VeraSun Energy Corp. (NYSE: VSE), a cash-strapped ethanol company that lost big in hedging corn prices, said late Friday it had filed for bankruptcy.
The ethanol maker said it had suffered serious losses in the third quarter from the corn contracts and poor margins. Faltering financial markets also compounded its financial woes, VeraSun said.
The Sioux Falls, S.D.-based company said it plans to continue to operate refineries and ship ethanol to customers and expects to reach an agreement with its creditors by Monday to make sure it has the money to continue operations.
"We appreciate the loyalty of our employees, customers and suppliers during this challenging time," VeraSun CEO Don Endres said in a statement.
The company has lined up $250 million from Ableco Finance, part of Cerberu Capital Management, that it plans to use to restructure operations in an attempt to settle its debts. The arrangement calls for creditors to restructure VeraSun's debts before the company files for bankruptcy court protection, The Wall Street Journal reported shortly before VeraSun's announcement.
VeraSun claims to be the largest ethanol producer in the world, citing data from the Renewable Fuel Association and its own estimates. As of Sept. 5, the company was running 14 ethanol plants that, combined, had the capacity to produce 1.4 billion gallons of ethanol per year, or about 14 percent of the U.S. ethanol production capacity. VeraSun was adding three more plants to bring its total capacity to 1.64 billion gallons per year by the end of 2008.
VeraSun's shares, which fell nearly 16 percent Friday, dived an additional 34 percent to reach $0.32 per share in after-hours trading.
Jeff Osborne, an analyst at Thomas Weisel Partners, already cut his price target for VeraSun's stock from $4.50 per share to $2 per share earlier this week, following a report that the company had shut down its ethanol plant in Linden, Indiana (see VeraSun Shutters Ethanol Plant).
Speculations about VeraSun's fate began to emerge after it canceled a planned offering of 20 million shares of its common stock last month and issued a terse press release saying it had hired Morgan Stanley to "evaluate strategic alternatives."
VeraSun is in poor financial health, with $1.5 billion in debt, Osborne wrote in his research note. During and before the third quarter ended, the company had signed contracts to hedge corn prices. But VeraSun made the wrong bets as corn prices began to fall, requiring the company to pay much more than the spot market price during the third quarter.
VeraSun previously said those agreements will lead to a net loss of between $63 million and $103 million for the third quarter (see Green Light post). The company has yet to announce its third-quarter earnings.
VeraSun is one of several ethanol producers that have shuttered plants, at least temporarily. Abengoa Bioenergy said last week it was closing its plant in Portales, N.M. for now and was laying off some of its 40 employees. Glacial Lakes Energy also said last week it was temporarily shuttering its plant in Mina, S.D., citing a shortage of corn from areas close to the plant.
"Reports of other players halting ethanol production abound and point to tough times in the markets where some producers undone by poor corn hedging strategies may be better off not producing at all than producing at a loss," Osborne wrote in the note.
The slumping economy is more bad news for ethanol producers, which have had to deal with high corn prices and low profit margins – along with the controversy about the impact of ethanol production on food prices – in recent years.
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