VLO, Mascoma in Ethanol Plant Pact

Texas-based Valero Energy Corporation (VLO - Analyst Report) has inked a definitive agreement with Lebanon, New Hampshire-based renewable fuels company Mascoma Corp. to develop a commercial scale cellulosic ethanol facility in Kinross, Michigan at a cost of nearly $232 million.

A joint venture – Kinross Cellulosic Ethanol LLC – has been formed by the subsidiaries of both companies to develop and operate the ethanol plant.

The Kinross facility will employ Mascoma's proprietary consolidated bioprocessing technology platform, to extract 20 million gallons of ethanol per year from hardwood pulpwood. Hardwood pulpwood is a selectively harvested, naturally regenerated feedstock that is presently underutilized, and has an abundant resource in the surrounding area.

With the construction of the plant on the Kinross facility expected to start within the next three to six months, Valero will have the option of increasing the capacity to 80 million gallons per year, subsequently depending on demand statistics. The work on the plant is slated to be over by year-end 2013.

Valero will be responsible for the construction and operations of the Kinross plant and sell the fuel manufactured there, while Mascoma will receive royalties.

Valero, an independent U.S.oil refiner owns ten corn-based ethanol plants. The company is in quest of technologies that may have applications at its corn ethanol factories, and will supply the majority of financing for the plant. The balance of the fund will come from the U.S. Department of Energy and the State of Michigan.

This project is appealing to Valero as it is among the pioneering commercial-scale cellulosic ethanol plants. Further, the company is also planning to include genetically modified yeasts that Mascoma developed into its ethanol production.

Valero organizes its business into three reportable segments: Refining, Ethanol and Retail. The Ethanol segment includes sales of internally produced ethanol and distillers grains. Operations of this segment are geographically located in the Central Plains region of the United States.

Valero, which competes in the ‘Oil Refining and Marketing’ industry with firms like Tesoro Corp. (TSO - Analyst Report) and Western Refining Inc. (WNR - Analyst Report), holds a Zacks #3 Rank (equivalent to a Hold rating for a period of one to three months). For the long term, we maintain an Outperform rating.

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