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  • bluecheese4u bluecheese4u Nov 19, 2009 12:45 AM Flag

    Ethanol is producing a profit for Valero

    Ethanol is producing a profit for Valero

    By Vicki Vaughan - Express-News Although Valero Energy Corp.'s refining business has been pummeled this year, there's a bright spot on the company's balance sheet that comes from a surprising source: ethanol.

    Valero is making money with the corn-based fuel just six months after buying seven corn ethanol plants from bankrupt VeraSun Energy for $477 million.

    Although Valero's ethanol business is small when compared with its vast refining operations, “the business has worked out for us very well,” Valero CEO Bill Klesse told analysts during the company's earnings conference call late last month. “We feel very strongly that ethanol is going to be part of the fuel mix going forward.”

    In its most recent regulatory filing, Valero said its ethanol business posted operating income, or earnings before interest and taxes, of $49 million for the three months ending Sept. 30 and $71 million for the nine months ending Sept. 30.

    By contrast, Valero posted an operating loss for both periods when all its businesses are included.

    Valero officials said they're seeing demand for ethanol ramp up because of government mandates to boost usage and because ethanol is now priced cheaper than gasoline. “So there is extra incentive to blend ethanol with gasoline,” Valero spokesman Bill Day said.

    The government subsidizes production of ethanol because it helps gasoline burn cleaner, aids corn producers and reduces dependence on foreign oil.

    Yet as recently as summer 2008, the ethanol industry was close to collapse as the recession and high fuel prices kept Americans off the road. Plants were shutting down even as the government has mandated a doubling of corn ethanol use to 15 billion gallons a year by 2015.

    Today, though, ethanol producers are in a better position to make a profit because of the declining cost of corn and because the price of natural gas, the dominant fuel used to power ethanol plants, has dropped 24 percent this year, said oil and gas analyst Mark Gilman of the Benchmark Co. in New York.

    But Gilman questions whether Valero's strong results from its ethanol business “are sustainable going forward. I'm not an agricultural economist, so perhaps they can.”

    Gilman is critical of Valero's investment in the plants, saying he doesn't believe investing in an industry whose growth is tied to government mandates — which are subject to change — is a sound strategy.

    Other experts say ethanol could get another boost if the government allows more of the fuel to be added to gasoline.

    Ethanol producers are asking the Environmental Production Agency to allow the ethanol blend in gasoline to be raised to 15 percent from 10 percent for use in all passenger vehicles, said Matt Hartwig, communications director at the Renewable Fuels Association. Increasing the blend in gasoline is controversial because automakers say a higher blend could damage vehicles. “We think 15 percent blend would work,” Hartwig said.

    The EPA is set to rule on the matter by Dec. 1, but Jerry Gulke, an analyst and president of Chicago-based Gulke Group, a consulting firm, thinks the agency will take a moderate step, perhaps allowing 12 percent ethanol to be mixed with gasoline.

    “They may be looking at (adding) 2 percent now and get to 15 percent later,” he said.

    Valero is encouraged enough about its ethanol business to be looking for ways to augment it. That would include Valero's investment in more experimental biofuels, such as producing biodiesel from algae. “You'll see us continue to add to this business,” Klesse told analysts, “but prudently.”

    http://www.mysanantonio.com/business/70420812.html

 
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