Valero agrees to fund Mascoma cellulosic ethanol plant

By Kris Bevill | December 09, 2011

Cellulosic ethanol technology developer Mascoma Corp. has finalized an agreement with petroleum refiner Valero Energy Corp. to finance the construction and start-up of its first commercial-scale cellulosic ethanol facility, to be located in Michigan’s Upper Peninsula near Kinross. The hardwood-to-ethanol plant will initially be built to produce 20 MMgy, but could be potentially expanded to produce 40 MMgy. Construction of the facility is expected to begin by June and should be complete by the end of 2013, according to Mascoma.

Under the terms of the agreement, Valero will provide project management to build and will operate the Kinross plant. Valero will also hold a majority interest in the joint venture, known as Frontier Renewable Resources LLC, and will market ethanol produced at the plant. Mascoma will receive royalties for a certain time period based on ethanol yield milestones, the company said.

 Construction, commissioning and start-up of the facility are estimated to cost about $232 million. Mascoma said the costs being funded by Valero and through financial awards received from the U.S. DOE and the State of Michigan. According to Mascoma’s S-1 registration form filed with the U.S.  Securities and Exchange Commission on Sept. 16, the company has been awarded twin $20 million grants from the DOE and the Michigan Strategic Fund to be used toward constructing the Kinross plant. As of June 30, Mascoma had received $16.5 million of the DOE grant and $12.1 million from MSF. The company has also received $5.1 million from Alberta’s BioEnergy Science Center to research the conversion of biomass to ethanol using its consolidated bioprocessing (CBP) technology. If Mascoma continues to meet the requirements set forth in the grant approvals and receives the full $45.1 million it has been awarded, Valero’s financial commitment to the construction and start-up of the plant will be approximately $190 million.

“Valero’s substantial financial commitment to the Kinross facility demonstrates Mascoma’s technology leadership, as well as our ability to attract the significant investment that has posed a key challenge to advanced biofuels production in this country,” Mascoma CEO Bill Brady said in a statement. “Our partnership with Valero to develop and operate the Kinross cellulosic ethanol facility, and facilities beyond Kinross, is a major step forward in our goal to provide a low-cost, more sustainable alternative to petroleum-based products.”

Mascoma said in its S-1 filing that it is also planning to construct a hardwood-to-ethanol facility similar to the Kinross plant in Drayton Valley, Alberta, but construction of that plant may not begin until 2013. Mascoma officials were unable to provide further comments on either project due to SEC restrictions.

Valero has been a stakeholder in Mascoma for some time. Earlier this year, the two companies announced a non-binding letter of intent for Valero to invest up to $50 million of the equity required to finance the Kinross project. Solidification of the deal was pending validation of Mascoma’s technology and other factors, all of which have now been finalized. Additionally, in August Valero’s subsidiary Diamond Alternative Energy LLC paid $5 million for 1.33 million shares of Mascoma stock, according to Mascoma’s S-1 filing.

Valero media relations director Bill Day said the company is confident in Mascoma’s technology and is looking forward to moving ahead with the plant. George Stutzmann, vice president of alternative energy at Valero, agreed. “This partnership provides an exciting opportunity to combine Mascoma’s innovative CBP technology platform and expertise with Valero’s project management, operating, distribution and marketing capabilities,” Stutzmann said. “We view this first commercial-scale cellulosic ethanol facility in Kinross and our partnership with Mascoma as an important foundation for potential expansion beyond Kinross.”