VeraSun Energy Corporation

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VeraSun Energy Corporation

ETHANOL PRODUCTION BEGINS IN 2003

VERASUN’S PUBLIC DEBUT IN 2006

ORIGINS

Donald L. Endres brought both an understanding of agriculture and confirmed success as an entrepreneur to the founding of VeraSun, boasting ideal attributes for the challenges that lay ahead. He was raised in Watertown, South Dakota, the son of a corn farmer whose father was a corn farmer. Endres’s brothers followed in the footsteps of their father and grandfather, adding a third generation of corn farmers to the family history. Endres shot off in an entirely different direction, becoming an entrepreneur in the technology sector after earning a bachelor of science degree in animal science from South Dakota State University. He displayed a Midas touch, leading a group of associates through several multimillion-dollar technology ventures that enriched all involved. In one such venture, Endres teamed with William L. Honnef to launch an Internet gift certificate company named ExpressGold.com. The pair sold the company to CyberSource Corporation in January 2000, cashing out for $75 million. Honnef, who had earned his undergraduate degree from Indiana University of Pennsylvania, was selected by his alma mater as “Entrepreneur of the Year” in 2000, a distinction South Dakota State University also bestowed on Endres in 2000.

One year after they collected their awards, Endres and Honnef were ready to launch their next venture. VeraSun began to take shape in 2001, and it took Endres back to his agricultural roots. “We knew there was an energy shortage,” Endres explained in a February 11, 2005, interview with Top Producer, “so we looked at wind power, biodiesel, and ethanol. Ethanol had the unique potential to have more positive impact in the region. We had been successful in the past, but unlike previous ventures, this looked like a unique opportunity to involve the community.”

Endres also was more than familiar with the intricacies of ethanol production. In 2000 he cofounded Glacial Lakes Energy, a farmer-owned, limited liability company (LLC) that operated an ethanol plant in his hometown. He also invested in Badger State Ethanol, a Monroe, Wisconsin, LLC. His plans for VeraSun differed from the two other ventures, however, distinguished by the scale of the operations he and Honnef were contemplating in 2001. Glacial Lakes operated a plant that annually produced 45 million gallons of ethanol. Badger State’s facility had an annual capacity of 40 million gallons of ethanol. Endres, looking to optimize efficiencies and distribution, envisioned VeraSun as a producer of much greater magnitude, a company whose annual capacity would approach that of the nation’s largest ethanol producer, agricultural giant Archer Daniels Midland Company. “First,” Endres explained in his interview with Top Producer, “we saw 30-million-gallon, then 50-million-gallon, now 100-million-gallon plants. That’s the life cycle of all businesses. As they mature, they become more efficient. In the ethanol industry, one means of capturing efficiencies is through scale. Buying inputs is just easier when you’re bigger, and you can sell in bigger volumes to petroleum companies.”

Endres set his sights on building not just one, but a series of ethanol plants capable of producing 100 million gallons per year (MGPY) or more. The objective was ambitious, calling for substantial financial resources to achieve. To make VeraSun more attractive to investors, Endres organized the company as a C-corporation, a move that also enabled VeraSun’s board of directors to execute decisions far more quickly than allowed by the one-person, one-vote structure of a farmer-owned cooperative. Endres pitched his business plan to investors, drawing the interest of one venture-capital firm, Bluestem Capital Company, in particular. With the help of Bluestem, a Midwest-focused, Sioux Falls, South Dakota-based firm, Endres was able to raise more than $100 million to equip VeraSun with the capital to build its first ethanol plant.

As VeraSun’s financing was being arranged, Endres and his team began scouting for the location of the company’s first plant. Research efforts led the team to east-central South Dakota, specifically near the town of Aurora, a corn-rich area in proximity to the Dakota Minnesota & Eastern railroad that offered outlets to ethanol and grain byproduct markets. Plans for the 417-acre Aurora site called for the construction of a 100 MGPY plant that was expected to be completed in March 2004, when VeraSun was slated for its debut in the fast-growing ethanol market.

As a biofuel alternative to gasoline, ethanol represented a ray of hope for a country facing numerous challenges on the energy front. U.S. dependence on foreign oil, escalating gasoline prices, and excessive carbon dioxide emissions were issues that could be addressed, in part, by using alternative fuels, and ethanol was one of the leading alternative fuels causing a stir of interest as VeraSun began building its plant in Aurora. A high-octane, anhydrous (water free) alcohol, ethanol was most widely used as a blending ingredient in gasoline because it released less carbon dioxide than conventional gasoline and offered a replacement for phased-out methyl t-butyl ether (MTBE), which had been the gasoline additive of choice until it was discovered to be a soil and aquifer contaminant. Ethanol, produced by fermenting yeast with the starch or sugar in a wide variety of crops, presented none of the environmental problems posed by MTBE. Further, in cars and trucks designated as flex-fuel vehicles (FFVs), blends of 85 percent ethanol and 15 percent gasoline (E85) could be used, by far eclipsing MTBE’s role as an oxygenate.

COMPANY PERSPECTIVES

At VeraSun Energy, we are focused on creating a future that includes renewable energy. Our nation’s growing dependence on fossil fuels and the impact of our consumption have never been more apparent than they are today. We believe there is a better way—renewable fuels.

For his Aurora plant, and others to follow, Endres chose to use a dry-mill process of converting corn into ethanol, turning to the crop cultivated by his grandfather, father, and brothers. In the dry-mill process, each bushel of corn yielded roughly 2.8 gallons of ethanol and roughly 18 pounds of distillers grains, a high quality, nutritious livestock feed.

ETHANOL PRODUCTION BEGINS IN 2003

For a company waiting to receive its first stream of revenue, word of the construction activity in Aurora provided welcomed news. The plant was finished ahead of schedule, opening in November 2003 and commencing production the following month. The 100 MGPY capacity of the plant, which operated 24 hours per day, seven days per week, represented a boon to corn farmers, requiring more than 35 million bushels of corn annually, and to VeraSun’s coffers, giving it ethanol to sell and annual production of 320,000 tons of distillers grains, enough to feed more than 600,000 dairy cattle per day. The debut of the Aurora plant was a celebratory event, but before VeraSun produced its first gallon of ethanol, Endres had already moved on to his next project. In December 2003, Alternative Transportation Fuels Today reported that city officials in Fort Dodge, Iowa, had been approached by VeraSun representatives. The inquiries led to the formalization of plans for a second VeraSun production facility, which commenced construction in September 2004. The 110 MGPY Fort Dodge facility started producing ethanol in October 2005, two months after expansion of the Aurora plant lifted capacity to 120 MGPY.

VeraSun ranked as the second largest ethanol producer in the country by the time the Fort Dodge facility went online, its rise through the ranks of a highly fragmented industry a testament to Endres’s drive to expand. Additional plants would soon follow—the purchase of a 228-acre farm in Floyd County, Iowa, in late 2005 became the site of the company’s Charles City plant—but Endres attended to other matters as well, namely, promoting the use of ethanol and preparing for VeraSun’s debut as a publicly traded company. One of the major concerns in the ethanol industry was the lack of an extensive infrastructure to deliver biofuel to consumers. Of the more than 180,000 fuel stations blanketing the country, only 500 were equipped to offer E85. VeraSun, which had branded its E85 product as “VE85” in May 2005, assumed an active role in establishing a network of ethanol fuel stations. In late 2005, the company signed a partnership agreement with Ford Motor to expand the fueling infrastructure for FFVs. In June 2006, one day after U.S. automakers announced they intended to double the production of FFVs by 2010, VeraSun and Ford said they intended to add more than 50 stations offering E85 in Missouri and Illinois in an effort to create an “ethanol corridor” in the Midwest. At roughly the same time, VeraSun allied itself with General Motors and Shell Oil Products U.S. in an effort to build 26 new E85 refueling stations in the greater Chicago area.

VERASUN’S PUBLIC DEBUT IN 2006

Against the backdrop of construction efforts, VeraSun began the process of converting to public ownership. Pacific Ethanol, with plans to dot the West Coast with production plants, became the first pure-play ethanol company to trade publicly in the United States, completing an initial public offering (IPO) in March 2005 that caused a stir of excitement in the investment community (the company’s shares shot up 165 percent in value within a year). VeraSun and another ethanol producer, Aventine Renewable Energy, queued up next, filing with the Securities and Exchange Commission in early 2006 in preparation for their public debuts. VeraSun proposed a $150 million offering, hoping to use the proceeds to build two ethanol plants in the upper Midwest, but the size of the offering soon increased. After announcing an eightfold increase in profits for the first fiscal quarter of 2006, the company doubled the size of its IPO, seeking to draw more than $300 million from Wall Street. When the company’s IPO was completed in June 2006, the perception of VeraSun’s value among investors gave the offering another boost, resulting in a $419 million offering. VeraSun raised gross proceeds of $253 million, giving it the capital to pursue its goal of increasing production to 560 MGPY by the end of the first fiscal quarter in 2008.

KEY DATES

2001:: VeraSun Energy Corporation is founded.
2003:: VeraSun completes the construction of its first ethanol plant, a facility in Aurora, South Dakota.
2004:: Construction of a second ethanol production plant begins in Fort Dodge, Iowa.
2006:: VeraSun completes its initial public offering of stock and announces its intention to produce biodiesel.
2007:: The company’s third ethanol plant, a facility in Charles City, Iowa, begins production in April, the same month construction of a sixth plant in Reynolds, Indiana, begins.

In the wake of the stunning success of its IPO, VeraSun redoubled its expansion efforts and broadened its strategic scope. The company began construction of two plants in November 2006, a 110 MGPY facility in Hartley, Iowa, and a 110 MGPY facility in Welcome, Minnesota, that set it on track to achieve its production goal for early 2008. November also marked the announcement of VeraSun’s intent to make history in the alternative fuels industry. The company revealed it had discovered a way to produce biodiesel, a clean-burning, renewable fuel, from oil extracted from distillers grains. By removing the oil from distillers grains, the company both increased the value of the oil for fuel use and improved the quality of the resulting distillers grains as a livestock feed because the process concentrated protein and reduced fat content in the grains. VeraSun immediately began scouting for locations for a 30 MGPY biodiesel production facility, with construction expected to start in 2007 and production to commence in 2008. The completion of the facility was expected to make VeraSun the first company to develop a large-scale commercial facility for biodiesel from a coproduct of the ethanol production process, thereby enabling the company to produce two biofuels from the same feedstock.

The frenetic pace of expansion during VeraSun’s first five years of business promised to continue as the company plotted its future course. The Charles City plant opened in April 2007, three months ahead of schedule, the same month the company announced the location of its sixth ethanol plant, a 110 MGPY facility in Reynolds, Indiana. Construction of the Reynolds facility was expected to be completed before the end of 2008, but it was not expected to be the last plant built under the VeraSun banner. With ethanol and biodiesel offering Endres two avenues of growth to pursue, the company figured to play a leading role in the biofuel market for years to co me.

Jeffrey L. Covell

PRINCIPAL SUBSIDIARIES

VeraSun Aurora Corporation; VeraSun Fort Dodge, LLC; VeraSun Charles City, LLC; VeraSun Marketing, LLC; VeraSun Hartley, LLC; VeraSun Granite City, LLC; VeraSun Reynolds, LLC; VeraSun Welcome, LLC.