VeraSun Energy (VSE)

Industry-Leading Ethanol Producer

VeraSun Energy is an industry-leading ethanol producer in the U.S.A. The company went public in June of 2006 raising net proceeds of $236 million. With twelve operational facilities, the company has a total production capacity of 1.2 billion gallons per year. As of July 31, 2008, VeraSun Energy's ethanol production capacity represented approximately 12.7% of the total ethanol production capacity in the USA, according to the RFA. The company also sells ethanol co-products, such as distillers' grains, and markets its branded E85 fuel, VE85 (85% ethanol and 15% gasoline) at more than 150 retail locations. VeraSun is also planning to launch another fuel blend variant (30% ethanol and 70% gasoline) VE30.

Aggressive Capacity Expansion Plans

VeraSun with the completion of its merger with US BioEnergy on April 1, 2008 had eleven facilities in operation with a combined yearly ethanol production capacity of 1.1 billion gallons. As of this report, the company has twelve facilities with 1.2 billion gallons with the startup of its 110 million gallon per year ethanol biorefinery located near Hankinson, North Dakota. In addition, the company has four additional ethanol production facilities under construction with a combined annual production capacity of 440 million gallons per year, which will propel total yearly production capacity to 1.64 billion gallons by year-end 2008. Of this, facilities in Dyersville (Iowa) and Janesville (Minnesota) are expected to become operational in the 3rd and 4th quarters of 2008, respectively. On the other hand Hartley (Iowa) and Welcome (Minnesota) facilities start-up has been delayed by the company due to adverse market conditions. It also started site preparation work on a facility in Reynolds (Indiana) in April 2007, but in October 2007 suspended construction of the facility due to adverse market conditions. The company also entered into corn oil production. It began construction of a corn oil extraction facility at its plant in Aurora, South Dakota in December 2007. VeraSun expects to complete this construction by the 4th quarter of 2008.

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Company Products/Services/Markets:

Ethanol is primarily used as a blend component in the U.S. gasoline fuel market, which approximated 142 billion gallons in 2006 according to the Energy Information Administration (“EIA”). Refiners and marketers have historically blended ethanol with gasoline to increase octane and reduce tailpipe emissions.

The ethanol market is highly competitive. According to the RFA, world ethanol production rose to 12 billion gallons in 2006. Fuel ethanol accounted for 73% of world production. The U.S. and Brazil are the world’s largest producers of ethanol. As of February 25, 2007, industry capacity in the U.S. approximated 5.6 BGY, with an additional 6.2 BGY of capacity under construction. The ethanol industry in the U.S. consists of more than 100 production facilities and is primarily corn based, while the Brazilian ethanol production is primarily sugar cane based.

Vera Sun competes nationally.

Strategy:

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Competitors:

VSE competes with Archer Daniels Midland Company, which has approximately 19% of the ethanol production capacity in the U.S., as well as other large producers such as US BioEnergy Corporation and Hawkeye Renewables, LLC, each of which has about 4% of the U.S. production capacity, and Aventine, which has about 3% of the U.S. production capacity. The industry is otherwise highly fragmented, with many small, independent firms and farmer-owned cooperatives constituting the rest of the market. 

Industry Trends and News:

The ethanol industry has grown significantly over the last few years, expanding production capacity at a compounded annual growth rate of approximately 22% from 2000 to 2006. VeraSun management believes the ethanol market will continue to grow as a result of its cleaner burning characteristics, a shortage of domestic petroleum refining capacity, geopolitical concerns, and federally mandated renewable fuel usage. They also believe that E85, a fuel blend composed primarily of ethanol, may become increasingly important over time as an alternative to unleaded gasoline.

Ethanol Supply

Production in the ethanol industry remains fragmented. According to the RFA, while domestic ethanol production capacity increased from 1.7 billion gallons in 1997 to 5.4 billion gallons in 2006, the top five producers accounted for approximately 37% of the industry’s total estimated production capacity as of December 2006. The remaining production was generated by more than 50 smaller producers and farmer-owned cooperatives, most with production of 50 MMGY or less. Since a typical ethanol facility can be constructed in approximately 16-20 months from groundbreaking to operation, the industry is able to forecast capacity additions for up to 18 months in the future. As of February 25, 2007, the RFA estimated that ethanol facilities with capacity of an aggregate of an additional 6.2 BGY were under construction.

Most U.S. ethanol is produced from corn grown in Illinois, Iowa, Minnesota, Nebraska and South Dakota, where corn is abundant. In addition to corn, the production process employs natural gas or, in some cases, coal to power the facility and to dry distillers grains. Proximity to sufficient low-cost corn and natural gas supply, therefore, provides a key competitive advantage for ethanol producers.

Over half of total U.S. ethanol production is consumed in the east- and west-coast markets, primarily as a result of the stricter air quality requirements in large parts of those markets. The primary means of transporting ethanol from the Midwest to the coasts is by rail. As a result, adequate access to rail transportation is a key consideration for locating ethanol production facilities. Furthermore, a producer’s ability to form unit trains, consisting entirely of ethanol tank cars from one facility, allows for reduced transportation costs and faster delivery times.

Ethanol Demand

Shortage of domestic petroleum refining capacity.  While the number of operable U.S. petroleum refineries has decreased from 319 in 1980 to 149 in 2006, according to the EIA, domestic demand has increased 40% over the same period. The EIA expects growth in refining capacity to average 1.3% per year until 2025, with demand for refined petroleum products growing at 1.5% per year over the same period. Because ethanol is blended with gasoline after the refining process, it directly increases domestic fuel capacity.   Management  believes that domestic fuel refining shortages will result in greater demand for ethanol.

Geopolitical concerns.  The U.S. is increasingly dependent on foreign oil. According to the EIA, crude oil imports represented 66% of the U.S. crude oil supply in 2006 and are estimated to rise to 75% by 2025. Political unrest and attacks on oil infrastructure in the major oil producing nations, particularly in the Middle East, have periodically disrupted the flow of oil. Fears of terrorist attacks have added a “risk premium” to world oil prices. At the same time, developing nations such as China and India have increased their demand for oil. As a result, in 2006, world oil prices topped $70 a barrel at times and averaged above $60 a barrel. As a domestic renewable source of energy, ethanol reduces the U.S.’s dependence on foreign oil by increasing the availability of domestic fuel supplies.

Renewable Fuels Standard.  In August 2005, President Bush signed the Energy Policy Act establishing the Renewable Fuels Standard, or RFS, which eliminated the mandated use of oxygenates in reformulated gasoline and mandates annual use of 7.5 billion gallons per year, or BGY, of renewable fuels in the U.S. fuel supply by the year 2012. The RFS requires motor fuels sold in the U.S. to contain, in the aggregate, minimum volumes of renewable fuels in future years, ranging from 4.7 billion gallons in 2007 to 7.5 billion gallons in 2012. Management expects this mandate to result in a significant increase in ethanol demand, and believes the actual use of ethanol and other renewable fuels will surpass the mandated requirements, especially in the early years of implementation of the RFS.

Acquisitions, Divestitures, Major Transactions, Spin-offs :

VeraSun Energy Corp. (NYSE: VSE) and US BioEnergy Corp. (Nasdaq: USBE) entered into a definitive merger agreement November 29, 2007. The merger is expected to close during the first quarter of 2008, pending shareholder approval, anti-trust regulatory clearance and the completion of other customary conditions.

Under the merger agreement, 0.81 share of VeraSun common stock will be issued for each outstanding share of US BioEnergy common stock, representing a premium of approximately 11 percent based on November 23, 2007, closing prices. The existing VeraSun shares will remain outstanding and will represent approximately 60 percent of the shares outstanding after the merger.

Upon completion of the merger, the combined company will have nine ethanol production facilities in operation and seven additional facilities under construction. By the end of 2008, the company is expected to have a total production capacity of more than 1.6 billion gallons per year (BGY) and 16 facilities constructed by Fagen, Inc. and utilizing ICM process technology.

The combined entity will retain the VeraSun name and trade under VeraSun's existing NYSE ticker symbol, VSE.

Management – Pros & Cons, Changes:

VeraSun Chairman, CEO and President Donald L. Endres will remain CEO of the combined company, and US BioEnergy President and CEO Gordon Ommen will serve as chairman following the closing of the merger. VeraSun Senior Vice President and Chief Financial Officer Danny C. Herron will become president of the combined company.

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