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The Sun Sets On VeraSun Energy
Posted: Nov 04, 2008 14:37 PM by Eric Fox
VeraSun Energy (NYSE:VSE), the poster child for the alternative energy boom in America, filed for bankruptcy after a bad hedge position on corn exacerbated the company's heavy debt load.
VeraSun operates 16 ethanol production facilities in eight states. Its annual capacity is expected to be 1.64 billion gallons of ethanol and 5 million tons of distillers grains, a byproduct of the ethanol manufacturing process, at year's end. The company also markets E85, an 85% ethanol/15% gasoline fuel for use in flexible-fuel vehicles.
Corn Costs Gone Wild
Corn costs are a major component of manufacturing ethanol. In the six months ended June 30, they represented 67.3% of the total costs of goods sold for VeraSun. In July, corn prices reached $8 per bushel, and VeraSun decided to exit some of its short positions and lock in the current cost of corn. The price of corn fell over the summer, forcing the company to pay above-market prices for its largest cost input.
VeraSun now estimates that its third-quarter corn costs will average between $6.75 and $7 per bushel. In a September 16 filing, it estimated its net loss for Q3 to be between $63 million and $103 million, or 40 to 65 cents per share.
Beware EBITDA
The situation at VeraSun highlights the danger associated with investors' over-reliance on using earnings before interest, taxes, depreciation and amortization (EBITDA) as a measure of financial success. The company produced EBITDA of $73 million in Q2 and $32.3 million in Q1 2008. The trailing 12-month EBITDA was $158 million on June 30. VeraSun even talked about this during a recent conference call, showing a slide boasting that its EBITDA as a percent of revenue was 9.7%, the second-highest in the industry.
Unfortunately for VeraSun, it still had to pay cash interest and principal payments to its bondholders. On June 30, the company estimated these costs for the next 12 months to be $155 million, consisting of $115 million of interest and $40 million of debt amortization.
VeraSun reported total debt of $1.5 billion at the end of Q2. While the high debt was not the immediate cause of the company's bankruptcy, it was certainly a contributing factor. (For another look at how debt affects company health, see Debt Reckoning.)
Other ethanol manufacturers seemed to be better at hedging than VeraSun. Aventine Renewable Energy (NYSE:AVR) reported during its conference call that its "average corn cost in Q3 continued to be below the average CBOT [Chicago Board of Trade] corn price of $5.82 per bushel for the quarter."
The industry has been battered year-to-date. Through the first 10 months, Pacific Ethanol (Nasdaq:PEIX) is down 87% from its 52-week high of $9.88. The Andersons (Nasdaq:ANDE), a more diversified company with an ethanol segment, is down nearly 51% from its 52-week high of $48.82.
VeraSun’s bankruptcy filing was the result of a poorly timed hedging decision and the consequences of too much debt financing.
For a deeper look at ethanol, see The Biofuels Debate Heats Up.
By Eric Fox
Eric J. Fox, is the founder of Brittain Capital Management, LLC., which manages the Alesia Fund, LP., a Value oriented long/short investment partnership. You can read more of his views on investments at his blog - Stock Market Prognosticator.
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