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Bankruptcy court allows VeraSun to buy corn, pay employees

VeraSun Energy Corporation won approval to keep paying bills in a hearing Monday in a federal bankruptcy court in Delaware.

The Sioux Falls, South Dakota-based company, which owns 14 plants that produce nearly 14% of the nation's ethanol output filed for Chapter 11 bankruptcy late Friday. It has $3.5 billion in total assets, $1.9 billion in debts, and more than 1,700 creditors, potential creditors and business relationships. VeraSun operates in eight states.

After working over the weekend to secure loans to continue operating under Chapter 11, VeraSun announced late Monday that it has commitments for up to $215 million, including credit from groups of Lenders led by AgStar Financial Services, a Minnesota-based member of the Farm Credit System.

On Monday, Judge Brendan L. Shannon of the U.S. Bankruptcy Court, District of Delaware in Wilmington granted VeraSun's emergency request to pay outstanding employee checks, to pay suppliers for postpetition goods and services and up to $20 million for goods delivered on or after October 11, 2008. It also approved tapping up to $40 million from the credit commitment VeraSun has obtained from its lenders.

The Bankruptcy Court is expected to conduct a hearing today to rule on the remaining relief requested by VeraSun in its "first day" motions.

"The financing package...allows VeraSun to maintain operations and continue supplying its customers. The relief granted by the Court…will allow us to focus on our operations and, at the same time, provide VeraSun with the liquidity and ability to continue operations, which means producing ethanol and distillers grains, paying suppliers, and satisfying customer needs for product," Don Endres, VeraSun's CEO said in a statement.

The temporary credit and approval to pay bills was a key hurdle.

In papers filed with the bankruptcy court, VeraSun's Chief Financial Officer, Danny C. Herron, requested approval to pay for goods and services, including farmers' grain, that were delivered to VeraSun and its ethanol plants within 20 days of filing for bankruptcy.

"The debtors estimate that approximately $30.7 million in respect of such 20-Day Goods will become due and payable during the next sixty…days," Herron wrote.

"Many Vendors may not be sophisticated in the complexities of chapter 11 cases and may require additional confirmation that payment for Goods and Services provided will occur in a timely manner," Herron continued. "Should one of these Vendors decide not to deliver Goods during the course of these Chapter 11 Cases out of fear that it will not be paid, I believe the Debtors may have to shut down, or reduce production at one or more of their manufacturing plants."

That hasn't happened. Most of VeraSun's plants were reportedly running this week and analysts believe lenders will do all they can to keep financially stressed ethanol plants going.

In Iowa, farmers who have already delivered to VeraSun plants are also protected by the state's grain indemnity fund, Iowa Agriculture Secretary Bill Northey told Agriculture Online Monday. The fund, which currently has more than $8 million, will pay farmers 90% of any losses, up to $150,000.

Northey said that growers who have sold corn on forward contracts to VeraSun plants are concerned about whether or not to company will be able to honor those.

"I talked to a guy that sold 20,000 bushels at $6.51, about $3 above the current market, and he doesn't know, and I don't know that any of us know yet whether they will stand behind that contract," Northey said.

Northey said that the grain indemnity fund doesn't cover any potential losses for grain that elevators may have sold to VeraSun. He said the Iowa Department of Agriculture and Land Stewardship is trying to determine the extent of potential effects on the indemnity fund. If claims on the fund drop its reserves below $6 million, a state-wide checkoff of 1/4 cent per bushel kicks in on corn and beans. It's collected by elevators but ultimately paid by growers.

Not everyone who has sold to a VeraSun plant is worried yet.

"We do have a couple of contracts with them right now," said John McCandless, whose family farms near Greene, Iowa and has sold to a VeraSun plant in nearby Charles City. "I understand that they will operate under bankruptcy."

Right now, though, the McCandless family is in the middle of corn harvest and hasn't had time to think much about its contracts with VeraSun, he said.

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VeraSun Energy Corporation won approval to keep paying bills in a hearing Monday in a federal bankruptcy court in Delaware.

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