Valero Creates Ethanol Seismic Shift

Refining Giant Vaults to Top Three US Ethanol Producers With Plants Purchase

Todd Neeley
By  Todd Neeley , DTN Staff Reporter
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Valero Renewable Fuels buys three ethanol plants from Green Plains Inc., in a $328 million deal. (DTN illustration by Nick Scalise)

OMAHA (DTN) -- Though Green Plains Inc.'s sale of three ethanol plants this week was expected, the transaction with Valero Renewable Fuels changes the production landscape in the United States.

In a $328 million deal announced on Wednesday, Valero acquired about 280 million gallons of production capacity in purchasing GP plants in Lakota, Iowa, Riga, Michigan, and Bluffton, Indiana.

The deal creates a seismic shift among the nation's top five producers, as Valero now moves up the list, past Green Plains and virtually tied with Archer Daniels Midland at No. 2. Poet is the nation's top producer at about 2 billion gallons.

Valero will have a production capacity of between 1.6 billion and 1.7 billion gallons at 14 plants. Green Plains' capacity falls to just below 1.2 billion gallons at 11 plants.

According to a news release from Green Plains, Valero will pay $300 million in cash and about $28 million of working capital also paid in cash.

Green Plains President and Chief Executive Officer Todd Becker said in a news release the company intends to continue to pay debt and expects to make additional transactions.

"The sale of these three ethanol plants demonstrates our commitment to strengthening our balance sheet and unlocking value for our shareholders," he said.

"As we stated in May, when we outlined our portfolio optimization program, we would divest assets that enable us to execute our long-term strategic objectives. This sale is the first step towards our strategic objectives to prove the value of our assets and to significantly reduce or eliminate term debt by the end of 2018."

In addition, Green Plains also entered into an asset purchase agreement with Green Plains Partners LP to acquire the storage and transportation assets and the assignment of railcar leases associated with the Lakota, Bluffton and Riga ethanol plants. That agreement means Green Plains Inc. will exchange about 8.9 million units it owns of the Green Plains Partners LP, valued at $120.9 million, in exchange for the storage, transportation assets and railcar leases.

Green Plains said in a news release it intends to close the transactions before the end of the year.

Back in May, GP announced it was considering selling assets as part of the portfolio optimization plan. As part of that plan, the company has been expanding its cattle business and is investing in vinegar production.

Pavel Molchanov, senior vice president and equity research analyst at Raymond James and Associates, told DTN the Valero acquisition fits the company's business footprint.

"Of note, the three plants are located in Iowa, Indiana and Michigan, which should be highly complementary to VLO's 11 existing ethanol plants located throughout the mid-continent region," he said in an analysis of the transaction.

Valero already has four plants in Iowa and two in Indiana, Molchanov said.

"While the ethanol segment tends to be overlooked by many in the Valero story, particularly with strong refining segment profitability, the acquired assets appear highly complementary to VLO's existing business," he said.

Molchanov said cash flow for Green Plains will be reduced by about $14.6 million a year, "but this will be more than offset by a $17 million decrease in future distributions to the parent."

Todd Neeley can be reached at todd.neeley@dtn.com

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Todd Neeley