The Environmental Protection Agency's decision to get the lead out of gasoline -- hailed as an important health ruling by scientists and environmentalists -- has been a matter of life and death for two local companies as well.
For Ethyl Corp. of Richmond -- once the country's leading maker of tetraethyls, the lead compound mixed into gasoline to eliminate engine "knocks" -- the EPA ruling that became effective last month all but killed what was once its only line of business. The new rule required refiners to reduce the amount of lead in leaded gasoline from 1.1 grams per gallon to 0.5 gram per gallon by July 1, and to 0.1 gram by Jan. 1, 1986. A complete ban is scheduled to take effect Jan. 1, 1988.
But for American Fuel Technologies Inc., an ethanol maker based on Maryland's Eastern Shore, the EPA decision was a breath of life that saved it -- at least temporarily -- from financial ruin. The rule created a sudden huge market for the gasohol AFT produces from corn and molasses -- a product that is an effective, relatively cheap octane booster and substitute for tetraethyls. In less than two months, AFT signed contracts to supply more ethanol this year than it can produce -- a big turnaround for the company that 13 months ago had to shut down its two plants because it lacked the day-to-day capital to run them.
The death of Ethyl's lead business, and the resuscitation of AFT's prospects, provide an interesting contrast in the way companies respond to external forces and pressures.
In Ethyl's case, the EPA rule, which was hard-fought but long expected, was treated as an opportunity to diversify from lead additives and restructure the company into a business so broadly based it can't easily be rocked by a single, overwhelming jolt. Announcement of the tougher lead standard caused barely a blip in Ethyl's stock price, and analysts give most of the credit to experienced company managers.
AFT officials admit, on the other hand, that their company's survival has been more a matter of luck than design; while the lead rule has taken AFT off the critical list, it has not put the company out of danger. One serious problem has been lack of management experience in the fledgling industry. To counter this, last month AFT named Wayne English, formerly chief financial officer with MCI Communications Corp., to the post of chairman.
As an adviser, English helped arrange a May agreement under which AFT eventually might be controlled by Savannah Food & Industries Inc., a Georgia sugar refiner. "From what I've heard, our growing pains are similar to MCI's," explains AFT founder, president and former chairman O. Wayne Eakin. "To have people who were there help guide AFT through the same kind of growth pains is very beneficial to us."
Ethyl Corp. first heard the death knell for lead in the early 1970s, when environmentalists began seeking a ban on tetraethyls after research showed a link between lead and brain damage in children.
"Ethyl faced up to the fact that it was in a dying business long ago, . . ." says Louis E. Hannen, an analyst who follows the company for Wheat, First Securities of Richmond. "When you are faced with the fact that your business may be declared illegal, you hope and try to change their mind, you try to get a grace period, but mostly, you try to get out."
Ethyl's top executives mounted their own aggressive crusade challenging the scientific evidence. But they also began diversifying fast. Whereas antiknock compounds made up almost 100 percent of Ethyl's sales in the 1960s, net sales of lead had declined to 29 percent in 1982, 16 percent in 1983 and 14 percent last year, according to filings with the Securities and Exchange Commission. Tetraethyls are "irrelevant now" to Ethyl's financial picture, Hannen says. "If it was eliminated today, all it would do would cause a flat earnings year rather than a down year."
The new rule did prompt a $20 million write-off for the second quarter of the current fiscal year, including the costs of shutting down the company's last remaining U.S. lead plant in Baton Rouge, La. For the quarter ended June 30, Ethyl posted profits of $16 million on sales of $404.2 million, down from $35.6 million on sales of $446.5 million for the 1984 quarter. Last year, the company earned $132.2 million, a 25 percent increase from 1983, though sales were off 4 percent, to $1.675 billion.
Ethyl's first diversification effort was the 1974 purchase of Elk Horn Coal Corp. Other acquisitions included a maker of aluminum products, several plastics companies, a manufacturer of lubricant additives and two producers of specialty chemicals.
In 1982 Ethyl moved further afield by acquiring First Colony Life Insurance Co. of Lynchburg, Va., for $270 million. Most recently, it purchased Morgan Semiconductor Inc., of Garland, Tex., a leading manufacturer of semiconductor materials, and a half-interest in The Barclay Group Inc., a provider of employe benefits. Executives even considered buying a cigarette company, but that deal fell through because "it didn't make sense to be in two businesses that were under pressure from the government," Chairman Floyd D. Gottwald Jr. told reporters in 1984.
When acquisitions didn't work out -- as happened in the plastics group -- Ethyl officials lost no time in selling them. The company now has major holdings in the chemicals, plastics, aluminum, energy and insurance industries, with manufacturing and research facilities throughout the United States and in Canada, Britain and Belgium. It sells mostly to manufacturers, and provides, among other products, the plastic inner lining for disposable diapers, additives for detergents, ingredients for flame-retardant fabrics, and thermally efficient windows and aluminum siding. It is also the only U.S. producer of the pain reliever ibuprofen, which was recently approved for over-the-counter sales by the Food and Drug Administration and is marketed under the brand names Advil and Nuprin.
This is not the first time external pressures have forced Ethyl to change directions completely. The company was founded in Richmond in 1887 as the Albemarle Paper Manufacturing Co., a family-owned and -operated maker of blotting paper for fountain pens. But ballpoint writing pens almost completely replaced fountain pens by 1960, making blotting paper obsolete, and Albemarle found itself in trouble. To survive, in 1962 it acquired Ethyl Corp. of Baton Rouge for $200 million and took on that company's name as well as its main line of business.
Today the company remains largely in the control of the Gottwald family, whose late patriarch, Floyd D., engineered Albemarle's purchase of Ethyl from its founders, Standard Oil of New Jersey and General Motors Corp. Floyd Jr., 63, a former safari hunter, is the company's chairman and chief executive officer, while his younger brother Bruce, 52, is Ethyl's president and chief operating officer.
Analysts give high marks to the Gottwalds and other top company executives, including recently retired chief financial officer Lawrence E. Blanchard Jr., for their willingness to take risks and change directions. (Ethyl executives refused to be interviewed for this article.) Hannen and Joseph Salvani, vice president of research for Goldman Sachs in New York, are particularly high on the acquisition of First Colony, which made its reputation as a specialty insurer that wrote policies for diabetics, heart patients and other insurance "untouchables."
First Colony was a pioneer of universal life insurance, another innovation that makes it attractive to investors. But when Ethyl decided to borrow $200 million to buy the company, many analysts were critical, and Standard & Poor's put Ethyl on its "credit watch" list.
"The acquisition was criticized for adding a lot of leverage, and because many thought Ethyl had overpaid for it," Hannen says. "But First Colony has been growing at a 30 percent rate, it made $50 million last year, and I expect it to make $60 million this year. . . .
"It's been a superb acquisition for them," Hannen adds. "The problem is that Ethyl [had been] followed by a bunch of chemical analysts who didn't know anything about the insurance business, and they didn't understand what Ethyl was doing." He estimates the insurance division, which is run as an unconsolidated subsidiary, will account for about 25 percent of Ethyl's pretax income in 1985.
The company's other recent purchases have been wise, if less spectacularly successful, Hannen said. The January acquisition of Morgan Semiconductor, for example, while "pretty exciting, doesn't add up to anything" so far. That segment of the company remains worth watching, however, he said.
Ethyl still has an interest in the lead additive business. Though it plans to close its Louisiana plant this year, subsidiaries continue to operate manufacturing facilities in Greece and Canada, for sales to countries with less stringent lead pollution standards than the United States. And last month Ethyl entered into a joint agreement with E. I. du Pont de Nemours & Co., under which the Richmond company will market and distribute Du Pont-made lead compounds to the export market.
"Generally, what the company has been able to do is pretty amazing," Salvani adds. "Ethyl has been able to sustain the best growth rates in the last four years of any specialty chemical company. . . . Most companies just do not do that well when they diversify."
If the EPA ruling caused barely a ripple at Ethyl Corp., it had the impact of a tidal wave at American Fuel Technologies, formerly the Delaware Gasohol Co., an ethanol producer based in Federalsburg, Md. The EPA rule, combined with a decision by the agency in January, helped redefine ethanol's main use -- as a fuel "enhancer" rather than a fuel "extender." It is an important distinction that AFT executives say has pulled their company from the brink of failure, at least for now.
Ethanol is a fuel alcohol produced from sugars derived from grains such as sugar cane and corn. Though ethanol can be used as a solvent and a feedstock, the industry was virtually nonexistent until the 1970s, when the United States was cut off twice by petroleum suppliers in the Middle East. The energy industry and federal government both began looking for alternative, renewable sources of energy that would lessen this country's dependence on foreign oil. Ethanol, while relatively expensive to produce, seemed to fit the bill.
Spurred by government subsidies and tax credits, a number of companies jumped into the ring, including AFT in 1979. AFT used corn to produce its ethanol, and much of that came from Eastern Shore farms that surround the company's plant in Federalsburg. In fact, the company's three founders -- including Eakins -- have strong ties to agriculture and formed the company, in part, to provide alternative markets for corn farmers.
But according to AFT Executive Vice President Thomas P. Tanis Jr., the very concept that gave birth to the industry -- the notion that ethanol could be a fuel substitute or a means of extending existing U.S. reserves of gasoline -- prevented it from flourishing. For as it turned out, the price of fuel ethanol was just as unpredictable and unstable as the price of petroleum.
First, the technology to produce and refine ethanol ranged from crude to virtually nonexistent. "We did reinvent the wheel, yes," Tanis said. Secondly, the price of ethanol rose and fell with the availability of corn, which in turn depended on such unpredictable factors as weather, subsidy programs and crop results. The price also was inversely tied to the availability and cost of crude oil. As crude prices dropped, demand for ethanol slacked and prices could not cover production costs.
Between 1979 and 1983, AFT's first full year of production, the company -- then called American Synfuels Corp. -- remained deeply in the red. The year that ended May 31, 1984, was devastating. A drought drastically reduced the size of the corn crop, and the company paid almost 40 percent a bushel more for corn of lower quality than it had been using -- "The kind you get from sweeping the bottom of the bin because there's no more else around," Tanis said. The lower-grade corn contained dust and dirt, which "put colossal wear and tear" on the company's plants in Federalsburg and Hydro, Okla. "It wore them out," Tanis says, while only yielding half as much gasohol as the higher-grade corn.
The company's revenue dried up, while equipment breakdowns caused expenses to rise. For the fiscal year, the company suffered a loss of $4.9 million, compared with a $1.9 million loss in 1983. By June 1984, AFT virtually had run out of money, and it decided to shut down both plants. "Basically, we had to stop wasting the shareholder's money," Tanis says. "Those were the days that the industry -- and us -- came as close to dying as I ever want to come to anything."
Tanis, Eakins and the directors "took a serious look in the mirror," Tanis recalls, and weighed going out of business. Instead, they decided to refinance their debt by selling and leasing back the Oklahoma facility to a limited partnership assembled from a group of loyal shareholders, banks and business executives, including several from MCI. The refinancing raised about $4.4 million, which AFT used to repay short-term debt and overhaul the plants. The Eastern Shore facility was restarted in December, while the Oklahoma plant returned to production in April.
The thing that pulled AFT back from the brink, Tanis says, was a gradual change in ethanol's definition, from that of fuel extender to fuel enhancer. A funny thing happened on the way to the death of the ethanol industry: Blenders and refiners discovered that gasohol, while not economically desirable as a fuel substitute, greatly improved the mileage performance of gasoline and reduced engine knocking -- just like lead additives.
"We said, 'Gee, we've got a specialty chemical on our hands,' " Tanis says. "Becoming a specialty chemical had the potential to make us economically viable."
The EPA ruling had been in the works for years, and AFT and other ethanol producers already had begun to benefit from it even before the standards were announced officially in March. But on Jan. 14, EPA gave the industry another big boost by approving the so-called "Du Pont waiver," allowing that company to use methanol as an octane booster in petroleum as long as it included a minimum amount of ethanol in the mixture as well.
"On Jan. 15, our phone rang off the hook from people highly interested in using ethanol in their gas," Tanis says. Tanis estimates that in five years, demand for ethanol could exceed 8 billion gallons a year (if all the lead now in gasoline is replaced with ethanol), though industry analysts say actual demand will be closer to 1 billion gallons.
Since the Du Pont waiver and the EPA rules were announced, AFT has won contracts to supply $20 million in ethanol -- or double the company's sales for all of fiscal 1984 -- and says several other deals are in the works. Tanis says it is "feasible" that the company will supply 100 million gallons of ethanol in the year ended May 31, 1986 -- compared with about 4 million last year. In 36 months, Tanis says, the company could be supplying 300 million gallons a year. (According to a 1984 report by Oppenheimer & Co. Inc. analyst O. Lee Tawes III, demand for all of 1983 was 490 million gallons.)
The company says it will accomplish this immediately by producing up to 9 million gallons of ethanol in its own plants, and by acquiring the rest from other suppliers, including those in Latin America and Europe.
AFT also hopes to improve its efficiency through a deal it set in May with Savannah Food Industries. AFT will manufacture ethanol from molasses supplied by the Georgia firm, instead of the corn it has been buying from Eastern Shore farmers. The switch will help it save money because the molasses requires fewer steps to process than raw corn. The agreement also will give AFT a much-needed cash infusion and gives Savannah the right to acquire 50.5 percent of AFT stock over the next five years. AFT says it will use some of that cash to acquire ethanol plants nationwide, many of which now are idle.
Tanis and other company officials admit their view of the future may well be overly optimistic -- considering that the company has never turned a profit, and may not for several months or years. And though AFT will benefit from the recent EPA rulings, the real gainers are likely to be the industry's leaders, Archer-Daniels-Midland Co. and A. E. Staley Manufacturing Co., both of Decatur, Ill.
And Tawes of Oppenheimer sees a decline in ethanol demand later this decade after the initial surge, as refiners refit their plants to produce their own, non-grain alcohol octane boosters. Tawes says that small gas refiners may increase their demand for ethanols to replace lead because they won't be able to afford to refit their facilities. But "large refiners will, to the greatest extent possible, invest the capital necessary to produce unleaded gas without the use of alcohols due largely to their desire for self-reliance and control," he predicts.
And Tawes warns that without state tax credits, currently averaging 5 cents a gallon in 34 states, "ethanol is not competitive with other octane enhancers." Several states have reduced credits recently, he notes, and others have threatened to.
But English, the new chairman, draws a comparison between AFT and his old company, MCI. "When I joined MCI in 1976 , we owed the banks almost $100 million. We weren't paying interest, we weren't paying principal, we had very little cash in the till. . . . But we raised the cash, and look what happened. There are parallels. . . . The ethanol industry has definitely taken a turn for the better. We see strong evidence of a substantial increase in demand for ethanol. The basic economics of the industry I think are very good."