Valero eyes cellulosic ethanol with $477M VeraSun buy

San Antonio, Texas-based refiner Valero Energy (NYSE:VLO) won a bankruptcy auction today to buy seven corn-based ethanol plants from VeraSun Energy for $477 million, plus additional working capital.

Valero chose the seven plants out of 16 owned by Brookings, S.D.-based VeraSun because they offer the potential to incorporate next-generation biofuel technologies, said Bill Day, director of media relations for Valero.

“These plants all have the capacity to add new technologies,” Day told the Cleantech Group. “For instance, cellulosic ethanol, when it becomes viable, could be added on to these plants.”

The deal was announced yesterday but was subject to approval by a bankruptcy court today. A few more regulatory approvals need to be met before the expected closing of the agreement in early April.

Shares of Valero were up 0.05 percent to $18.51  in trading today.

The seven plants have a combined production capacity of 780 million gallons of ethanol per year. Valero plans to have the plants running at capacity soon, with some of the ethanol to be sold in the marketplace and some used directly for Valero’s operations across North America.

Governments across the globe have said they plan to continue to increase the percentage of ethanol that must be blended with gasoline. In November, the U.S. Environmental Protection Agency increased the ethanol blend mandate from 7.76 percent to 10.21 percent for 2009, creating a market for 11.1 billion gallons of ethanol (see Ethanol blend increases while oil reaches new low). By 2022, the government expects the mandate to create a market for 36 billion gallons of ethanol annually.

“These requirements are not going away, so there’s going to continue to be a market for ethanol,” Day said, declining to specify how much ethanol Valero buys each year. “We already have to buy a large amount of ethanol to blend with gasoline, so it made sense to get in the production business. We’ll be making ethanol instead of buying it.”

Despite the growing market for ethanol, corn-based biofuel producers have struggled in the past year because of the skyrocketing price of their feedstock (see Using superpowers for the greater cleantech good). The Renewable Fuels Association estimates that 24 corn-based ethanol plants owned by 10 firms closed in the last three months, representing 15 percent of the U.S. ethanol supply (see Genomatica develops second biochemical from microbes).

Corn prices have dropped to about half of what they were in late June, but competition has grown. There are 160 ethanol producers in the U.S., up from 57 in 2007, according to the Federal Trade Commission.

VeraSun was one of the biggest ethanol producers in the U.S. after acquiring St. Paul, Minn.'s US BioEnergy (Nasdaq: USBE) in an all-stock deal (see VeraSun to buy US BioEnergy). But a dramatic spike in corn prices led to significant losses in the third quarter of 2008, compounding already unfavorable margins, the company says. And the worsening capital market conditions and a tightening of trade credit resulted in severe constraints on the company’s liquidity, VeraSun says (see VeraSun reportedly near bankruptcy).

Day said Valero understands how to most efficiently run refineries, as the company has been doing it since 1980.

“We believe we can bring our manufacturing and technical expertise and improve efficiencies at these plants, but we haven’t determined how to do that yet,” Day said.

Day said it was too early to determine whether new technologies for the plants would come in-house or through strategic partnerships. The company already has a group set up to look into renewable and alternative fuels, he said.

Valero has already stepped into the cellulosic ethanol market by participating in a $34 million financing round for Lakewood, Colo.-based ZeaChem in January with Globespan Capital Partners and PrairieGold Venture Partners (see New year money goes to biofuels).

Valero plans to retain all 435 employees working at the plants, which are all in operation or close to being in operation, he said. Valero plans to begin speaking with the employees today about the transition.

Valero originally submitted a bid in early February for five plants but ultimately bought seven that were the best of those available, Day said (see Investors inject new funds in recycling). The seven plants are relatively new, located near feedstock supplies, and have high production rates, he said. The plants are located in Nebraska, Iowa, South Dakota, and Minnesota. Valero also bid on the right to construct a plant in Reynolds, Ind.

There are three bidders for the remaining plants:

• Dougherty Funding bid $93 million for a facility in South Dakota.
• A group of lenders led by AgStar Financial Services bid $324 million for six facilities in Nebraska, Iowa, North Dakota, Minnesota and Michigan.
• A group of lenders led by West LB bid $99 million for two production facilities in Ohio and Indiana.

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