of such executive officers is set by CVR Energy, and we have no control over the amount paid to such officers. The services agreement does not contain any cap on the amounts we may be required to pay CVR Energy pursuant to this agreement.
 
A shortage of skilled labor, together with rising labor costs, could adversely affect our results of operations and cash available for distribution to our unitholders.
 
Efficient production of nitrogen fertilizer using modern techniques and equipment requires skilled employees. Our nitrogen fertilizer facility relies on gasification technology that requires special expertise to operate efficiently and effectively. To the extent that the services of our key technical personnel become unavailable to us for any reason, we would be required to hire other personnel. We may not be able to locate or employ such qualified personnel on acceptable terms or at all. We face competition for these professionals from our competitors, our customers and other companies operating in our industry. If we are unable to find qualified employees, or if the cost to find qualified employees increases materially, our results of operations and cash available for distribution to our unitholders could be adversely affected.
 
If licensed technology were no longer available, our business may be adversely affected.
 
We have licensed, and may in the future license, a combination of patent, trade secret and other intellectual property rights of third parties for use in our business. In particular, the gasification process we use to convert pet coke to high purity hydrogen for subsequent conversion to ammonia is licensed from General Electric. The license, which is fully paid, grants us perpetual rights to use the pet coke gasification process on specified terms and conditions and is integral to the operations of our facility. If this, or any other license agreements on which our operations rely were to be terminated, licenses to alternative technology may not be available, or may only be available on terms that are not commercially reasonable or acceptable. In addition, any substitution of new technology for currently-licensed technology may require substantial changes to manufacturing processes or equipment and may have a material adverse effect on our results of operations, financial condition and ability to make cash distributions.


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We may face third-party claims of intellectual property infringement, which if successful could result in significant costs for our business.
 
There are currently no claims pending against us relating to the infringement of any third-party intellectual property rights. However, in the future we may face claims of infringement that could interfere with our ability to use technology that is material to our business operations. Any litigation of this type, whether successful or unsuccessful, could result in substantial costs to us and diversions of our resources, either of which could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions. In the event a claim of infringement against us is successful, we may be required to pay royalties or license fees for past or continued use of the infringing technology, or we may be prohibited from using the infringing technology altogether. If we are prohibited from using any technology as a result of such a claim, we may not be able to obtain licenses to alternative technology adequate to substitute for the technology we can no longer use, or licenses for such alternative technology may only be available on terms that are not commercially reasonable or acceptable to us. In addition, any substitution of new technology for currently licensed technology may require us to make substantial changes to our manufacturing processes or equipment or to our products, and could have a material adverse effect on our results of operations, financial condition and ability to make cash distributions.
 
Our new credit facility may contain significant limitations on our business operations, including our ability to make distributions and other payments.
 
Upon the closing of this offering, we expect to enter into a new credit facility. We anticipate that as of September 30, 2010, on a pro forma basis after giving effect to this offering and the use of the estimated proceeds hereof and the establishment of our new credit facility, we would have had $125.0 million of term loan debt outstanding and incremental borrowing capacity of approximately $25.0 million under the revolving credit facility. We and our subsidiary may be able to incur significant additional indebtedness in the future. We anticipate that both our ability to make distributions to holders of our common units and our ability to borrow under this new credit facility to fund distributions (if we elected to do so) will be subject to covenant restrictions under the agreement governing this new credit facility. If we were unable to comply with any such covenant restrictions in any quarter, our ability to make distributions to unitholders would be curtailed or limited.
 
In addition, we will be subject to covenants contained in our new credit facility and any agreement governing other future indebtedness. These covenants may include, among others, restrictions on certain payments, the granting of liens, the incurrence of additional indebtedness, dividend restrictions affecting subsidiaries, asset sales, transactions with affiliates and mergers, acquisitions and consolidations. Any failure to comply with these covenants could result in a default under our new credit facility. Upon a default, unless waived, the lenders under our new credit facility would have all remedies available to a secured lender, and could elect to terminate their commitments, cease making further loans, cause their loans to become due and payable in full, institute foreclosure proceedings against our or our subsidiary’s assets, and force us and our subsidiary into bankruptcy or liquidation.
 
Borrowings under our new credit facility will bear interest at variable rates. If market interest rates increase, such variable-rate debt will create higher debt service requirements, which could adversely affect our cash flow and ability to make cash distributions.
 
Our ability to make scheduled debt payments, to refinance our obligations with respect to our indebtedness and to fund capital and non-capital expenditures necessary to maintain the condition of our operating assets, properties and systems software, as well as to provide capacity for the growth of our business, depends on our financial and operating performance, which, in turn, is subject to prevailing economic conditions and financial, business, competitive, legal and other factors.
 
If our operating results are not sufficient to service our current or future indebtedness, we will be forced to take actions such as reducing distributions, reducing or delaying our business activities, acquisitions, investments or capital expenditures, selling assets, restructuring or refinancing our debt, or seeking additional equity capital or bankruptcy protection.


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We are a holding company and depend upon our subsidiary for our cash flow.
 
We are a holding company. All of our operations are conducted and all of our assets are owned by Coffeyville Resources Nitrogen Fertilizers, LLC, our wholly-owned subsidiary and our sole direct or indirect subsidiary. Consequently, our cash flow and our ability to meet our obligations or to make cash distributions in the future will depend upon the cash flow of our subsidiary and the payment of funds by our subsidiary to us in the form of dividends or otherwise. The ability of our subsidiary to make any payments to us will depend on its earnings, the terms of its indebtedness, including the terms of any credit facilities, and legal restrictions. In particular, future credit facilities incurred at our subsidiary may impose significant limitations on the ability of our subsidiary to make distributions to us and consequently our ability to make distributions to our unitholders. See also “— We may not have sufficient available cash to pay any quarterly distribution on our common units. For the twelve months ended September 30, 2010, on a pro forma basis, our annual distribution would have been $      per unit, significantly less than the $      per unit distribution we project that we will be able to pay for the year ended December 31, 2011.”
 
We have never operated as a stand-alone company.
 
Because we have never operated as a stand-alone company, it is difficult for you to evaluate our business and results of operations to date and to assess our future prospects and viability. Our nitrogen fertilizer facility commenced operations in 2000 and was operated as one of eight fertilizer facilities within Farmland until March 2004. Since March 2004, we have been operated as part of a larger company together with a petroleum refining company. The financial information reflecting our business contained in this prospectus, including our historical financial information as well as the pro forma financial information included herein, do not necessarily reflect what our operating performance would have been had we been a stand-alone company during the periods presented.
 
We will incur increased costs as a result of being a publicly traded partnership.
 
As a publicly traded partnership, we will incur significant legal, accounting and other expenses that we did not incur prior to this offering. In addition, the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act of 2010, as well as rules implemented by the SEC and the New York Stock Exchange, require, or will require, publicly traded entities to adopt various corporate governance practices that will further increase our costs. Before we are able to make distributions to our unitholders, we must first pay our expenses, including the costs of being a public company and other operating expenses. As a result, the amount of cash we have available for distribution to our unitholders will be affected by our expenses, including the costs associated with being a publicly traded partnership. We estimate that we will incur approximately $3.5 million of estimated incremental costs per year, some of which will be direct charges associated with being a publicly traded partnership, and some of which will be allocated to us by CVR Energy; however, it is possible that our actual incremental costs of being a publicly traded partnership will be higher than we currently estimate.
 
Prior to this offering, we have not filed reports with the SEC. Following this offering, we will become subject to the public reporting requirements of the Securities Exchange Act of 1934, as amended, or the Exchange Act. We expect these requirements will increase our legal and financial compliance costs and to make compliance activities more time-consuming and costly. For example, as a result of becoming a publicly traded partnership, we are required to have at least three independent directors and adopt policies regarding internal controls and disclosure controls and procedures, including the preparation of reports on internal control over financial reporting. In addition, we will incur additional costs associated with our publicly traded company reporting requirements.
 
As a publicly traded partnership we qualify for, and are relying on, certain exemptions from the New York Stock Exchange’s corporate governance requirements.
 
As a publicly traded partnership, we qualify for, and are relying on, certain exemptions from the New York Stock Exchange’s corporate governance requirements, including:
 
  •  the requirement that a majority of the board of directors of our general partner consist of independent directors;
 
  •  the requirement that the board of directors of our general partner have a nominating/corporate governance committee that is composed entirely of independent directors; and


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  •  the requirement that the board of directors of our general partner have a compensation committee that is composed entirely of independent directors.
 
As a result of these exemptions, our general partner’s board of directors will not be comprised of a majority of independent directors, our general partner’s compensation committee may not be comprised entirely of independent directors and our general partner’s board of directors may not establish a nominating/corporate governance committee. Accordingly, unitholders will not have the same protections afforded to equityholders of companies that are subject to all of the corporate governance requirements of the New York Stock Exchange. See “Management.”
 
We will be exposed to risks relating to evaluations of controls required by Section 404 of the Sarbanes-Oxley Act.
 
We are in the process of evaluating our internal controls systems to allow management to report on, and our independent auditors to audit, our internal controls over financial reporting. We will be performing the system and process evaluation and testing (and any necessary remediation) required to comply with the management certification and auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act, and under current rules will be required to comply with Section 404 in our annual report for the year ended December 31, 2012 (subject to any change in applicable SEC rules). Furthermore, upon completion of this process, we may identify control deficiencies of varying degrees of severity under applicable SEC and Public Company Accounting Oversight Board, or PCAOB, rules and regulations that remain unremediated. Although we produce our financial statements in accordance with GAAP, our internal accounting controls may not currently meet all standards applicable to companies with publicly traded securities. As a publicly traded partnership, we will be required to report, among other things, control deficiencies that constitute a “material weakness” or changes in internal controls that, or that are reasonably likely to, materially affect internal controls over financial reporting. A “material weakness” is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis.
 
If we fail to implement the requirements of Section 404 in a timely manner, we might be subject to sanctions or investigation by regulatory authorities such as the SEC. If we do not implement improvements to our disclosure controls and procedures or to our internal controls in a timely manner, our independent registered public accounting firm may not be able to certify as to the effectiveness of our internal controls over financial reporting pursuant to an audit of our internal controls over financial reporting. This may subject us to adverse regulatory consequences or a loss of confidence in the reliability of our financial statements. We could also suffer a loss of confidence in the reliability of our financial statements if our independent registered public accounting firm reports a material weakness in our internal controls, if we do not develop and maintain effective controls and procedures or if we are otherwise unable to deliver timely and reliable financial information. Any loss of confidence in the reliability of our financial statements or other negative reaction to our failure to develop timely or adequate disclosure controls and procedures or internal controls could result in a decline in the price of our common units. In addition, if we fail to remedy any material weakness, our financial statements may be inaccurate, we may face restricted access to the capital markets and the price of our common units may be adversely affected.
 
Our relationship with CVR Energy and its financial condition subjects us to potential risks that are beyond our control.
 
Due to our relationship with CVR Energy, adverse developments or announcements concerning CVR Energy could materially adversely affect our financial condition, even if we have not suffered any similar development. The ratings assigned to CVR Energy’s senior secured indebtedness are below investment grade. Downgrades of the credit ratings of CVR Energy could increase our cost of capital and collateral requirements, and could impede our access to the capital markets.
 
The credit and business risk profiles of CVR Energy may be factors considered in credit evaluations of us. This is because we rely on CVR Energy for various services, including management services and the supply of pet coke. Another factor that may be considered is the financial condition of CVR Energy, including the degree of its financial leverage and its dependence on cash flow from us to service its indebtedness. The credit and risk profile of CVR


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Energy could adversely affect our credit ratings and risk profile, which could increase our borrowing costs or hinder our ability to raise capital.
 
If we were to seek a credit rating in the future, our credit rating may be adversely affected by the leverage of CVR Energy, as credit rating agencies may consider the leverage and credit profile of CVR Energy and its affiliates because of their ownership interest in and joint control of us and the strong operational links between CVR Energy’s refining business and us. Any adverse effect on our credit rating would increase our cost of borrowing or hinder our ability to raise financing in the capital markets, which would impair our ability to grow our business and make cash distributions to unitholders.
 
Risks Related to an Investment in Us
 
The board of directors of our general partner will adopt a policy to distribute all of the available cash we generate each quarter, which could limit our ability to grow and make acquisitions.
 
The board of directors of our general partner will adopt a policy to distribute all of the available cash we generate each quarter to our unitholders. As a result, our general partner will rely primarily upon external financing sources, including commercial bank borrowings and the issuance of debt and equity securities, to fund our acquisitions and expansion capital expenditures. As a result, to the extent we are unable to finance growth externally, our cash distribution policy will significantly impair our ability to grow.
 
In addition, because the board of directors of our general partner will adopt a policy to distribute all of the available cash we generate each quarter, our growth may not be as fast as that of businesses that reinvest their available cash to expand ongoing operations. To the extent we issue additional units in connection with any acquisitions or expansion capital expenditures, the payment of distributions on those additional units will decrease the amount we distribute on each outstanding unit. There are no limitations in our partnership agreement on our ability to issue additional units, including units ranking senior to the common units. The incurrence of additional commercial borrowings or other debt to finance our growth strategy would result in increased interest expense, which, in turn, would reduce the available cash that we have to distribute to our unitholders.
 
Our general partner, an indirect wholly-owned subsidiary of CVR Energy, has fiduciary duties to CVR Energy and its stockholders, and the interests of CVR Energy and its stockholders may differ significantly from, or conflict with, the interests of our public common unitholders.
 
Our general partner is responsible for managing us. Although our general partner has fiduciary duties to manage us in a manner beneficial to us and the common unitholders, the fiduciary duties are specifically limited by the express terms of our partnership agreement, and the directors and officers of our general partner also have fiduciary duties to manage our general partner in a manner beneficial to CVR Energy and its stockholders. The interests of CVR Energy and its stockholders may differ from, or conflict with, the interests of our common unitholders. In resolving these conflicts, our general partner may favor its own interests, the interests of Coffeyville Resources, its sole member, or the interests of CVR Energy and holders of CVR Energy’s common stock over our interests and those of our common unitholders.
 
The potential conflicts of interest include, among others, the following:
 
  •  Affiliates of our general partner, including CVR Energy, funds affiliated with Goldman, Sachs & Co., or the Goldman Sachs Funds, and funds affiliated with Kelso & Company, L.P., or the Kelso Funds, are permitted to compete with us or to own businesses that compete with us. In addition, the affiliates of our general partner are not required to share business opportunities with us.
 
  •  Neither our partnership agreement nor any other agreement will require the owners of our general partner, including CVR Energy, to pursue a business strategy that favors us. The affiliates of our general partner, including CVR Energy, have fiduciary duties to make decisions in their own best interests and in the best interest of holders of CVR Energy’s common stock, which may be contrary to our interests. In addition, our general partner is allowed to take into account the interests of parties other than us or our unitholders, such as its owners or CVR Energy, in resolving conflicts of interest, which has the effect of limiting its fiduciary duty to our unitholders.


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  •  Our general partner has limited its liability and reduced its fiduciary duties under our partnership agreement and has also restricted the remedies available to our unitholders for actions that, without the limitations, might constitute breaches of fiduciary duty. As a result of purchasing common units, unitholders consent to some actions and conflicts of interest that might otherwise constitute a breach of fiduciary or other duties under applicable state law.
 
  •  The board of directors of our general partner will determine the amount and timing of asset purchases and sales, capital expenditures, borrowings, repayment of indebtedness and issuances of additional partnership interests, each of which can affect the amount of cash that is available for distribution to our common unitholders.
 
  •  Our partnership agreement does not restrict our general partner from causing us to pay it or its affiliates for any services rendered to us or entering into additional contractual arrangements with any of these entities on our behalf. There is no limitation on the amounts our general partner can cause us to pay it or its affiliates.
 
  •  Our general partner may exercise its rights to call and purchase all of our common units if at any time it and its affiliates (including Coffeyville Resources) own more than     % of the common units.
 
  •  Our general partner will control the enforcement of obligations owed to us by it and its affiliates. In addition, our general partner will decide whether to retain separate counsel or others to perform services for us.
 
  •  Our general partner determines which costs incurred by it and its affiliates are reimbursable by us.
 
  •  The executive officers of our general partner, and the majority of the directors of our general partner, also serve as directors and/or executive officers of CVR Energy. The executive officers who work for both CVR Energy and our general partner, including our chief executive officer, chief operating officer, chief financial officer and general counsel, divide their time between our business and the business of CVR Energy. These executive officers will face conflicts of interest from time to time in making decisions which may benefit either us or CVR Energy.
 
See “Conflicts of Interest and Fiduciary Duties.”
 
Our partnership agreement limits the liability and reduces the fiduciary duties of our general partner and restricts the remedies available to us and our common unitholders for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.
 
Our partnership agreement limits the liability and reduces the fiduciary duties of our general partner, while also restricting the remedies available to our common unitholders, for actions that, without these limitations and reductions, might constitute breaches of fiduciary duty. Delaware partnership law permits such contractual reductions of fiduciary duty. By purchasing common units, common unitholders consent to some actions that might otherwise constitute a breach of fiduciary or other duties applicable under state law. Our partnership agreement contains provisions that reduce the standards to which our general partner would otherwise be held by state fiduciary duty law. For example:
 
  •  Our partnership agreement permits our general partner to make a number of decisions in its individual capacity, as opposed to its capacity as general partner. This entitles our general partner to consider only the interests and factors that it desires, and it has no duty or obligation to give any consideration to any interest of, or factors affecting, our common unitholders. Decisions made by our general partner in its individual capacity will be made by Coffeyville Resources as the sole member of our general partner, and not by the board of directors of our general partner. Examples include the exercise of the general partner’s call right, its voting rights with respect to any common units it may own, its registration rights and its determination whether or not to consent to any merger or consolidation or amendment to our partnership agreement.
 
  •  Our partnership agreement provides that our general partner will not have any liability to us or our unitholders for decisions made in its capacity as general partner so long as it acted in good faith, meaning it believed that the decisions were in our best interests.


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  •  Our partnership agreement provides that our general partner and the officers and directors of our general partner will not be liable for monetary damages to us for any acts or omissions unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that our general partner or those persons acted in bad faith or engaged in fraud or willful misconduct or, in the case of a criminal matter, acted with knowledge that such person’s conduct was criminal.
 
  •  Our partnership agreement generally provides that affiliate transactions and resolutions of conflicts of interest not approved by the conflicts committee of the board of directors of our general partner and not involving a vote of unitholders must be on terms no less favorable to us than those generally provided to or available from unrelated third parties or be “fair and reasonable.” In determining whether a transaction or resolution is “fair and reasonable,” our general partner may consider the totality of the relationship between the parties involved, including other transactions that may be particularly advantageous or beneficial to us.
 
By purchasing a common unit, a unitholder will become bound by the provisions of our partnership agreement, including the provisions described above. See “Description of Our Common Units — Transfer of Common Units.”
 
CVR Energy has the power to appoint and remove our general partner’s directors.
 
Upon the consummation of this offering, CVR Energy, through its ownership of 100% of Coffeyville Resources, will have the power to elect all of the members of the board of directors of our general partner. Our general partner has control over all decisions related to our operations. See “Management — Management of CVR Partners, LP.” Our public unitholders do not have an ability to influence any operating decisions and will not be able to prevent us from entering into any transactions. Furthermore, the goals and objectives of CVR Energy, as the indirect owner of our general partner, may not be consistent with those of our public unitholders.
 
The Goldman Sachs Funds and the Kelso Funds, which own a substantial amount of CVR Energy’s common stock, may have conflicts of interest with the interests of our common unitholders.
 
The Goldman Sachs Funds and the Kelso Funds own approximately 40% of the common stock of CVR Energy, which indirectly owns our general partner and     % of our common units. Each has two directors currently serving on CVR Energy’s nine-member board of directors. Accordingly, the Goldman Sachs Funds and the Kelso Funds will have influence over the conduct of our business, including the selection of the members of the board of directors of our general partner (through their ownership of CVR Energy common stock) and our senior management team and determination of our business strategies, as well as potential mergers or acquisitions, assets sales and other significant corporate transactions. In addition, two nominees from each of the Goldman Sachs Funds and the Kelso Funds currently serve on the board of directors of our general partner. In general, the Goldman Sachs Funds and the Kelso Funds or their affiliates could pursue business interests, or exercise their rights through their board representation or as stockholders of CVR Energy, in ways that are detrimental to us, but beneficial to themselves or to other companies in which they invest or with whom they have a material relationship.
 
Common units are subject to our general partner’s call right.
 
If at any time our general partner and its affiliates own more than  % of the common units, our general partner will have the right, which it may assign to any of its affiliates or to us, but not the obligation, to acquire all, but not less than all, of the common units held by public unitholders at a price not less than their then-current market price, as calculated pursuant to the terms of our partnership agreement. As a result, you may be required to sell your common units at an undesirable time or price and may not receive any return on your investment. You may also incur a tax liability upon a sale of your common units. Our general partner is not obligated to obtain a fairness opinion regarding the value of the common units to be repurchased by it upon exercise of the call right. There is no restriction in our partnership agreement that prevents our general partner from issuing additional common units and then exercising its call right. Our general partner may use its own discretion, free of fiduciary duty restrictions, in determining whether to exercise this right. As a result, a common unitholder may have his common units purchased from him at an undesirable time or price. See “The Partnership Agreement — Call Right.”


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Our unitholders have limited voting rights and are not entitled to elect our general partner or our general partner’s directors.
 
Unlike the holders of common stock in a corporation, our unitholders have only limited voting rights on matters affecting our business and, therefore, limited ability to influence management’s decisions regarding our business. Unitholders will have no right to elect our general partner or our general partner’s board of directors on an annual or other continuing basis. The board of directors of our general partner, including the independent directors, will be chosen entirely by CVR Energy as the indirect owner of the general partner and not by the common unitholders. Unlike publicly traded corporations, we will not hold annual meetings of our unitholders to elect directors or conduct other matters routinely conducted at such annual meetings of stockholders. Furthermore, even if our unitholders are dissatisfied with the performance of our general partner, they will have no practical ability to remove our general partner. As a result of these limitations, the price at which the common units will trade could be diminished.
 
Our public unitholders will not have sufficient voting power to remove our general partner without CVR Energy’s consent.
 
Following the closing of this offering, CVR Energy will indirectly own approximately     % of our common units (approximately     % if the underwriters exercise their option to purchase additional common units in full), which means holders of common units purchased in this offering will not be able to remove the general partner, under any circumstances, unless CVR Energy sells some of the common units that it owns or we sell additional units to the public.
 
Our partnership agreement restricts the voting rights of unitholders owning 20% or more of our common units (other than our general partner and its affiliates and permitted transferees).
 
Our partnership agreement restricts unitholders’ voting rights by providing that any units held by a person that owns 20% or more of any class of units then outstanding, other than our general partner, its affiliates, their transferees and persons who acquired such units with the prior approval of the board of directors of our general partner, may not vote on any matter. Our partnership agreement also contains provisions limiting the ability of common unitholders to call meetings or to acquire information about our operations, as well as other provisions limiting the ability of our common unitholders to influence the manner or direction of management.
 
Cost reimbursements due to our general partner and its affiliates will reduce cash available for distribution to you.
 
Prior to making any distribution on our outstanding units, we will reimburse our general partner for all expenses it incurs on our behalf including, without limitation, our pro rata portion of management compensation and overhead charged by CVR Energy in accordance with our services agreement. The services agreement does not contain any cap on the amount we may be required to pay pursuant to this agreement. The payment of these amounts, including allocated overhead, to our general partner and its affiliates could adversely affect our ability to make distributions to you. See “Our Cash Distribution Policy and Restrictions on Distributions,” “Certain Relationships and Related Party Transactions” and “Conflicts of Interest and Fiduciary Duties — Conflicts of Interest.”
 
Limited partners may not have limited liability if a court finds that unitholder action constitutes control of our business.
 
A general partner of a partnership generally has unlimited liability for the obligations of the partnership, except for those contractual obligations of the partnership that are expressly made without recourse to the general partner. Our partnership is organized under Delaware law and we conduct business in a number of other states, including Kansas, Nebraska and Texas. Limited partners could be liable for our obligations as if such limited partners were general partners if a court or government agency determined that:
 
  •  we were conducting business in a state but had not complied with that particular state’s partnership statute; or


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  •  limited partners’ right to act with other unitholders to remove or replace our general partner, to approve some amendments to our partnership agreement or to take other actions under our partnership agreement constituted “control” of our business.
 
See “The Partnership Agreement — Limited Liability” for a discussion of the implications of the limitations of liability on a limited partner.
 
Unitholders may have liability to repay distributions.
 
In the event that: (i) we make distributions to our unitholders when our nonrecourse liabilities exceed the sum of (a) the fair market value of our assets not subject to recourse liability and (b) the excess of the fair market value of our assets subject to recourse liability over such liability, or a distribution causes such a result, and (ii) a unitholder knows at the time of the distribution of such circumstances, such unitholder will be liable for a period of three years from the time of the impermissible distribution to repay the distribution under Section 17-607 of the Delaware Act.
 
Likewise, upon the winding up of the partnership, in the event that (a) we do not distribute assets in the following order: (i) to creditors in satisfaction of their liabilities; (ii) to partners and former partners in satisfaction of liabilities for distributions owed under our partnership agreement; (iii) to partners for the return of their contribution; and finally (iv) to the partners in the proportions in which the partners share in distributions and (b) such unitholder knows at the time of such circumstances, then such unitholder will be liable for a period of three years from the impermissible distribution to repay the distribution under Section 17-807 of the Delaware Act.
 
A purchaser of common units who becomes a limited partner is liable for the obligations of the transferring limited partner to make contributions to the partnership that are known by the purchaser at the time it became a limited partner, and for unknown obligations if the liabilities could be determined from our partnership agreement.
 
Our general partner’s interest in us and the control of our general partner may be transferred to a third party without unitholder consent.
 
Our general partner may transfer its general partner interest in us to a third party in a merger or in a sale of all or substantially all of its assets without the consent of the unitholders. Furthermore, there is no restriction in our partnership agreement on the ability of CVR Energy to transfer its equity interest in our general partner to a third party. The new equity owner of our general partner would then be in a position to replace the board of directors and the officers of our general partner with its own choices and to influence the decisions taken by the board of directors and officers of our general partner.
 
If control of our general partner were transferred to an unrelated third party, the new owner of the general partner would have no interest in CVR Energy. We rely substantially on the senior management team of CVR Energy and have entered into a number of significant agreements with CVR Energy, including a services agreement pursuant to which CVR Energy provides us with the services of its senior management team and a long-term agreement for the provision of pet coke. If our general partner were no longer controlled by CVR Energy, CVR Energy could be more likely to terminate the services agreement which, following the one-year anniversary of the closing date of this offering, it may do upon 180 days’ notice, or elect not to renew the pet coke agreement, which expires in 2027.
 
Increases in interest rates could adversely impact our unit price and our ability to issue additional equity to make acquisitions, incur debt or for other purposes.
 
We cannot predict how interest rates will react to changing market conditions. Interest rates on our new credit facility, future credit facilities and debt offerings could be higher than current levels, causing our financing costs to increase accordingly. Additionally, as with other yield-oriented securities, we expect that our unit price will be impacted by the level of our quarterly cash distributions and implied distribution yield. The distribution yield is often used by investors to compare and rank related yield-oriented securities for investment decision-making purposes. Therefore, changes in interest rates may affect the yield requirements of investors who invest in our common units, and a rising interest rate environment could have a material adverse impact on our unit price and our ability to issue additional equity to make acquisitions or to incur debt as well as increasing our interest costs.


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There is no existing market for our common units, and we do not know if one will develop to provide you with adequate liquidity. If our unit price fluctuates after this offering, you could lose a significant part of your investment.
 
Prior to this offering, there has not been a public market for our common units. If an active trading market does not develop, you may have difficulty selling any of our common units that you buy. The initial public offering price for the common units will be determined by negotiations between us and the underwriters and may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell our common units at prices equal to or greater than the price paid by you in this offering. The market price of our common units may be influenced by many factors including:
 
  •  the level of our distributions and our earnings or those of other companies in our industry;
 
  •  the failure of securities analysts to cover our common units after this offering or changes in financial estimates by analysts;
 
  •  announcements by us or our competitors of significant contracts or acquisitions;
 
  •  variations in quarterly results of operations;
 
  •  loss of a large customer or supplier;
 
  •  market price of nitrogen fertilizers;
 
  •  general economic conditions;
 
  •  terrorist acts;
 
  •  changes in the applicable environmental regulations;
 
  •  changes in accounting standards, policies, guidance, interpretations or principles;
 
  •  future sales of our common units; and
 
  •  investor perceptions of us and the industries in which our products are used.
 
As a result of these factors, investors in our common units may not be able to resell their common units at or above the initial offering price. In addition, the stock market in general has experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies like us. These broad market and industry factors may materially reduce the market price of our common units, regardless of our operating performance.
 
You will incur immediate and substantial dilution in net tangible book value per common unit.
 
The assumed initial public offering price of our common units is substantially higher than the pro forma net tangible book value of our outstanding units. As a result, if you purchase common units in this offering, you will incur immediate and substantial dilution in the amount of $      per common unit. This dilution results primarily because the assets contributed by CVR Energy and its affiliates are recorded at their historical costs, and not their fair value, in accordance with GAAP. See “Dilution.”
 
We may issue additional common units and other equity interests without your approval, which would dilute your existing ownership interests.
 
Under our partnership agreement, we are authorized to issue an unlimited number of additional interests without a vote of the unitholders. The issuance by us of additional common units or other equity interests of equal or senior rank will have the following effects:
 
  •  the proportionate ownership interest of unitholders immediately prior to the issuance will decrease;
 
  •  the amount of cash distributions on each unit will decrease;
 
  •  the ratio of our taxable income to distributions may increase;


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  •  the relative voting strength of each previously outstanding unit will be diminished; and
 
  •  the market price of the common units may decline.
 
In addition, our partnership agreement does not prohibit the issuance by our subsidiaries of equity interests, which may effectively rank senior to the common units.
 
Units eligible for future sale may cause the price of our common units to decline.
 
Sales of substantial amounts of our common units in the public market, or the perception that these sales may occur, could cause the market price of our common units to decline. This could also impair our ability to raise additional capital through the sale of our equity interests.
 
There will be           common units outstanding following this offering.          common units are being sold to the public in this offering (          common units if the underwriters exercise their option to purchase additional common units in full) and           common units will be owned by Coffeyville Resources following this offering (           common units if the underwriters exercise their option to purchase additional common units in full). The common units sold in this offering will be freely transferable without restriction or further registration under the Securities Act of 1933, or the Securities Act, by persons other than “affiliates,” as that term is defined in Rule 144 under the Securities Act.
 
In addition, under our partnership agreement, our general partner and its affiliates have the right to cause us to register their units under the Securities Act and applicable state securities laws. In connection with this offering, we will enter into an amended and restated registration rights agreement with Coffeyville Resources pursuant to which we may be required to register the sale of the common units it holds under the Securities Act and applicable state securities laws.
 
In connection with this offering, we, Coffeyville Resources, our general partner and our general partner’s directors and executive officers will enter into lock-up agreements, pursuant to which they will agree, subject to certain exceptions, not to sell or transfer, directly or indirectly, any of our common units until 180 days from the date of this prospectus, subject to extension in certain circumstances. Following termination of these lockup agreements, all units held by Coffeyville Resources, our general partner and their affiliates will be freely tradable under Rule 144, subject to the volume and other limitations of Rule 144. See “Common Units Eligible for Future Sale.”
 
Tax Risks
 
In addition to reading the following risk factors, please read “Material U.S. Federal Income Tax Consequences” for a more complete discussion of the expected material U.S. federal income tax consequences of owning and disposing of our common units.
 
Our tax treatment depends on our status as a partnership for U.S. federal income tax purposes, as well as our not being subject to a material amount of entity-level taxation by individual states. If the IRS were to treat us as a corporation for U.S. federal income tax purposes or if we were to become subject to additional amounts of entity-level taxation for state tax purposes, then our cash available for distribution to our unitholders would be substantially reduced.
 
The anticipated after-tax economic benefit of an investment in our common units depends largely on our being treated as a partnership for U.S. federal income tax purposes. Despite the fact that we are a limited partnership under Delaware law, it is possible in certain circumstances for a partnership such as ours to be treated as a corporation for U.S. federal income tax purposes. During 2011, and in each taxable year thereafter, current law requires us to derive at least 90% of our annual gross income from specific activities to continue to be treated as a partnership for U.S. federal income tax purposes. We may not find it possible to meet this qualifying income requirement, or may inadvertently fail to meet this qualifying income requirement.
 
Although we do not believe based upon our current operations that we are treated as a corporation for U.S. federal income tax purposes, a change in our business or a change in current law could cause us to be treated as a corporation for U.S. federal income tax purposes or otherwise subject us to taxation as an entity. We may in the


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future enter into new activities or businesses. If our legal counsel were to be unable to opine that gross income from any such activity or business will count toward satisfaction of the 90% gross income, or qualifying income, requirement to be treated as a partnership for U.S. federal income tax purposes, we could seek a ruling from the IRS that gross income we earn from any such activity or business will be qualifying income. There can be no assurance, however, that the IRS would issue a favorable ruling under such circumstances. If we did not receive a favorable ruling, we could choose to engage in the activity or business through a corporate subsidiary, which would subject the income related to such activity or business to entity-level taxation. We have not requested and, except to the extent that we in the future request a ruling regarding the qualifying nature of our income, we do not intend to request a ruling from the IRS with respect to our treatment as a partnership for U.S. federal income tax purposes or any other matter affecting us.
 
If we were treated as a corporation for U.S. federal income tax purposes, we would pay U.S. federal income tax on all of our taxable income at the corporate tax rate, which is currently a maximum of 35%, and would likely pay additional state and local income tax at varying rates. Distributions to our unitholders would generally be taxed again as corporate distributions, and no income, gains, losses, deductions or credits would flow through to our unitholders. Because a tax would be imposed upon us as a corporation, our cash available for distribution to our unitholders would be substantially reduced. Therefore, treatment of us as a corporation for U.S. federal income tax purposes would result in a material reduction in the anticipated cash flow and after-tax return to our unitholders, likely causing a substantial reduction in the value of our common units.
 
The tax treatment of publicly traded partnerships or an investment in our common units could be subject to potential legislative, judicial or administrative changes and differing interpretations, possibly on a retroactive basis.
 
The present U.S. federal income tax treatment of publicly traded partnerships, including us, or an investment in our common units may be modified by administrative, legislative or judicial interpretation at any time. Current law may change to cause us to be treated as a corporation for U.S. federal income tax purposes or otherwise subject us to entity-level taxation. For example, members of Congress have recently considered substantive changes to the existing U.S. federal income tax laws that affect publicly traded partnerships. Any modification to the U.S. federal income tax laws and interpretations thereof may or may not be applied retroactively and could make it more difficult or impossible for certain publicly traded partnerships to be treated as partnerships for U.S. federal income tax purposes. Although the considered legislation would not have appeared to affect our treatment as a partnership for U.S. federal income tax purposes, we are unable to predict whether any of these changes, or other proposals will be reintroduced or will ultimately be enacted. Any such changes could cause a substantial reduction in the value of our common units.
 
At the state level, several states are evaluating ways to subject partnerships to entity-level taxation through the imposition of state income, franchise or other forms of taxation. Specifically, we are required to pay Texas franchise tax each year at a maximum effective rate of 0.7% of our gross income apportioned to Texas in the prior year. Imposition of this tax by Texas and, if applicable, by any other state in which we do business will reduce our cash available for distribution to our unitholders. We are unable to predict whether any of these changes or other proposals will ultimately be enacted. Any such changes could cause a substantial reduction in the value of our common units.
 
If the IRS contests the U.S. federal income tax positions we take, the market for our common units may be materially and adversely impacted, and the cost of any IRS contest will reduce our cash available for distribution to our unitholders.
 
Except to the extent that we, in the future, request a ruling regarding the qualifying nature of our income, we have not and do not intend to request a ruling from the IRS with respect to our treatment as a partnership for U.S. federal income tax purposes or any other matter affecting us. The IRS may adopt positions that differ from the conclusions of our counsel expressed in this prospectus or from the positions we take, and the IRS’s positions may ultimately be sustained. It may be necessary to resort to administrative or court proceedings to sustain some or all of our counsel’s conclusions or positions we take. A court may not agree with some or all of our counsel’s conclusions or positions we take. Any contest with the IRS may materially and adversely impact the market for our common


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units and the price at which they trade. In addition, our costs of any contest with the IRS will be borne indirectly by our unitholders because the costs will reduce our cash available for distribution.
 
Unitholders’ share of our income will be taxable for U.S. federal income tax purposes even if they do not receive any cash distributions from us.
 
Because our unitholders will be treated as partners to whom we will allocate taxable income that could be different in amount than the cash we distribute, a unitholder’s allocable share of our taxable income will be taxable to him, which may require the payment of U.S. federal income taxes and, in some cases, state and local income taxes on his share of our taxable income, even if he receives no cash distributions from us. Unitholders may not receive cash distributions from us equal to their share of our taxable income or even equal to the actual tax liability that results from that income.
 
Tax gain or loss on the disposition of our common units could be more or less than expected.
 
If our unitholders sell common units, they will recognize a gain or loss for U.S. federal income tax purposes equal to the difference between the amount realized and their tax basis in those common units. Because distributions in excess of their allocable share of our net taxable income decrease their tax basis in their common units, the amount, if any, of such prior excess distributions with respect to the common units our unitholders sell will, in effect, become taxable income to our unitholders if they sell such common units at a price greater than their tax basis in those common units, even if the price they receive is less than their original cost. Furthermore, a substantial portion of the amount realized, whether or not representing gain, may be taxed as ordinary income due to potential recapture items, including depreciation recapture. In addition, because the amount realized includes a unitholder’s share of our nonrecourse liabilities, if our unitholders sell common units, they may incur a tax liability in excess of the amount of cash the unitholders receive from the sale. Please read “Material U.S. Federal Income Tax Consequences — Disposition of Common Units — Recognition of Gain or Loss” for a further discussion of the foregoing.
 
Tax-exempt entities and non-U.S. persons face unique tax issues from owning our common units that may result in adverse tax consequences to them.
 
Investment in our common units by tax-exempt entities, such as employee benefit plans and individual retirement accounts (known as IRAs), and non-U.S. persons, raises issues unique to them. For example, virtually all of our income allocated to organizations that are exempt from U.S. federal income tax, including IRAs and other retirement plans, will be unrelated business taxable income and will be taxable to them. Distributions to non-U.S. persons will be reduced by withholding taxes at the highest applicable effective tax rate, and non-U.S. persons will be required to file U.S. federal income tax returns and pay tax on their share of our taxable income. Unitholders that are tax-exempt entities or non-U.S. persons should consult their tax advisor before investing in our common units.
 
We will treat each purchaser of our common units as having the same tax benefits without regard to the actual common units purchased. The IRS may challenge this treatment, which could adversely affect the value of our common units.
 
Due to our inability to match transferors and transferees of common units, we will adopt depreciation and amortization positions that may not conform to all aspects of existing Treasury Regulations promulgated under the Internal Revenue Code, referred to as “Treasury Regulations.” A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to our unitholders. It also could affect the timing of these tax benefits or the amount of gain from the sale of common units and could cause a substantial reduction in the value of our common units or result in audit adjustments to our unitholders’ tax returns. Please read “Material U.S. Federal Income Tax Consequences — Tax Consequences of Common Unit Ownership — Section 754 Election” for a further discussion of the effect of the depreciation and amortization positions we will adopt.


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We will prorate our items of income, gain, loss and deduction, for U.S. federal income tax purposes, between transferors and transferees of our common units each month based upon the ownership of our common units on the first day of each month, instead of on the basis of the date a particular common unit is transferred. The IRS may challenge this treatment, which could change the allocation of items of income, gain, loss and deduction among our unitholders.
 
We will prorate our items of income, gain, loss and deduction between transferors and transferees of our common units each month based upon the ownership of our common units on the first day of each month, instead of on the basis of the date a particular common unit is transferred. The use of this proration method may not be permitted under existing Treasury Regulations. Recently, however, the U.S. Treasury Department issued proposed Treasury Regulations that provide a safe harbor pursuant to which publicly traded partnerships may use a similar monthly simplifying convention to allocate tax items among transferor and transferee unitholders. Nonetheless, the proposed regulations do not specifically authorize the use of the proration method we will adopt. If the IRS were to challenge our proration method or new Treasury Regulations were issued requiring a change, we may be required to change the allocation of items of income, gain, loss and deduction among our unitholders. Vinson & Elkins L.L.P. has not rendered an opinion with respect to whether our monthly convention for allocating taxable income and losses is permitted by existing Treasury Regulations. Please read “Material U.S. Federal Income Tax Consequences — Disposition of Common Units — Allocations Between Transferors and Transferees.”
 
A unitholder whose common units are loaned to a “short seller” to cover a short sale of common units may be considered as having disposed of those common units. If so, the unitholder would no longer be treated for U.S. federal income tax purposes as a partner with respect to those common units during the period of the loan and may recognize gain or loss from the disposition.
 
Because a unitholder whose common units are loaned to a “short seller” to cover a short sale of common units may be considered as having disposed of the loaned common units, he may no longer be treated for U.S. federal income tax purposes as a partner with respect to those common units during the period of the loan to the short seller and the unitholder may recognize gain or loss from such disposition. Moreover, during the period of the loan to the short seller, any of our income, gain, loss or deduction with respect to those common units may not be reportable by the unitholder and any cash distributions received by the common unitholder as to those common units could be fully taxable as ordinary income. Vinson & Elkins L.L.P. has not rendered an opinion regarding the treatment of a unitholder where common units are loaned to a short seller to cover a short sale of common units due to a lack of controlling authority; therefore, unitholders desiring to assure their status as partners for U.S. federal income tax purposes and avoid the risk of gain recognition from a loan to a short seller are urged to consult a tax advisor to discuss whether it is advisable to modify any applicable brokerage account agreements to prohibit their brokers from borrowing their common units.
 
The sale or exchange of 50% or more of our capital and profits interests during any twelve-month period will result in the termination of our partnership for U.S. federal income tax purposes.
 
We will be considered to have technically terminated for U.S. federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in our capital and profits within a twelve-month period. For purposes of determining whether the 50% threshold has been met, multiple sales of the same common unit will be counted only once. While we would continue our existence as a Delaware limited partnership, our technical termination would, among other things, result in the closing of our taxable year for all unitholders, which would result in us filing two tax returns (and our unitholders could receive two Schedules K-1) for one fiscal year and could result in a significant deferral of depreciation deductions allowable in computing our taxable income. In the case of a unitholder reporting on a taxable year other than a fiscal year ending December 31, the closing of our taxable year may also result in more than one year of our taxable income or loss being includable in his taxable income for the year of termination. A technical termination currently would not affect our classification as a partnership for U.S. federal income tax purposes, but instead, we would be treated as a new partnership for such tax purposes. If treated as a new partnership, we must make new tax elections and could be subject to penalties if we are unable to determine that a technical termination occurred. The IRS has recently announced a relief procedure whereby a publicly traded partnership that has technically terminated may request special relief that, if granted, would permit


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the partnership to provide only a single Schedule K-1 to unitholders for the tax years in which the termination occurs. Please read “Material U.S. Federal Income Tax Consequences — Disposition of Common Units — Constructive Termination” for a discussion of the consequences of a technical termination for U.S. federal income tax purposes.
 
Unitholders will likely be subject to state and local taxes and return filing requirements in jurisdictions where they do not live as a result of investing in our common units.
 
In addition to U.S. federal income taxes, unitholders will likely be subject to other taxes, including state and local taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we do business or control property now or in the future, even if they do not live in any of those jurisdictions. Unitholders will likely be required to file state and local income tax returns and pay state and local income taxes in some or all of these various jurisdictions. Further, unitholders may be subject to penalties for failure to comply with those requirements. We will initially own assets and conduct business in Kansas, Nebraska and Texas. Kansas and Nebraska currently impose a personal income tax on individuals. Kansas and Nebraska also impose an income tax on corporations and other entities. Texas currently imposes a franchise tax on corporations and other entities. As we make acquisitions or expand our business, we may own or control assets or conduct business in additional states that impose a personal income tax. It is the responsibility of each unitholder to file all U.S. federal, state, local and non-U.S. tax returns. Our counsel has not rendered an opinion on the state, local or non-U.S. tax consequences of an investment in our common units.


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CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
 
This prospectus contains forward-looking statements. Statements that are predictive in nature, that depend upon or refer to future events or conditions or that include the words “will,” “believe,” “expect,” “anticipate,” “intend,” “estimate” and other expressions that are predictions of or indicate future events and trends and that do not relate to historical matters identify forward-looking statements. Our forward-looking statements include statements about our business strategy, our industry, our future profitability, our expected capital expenditures (including environmental expenditures) and the impact of such expenditures on our performance, the costs of operating as a public company and our capital programs. All statements herein about our forecast of available cash and our forecasted results for 2011 constitute forward-looking statements. These statements involve known and unknown risks, uncertainties and other factors, including the factors described under “Risk Factors,” that may cause our actual results and performance to be materially different from any future results or performance expressed or implied by these forward-looking statements. Such risks and uncertainties include, among other things:
 
  •  our ability to make cash distributions on the units;
 
  •  the volatile nature of our business and the variable nature of our distributions;
 
  •  the ability of our general partner to modify or revoke our distribution policy at any time;
 
  •  our ability to forecast our future financial condition or results of operations and our future revenues and expenses;
 
  •  the cyclical nature of our business;
 
  •  our largely fixed costs and the potential decline in the price of natural gas, which is the main resource used by our competitors and which will lower our competitors’ cost to produce nitrogen fertilizer products without lowering ours;
 
  •  the potential decline in the price of natural gas;
 
  •  a decrease in ethanol production;
 
  •  intense competition from other nitrogen fertilizer producers;
 
  •  adverse weather conditions, including potential floods;
 
  •  the seasonal nature of our business;
 
  •  the dependence of our operations on a few third-party suppliers, including providers of transportation services and equipment;
 
  •  our reliance on pet coke that we purchase from CVR Energy;
 
  •  the supply and price levels of essential raw materials;
 
  •  the risk of a material decline in production at our nitrogen fertilizer plant;
 
  •  potential operating hazards from accidents, fire, severe weather, floods or other natural disasters;
 
  •  the risk associated with governmental policies affecting the agricultural industry;
 
  •  the volatile nature of ammonia, potential liability for accidents involving ammonia that cause interruption to our business, severe damage to property or injury to the environment and human health and potential increased costs relating to transport of ammonia;
 
  •  capital expenditures and potential liabilities arising from environmental laws and regulations;
 
  •  our potential inability to obtain or renew permits;
 
  •  existing and proposed environmental laws and regulations, including those relating to climate change, alternative energy or fuel sources, and on the end-use and application of fertilizers;


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  •  new regulations concerning the transportation of hazardous chemicals, risks of terrorism and the security of chemical manufacturing facilities;
 
  •  our lack of asset diversification;
 
  •  our dependence on significant customers;
 
  •  the potential loss of our transportation cost advantage over our competitors;
 
  •  our ability to comply with employee safety laws and regulations;
 
  •  potential disruptions in the global or U.S. capital and credit markets;
 
  •  the success of our acquisition and expansion strategies;
 
  •  our potential inability to successfully implement our business strategies, including the completion of significant capital programs;
 
  •  additional risks, compliance costs and liabilities from expansions or acquisitions;
 
  •  our reliance on CVR Energy’s senior management team;
 
  •  the potential shortage of skilled labor or loss of key personnel;
 
  •  our ability to continue to license the technology used in our operations;
 
  •  successfully defending against third-party claims of intellectual property infringement;
 
  •  restrictions in our debt agreements;
 
  •  the dependence on our subsidiary for cash to meet our debt obligations;
 
  •  our limited operating history as a stand-alone company;
 
  •  potential increases in costs and distraction of management resulting from the requirements of being a publicly traded partnership;
 
  •  exemptions we will rely on in connection with NYSE corporate governance requirements;
 
  •  risks relating to evaluations of internal controls required by Section 404 of the Sarbanes-Oxley Act;
 
  •  risks relating to our relationships with CVR Energy;
 
  •  control of our general partner by CVR Energy;
 
  •  the conflicts of interest faced by our senior management team, which operates both us and CVR Energy, and our general partner;
 
  •  limitations on the fiduciary duties owed by our general partner which are included in the partnership agreement; and
 
  •  changes in our treatment as a partnership for U.S. income or state tax purposes.
 
You should not place undue reliance on our forward-looking statements. Although forward-looking statements reflect our good faith beliefs, forward-looking statements involve known and unknown risks, uncertainties and other factors, which may cause our actual results, performance or achievements to differ materially from anticipated future results, performance or achievements expressed or implied by such forward-looking statements. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events, changed circumstances or otherwise, unless required by law.


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THE TRANSACTIONS AND OUR STRUCTURE AND ORGANIZATION
 
The Transactions
 
The following transactions will take place in connection with this offering. We refer to these transactions collectively as the “Transactions”:
 
  •  We will distribute the due from affiliate balance of $160.5 million (as of September 30, 2010) owed to us by Coffeyville Resources;
 
  •  Our general partner and Coffeyville Resources, a wholly owned subsidiary of CVR Energy, will enter into a second amended and restated agreement of limited partnership, the form of which is attached hereto as Appendix A;
 
  •  We will distribute to Coffeyville Resources all cash on our balance sheet before the closing date of the offering (other than cash in respect of prepaid sales);
 
  •  CVR Special GP, LLC, or Special GP, a wholly-owned subsidiary of Coffeyville Resources, will be merged with and into Coffeyville Resources, with Coffeyville Resources continuing as the surviving entity;
 
  •  Coffeyville Resources’ interests in us will be converted into           common units;
 
  •  We will offer and sell           common units in this offering (           common units if the underwriters exercise their option in full), pay related commissions and expenses;
 
  •  We will distribute $18.4 million of the offering proceeds to Coffeyville Resources in satisfaction of our obligation to reimburse it for certain capital expenditures it made with respect to the nitrogen fertilizer business prior to October 24, 2007;
 
  •  We will make a special distribution of $       million of the proceeds of this offering to Coffeyville Resources in order to, among other things, fund the offer to purchase Coffeyville Resources’ senior secured notes required upon consummation of this offering;
 
  •  Simultaneously with the closing of this offering, we will be released from our obligations as a guarantor under Coffeyville Resources’ existing revolving credit facility, its 9.0% First Lien Senior Secured Notes due 2015 and its 10.875% Second Lien Senior Secured Notes due 2017;
 
  •  We expect to enter into a new credit facility, which will include a $125.0 million term loan and a $25.0 million revolving credit facility and pay associated financing costs.
 
  •  At the closing of this offering, we will draw the $125.0 million term loan in full and use $      million of the proceeds therefrom to fund a special distribution to Coffeyville Resources in order to, among other things, fund the offer to purchase Coffeyville Resources’ senior secured notes required upon consummation of this offering.
 
  •  To the extent the underwriters do not exercise their option to purchase additional common units, we will issue those common units to Coffeyville Resources;
 
  •  Our general partner will sell to us its incentive distribution rights, or IDRs, for $26.0 million in cash (representing fair market value), which will be paid as a distribution to its current owners, which include affiliates of the Goldman Sachs Funds and the Kelso Funds and members of our senior management, and we will extinguish such IDRs; and
 
  •  Coffeyville Acquisition III, the current owner of CVR GP, LLC, our general partner, will sell our general partner, which holds a non-economic general partner interest in us, to Coffeyville Resources for nominal consideration.
 
Management
 
Our general partner manages our operations and activities. Following the Transactions, our general partner will be indirectly owned by CVR Energy. For information about the executive officers and directors of our general partner, see “Management — Executive Officers and Directors.” Our general partner will not receive any management fee or other compensation in connection with the management of our business but will be entitled to be


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reimbursed for all direct and indirect expenses incurred on our behalf, including management compensation and overhead allocated to us by CVR Energy in accordance with our services agreement. Upon the closing of this offering, our general partner will own a non-economic general partner interest and therefore will not be entitled to receive cash distributions. However, it may acquire common units in the future and will be entitled to receive pro rata distributions therefrom.
 
Unlike shareholders in a corporation, our common unitholders are not entitled to elect our general partner or the board of directors of our general partner. See “Management — Management of CVR Partners, LP.”
 
Conflicts of Interest and Fiduciary Duties
 
CVR GP, LLC, our general partner, has legal duties to manage us in a manner beneficial to our unitholders. These legal duties are commonly referred to as “fiduciary duties.” Because our general partner is indirectly owned by CVR Energy, the officers and directors of our general partner and the officers and directors of CVR Energy, which indirectly owns our general partner, also have fiduciary duties to manage the business of our general partner in a manner beneficial to CVR Energy. As a result of these relationships, conflicts of interest may arise in the future between us and our unitholders, on the one hand, and our general partner and its affiliates, on the other hand. For a more detailed description of the conflicts of interest and fiduciary duties of our general partner, see “Risk Factors — Risks Related to an Investment in Us” and “Conflicts of Interest and Fiduciary Duties.”
 
Our partnership agreement limits the liability and reduces the fiduciary duties of our general partner and its directors and officers to our unitholders. Our partnership agreement also restricts the remedies available to unitholders for actions that might otherwise constitute breaches of our general partner’s fiduciary duties. By purchasing a common unit, you are consenting to various limitations on fiduciary duties contemplated in our partnership agreement and conflicts of interest that might otherwise be considered a breach of fiduciary or other duties under applicable law. See “Conflicts of Interest and Fiduciary Duties — Fiduciary Duties” for a description of the fiduciary duties imposed on our general partner by Delaware law, the material modifications of these duties contained in our partnership agreement and certain legal rights and remedies available to unitholders. In addition, our general partner will have rights to call for redemption, under specified circumstances, all of the outstanding common units without considering whether this is in the interest of our common unitholders. For a description of such redemption rights, see “The Partnership Agreement — Call Right.”
 
For a description of our other relationships with our affiliates, see “Certain Relationships and Related Party Transactions.”
 
Trademarks, Trade Names and Service Marks
 
This prospectus includes trademarks belonging to CVR Energy, including CVR Partners, LP®, COFFEYVILLE RESOURCES® and CVR Energytm. This prospectus also contains trademarks, service marks, copyrights and trade names of other companies.
 
CVR Energy
 
CVR Energy, which following this offering will indirectly own our general partner and approximately     % of our outstanding units (     % of our common units if the underwriters exercise their option to purchase additional common units in full), currently operates a 115,000 bpd sour crude oil refinery and ancillary businesses. CVR Energy’s common stock is listed for trading on the New York Stock Exchange under the symbol “CVI.” At November 30, 2010, approximately 40% of CVR Energy’s outstanding shares were beneficially owned by the Kelso Funds (23%) and the Goldman Sachs Funds (17%).
 
For the nine months ended September 30, 2010, CVR Energy had consolidated net sales of approximately $2,931.6 million, consolidated net income of $12.0 million and consolidated operating income of approximately $58.3 million. For the years ended December 31, 2007, 2008 and 2009 CVR Energy had consolidated net sales of $3.0 billion, $5.0 billion and $3.1 billion, respectively, consolidated net income of ($67.6) million, $163.9 million and $69.4 million, respectively, and consolidated operating income of $186.6 million, $148.7 million and $208.2 million, respectively. These consolidated results include our results of operations as well as the results of operating CVR Energy’s refining business, with intercompany transactions eliminated.
 


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USE OF PROCEEDS
 
We expect to receive approximately $      million of estimated net proceeds from the sale of common units by us in this offering, after deducting underwriting discounts and commissions and the estimated expenses of this offering, based on an assumed initial public offering price of $      per common unit (the mid-point of the price range set forth on the cover page of the prospectus). We intend to use the estimated net proceeds of this offering as follows:
 
  •  approximately $      million will be used to make a special distribution to Coffeyville Resources in order to, among other things, fund the offer to purchase Coffeyville Resources’ senior secured notes required upon consummation of this offering;
 
  •  approximately $26.0 million will be used to purchase (and subsequently extinguish) the incentive distribution rights currently owned by our general partner;
 
  •  approximately $      million will be used by us to pay financing fees in connection with entering into our new credit facility; and
 
  •  the balance will be used for general partnership purposes, including approximately $      million to fund the intended approximately $135 million UAN expansion, for which approximately $31 million had been spent as of December 31, 2010.
 
If the underwriters exercise their option to purchase           additional common units in full, the additional net proceeds to us would be approximately $      million (and the total net proceeds to us would be approximately $      million), in each case assuming an initial public offering price per common unit of $       (the mid-point of the price range set forth on the cover page of the prospectus). The net proceeds from any exercise of such option will also be paid as a special distribution to Coffeyville Resources.
 
A $1.00 increase (or decrease) in the assumed initial public offering price of $      per common unit would increase (decrease) the net proceeds to us from the offering by $      million, assuming the number of common units offered by us, as set forth on the cover page of this prospectus, remains the same and assuming the underwriters do not exercise their option to purchase additional common units, and after deducting the underwriting discounts and commissions. The actual initial public offering price is subject to market conditions and negotiations between us and the underwriters.
 
Depending on market conditions at the time of pricing of this offering and other considerations, we may sell fewer or more common units than the number set forth on the cover page of this prospectus.


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CAPITALIZATION
 
The following table sets forth our consolidated cash and cash equivalents and capitalization as of September 30, 2010 on (a) an actual basis and (b) a pro forma basis to reflect the Transactions. The table assumes (x) an initial public offering price of $      per unit (the mid-point of the price range set forth on the cover page of the prospectus, and (y) no exercise by the underwriters of their option to purchase additional common units.
 
You should read this table in conjunction with “Use of Proceeds,” “Selected Historical Consolidated Financial Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Unaudited Pro Forma Condensed Consolidated Financial Statements,” and the consolidated financial statements and related notes included elsewhere in this prospectus.
 
                 
    As of September 30, 2010  
    Actual     Pro Forma  
    (unaudited)  
    (in thousands)  
 
Cash and cash equivalents
  $ 28,775     $        
                 
New revolving credit facility(1)
           
New term loan facility(2)
             
Partners’ capital:
               
Equity held by public:
               
Common units: none issued and outstanding actual;          issued and outstanding pro forma
             
Equity held by CVR Energy and its affiliates:
               
Special general partner’s interest: 30,303,000 units issued and outstanding actual; none issued and outstanding pro forma
    556,244        
Special limited partner’s interest: 30,333 units issued and outstanding actual; none issued and outstanding pro forma
    559        
Common units: none issued and outstanding actual;          issued and outstanding pro forma(2)
             
General partner’s interest
    3,854          
                 
Total partners’ capital
    560,657          
                 
Total capitalization
  $ 560,657     $  
                 
 
 
(1) We expect to have approximately $25.0 million of available capacity under our new revolving credit facility at the closing of this offering.
 
(2) We expect to draw $125.0 million under a new term loan facility at the closing of this offering. We will use $      million of the proceeds therefrom to pay a special distribution to Coffeyville Resources in order to, among other things, fund the offer to purchase Coffeyville Resources’ senior secured notes required upon consummation of this offering. The pro forma capitalization with respect to the common units held by CVR Energy and its affiliates has been adjusted for the term loan facility distribution as well as the other distributions to Coffeyville Resources which are part of the Transactions.


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DILUTION
 
Purchasers of common units offered by this prospectus will suffer immediate and substantial dilution in net tangible book value per unit. Our pro forma net tangible book value as of December 31, 2010, excluding the net proceeds of this offering, was approximately $      million, or approximately $      per unit. Pro forma net tangible book value per unit represents the amount of tangible assets less total liabilities (excluding the net proceeds of this offering), divided by the pro forma number of units outstanding (excluding the units issued in this offering).
 
Dilution in net tangible book value per unit represents the difference between the amount per unit paid by purchasers of our common units in this offering and the pro forma net tangible book value per unit immediately after this offering. After giving effect to the sale of        common units in this offering at an assumed initial public offering price of $      per common unit (the mid-point of the price range set forth on the cover page of the prospectus), and after deduction of the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma net tangible book value as of December 31, 2010 would have been approximately $      million, or $      per unit. This represents an immediate increase in net tangible book value of $      per unit to our existing unitholders and an immediate pro forma dilution of $      per unit to purchasers of common units in this offering. The following table illustrates this dilution on a per unit basis:
 
                 
Assumed initial public offering price per common unit
  $           $        
Pro forma net tangible book value per unit before this offering(1)
  $       $    
Increase in net tangible book value per unit attributable to purchasers in this offering and use of proceeds
  $       $  
                 
Less: Pro forma net tangible book value per unit after this offering(2)
  $       $  
                 
Immediate dilution in net tangible book value per common unit to purchasers in this offering
  $       $  
                 
 
 
(1) Determined by dividing the net tangible book value of our assets less total liabilities by the number of units outstanding prior to this offering.
(2) Determined by dividing our pro forma net tangible book value, after giving effect to the application of the net proceeds of this offering, by the total number of units to be outstanding after this offering.
 
A $1.00 increase (decrease) in the assumed initial public offering price of $      per common unit (the mid-point of the price range set forth on the cover page of the prospectus) would increase (decrease) our pro forma net tangible book value by $      million, the pro forma net tangible book value per unit by $      and the dilution per common unit to new investors by $     , assuming the number of common units offered by us, as set forth on the cover page of this prospectus, remains the same and the underwriters do not exercise their option to purchase additional common units, and after deducting the underwriting discounts and estimated offering expenses payable by us. Depending on market conditions at the time of pricing of this offering and other considerations, we may sell fewer or more common units than the number set forth on the cover page of this prospectus.
 
The following table sets forth the total value contributed by CVR Energy and its affiliates in respect of the units held by them and the total amount of consideration contributed to us by the purchasers of common units in this offering upon the completion of the Transactions.
 
                                 
    Units Acquired     Total Consideration  
    Number     Percent     Amount     Percent  
 
Coffeyville Resources(1)(2)
                      %   $                   %
New investors
            %   $         %
                                 
Total
            %   $         %
                                 
 
 
(1) Upon the completion of the Transactions, Coffeyville Resources will own           common units.
(2) The assets contributed by affiliates of CVR Energy were recorded at historical cost in accordance with GAAP.


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A $1.00 increase (decrease) in the assumed initial public offering price of $      per common unit would increase (decrease) total consideration paid by new investors and total consideration paid by all unitholders by $      million, assuming the number of common units offered by us, as set forth on the cover page of this prospectus, remains the same, and after deducting the underwriting discounts and estimated offering expenses payable by us.
 
If the underwriters exercise their option to purchase           common units in full, then the pro forma increase per unit attributable to new investors would be $      , the net tangible book value per unit after this offering would be $      and the dilution per unit to new investors would be $       . In addition, new investors would purchase           common units, or approximately     % of units outstanding, and the total consideration contributed to us by new investors would increase to $      million, or     % of the total consideration contributed (based on an assumed initial public offering price of $      per common unit).


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OUR CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS
 
You should read the following discussion of our cash distribution policy and restrictions on distributions in conjunction with the specific assumptions upon which our cash distribution policy is based. See “— Assumptions and Considerations” below. For additional information regarding our historical and pro forma operating results, you should refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” our audited historical consolidated financial statements, our unaudited historical condensed consolidated financial statements and our unaudited pro forma condensed consolidated financial statements included elsewhere in this prospectus. In addition, you should read “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” for information regarding statements that do not relate strictly to historical or current facts and certain risks inherent in our business.
 
General
 
Our Cash Distribution Policy
 
The board of directors of our general partner will adopt a policy pursuant to which we will distribute all of the available cash we generate each quarter. Available cash for each quarter will be determined by the board of directors of our general partner following the end of such quarter. We expect that available cash for each quarter will generally equal our cash flow from operations for the quarter, less cash needed for maintenance capital expenditures, debt service and other contractual obligations, and reserves for future operating or capital needs that the board of directors of our general partner deems necessary or appropriate. We do not intend to maintain excess distribution coverage for the purpose of maintaining stability or growth in our quarterly distribution or otherwise to reserve cash for distributions, nor do we intend to incur debt to pay quarterly distributions. We expect to finance substantially all of our growth externally, either by debt issuances or additional issuances of equity.
 
Because our policy is to distribute all available cash we generate each quarter, without reserving cash for future distributions or borrowing to pay distributions during periods of low cash flow from operations, our unitholders will have direct exposure to fluctuations in the amount of cash generated by our business. We expect that the amount of our quarterly distributions, if any, will vary based on our operating cash flow during such quarter. Our quarterly cash distributions, if any, will not be stable and will vary from quarter to quarter as a direct result of variations in our operating performance and cash flow caused by fluctuations in the price of nitrogen fertilizers as well as forward and prepaid sales; see “Business — Distribution, Sales and Marketing.” Such variations may be significant. The board of directors of our general partner may change the foregoing distribution policy at any time and from time to time. Our partnership agreement does not require us to pay cash distributions on a quarterly or other basis.
 
From time to time we make prepaid sales, whereby we receive cash during one quarter in respect of product to be produced and sold in a future quarter, but we do not record revenue in respect of the cash received until the quarter when product is delivered. All cash on our balance sheet in respect of prepaid sales on the date of the closing of this offering will not be distributed to Coffeyville Resources at the closing of this offering but will be reserved for distribution to holders of common units.
 
Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy
 
There is no guarantee that unitholders will receive quarterly cash distributions from us. Our distribution policy may be changed at any time and is subject to certain restrictions, including:
 
  •  Our unitholders have no contractual or other legal right to receive cash distributions from us on a quarterly or other basis. The board of directors of our general partner will adopt a policy pursuant to which we will distribute to our unitholders each quarter all of the available cash we generate each quarter, as determined quarterly by the board of directors, but it may change this policy at any time.
 
  •  Our business performance is expected to be more seasonal and volatile, and our cash flows are expected to be less stable, than the business performance and cash flows of most publicly traded partnerships. As a result, our quarterly cash distributions will be volatile and is expected to vary quarterly and annually. Unlike most publicly traded partnerships, we will not have a minimum quarterly distribution or employ structures intended to consistently maintain or increase quarterly distributions over time. Furthermore, none of our


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  limited partnership interests, including those held by Coffeyville Resources, will be subordinate in right of distribution payment to the common units sold in this offering.
 
  •  The amount of distributions we pay under our cash distribution policy and the decision to make any distribution is determined by the board of directors of our general partner. Our partnership agreement will not provide for any minimum quarterly distributions.
 
  •  Under Section 17-607 of the Delaware Act, we may not make a distribution to our limited partners if the distribution would cause our liabilities to exceed the fair value of our assets.
 
  •  We expect that our distribution policy will be subject to restrictions on distributions under our new credit facility. We anticipate that our new credit facility will contain customary tests that we must satisfy in order to make distributions to unitholders. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — New Credit Facility.” Should we be unable to satisfy these restrictions under our new credit facility, we would be prohibited from making cash distributions to you.
 
  •  We may lack sufficient cash to make distributions to our unitholders due to a number of factors that would adversely affect us, including but not limited to decreases in net sales or increases in operating expenses, principal and interest payments on debt, working capital requirements, capital expenditures or anticipated cash needs. See “Risk Factors” for information regarding these factors.
 
We do not have any operating history as an independent company upon which to rely in evaluating whether we will have sufficient cash to allow us to pay distributions on our common units. While we believe, based on our financial forecast and related assumptions, that we should have sufficient cash to enable us to pay the forecasted aggregate distribution on all of our common units for the year ending December 31, 2011, we may be unable to pay the forecasted distribution or any amount on our common units.
 
We intend to pay our distributions on or about the 15th day of each February, May, August and November to holders of record on or about the 1st day of each such month. Our first distribution will include available cash for the first full quarter ending after the consummation of this offering.
 
In the sections that follow, we present the following two tables:
 
  •  “CVR Partners, LP Unaudited Pro Forma Available Cash for the Year Ending December 31, 2011,” in which we present our estimate of the amount of pro forma available cash we would have had for the twelve months ended September 30, 2010, based on our unaudited pro forma condensed consolidated financial statements included elsewhere in this prospectus. See “Unaudited Pro Forma Condensed Consolidated Financial Statements” on page P-1; and
 
  •  “CVR Partners, LP Estimated Available Cash for the Year Ending December 31, 2011,” in which we present our unaudited forecast of available cash for the year ending December 31, 2011.
 
We do not as a matter of course make or intend to make projections as to future sales, earnings, or other results. However, our management has prepared the prospective financial information set forth under “— Forecasted Available Cash” below to supplement the historical and pro forma financials included elsewhere in this prospectus. To management’s knowledge and belief, the accompanying prospective financial information was prepared on a reasonable basis, reflects currently available estimates and judgments, and presents our expected course of action and our expected future financial performance. However, this information is not fact and should not be relied upon as being indicative of future results, and readers of this prospectus are cautioned not to place undue reliance on the prospective financial information. Neither our independent registered public accounting firm, nor any other registered public accounting firm, has compiled, examined, or performed any procedures with respect to the prospective financial information contained in this section, nor have they expressed any opinion or any other form of assurance on such information or its achievability, and assume no responsibility for, and disclaim any association with, the prospective financial information. See “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors.”


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Pro Forma Available Cash
 
We believe that our pro forma available cash generated during the twelve months ended September 30, 2010 would have been approximately $39.3 million. Based on the cash distribution policy we expect our board of directors to adopt, this amount would have resulted in an aggregate annual distribution equal to $      per common unit for the twelve months ended September 30, 2010.
 
Pro forma available cash reflects the payment of incremental general and administrative expenses we expect that we will incur as a publicly traded limited partnership, such as costs associated with SEC reporting requirements, including annual and quarterly reports to unitholders, tax return and Schedule K-1 preparation and distribution, independent auditor fees, investor relations activities and registrar and transfer agent fees. We estimate that these incremental general and administrative expenses will approximate $3.5 million per year. The estimated incremental general and administrative expenses are reflected in our pro forma available cash but are not reflected in our unaudited pro forma condensed consolidated financial statements.
 
The pro forma financial statements, from which pro forma available cash is derived, do not purport to present our results of operations had the transactions contemplated below actually been completed as of the date indicated. Furthermore, available cash is a cash accounting concept, while our unaudited pro forma condensed consolidated financial statements have been prepared on an accrual basis. We derived the amounts of pro forma available cash stated above in the manner described in the table below. As a result, the amount of pro forma available cash should only be viewed as a general indication of the amount of available cash that we might have generated had we been formed and completed the transactions contemplated below in earlier periods.


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The following table illustrates, on a pro forma basis for the twelve months ended September 30, 2010, the amount of cash that would have been available for distributions to our unitholders, assuming that the Transactions (as defined on page 50 of this prospectus) had occurred at the beginning of such period:
 
CVR Partners, LP
Unaudited Pro Forma Available Cash for the
Twelve Months Ended September 30, 2010
 
         
    Pro Forma  
    Twelve Months Ended
 
    September 30, 2010  
    (unaudited)
 
    (in millions, except
 
    per unit data)  
 
Net income(a)(b)
  $ 29.9  
Add:
       
Interest expense and other financing costs
    7.0  
Income tax expense
     
Depreciation and amortization
    18.5  
         
EBITDA(c)
    55.4  
Subtract:
       
Debt service costs(d)
    7.7  
Estimated incremental general and administrative expenses(e)
    3.5  
Maintenance capital expenditures(f)
    3.6  
Add:
       
Share-based compensation expense reversal(g)
    (1.3 )
         
Available Cash
  $ 39.3  
Distribution on a per unit basis
  $  
 
(a) Interest expense and other financing costs represents the interest expense and fees, net of interest income, related to our borrowings, assuming that our new credit facility had been put in place on October 1, 2009, and also reflects the amortization of deferred financing fees related to our new credit facility. We assume that we will make term loan borrowings of $125.0 million under our new credit facility at the closing of this offering at an assumed interest rate of 5.0%.
(b) Pro forma net income assumes that the due from affiliate balance was distributed to Coffeyville Resources as of October 1, 2009 and the interest income associated with that balance was eliminated.
(c) EBITDA is defined as net income plus interest expense and other financing costs, income tax expense and depreciation and amortization, net of interest income. We calculate available cash as used in this table as EBITDA less interest expense and other financing costs paid, debt amortization payments, estimated incremental general and administrative expenses associated with being a public company and maintenance capital expenditures, plus non-cash share-based compensation expense.
We present EBITDA because it is a material component in our calculation of available cash. In addition, EBITDA and available cash are used as supplemental financial measures by management and by external users of our financial statements, such as investors and commercial banks, to assess:
   •   the financial performance of our assets without regard to financing methods, capital structure or historical cost basis; and
   •   our operating performance and return on invested capital compared to those of other publicly traded limited partnerships, without regard to financing methods and capital structure.
EBITDA and available cash should not be considered alternatives to net income, operating income, net cash provided by operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP. EBITDA and available cash may have material limitations as performance measures


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because they exclude items that are necessary elements of our costs and operations. In addition, EBITDA and available cash presented by other companies may not be comparable to our presentation, since each company may define these terms differently.
(d) Debt service is defined as interest expense and other financing costs paid and debt amortization payments.
(e) Reflects an adjustment for estimated incremental general and administrative expenses we expect that we will incur as a publicly traded limited partnership, such as costs associated with SEC reporting requirements, including annual and quarterly reports to unitholders, tax return and Schedule K-1 preparation and distribution, independent auditor fees, investor relations activities, and registrar and transfer agent fees.
(f) Reflects actual maintenance capital expenditures during the period.
(g) Reflects an adjustment for share-based expense which is not subject to reimbursement by us. We are allocated non-cash share-based compensation expense from CVR Energy for purposes of financial statement reporting. CVR Energy accounts for share-based compensation in accordance with ASC 718, Compensation — Stock Compensation as well as guidance regarding the accounting for share-based compensation granted to employees of an equity-method investee. In accordance with SAB Topic 1-B, CVR Energy allocates costs between itself and us based upon the percentage of time a CVR Energy employee provides services to us. In accordance with the services agreement, we will not be responsible for the payment of cash related to any share-based compensation which CVR Energy allocates to us.
 
Forecasted Available Cash
 
During the year ending December 31, 2011, we estimate that we will generate $115.5 million of available cash. In “— Assumptions and Considerations” below, we discuss the major assumptions underlying this estimate. The available cash discussed in the forecast should not be viewed as management’s projection of the actual available cash that we will generate during the year ending December 31, 2011. We can give you no assurance that our assumptions will be realized or that we will generate any available cash, in which event we will not be able to pay quarterly cash distributions on our common units.
 
When considering our ability to generate available cash and how we calculate forecasted available cash, please keep in mind all the risk factors and other cautionary statements under the headings “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements,” which discuss factors that could cause our results of operations and available cash to vary significantly from our estimates.
 
We do not, as a matter of course, make public projections as to future sales, earnings or other results. However, our management has prepared the prospective financial information set forth below in the table entitled “CVR Partners, LP Estimated Available Cash for the Year Ending December 31, 2011” to present our expectations regarding our ability to generate $115.5 million of available cash for the year ending December 31, 2011. The accompanying prospective financial information was not prepared with a view toward complying with the guidelines established by the American Institute of Certified Public Accountants with respect to prospective financial information, but, in the view of our management, was prepared on a reasonable basis, reflects the best currently available estimates and judgments, and presents, to the best of management’s knowledge and belief, the expected course of action and our expected future financial performance. However, this information is not fact and should not be relied upon as being necessarily indicative of future results, and readers of this prospectus are cautioned not to place undue reliance on this prospective financial information.
 
The assumptions and estimates underlying the prospective financial information are inherently uncertain and, though considered reasonable by the management team of our general partner, all of whom are employed by CVR Energy, as of the date of its preparation, are subject to a wide variety of significant business, economic, and competitive risks and uncertainties that could cause actual results to differ materially from those contained in the prospective financial information, including, among others, risks and uncertainties. Accordingly, there can be no assurance that the prospective results are indicative of our future performance or that actual results will not differ materially from those presented in the prospective financial information. Inclusion of the prospective financial information in this prospectus should not be regarded as a representation by any person that the results contained in the prospective financial information will be achieved.
 
We do not undertake any obligation to release publicly the results of any future revisions we may make to the financial forecast or to update this financial forecast to reflect events or circumstances after the date of this prospectus. In light of the above, the statement that we believe that we will have sufficient available cash to allow us to pay the forecasted quarterly distributions on all of our outstanding common units for the year ending


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December 31, 2011, should not be regarded as a representation by us or the underwriters or any other person that we will make such distributions. Therefore, you are cautioned not to place undue reliance on this information.
 
The following table shows how we calculate estimated available cash for the year ending December 31, 2011. The assumptions that we believe are relevant to particular line items in the table below are explained in the corresponding footnotes and in “— Assumptions and Considerations.”
 
Neither our independent registered public accounting firm, nor any other independent registered public accounting firm, has compiled, examined or performed any procedures with respect to the forecasted financial information contained herein, nor has it expressed any opinion or given any other form of assurance on such information or its achievability, and it assumes no responsibility for such forecasted financial information. Our independent registered public accounting firm’s reports included elsewhere in this prospectus relate to our audited historical consolidated financial information. These reports do not extend to the tables and the related forecasted information contained in this section and should not be read to do so.
 
CVR Partners, LP
Estimated Available Cash for the
Year Ending December 31, 2011
 
The following table illustrates how we estimate our business will be able to generate the amount of cash that would be required to pay an aggregate of $      per common unit on all of our outstanding units for the year ending December 31, 2011 (assuming that the board of our general partner acts in accordance with the cash distribution policy it will adopt. See “— General”). All of the amounts for the year ending December 31, 2011 in the table below are estimates.
 
         
    Year Ending
 
    December 31, 2011  
    (in millions, except
 
    per unit data)
 
    (unaudited)  
 
Net sales
  $ 272.0  
Cost of product sold (exclusive of depreciation and amortization)
    45.5  
Direct operating expenses (exclusive of depreciation and amortization)
    84.0  
Selling, general and administrative expenses (exclusive of depreciation and amortization)
    12.8  
Interest expense and other financing costs
    7.1  
Interest income
     
Income tax expense
     
Depreciation and amortization
    19.2  
         
Net income
  $ 103.4  
Adjustments to reconcile net income to EBITDA:
       
Add:
       
Interest expense and other financing costs
  $ 7.1  
Interest income
     
Income tax expense
     
Depreciation and amortization
    19.2  
         


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    Year Ending
 
    December 31, 2011  
    (in millions, except
 
    per unit data)
 
    (unaudited)  
 
EBITDA
  $ 129.7  
Adjustments to reconcile EBITDA to available cash
       
Subtract:
       
Debt service costs
    7.7  
Maintenance capital expenditures (includes environmental, health and safety expenditures)
    6.5  
         
Available cash
  $ 115.5  
Distribution on a per unit basis
  $  
 
Assumptions and Considerations
 
Based upon the specific assumptions outlined below with respect to the year ending December 31, 2011, we expect to generate EBITDA and available cash in an amount sufficient to allow us to pay $      per common unit on all of our outstanding units for the year ending December 31, 2011.
 
While we believe that these assumptions are reasonable in light of our management’s current expectations concerning future events, the estimates underlying these assumptions are inherently uncertain and are subject to significant business, economic, regulatory, environmental and competitive risks and uncertainties that could cause actual results to differ materially from those we anticipate. If our assumptions are not correct, the amount of actual cash available to pay distributions could be substantially less than the amount we currently estimate and could, therefore, be insufficient to allow us to pay the forecasted yearly cash distribution, or any amount, on all of our outstanding common units, in which event the market price of our common units may decline substantially. When reading this section, you should keep in mind the risk factors and other cautionary statements under the headings “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.” Any of the risks discussed in this prospectus could cause our actual results to vary significantly from our estimates.
 
Basis of Presentation
 
The accompanying financial forecast and summary of significant forecast assumptions of CVR Partners, LP present the forecasted results of operations of CVR Partners, LP for the year ending December 31, 2011, assuming that the Transactions (as defined on page 50 of this prospectus) had occurred at the beginning of such period.
 
Summary of Significant Forecast Assumptions
 
Our nitrogen fertilizer facility is comprised of three major units: a gasifier complex, an ammonia unit and a dual-train UAN unit (together, our operating units). The manufacturing process begins with the production of hydrogen by gasifying the pet coke we purchase from CVR Energy’s refinery and on the open market. In a second step, the hydrogen is converted into ammonia with approximately 67,000 standard cubic feet of hydrogen consumed in producing one ton of ammonia. CVR Energy also has rights to purchase hydrogen from us at predetermined prices to the extent it needs hydrogen in connection with the operation of its refinery. We then produce approximately 2.44 tons of UAN from each ton of ammonia we choose to convert. Due to the value added sales price of UAN on a per pound of nitrogen basis, we strive to maximize UAN production. At the present time, we are not able to convert all of the ammonia we produce into UAN, and excess ammonia is sold to third-party purchasers.
 
Because hydrogen cannot be stored or purchased economically in the volumes we require, if our gasifier complex is not running, we cannot operate our ammonia unit. Therefore, the on-stream factor (total hours operated in a given period divided by total number of hours in the period) for the ammonia unit will necessarily be equal to or lower than that of the gasifier complex. We have the capability to store ammonia and can purchase ammonia from third parties to operate the UAN unit if necessary. As a result, it is possible for the actual on-stream factor of the

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UAN unit to exceed the on-stream factor of the ammonia unit. For the purpose of forecasting, however, we assume the UAN unit is idle when the ammonia unit is idle and that the UAN unit may experience incremental downtime. As a result, the projected on-stream factor for the UAN unit is less than the projected on-stream factor for the ammonia unit.
 
Given the fixed cost nature of our fertilizer operation, we operate our facility at maximum daily rates whenever possible. The on-stream factors for the forecast period provided below are calculated based on historical operating performance and in all cases include allowances for unscheduled downtime.
 
On-Stream Factors.  For the year ending December 31, 2011, we estimate on-stream factors of 96.1%, 95.1% and 92.0% for our gasifier, ammonia and UAN units, respectively, which would result in our gasifier, ammonia and UAN units being in operation for 351 days, 347 days and 336 days, respectively, during the forecast period. These periods assume that our operating units are not offstream during 2011 for any turnaround.
 
During the twelve months ended September 30, 2010, our gasifier, ammonia and UAN units were in operation for 352.5 days, 348.4 days and 340.7 days, respectively, with on-stream factors of 96.6%, 95.4% and 93.3%, respectively. Our operating units’ on-stream factors in 2010 were adversely affected by downtime associated with repairs and maintenance and a Linde air separating unit outage, which resulted in 12.5 down days for our gasifier unit, 16.6 down days for our ammonia units and 24.3 down days for our UAN unit. Excluding the impact of the Linde air separation unit outage in 2010, the on-stream factors for the twelve months ended September 30, 2010 would have been 98.0% for gasifier, 97.0% for ammonia and 94.9% for UAN.
 
Net Sales.  We estimate net sales based on a forecast of future ammonia and UAN prices (assuming that the purchaser will pay shipping costs) multiplied by the number of fertilizer tons we estimate we will produce and sell during the forecast period, assuming no change in finished goods inventory between the beginning and end of the period. In addition, our net sales estimate includes the delivery cost for ammonia and UAN sold on a freight on board, or FOB, delivered basis, with an amount equal to the delivery cost included in cost of product sold (exclusive of depreciation and amortization) assuming that all delivery costs are paid by the customer. Historically, net sales has also included our hydrogen sales to CVR Energy’s refinery. Based on these assumptions, we estimate our net sales for the year ending December 31, 2011 will be approximately $272.0 million. Our net sales in the twelve months ended September 30, 2010 were $180.4 million.
 
We estimate that we will sell 671,400 tons of UAN at an average plant gate price (which excludes delivery charges that are included in net sales) of $252.09 per ton, for total sales of $169.3 million, for the year ending December 31, 2011. We sold 684,000 tons of UAN at an average plant gate price of $167.71 per ton, for total sales of $114.7 million, for the twelve months ended September 30, 2010. The average plant gate price estimate for UAN was determined by management based on our current committed orders, price discovery generated through the selling efforts of our fertilizer marketing group and price projections data received from leading consultants in the fertilizer industry such as Blue Johnson.
 
We estimate that we will sell 158,024 tons of ammonia at an average plant gate price of $523.13 per ton, for total sales of $82.7 million, for the year ending December 31, 2011. We sold 149,600 tons of ammonia at an average plant gate price of $304.69 per ton, for total sales of $45.6 million, for the twelve months ended September 30, 2010. As in the case of UAN described above, the average plant gate price estimate for ammonia was determined by management based on our current committed orders, price discovery generated through the selling efforts of our fertilizer marketing group and price projections data received from leading consultants in the fertilizer industry such as Blue Johnson.
 
We estimate that we will sell approximately 52,500 MSCF of hydrogen to CVR Energy at an average price of $3.30 per thousand standard cubic feet, or MSCF, for total sales of $0.2 million, for the year ending December 31, 2011. We sold 46,213 MSCF of hydrogen at an average plant gate price of $3.30 per MSCF, for total sales of approximately $0.2 million for the twelve months ended September 30, 2010.
 
Holding all other variables constant, we expect that a 10% change in the price per ton of ammonia would change our forecasted available cash by approximately $8.3 million for the year ending December 31, 2011. For the month of September 2010, the average plant gate price of ammonia was $350.13 per ton. In addition, holding all other variables constant, we estimate that a 10% change in the price per ton of UAN would change our forecasted


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available cash by approximately $16.9 million for the year ending December 31, 2011. The average plant gate price of UAN for the month of September 2010 was $165.59 per ton.
 
Cost of Product Sold (Exclusive of Depreciation and Amortization).  Cost of product sold includes pet coke expense, freight and distribution expenses and railcar expense. Freight and distribution expenses consist of our outbound freight costs which we pass through to our customers. Railcar expense is our actual expense to acquire, maintain and lease railcars. We estimate that our cost of product sold for the year ending December 31, 2011 will be approximately $45.5 million. Our cost of product sold for the twelve months ended September 30, 2010 was $35.2 million.
 
Cost of Product Sold (Exclusive of Depreciation and Amortization) — Pet Coke Expense.  We estimate that our total pet coke expense for the year ending December 31, 2011 will be approximately $17.7 million and that our average pet coke cost for the year ending December 31, 2011 will be $34.76 per ton. Our total pet coke expense for the twelve months ended September 30, 2010 was $8.5 million and our average pet coke cost for the twelve months ended September 30, 2010 was $17.97 per ton. We estimate that we will purchase approximately 388,000 tons, or 76% of our pet coke needs, from CVR Energy in accordance with the coke supply agreement that we entered into with CVR Energy in October 2007. For the nine months ended September 30, 2010, we purchased approximately 76% of our pet coke from CVR Energy. We use 1.1 tons of pet coke to produce 1.0 ton of ammonia. The coke supply agreement with CVR Energy provides for a price based on the lesser of a pet coke price derived from the price received by us for UAN (subject to a UAN based price ceiling and floor) and a pet coke price index for pet coke. We estimate that we will pay an average of $33.71 per ton for pet coke purchased under the coke supply agreement, and our forecast assumes that we will fulfill our remaining pet coke needs through purchases from third parties at an average price of $40.95 per ton. If we were forced to obtain 100% of our pet coke needs from third parties, this would increase our pet coke expense (and reduce our forecasted net income and available cash) by approximately $2.8 million.
 
Holding all other variables constant, we estimate that a 10% change per ton in the price of pet coke would change our forecasted available cash by $1.8 million for the year ending December 31, 2011. For the month of September 2010, the average pet coke cost was $28.34 per ton.
 
Cost of Product Sold (Exclusive of Depreciation and Amortization) — Railcar Expense.  We estimate that our railcar expense for the year ending December 31, 2011 will be approximately $5.4 million. Our railcar expense during the twelve months ended September 30, 2010 was $5.2 million.
 
Direct Operating Expenses (Exclusive of Depreciation and Amortization).  Direct operating expenses include direct costs of labor, maintenance and services, energy and utility costs, and other direct operating expenses. We estimate that our direct operating expenses (exclusive of depreciation and amortization), excluding share-based compensation expense for the year ending December 31, 2011 will be approximately $84.0 million. Our direct operating expenses for the twelve months ended September 30, 2010 were $80.8 million.
 
The largest direct operating expense item is the cost of electricity, which we expect to be $24.8 million for the year ending December 31, 2011, compared to $20.2 million for the twelve months ended September 30, 2010.
 
Selling, General and Administrative Expenses (Exclusive of Depreciation and Amortization).  Selling, general and administrative expenses consist primarily of direct and allocated legal expenses, treasury, accounting, marketing, human resources and maintaining our corporate offices in Texas and Kansas. We estimate that our selling, general and administrative expenses, excluding non-cash share-based compensation expense, will be approximately $12.8 million for the year ending December 31, 2011. Selling, general and administrative expenses for the twelve months ended September 30, 2010 were $8.9 million including the reversal of $1.1 million of non-cash share-based compensation expense. Excluding share-based compensation expense, selling, general and administrative expenses for the twelve months ended September 30, 2010 were $10.0 million. The largest contributor to the forecasted increase of $2.8 million is the additional expense to be incurred as a result of becoming a publicly traded partnership, including costs associated with SEC reporting requirements, including annual and quarterly reports to unitholders, tax return and Schedule K-1 preparation and distribution, independent auditor fees, investor relations activities and registrar and transfer agent fees. We estimate that these incremental general and administrative expenses will approximate $3.5 million per year.


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Depreciation and Amortization.  We estimate that depreciation and amortization for the year ending December 31, 2011 will be approximately $19.2 million, as compared to $18.5 million during the twelve months ended September 30, 2010.
 
Debt Service.  Debt service is defined as interest expense and other financing costs paid and debt amortization payments. As part of the Transactions, we will incur $125.0 million of term debt at an assumed interest rate of 5.0% and will pay associated interest expense for the year ending December 31, 2011. The estimate does not include the amortization of deferred financing costs related to our new credit facility, which would have no impact on EBITDA. Similarly, our earnings for the twelve months ended September 30, 2010 do not include interest expense or other financing costs.
 
Interest Income.  Although we anticipate that the net proceeds of this offering and our projected cash flows will result in our having cash balances during the forecast period, we have not included an estimate of interest income for the year ending December 31, 2011. Our earnings for the twelve months ended September 30, 2010 include interest income associated with amounts in our bank account.
 
Income Taxes.  We estimate that we will pay no income tax during the forecast period. We believe the only income tax to which our operations will be subject is the State of Texas franchise tax, and the total amount of such tax is immaterial for purposes of this forecast.
 
Net income.  Our net income for 2011 includes income that will be recorded during 2011 in connection with the delivery of prepaid sales made in prior periods, as we receive cash for prepaid sales when the sales are made but do not record revenue in respect of such sales until product is delivered. All cash on our balance sheet in respect of prepaid sales on the date of the closing of this offering will not be distributed to Coffeyville Resources at the closing of this offering but will be reserved for distribution to holders of common units.
 
Regulatory, Industry and Economic Factors.  Our forecast for the year ending December 31, 2011 is based on the following assumptions related to regulatory, industry and economic factors:
 
  •  no material nonperformance or credit-related defaults by suppliers, customers or vendors;
 
  •  no new regulation or interpretation of existing regulations that, in either case, would be materially adverse to our business;
 
  •  no material accidents, weather-related incidents, floods, unscheduled turnarounds or other downtime or similar unanticipated events;
 
  •  no material adverse change in the markets in which we operate resulting from substantially lower natural gas prices, reduced demand for nitrogen fertilizer products or significant changes in the market prices and supply levels of pet coke;
 
  •  no material decreases in the prices we receive for our nitrogen fertilizer products;
 
  •  no material changes to market or overall economic conditions; and
 
  •  an annual inflation rate of 2.0% to 3.0%.
 
Actual conditions may differ materially from those anticipated in this section as a result of a number of factors, including, but not limited to, those set forth under “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.”
 
Compliance with Debt Covenants.  Our ability to make distributions could be affected if we do not remain in compliance with the financial and other covenants that we expect to be included in our new credit facility. We have assumed we will be in compliance with such covenants.


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HOW WE MAKE CASH DISTRIBUTIONS
 
General
 
Within 45 days after the end of each quarter, beginning with the first full quarter following the closing date of this offering, we expect to make distributions, as determined by the board of directors of our general partner, to unitholders of record on the applicable record date.
 
Common Units Eligible for Distribution
 
Upon the closing of this offering, we will have           common units outstanding. Each common unit will be allocated a portion of our income, gain, loss, deduction and credit on a pro-rata basis, and each common unit will be entitled to receive distributions (including upon liquidation) in the same manner as each other unit.
 
Method of Distributions
 
We will make distributions pursuant to our general partner’s determination of the amount of available cash for the applicable quarter, which we will then distribute to our unitholders, pro rata; provided, however, that our partnership agreement allows us to issue an unlimited number of additional equity interests of equal or senior rank. Our partnership agreement permits us to borrow to make distributions, but we are not required and do not intend to borrow to pay quarterly distributions. Accordingly, there is no guarantee that we will pay any distribution on the units in any quarter. We do not have a legal obligation to pay distributions, and the amount of distributions paid under our policy and the decision to make any distribution is determined by the board of directors of our general partner. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources — New Credit Facility” for a discussion of provisions expected to be included in our new credit facility that may restrict our ability to make distributions.
 
General Partner Interest
 
Upon the closing of this offering, our general partner will own a non-economic general partner interest and therefore will not be entitled to receive cash distributions. However, it may acquire common units in the future and will be entitled to receive pro rata distributions therefrom.
 
Adjustments to Capital Accounts Upon Issuance of Additional Common Units
 
We will make adjustments to capital accounts upon the issuance of additional common units. In doing so, we will generally allocate any unrealized and, for tax purposes, unrecognized gain or loss resulting from the adjustments to our unitholders prior to such issuance on a pro rata basis, so that after such issuance, the capital account balances attributable to all common units are equal.


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SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
 
The selected consolidated financial information presented below under the caption Statement of Operations Data for the years ended December 31, 2007, 2008 and 2009 and the selected consolidated financial information presented below under the caption Balance Sheet Data as of December 31, 2008 and 2009, have been derived from our audited consolidated financial statements included elsewhere in this prospectus, which consolidated financial statements have been audited by KPMG LLP, independent registered public accounting firm. The selected consolidated financial information presented below under the caption Statement of Operations Data for the 174-day period ended June 23, 2005, for the 191-day period ended December 31, 2005 and the year ended December 31, 2006 and the selected consolidated financial information presented below under the caption Balance Sheet Data as of December 31, 2005, 2006 and 2007 have been derived from our audited consolidated financial statements that are not included in this prospectus. The selected consolidated financial information presented below under the caption Statement of Operations Data for the nine months ended September 30, 2009 and 2010 and the selected consolidated financial information presented below under the caption Balance Sheet Data as of September 30, 2010 are derived from our unaudited consolidated financial statements included elsewhere in this prospectus which, in the opinion of management, include all adjustments consisting only of normal, recurring adjustments necessary for a fair presentation of the results for the unaudited interim period.
 
Our consolidated financial statements included elsewhere in this prospectus include certain costs of CVR Energy that were incurred on our behalf. These costs, which are reflected in selling, general and administrative expenses (exclusive of depreciation and amortization) and direct operating expenses (exclusive of depreciation and amortization), are billed to us pursuant to a services agreement entered into in October 2007 that is a related party transaction. For the period of time prior to the services agreement, the consolidated financial statements include an allocation of costs and certain other amounts in order to account for a reasonable share of expenses, so that the accompanying consolidated financial statements reflect substantially all of our costs of doing business. The amounts charged or allocated to us are not necessarily indicative of the costs that we would have incurred had we operated as a stand-alone company for all periods presented.
 
On June 24, 2005, Coffeyville Acquisition LLC, or Coffeyville Acquisition, acquired all of the subsidiaries of Coffeyville Group Holdings, LLC, or Predecessor. See note 1 to our audited consolidated financial statements included elsewhere in this prospectus. We refer to this acquisition as the Acquisition, and we refer to our post-June 24, 2005 operations as Successor. As a result of certain adjustments made in connection with this Acquisition, a new basis of accounting was established on the date of the Acquisition. Included in the selected financial data below is a period of time when our business was operated by the Predecessor for the 174-days ended June 23, 2005. Since the assets and liabilities of Successor were presented on a new basis of accounting, the financial information for Successor is not comparable to the financial information of Predecessor.
 
Pro forma net income per unit is determined by dividing the pro forma net income that would have been allocated, in accordance with the provisions of our partnership agreement, to the common unitholders, by the number of common units expected to be outstanding at the closing of this offering. For purposes of this calculation, we assumed that pro forma distributions were equal to pro forma net earnings and that the number of units outstanding was           common units. All units were assumed to have been outstanding since January 1, 2009. No effect has been given to           common units that might be issued in this offering by us pursuant to the exercise by the underwriters of their option to purchase additional common units. Basic and diluted pro forma net income per unit are equivalent as there are no dilutive units at the date of closing of this offering.
 
We have omitted net income per unit data for Predecessor because we operated under a different capital structure than the one that will be in place at the time of this offering and, therefore, the information is not meaningful.
 
This data should be read in conjunction with, and is qualified in its entirety by reference to, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes included elsewhere in this prospectus.
 


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    Predecessor       Successor  
    174 Days
      191 Days
                              Nine Months
    Nine Months
 
    Ended
      Ended
    Year Ended
    Year Ended
    Year Ended
    Year Ended
      Ended
    Ended
 
    June 23,
      December 31,
    December 31,
    December 31,
    December 31,
    December 31,
      September 30,
    September 30,
 
    2005       2005(8)     2006     2007     2008     2009       2009     2010  
                    (unaudited)  
            (dollars in millions, except per unit data and as otherwise indicated)          
Statement of Operations Data:
                                                                   
Net sales
  $ 76.7       $ 96.8     $ 170.0     $ 187.4     $ 263.0     $ 208.4       $ 169.0     $ 141.1  
Cost of product sold(1)
    9.8         19.2       33.4       33.1       32.6       42.2         34.6       27.7  
Direct operating expenses(1)(2)
    26.0         29.1       63.6       66.7       86.1       84.5         64.4       60.7  
Selling, general and administrative expenses(1)(2)
    5.1         4.6       12.9       20.4       9.5       14.1         14.1       8.8  
Net costs associated with flood(3)
                        2.4                            
Depreciation and amortization(4)
    0.3         8.4       17.1       16.8       18.0       18.7         14.0       13.9  
                                                                     
Operating income
  $ 35.5       $ 35.5     $ 43.0     $ 48.0     $ 116.8     $ 48.9       $ 41.9     $ 30.0  
Other income (expense), net(5)
    (2.0 )       0.4       (6.9 )     0.2       2.1       9.0         6.2       9.5  
Interest expense
    (0.8 )       (14.8 )     (23.5 )     (23.6 )                          
Gain (loss) on derivatives, net
            4.9       2.1       (0.5 )                          
                                                                     
Income (loss) before income taxes
  $ 32.7       $ 26.0     $ 14.7     $ 24.1     $ 118.9     $ 57.9       $ 48.1     $ 39.5  
Income tax (expense) benefit
                                                   
                                                                     
Net income (loss)
  $ 32.7       $ 26.0     $ 14.7     $ 24.1     $ 118.9     $ 57.9       $ 48.1     $ 39.5  
                                                                     
Pro forma net income per common unit, basic and diluted(6):
                                                                   
Pro forma number of common units, basic and diluted:
                                                                   
Balance Sheet Data:
                                                                   
Cash and cash equivalents
            $     $     $ 14.5     $ 9.1     $ 5.4       $ 11.7     $ 28.8  
Working capital
              (2.5 )     (0.5 )     7.5       60.4       135.5         124.8       187.2  
Total assets
              423.7       416.1       429.9       499.9       551.5         546.7       595.7  
Total debt, including current portion
                                                     
Partners capital/divisional equity
              400.5       397.6       400.5       458.8       519.9         512.6       560.7  
Financial and Other Data:
                                                                   
Cash flows provided by operating activities
    24.3         45.3       34.1       46.5       123.5       85.5         75.1       56.6  
Cash flows (used in) investing activities
    (1.4 )       (2.0 )     (13.3 )     (6.5 )     (23.5 )     (13.4 )       (11.7 )     (3.8 )
Cash flows (used in) financing activities
    (22.9 )       (43.3 )     (20.8 )     (25.5 )     (105.3 )     (75.8 )       (60.8 )     (29.5 )
Capital expenditures for property, plant and equipment
    1.4         2.0       13.3       6.5       23.5       13.4         11.7       3.8  
Net distribution to parent
  $ 22.9       $ 43.3     $ 20.8     $ 31.5     $ 50.0     $       $     $  
Key Operating Data:
                                                                   
Production volume (thousand tons):
                                                                   
Ammonia (gross produced)
    193.2         220.0       369.3       326.7       359.1       435.2         323.4       322.9  
Ammonia (net available for sale)
    67.6         76.3       111.8       91.8       112.5       156.6         117.3       117.9  
UAN (tons in thousands)
    309.9         353.4       633.1       576.9       599.2       677.7         501.2       500.5  
On-stream factors(7):
                                                                   
Gasifier
    97.4 %       98.7 %     92.5 %     90.0 %     87.8 %     97.4 %       96.8 %     95.8 %
Ammonia
    95.0 %       98.3 %     89.3 %     87.7 %     86.2 %     96.5 %       95.9 %     94.6 %
UAN
    93.9 %       94.8 %     88.9 %     78.7 %     83.4 %     94.1 %       93.3 %     92.2 %
                                                                     
 
 
(1) Amounts are shown exclusive of depreciation and amortization.
(2) Our direct operating expenses (exclusive of depreciation and amortization) and selling, general and administrative expenses (exclusive of depreciation and amortization) for the 174 days ended June 23, 2005, for the 191 days ended December 31, 2005 and the years ended December 31, 2006, 2007, 2008 and 2009 and the nine month periods ended September 30, 2009 and 2010 include a charge related to CVR Energy’s share-based compensation expense allocated to us by CVR Energy for financial reporting purposes in accordance with ASC 718.


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These charges will continue to be attributed to us following the closing of this offering. We are not responsible for the payment of cash related to any share-based compensation allocated to us by CVR Energy. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies — Share-Based Compensation.” The amounts were:
 
                                                                   
    Predecessor     Successor  
    174 Days
    191 Days
                              Nine Months
    Nine Months
 
    Ended
    Ended
    Year Ended
    Year Ended
    Year Ended
    Year Ended
      Ended
    Ended
 
    June 23,
    December 31,
    December 31,
    December 31,
    December 31,
    December 31,
      September 30,
    September 30,
 
    2005     2005     2006     2007     2008     2009       2009     2010  
            (unaudited)  
    (in millions)          
Direct operating expenses (exclusive of depreciation and amortization)
  $     $ 0.1     $ 0.8     $ 1.2     $ (1.6 )   $ 0.2       $ 0.6     $ 0.2  
Selling, general and administrative expenses (exclusive of depreciation and amortization)
          0.2       3.2       9.7       (9.0 )     3.0         5.2       1.1  
                                                                   
Total
  $     $ 0.3     $ 4.0     $ 10.9     $ (10.6 )   $ 3.2       $ 5.8     $ 1.3  
                                                                   
                                                                   
 
(3) Total gross costs recorded as a result of the flood damage to our nitrogen fertilizer plant for the year ended December 31, 2007 were approximately $5.8 million, including approximately $0.8 million recorded for depreciation for temporarily idle facilities, $0.7 million for internal salaries and $4.3 million for other repairs and related costs. An insurance receivable of approximately $3.3 million was also recorded for the year December 31, 2007 for the probable recovery of such costs under CVR Energy’s insurance policies.
(4) Depreciation and amortization is comprised of the following components as excluded from direct operating expenses and selling, general and administrative expenses and as included in net costs associated with flood:
 
                                                                   
    Predecessor     Successor  
    174 Days
    191 Days
                              Nine Months
    Nine Months
 
    Ended
    Ended
    Year Ended
    Year Ended
    Year Ended
    Year Ended
      Ended
    Ended
 
    June 23,
    December 31,
    December 31,
    December 31,
    December 31,
    December 31,
      September 30,
    September 30,
 
    2005     2005     2006     2007     2008     2009       2009     2010  
            (unaudited)  
    (in millions)          
Depreciation and amortization excluded from direct operating expenses
  $ 0.3     $ 8.3     $ 17.1     $ 16.8     $ 18.0     $ 18.7       $ 14.0     $ 13.9  
Depreciation and amortization excluded from selling, general and administrative expenses
          0.1                                        
Depreciation included in net costs associated with flood
                      0.8                            
                                                                   
Total depreciation and amortization
  $ 0.3     $ 8.4     $ 17.1     $ 17.6     $ 18.0     $ 18.7       $ 14.0     $ 13.9  
                                                                   
                                                                   
 
(5) Miscellaneous income (expense) is comprised of the following components included in our consolidated statement of operations:
 
                                                                   
    Predecessor     Successor  
    174 Days
    191 Days
                              Nine Months
    Nine Months
 
    Ended
    Ended
    Year Ended
    Year Ended
    Year Ended
    Year Ended
      Ended
    Ended
 
    June 23,
    December 31,
    December 31,
    December 31,
    December 31,
    December 31,
      September 30,
    September 30,
 
    2005     2005     2006     2007     2008     2009       2009     2010  
            (unaudited)  
    (in millions)          
Interest income(a)
  $     $ 0.5     $ 1.4     $ 0.3     $ 2.0     $ 9.0       $ 6.2     $ 9.6  
Loss on extinguishment of debt
    (1.2 )           (8.5 )     (0.2 )                          
Other income (expense)
    (0.8 )     (0.1 )     0.2       0.1       0.1                     (0.1 )
                                                                   
Miscellaneous income (expense)
  $ (2.0 )   $ 0.4     $ (6.9 )   $ 0.2     $ 2.1     $ 9.0       $ 6.2     $ 9.5  
                                                                   
                                                                   
 
   (a) Interest income for the years ended December 31, 2008 and 2009 and the nine months ended September 30, 2009 and 2010 is primarily attributable to a due from affiliate balance owed to us by Coffeyville Resources as a result of affiliate loans. Prior to the closing of this offering, the due from affiliate balance will be distributed to Coffeyville Resources. Accordingly, such amounts will no longer be owed to us.
(6) We have omitted earnings per share for Predecessor and for Successor through the date Coffeyville Resources Nitrogen Fertilizers, LLC, our operating subsidiary, was contributed to us because during those periods we operated under a divisional equity structure. We have omitted


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net income per unitholder for Successor during the period we operated as a partnership through the closing of this offering because during those periods we operated under a different capital structure than what we will operate under following the closing of this offering, and, therefore, the information is not meaningful.
(7) On-stream factor is the total number of hours operated divided by the total number of hours in the reporting period. Excluding the impact of the Linde air separation unit outage in 2009, the on-stream factors for the nine months ended September 30, 2009 would have been 99.4% for gasifier, 98.5% for ammonia and 95.8% for UAN. Excluding the impact of the Linde air separation unit outage in 2010, the on-stream factors for the nine months ended September 30, 2010 would have been 97.7% for gasifier, 96.7% for ammonia and 94.3% for UAN. Excluding the Linde air separation unit outage in 2009, the on-stream factors would have been 99.3% for gasifier, 98.4% for ammonia and 96.1% for UAN for the year ended December 31, 2009. Excluding the turnaround performed in 2008 the on-stream factors would have been 91.7% for gasifier, 90.2% for ammonia and 87.4% for UAN for the year ended December 31, 2008. Excluding the impact of the flood in 2007 the on-stream factors would have been 94.6% for gasifier, 92.4% for ammonia and 83.9% for UAN for the year ended December 31, 2007.


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MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
You should read the following discussion and analysis of our financial condition, results of operations and cash flows in conjunction with our consolidated financial statements and related notes included elsewhere in this prospectus. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of a number of factors, including, but not limited to, those set forth under “Risk Factors,” “Cautionary Note Regarding Forward-Looking Statements” and elsewhere in this prospectus.
 
Overview
 
We are a Delaware limited partnership formed by CVR Energy to own, operate and grow our nitrogen fertilizer business. Strategically located adjacent to CVR Energy’s refinery in Coffeyville, Kansas, our nitrogen fertilizer manufacturing facility is the only operation in North America that utilizes a petroleum coke, or pet coke, gasification process to produce nitrogen fertilizer. Our facility includes a 1,225 ton-per-day ammonia unit, a 2,025 ton-per-day UAN unit, and a gasifier complex having a capacity of 84 million standard cubic feet per day. Our gasifier is a dual-train facility, with each gasifier able to function independently of the other, thereby providing redundancy and improving our reliability. We upgrade a majority of the ammonia we produce to higher margin UAN fertilizer, an aqueous solution of urea and ammonium nitrate which has historically commanded a premium price over ammonia. In 2009, we produced 435,184 tons of ammonia, of which approximately 64% was upgraded into 677,739 tons of UAN.
 
We intend to expand our existing asset base and utilize the experience of CVR Energy’s management team to execute our growth strategy. Our growth strategy includes expanding production of UAN and potentially acquiring additional infrastructure and production assets. Following completion of this offering, we intend to move forward with a significant two-year plant expansion designed to increase our UAN production capacity by 400,000 tons, or approximately 50%, per year. CVR Energy, a New York Stock Exchange listed company, which following this offering will indirectly own our general partner and approximately     % of our outstanding common units, currently operates a 115,000 bpd sour crude oil refinery and ancillary businesses.
 
The primary raw material feedstock utilized in our nitrogen fertilizer production process is pet coke, which is produced during the crude oil refining process. In contrast, substantially all of our nitrogen fertilizer competitors use natural gas as their primary raw material feedstock. Historically, pet coke has been significantly less expensive than natural gas on a per ton of fertilizer produced basis and pet coke prices have been more stable when compared to natural gas prices. By using pet coke as the primary raw material feedstock instead of natural gas, our nitrogen fertilizer business has historically been the lowest cost producer and marketer of ammonia and UAN fertilizers in North America. We currently purchase most of our pet coke from CVR Energy pursuant to a long-term agreement having an initial term that ends in 2027, subject to renewal. During the past five years, over 70% of the pet coke utilized by our plant was produced and supplied by CVR Energy’s crude oil refinery.
 
Factors Affecting Comparability
 
Our historical results of operations for the periods presented may not be comparable with prior periods or to our results of operations in the future for the reasons discussed below.
 
Corporate Allocations
 
Our consolidated financial statements included elsewhere in this prospectus include certain costs of CVR Energy that were incurred on our behalf. These costs, which are reflected in selling, general and administrative expenses (exclusive of depreciation and amortization) and direct operating expenses (exclusive of depreciation and amortization), are billed to us pursuant to a services agreement entered into in October 2007 that is a related party transaction. For the period of time prior to the services agreement, the consolidated financial statements include an allocation of costs and certain other amounts in order to account for a reasonable share of expenses, so that the accompanying consolidated financial statements reflect substantially all of our costs of doing business.


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Our financial statements reflect all of the expenses that Coffeyville Resources incurred on our behalf. Our financial statements therefore include certain expenses incurred by our parent which may include, but are not necessarily limited to, officer and employee salaries and share-based compensation, rent or depreciation, advertising, accounting, tax, legal and information technology services, other selling, general and administrative expenses, costs for defined contribution plans, medical and other employee benefits, and financing costs, including interest, mark-to-market changes in interest rate swap and losses on extinguishment of debt.
 
Selling, general and administrative expense allocations were based primarily on a percentage of total fertilizer payroll to the total fertilizer and petroleum segment payrolls. Property insurance costs were allocated based upon specific segment valuations. Interest expense, interest income, bank charges, gain (loss) on derivatives and loss on extinguishment of debt were allocated based upon fertilizer divisional equity as a percentage of total CVR Energy debt and equity. See Note 3, Summary of Significant Accounting Policies — Allocation of Costs, in our historical financial statements included elsewhere in this prospectus. The amounts charged or allocated to us are not necessarily indicative of the costs that we would have incurred had we operated as a stand-alone company for all periods presented.
 
Publicly Traded Partnership Expenses
 
We expect that our general and administrative expenses will increase due to the costs of operating as a publicly traded partnership, including costs associated with SEC reporting requirements, including annual and quarterly reports to unitholders, tax return and Schedule K-1 preparation and distribution, independent auditor fees, investor relations activities and registrar and transfer agent fees. We estimate that these incremental general and administrative expenses will approximate $3.5 million per year, excluding the costs associated with this offering and the costs of the initial implementation of our Sarbanes-Oxley Section 404 internal controls review and testing. Our financial statements following this offering will reflect the impact of these expenses, which will affect the comparability of our post-offering results with our financial statements from periods prior to the completion of this offering. Our unaudited pro forma financial statements, however, do not reflect these expenses.
 
2007 Flood
 
During the weekend of June 30, 2007, torrential rains in southeast Kansas caused the Verdigris River to overflow its banks and flood the city of Coffeyville. The river crested more than ten feet above flood stage, setting a new record for the river. Our nitrogen fertilizer plant, which is located in close proximity to the Verdigris River, was flooded, sustained damage and required repair.
 
As a result of the flooding, our nitrogen fertilizer facilities stopped operating on June 30, 2007. Production at the nitrogen fertilizer facility was restarted on July 13, 2007. Due to the downtime, we experienced a significant revenue loss attributable to the property damage during the period when the facilities were not in operation in 2007.
 
Our results for the year ended December 31, 2007 include net pretax costs, net of anticipated insurance recoveries, of $2.4 million associated with the flood. The 2007 flood had a significant adverse impact on our financial results for the year ended December 31, 2007, a nominal impact for the year ended December 31, 2008 and no impact for the year ended December 31, 2009.
 
September 2010 UAN Vessel Rupture
 
On September 30, 2010, our nitrogen fertilizer plant experienced an interruption in operations due to a rupture of a high-pressure UAN vessel. All operations at our nitrogen fertilizer facility were immediately shut down. No one was injured in the incident.
 
Our nitrogen fertilizer facility had previously scheduled a major turnaround to begin on October 5, 2010. To minimize disruption and impact to the production schedule, the turnaround was accelerated. The turnaround was completed on October 29, 2010 with the gasification and ammonia units in operation. The fertilizer facility restarted production of UAN on November 16, 2010, but repairs continue to be completed on the UAN unit due to the incident.


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Based upon an internal review and investigation, we currently estimate that the costs to repair the damage caused by the incident are expected to be in the range of $8.0 million to $11.0 million and repairs are expected to be substantially complete prior to the end of December 2010. To the extent additional damage is discovered during the completion of repairs, the costs to repair could increase or repairs could take longer to complete.
 
We are covered for property damage under CVR Energy’s insurance policies, which have a deductible of $2.5 million. We anticipate that substantially all of the repair costs in excess of the $2.5 million deductible will be covered by insurance. These insurance policies also provide coverage for interruption to the business, including lost profits, and reimbursement for other expenses and costs we have incurred relating to the damage and losses suffered for business interruption. This coverage, however, only applies to losses incurred after a business interruption of 45 days.
 
Fertilizer Plant Property Taxes
 
Our nitrogen fertilizer plant received a 10-year tax abatement from Montgomery County, Kansas in connection with its construction that expired on December 31, 2007. In connection with the expiration of the abatement, the county reassessed our nitrogen fertilizer plant and classified the nitrogen fertilizer plant as almost entirely real property instead of almost entirely personal property. The reassessment has resulted in an increase to our annual property tax liability for the plant by an average of approximately $10.7 million per year for the years ended December 31, 2008 and December 31, 2009, and is anticipated to result in an increase of approximately $11.7 million for the year ending December 31, 2010. We do not agree with the county’s classification of our nitrogen fertilizer plant and are currently disputing it before the Kansas Court of Tax Appeals, or COTA. However, we have fully accrued and paid for the property tax the county claims we owe for the years ended December 31, 2008 and 2009, and fully accrued such amounts for the nine months ended September 30, 2010. The first payment in respect of our 2010 property taxes will be due in December 2010, all of which is reflected as a direct operating expense in our financial results. An evidentiary hearing before COTA is currently scheduled during the first quarter of 2011 regarding our property tax claims for the year ended December 31, 2008. Assuming the hearing takes place during the first quarter of 2011, we believe COTA is likely to issue a ruling sometime during 2011. However, the timing of a ruling in the case is uncertain, and there can be no assurance we will receive a ruling in 2011. If we are successful in having the nitrogen fertilizer plant reclassified as personal property, in whole or in part, a portion of the accrued and paid expenses would be refunded to us, which could have a material positive effect on our results of operations. If we are not successful in having the nitrogen fertilizer plant reclassified as personal property, in whole or in part, we expect that we will pay taxes at or below the elevated rates described above. Our competitors do not disclose the property taxes they pay on a quarterly or annual basis, and such taxes may be higher or lower than the taxes we pay, depending on the jurisdiction in which such facilities are located and other factors.
 
Factors Affecting Results
 
Our earnings and cash flow from operations are primarily affected by the relationship between nitrogen fertilizer product prices and direct operating expenses. Unlike our competitors, we do not use natural gas as a feedstock and we use a minimal amount of natural gas as an energy source in our operations. As a result, volatile swings in natural gas prices have a minimal impact on our results of operations. Instead, CVR Energy’s adjacent refinery supplies us with most of the pet coke feedstock we need pursuant to a long-term pet coke supply agreement we entered into in October 2007. The price at which nitrogen fertilizer products are ultimately sold depends on numerous factors, including the global supply and demand for nitrogen fertilizer products which, in turn, depends on, among other factors, world grain demand and production levels, changes in world population, the cost and availability of fertilizer transportation infrastructure, weather conditions, the availability of imports and the extent of government intervention in agriculture markets.
 
Nitrogen fertilizer prices are also affected by local factors, including local market conditions and the operating levels of competing facilities. An expansion or upgrade of competitors’ facilities, international political and economic developments and other factors are likely to continue to play an important role in nitrogen fertilizer 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 industry typically experiences seasonal fluctuations in demand for nitrogen fertilizer products.


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In addition, the demand for fertilizers is affected by the aggregate crop planting decisions and fertilizer application rate decisions of individual farmers. Individual farmers make planting decisions based largely on the prospective profitability of a harvest, while the specific varieties and amounts of fertilizer they apply depend on factors like crop prices, their current liquidity, soil conditions, weather patterns and the types of crops planted.
 
Natural gas is the most significant raw material required in our competitors’ production of nitrogen fertilizers. North American natural gas prices increased significantly in the summer months of 2008 and moderated from these high levels in the last half of 2008. Over the past several years, natural gas prices have experienced high levels of price volatility. This pricing and volatility has a direct impact on our competitors’ cost of producing nitrogen fertilizer.
 
In order to assess the operating performance of our business, we calculate plant gate price to determine our operating margin. Plant gate price refers to the unit price of fertilizer, in dollars per ton, offered on a delivered basis, excluding shipment costs.
 
We and other competitors located in the U.S. farm belt share a transportation cost advantage when compared to our out-of-region competitors in serving the U.S. farm belt agricultural market. In 2010, approximately 45% of the corn planted in the United States was grown within a $35/UAN ton freight train rate of our nitrogen fertilizer plant. We are therefore able to cost-effectively sell substantially all of our products in the higher margin agricultural market, whereas a significant portion of our competitors’ revenues are derived from the lower margin industrial market. Because the U.S. farm belt consumes more nitrogen fertilizer than is produced in the region, it must import nitrogen fertilizer from the U.S. Gulf Coast as well as from international producers. Accordingly, U.S. farm belt producers may offer nitrogen fertilizers at prices that factor in the transportation costs of out-of-region producers without having incurred such costs. We estimate that our plant enjoys a transportation cost advantage of approximately $25 per ton over competitors located in the U.S. Gulf Coast. Selling products to customers within economic rail transportation limits of the nitrogen fertilizer plant and keeping transportation costs low are keys to maintaining profitability. Our location on Union Pacific’s main line increases our transportation cost advantage by lowering the costs of bringing our products to customers, assuming freight rates and pipeline tariffs for U.S. Gulf Coast importers as recently in effect. Our products leave the plant either in trucks for direct shipment to customers or in railcars for destinations located principally on the Union Pacific Railroad, and we do not incur any intermediate transfer, storage, barge freight or pipeline freight charges.
 
The value of nitrogen fertilizer products is also an important consideration in understanding our results. During 2009, we upgraded approximately 64% of our ammonia production into UAN, a product that presently generates a greater value than ammonia. UAN production is a major contributor to our profitability.
 
The direct operating expense structure of our business also directly affects our profitability. Using a pet coke gasification process, we have a significantly higher percentage of fixed costs than a natural gas-based fertilizer plant. Major fixed operating expenses include electrical energy, employee labor, maintenance, including contract labor, and outside services. These costs comprise the fixed costs associated with the nitrogen fertilizer plant. Variable costs associated with the nitrogen fertilizer plant averaged approximately 14% of direct operating expenses over the 24 months ended December 31, 2009. The average annual operating costs over the 24 months ended December 31, 2009 approximated $85 million, of which substantially all are fixed in nature.
 
Our largest raw material expense is pet coke, which we purchase from CVR Energy and third parties. In 2007, 2008 and 2009, we spent $13.6 million, $14.1 million and $12.8 million, respectively, for pet coke, which equaled an average cost per ton of $30, $31 and $27, respectively. If pet coke prices rise substantially in the future, we may be unable to increase our prices to recover increased raw material costs, because the price floor for nitrogen fertilizer products is generally correlated with natural gas prices, the primary raw material used by our competitors, and not pet coke prices.
 
Consistent, safe, and reliable operations at our nitrogen fertilizer plant are critical to our financial performance and results of operations. Unplanned downtime of the nitrogen fertilizer plant may result in lost margin opportunity, increased maintenance expense and a temporary increase in working capital investment and related inventory position. The financial impact of planned downtime, such as major turnaround maintenance, is mitigated through a diligent planning process that takes into account margin environment, the availability of resources to perform the


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needed maintenance, feedstock logistics and other factors. We generally undergo a facility turnaround every two years. The turnaround typically lasts 13 to 15 days each turnaround year and costs approximately $3 million to $5 million per turnaround. The facility underwent a turnaround in October 2010 at a cost of $3.6 million.
 
Agreements with CVR Energy
 
In connection with the initial public offering of CVR Energy and the transfer of the nitrogen fertilizer business to us in October 2007, we entered into a number of agreements with CVR Energy and its affiliates that govern our business relations with CVR Energy. These include the pet coke supply agreement under which we buy the pet coke we use in our nitrogen fertilizer plant; a services agreement, under which CVR Energy and its affiliates provide us with management services including the services of its senior management team; a feedstock and shared services agreement, which governs the provision of feedstocks, including hydrogen, high-pressure steam, nitrogen, instrument air, oxygen and natural gas; a raw water and facilities sharing agreement, which allocates raw water resources between the two businesses; an easement agreement; an environmental agreement; and a lease agreement pursuant to which we lease office space and laboratory space from CVR Energy.
 
We obtain most (over 70% on average during the last five years) of the pet coke we need from CVR Energy pursuant to the pet coke supply agreement, and procure the remainder on the open market. The price we pay pursuant to the pet coke supply agreement is based on the lesser of a pet coke price derived from the price received by us for UAN, or the UAN-based price, and a pet coke price index. The UAN-based price begins with a pet coke price of $25 per ton based on a price per ton for UAN (exclusive of transportation cost), or netback price, of $205 per ton, and adjusts up or down $0.50 per ton for every $1.00 change in the netback price. The UAN-based price has a ceiling of $40 per ton and a floor of $5 per ton.
 
The cost of the pet coke supplied by CVR Energy to us in most cases will be lower than the price which we otherwise would pay to third parties. The cost to us will be lower both because the actual price paid will be lower and because we will pay significantly reduced transportation costs (since CVR Energy’s refinery is adjacent to our nitrogen fertilizer plant). If CVR Energy fails to perform in accordance with the pet coke supply agreement, then we would need to purchase pet coke from third parties on the open market, which could negatively impact our results of operations to the extent third-party pet coke is unavailable or available only at higher prices. A $10 per ton increase in the cost of additional third-party coke purchases would increase production costs by approximately $3.75 million per year.
 
Prior to October 2007, when the pet coke supply agreement became effective, the cost of product sold (exclusive of depreciation and amortization) in the nitrogen fertilizer business on our financial statements was based on a pet coke price of $15 per ton. Our pet coke cost per ton purchased from CVR Energy averaged $17, $30 and $22 for the years ended December 31, 2007, 2008 and 2009, respectively, and $28 and $12 for the nine months ended September 30, 2009 and 2010, respectively. Third-party pet coke prices averaged $49, $39 and $37 for the years ended December 31, 2007, 2008 and 2009, respectively, and $37 and $40 for the nine months ended September 30, 2009 and 2010, respectively.
 
The services agreement, which became effective in October 2007, resulted in charges of approximately $1.8 million, $13.1 million, $12.1 million and $7.3 million for the fiscal years ended December 31, 2007, 2008 and 2009 and the nine months ended September 30, 2010, respectively (excluding share-based compensation), in selling, general and administrative expenses (exclusive of depreciation and amortization) in our statement of operations.
 
Results of Operations
 
The period-to-period comparisons of our results of operations have been prepared using the historical periods included in our financial statements. In order to effectively review and assess our historical financial information below, we have also included supplemental operating measures and industry measures that we believe are material to understanding our business.


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The tables below provide an overview of our results of operations, relevant market indicators and our key operating statistics during the past three fiscal years ended December 31, 2007, 2008 and 2009 and the nine month periods ending September 30, 2009 and 2010:
 
                                         
          Nine Months Ended
 
    Year Ended December 31,     September 30,  
Business Financial Results
  2007     2008     2009     2009     2010  
                      (unaudited)  
    (in millions)  
 
Net sales
  $ 187.4     $ 263.0     $ 208.4     $ 169.0     $ 141.1  
Cost of product sold (exclusive of depreciation and amortization)
    33.1       32.6       42.2       34.6       27.7  
Direct operating expenses (exclusive of depreciation and amortization)(1)
    66.7       86.1       84.5       64.4       60.7  
Selling, general and administrative expenses (exclusive of depreciation and amortization)(1)
    20.4       9.5       14.1       14.1       8.8  
Net costs associated with flood(2)
    2.4                          
Depreciation and amortization(3)
    16.8       18.0       18.7       14.0       13.9  
Operating income
    48.0       116.8       48.9       41.9       30.0  
Net income
    24.1       118.9       57.9       48.1       39.5  
 
 
(1) Our direct operating expenses (exclusive of depreciation and amortization) and selling, general and administrative expenses (exclusive of depreciation and amortization) for the years ended December 31, 2007, 2008 and 2009 and the nine month periods ended September 30, 2009 and 2010 include a charge related to CVR Energy’s share-based compensation expense allocated to us by CVR Energy for financial reporting purposes in accordance with ASC 718. We are not responsible for the payment of cash related to any share-based compensation allocated to us by CVR Energy. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Critical Accounting Policies — Share-Based Compensation.” The charges were:
 
                                         
          Nine Months
 
          Ended
 
    Year Ended December 31,     September 30,  
    2007     2008     2009     2009     2010  
                      (unaudited)  
    (in millions)  
 
Direct operating expenses (exclusive of depreciation and amortization)
  $ 1.2     $ (1.6 )     0.2     $ 0.6     $ 0.2  
Selling, general and administrative expenses (exclusive of depreciation and amortization)
    9.7       (9.0 )     3.0       5.2       1.1  
                                         
Total
  $ 10.9     $ (10.6 )   $ 3.2     $ 5.8     $ 1.3  
                                         
 
(2) Total gross costs recorded as a result of the damage to the nitrogen fertilizer plant for the year ended December 31, 2007 were approximately $5.8 million, including approximately $0.8 million recorded for depreciation for temporarily idle facilities, $0.7 million for internal salaries and $4.3 million for other repairs and related costs. An insurance receivable of approximately $3.3 million was also recorded for the year December 31, 2007 for the probable recovery of such costs under CVR Energy’s insurance policies.


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(3) Depreciation and amortization is comprised of the following components as excluded from direct operating expense and selling, general and administrative expense and as included in net costs associated with flood: