Tight credit could hurt small ethanol companies

By Mark Weinraub

CHICAGO (Reuters) - The tightening credit market will likely crimp the expansion plans of small players in the U.S. ethanol industry, but it will not curtail the growth of larger companies, a VeraSun Energy Corp. VSE.N executive said on Monday.

"I think that there will be less capital that will flow to greenfield projects, new companies," Verasun Chairman and Chief Executive Don Endres said in a telephone interview. "I think private investors are looking to invest capital in the public companies because they have liquidity."

It takes a long time for investors to see returns from investments in new ethanol companies, and that makes it harder for small, private firms to attract capital in this market, Endres said.

Builders already have reported that very few small-company projects are moving forward.

"The number of requests for proposals and bids has just significantly dropped off," Endres said.

On Monday VeraSun, the second-largest U.S. ethanol producer, closed its $725 million purchase of three ethanol plants from privately held ASAlliances Biofuels LLC.

The company's expansion plans, which will boost its ethanol production capacity to 1 billion gallons by the end of 2008, already have been fully funded. Endres said.

U.S. ethanol production capacity has risen more than 20 percent this year to about 6.48 billion gallons per year and is set to hit 8 billion gallons by the end of the year. There are currently 76 plants under construction, according to the Renewable Fuels Association.

VeraSun has not finalized any expansion plans for beyond 2008 but the company is actively exploring new possibilities.

"We have not changed our view at all," Endres said. "We are a growth company and ... will continue to look at opportunities."

The company, which raised $450 million through a debt offering in May, would likely use its equity to fund its next expansion project.

The rising cost of credit would not be a factor as the company determines if its next project will involve building more plants or buying existing ones from other companies.

Shares of VeraSun were down 40 cents at $12.85 in afternoon trading on the New York Stock Exchange. The stock has fallen by about 6.3 percent since the company announced in July its plan to buy the plants from ASAlliances.