Koch Industries is getting into the ethanol business, with subsidiary Flint Hills Resources announcing on Tuesday that it has bought two Iowa ethanol plants.
Flint Hills Resources, based in Wichita, owns and operates refineries, chemical plants and terminals across the Midwest and Texas.
It bought the plants during an auction held by Royal Bank of Scotland, outbidding the plants' builder and original owner, Hawkeye Energy, which lost control of them during bankruptcy. Hawkeye emerged from bankruptcy last month.
The Menlo and Shell Rock, Iowa, plants opened in 2008. The plants each employ about 50 people and each produce about 110 million gallons of ethanol a year.
No price was released.
The purchase, expected to close in September, marks Koch's entry into a new business — and a vote of confidence in the industry's future , the company said.
Flint Hills is forming a new subsidiary, Flint Hills Renewables, to manage the new plants, said Flint Hills spokesman Jake Reint
"The renewable business is an increasingly important part of the transportation fuel mix," Reint said.
Currently, the federal government allows blenders such as Flint Hills to blend up to 10 percent ethanol into the automobile fuel they sell. It gives them a tax credit as an incentive.
By owning ethanol production plants, Flint Hills can make a profit off the 10 percent of fuel that is no longer made up of gasoline.
But, Reint said, Flint Hills also has faith in the future of ethanol as well.
The federal government has set ethanol consumption targets of 36 billion gallons by 2022. That's more than a 200 percent increase from 2009 and almost certainly would require higher percentages of ethanol in automobile fuel, although the government hasn't established a clear path to reach those consumption targets.
The bottom line, Reint said, is that ethanol is competitive with gasoline from a cost standpoint.
"We continue to oppose mandates and subsidies," he said. "As we see it, ethanol can be competitive without subsidies."
Koch's purchase is a tremendous vote of confidence in the future of what has been a frequently criticized industry, said Robert Casper, president of Poet Ethanol Products.
"Koch is not a short-term thinker," Casper said. "They have a long-range vision for everything they do."
Casper said there has been a trend for outside companies, including petroleum producers and refiners, to buy troubled ethanol plants. He said he doesn't see that changing.
The ethanol industry expanded rapidly in the middle of the past decade after the federal government established the 10 percent limit.
But it hit a wall in 2008 when it reached that limit and plants began competing on price alone. Less efficient and more indebted ethanol plants went out of business.
The industry has been lobbying the Environmental Protection Agency and Congress over the past year to raise or remove the limit.