Q4 2020 Aemetis Inc Earnings Call
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Thanks for holding and we appreciate your time and patience. Please stay on the line and we'll be back and just a moment.
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Welcome to the of Medicine third quarter, 2020 earnings Review Conference call. At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Mr. Todd Waltz, Executive Vice President and Chief Financial Officer of of Medicine <unk>. Mr. Waltz, you may begin.
Thank you Kate and welcome to the <unk> third quarter fourth quarter, 2020 earnings review call. We suggest visiting our website at a net of stock column to review today's earnings press release press release.
<unk> corporate presentation filings with the Securities and Exchange Commission recent press releases.
And previous earnings conference call. The presentation for today's call is available for review or download on the investors section of the <unk> Dot Com website before we begin our discussion today I'd like to read the following disclaimer statements during.
During today's call, we'll be making forward looking statements, including without limitation statements with respect to our future stock performance plans opportunities and expectations with respect of financing activity and execution of our business plan. These statements must be considered in conjunction with the disclosures and cautionary warnings that appear in our SEC filings investors are cautioned that all.
Forward looking statements made on this call involve risks and uncertainties and the future events may differ materially from the statements made for additional information. Please refer to the company's security and Exchange Commission filings, which are posted on our website and are available from the company without charge.
Our our discussion on this call will include a review of non-GAAP measures as a supplement to financial results based on GAAP.
A reconciliation of non-GAAP measures to the most directly comparable GAAP measures is included in our earnings release for the quarter ended December 31, 2020, which is available on our website and.
Adjusted EBITDA is defined as net income or loss plus to the extent deducted in calculating such net income interest expense loss and extinguishment income tax expense intangible and other amortization expense of accretion expense depreciation expense loss contingency and litigation and share based compensation expense.
Now I'd like to review the financial results for the fourth quarter and year ended 2020.
Revenues were $37 3 million for the fourth quarter of 2020 compared to $52 1 million for the fourth quarter of 2019. The decrease in revenue was primarily attributable to delays and the India government oil marketing company biodiesel tender process, the delayed revenue and R&D operation and temporarily lower.
And all production and prices in North America.
Gross loss for the fourth quarter was $3 4 million compared to a gross profit of $5 8 million. During the same period and 2019. The gross profit change was attributable to the temporary ethanol production volume and price reductions during the fourth quarter of 2020.
During which the price of ethanol.
Kris from $1 82 per gallon to of $1 64 per gallon and a market where the cost of delivery of corn rose from $5 <unk>.
To $5 61 per bushel during the same respective periods.
Selling general and administrative expenses decreased to $4 $3 million during the fourth quarter of 2020 compared to $4 $7 million during the fourth quarter of 2019.
Operating loss was $7 7 million for the fourth quarter of 2020 compared to operating income of $1 million during the fourth quarter of 2019.
Net loss was $14 6 million for the fourth quarter of 2020 compared to a net loss of $7 $7 million for the fourth quarter of 2019.
Turning to our balance sheet cash at the end of the fourth quarter.
Of 2020 was $592000 compared to $656000 at the end of the fourth quarter of 2019.
As the additional note capital expenditures of <unk>.
$17 $3 million were made for the construction of carbon intensity reduction projects and.
Keyes plant upgrades during 2020.
That completes our financial review for the fourth quarter of year end 2020.
Now I'd like to introduce the founder Chairman and Chief Executive Officer of a medicine, Eric Mcafee for a business update Eric. Thank you Todd the earnings release that was sent out. This morning has a link to the updated <unk> presentation that we will refer to today as we discuss the results from 2020 I encourage you to consider viewing.
Our updated slide presentation, which can be found on the investor page of our website under this conference call.
<unk> was founded in 2006, we have grown and two four lines of business, which are focused on producing renewable natural gas, including below zero carbon intensity dairy biogas for transportation fuel.
Renewable fuels, including low carbon and below zero carbon intensity ethanol high grade distilled biodiesel renewable jet and diesel using cellulosic hydrogen from wastewater and byproducts, including carbon dioxide and corn oil.
Health safety products, including sanitizer alcohol refined glycerine blended hand, sanitizer and other health safety products and technology development to maximize the value of our products and processes.
We own and operate production facilities with more than the 110 million gallons per year of capacity and the U S and India included in our production portfolio was the 65 million gallons per year of fuel ethanol high grade alcohol wet distillers grains, and distillers corn oil plant located in Keyes, California near Modesto, We also built own and operate a 50 million gallon per year.
Year capacity distilled biodiesel and refined glycerin bio refinery.
On the East Coast of India, near the Port City of Kakinada.
Before discussing our business I'd.
I'd like to comment about the social and environmental impact of our company and projects the.
And the circular biochar the bio economy created by our California dairy renewable natural gas projects are soon to be solar powered ethanol plant, our renewable jet and diesel plant under development to use cellulosic hydrogen from waste Orchard Wood and our science has of alcohol business provide benefits to the local environment and communities.
For example by providing an alternative use of wastewater and ultimately eliminating field burning of the 3 billion pounds per year of waste Orchard Wood, and California Central Valley, we plan to significantly reduce greenhouse gas emissions and air pollution, while displacing carbon intensive feedstock with negative carbon intense.
The feedstock for the production of renewable jet and diesel fuel.
And <unk> projects result, in a healthier planet and a better quality of life for our fellow Californians.
From a social impact perspective, everyone living and the Central Valley is directly impacted by poor air quality since the region has of dubious distinction of having the second worst air quality in the us According to the EPA and the.
The <unk> production facilities and dairy renewable natural gas projects in California are located in or near disadvantaged communities. Our dairy renewable natural gas project Keyes plant upgrades and renewable jet and diesel projects are specifically designed to have a direct positive impact on these communities are projects directly benefit central <unk>.
Of the disadvantaged communities and families by improving air quality, while creating valuable energy and food products from dairy and Orchard egg waste and increasing the sustainability of farming and dairy operations that employ thousands of local workers.
The Med is 2020 earnings report was a positive overall outcome, especially considering that more than 50 ethanol plants and the U S were shutdown at various times during 2020 due to pandemic related gasoline demand decreases and significant corn price increases caused by historic Midwestern weather conditions.
Despite these challenges the <unk> Keyes ethanol plant operated continuously throughout the year by responding quickly to opportunities and.
In March 2020, we quickly upgraded production systems to supply of high grade alcohol into the same size of alcohol market and the Keyes plant became the largest sanitizer alcohol producer and the Western U S. During a time of critical need for our country.
And <unk> operations were significantly impacted in 2020 by where constraints.
And of market conditions during the COVID-19 pandemic.
In response, we focused on keeping our employees safe and we also invested more than $17 million and building carbon intensity reduction projects and other upgrades that have generated a significant amount of shareholder value.
Despite the difficult external conditions that began in Q1 of 2020.
We completed phase one of the dairy renewable natural gas project.
We began the installation of the important Keyes plant energy efficiency systems upgrades to significantly reduce the carbon intensity of our ethanol.
And the gig began the operations of the Messer Sidoti liquids location facility that is now generating Sidoti revenues and the IRS 45 credits from carbon reuse.
Protecting the health of our employees will continue to operate our California ethanol plant to supply animal feed to about 80 local dairies occurred during a time period and which of the demand for Biofuels. Starting in Q2 2020 decreased significantly due to the steep decline and gasoline consumption as a result of California shelter and place.
Orders.
However, as.
As the economy began to reopen in mid 2020 fuel ethanol demand partially recovered during the second half of 2020 with the release of the COVID-19 vaccines and early 2021 and overall increased economic activity.
And the Keyes plant is now running at full capacity in order to meet increased demand for ethanol and California, partially driven by recent severe winter weather in the Midwest the caused disruption to the railroads supply chain used by Midwest ethanol producers.
During the fourth quarter and full year of 2020, a med this achieved important milestones towards revenue growth and sustained profitability and each of our four lines of business.
Let's review, our and dairy renewable natural gas and pipeline project.
At the met US we are focused on producing below zero carbon intensity products, including the production of negative carbon intensity renewable natural gas and renewable fuels.
And <unk> projects maximize the value of carbon credits under the California, low carbon fuel standard.
And the federal renewable fuel standard and IRS 45, <unk> tax credits, while reducing operating expenses by using waste materials as feedstocks.
Using our byproducts from ethanol production.
Or using readily available agricultural waste products from the local area the.
Sustainability and environmental benefits of our processes can benefit all of the parties in the value chain.
And excellent excellent example of this low carbon sustainable circular biogas economy as our dairy renewable natural gas project, which is designed to have many synergies with our keyes ethanol plant.
<unk> ethanol plant uses agricultural feedstock that absorbs cotwo and the atmosphere than produces ethanol and animal feed.
The plant delivers about 2 million pounds per day of of wet distillers grain to about 80% of local dairies to feed more than 100000 dairy cows.
The dairy cows provide waste to the dairy digesters, we build that each dairy, thereby producing biogas that we clean up and pressurize and and <unk> processing unit at the dairy.
And then transport via the <unk> biogas pipeline back to the of medicine ethanol plant to use and the production of ethanol by.
And by displacing high carbon intensity petroleum natural gas.
In addition, the dairy biogas can be upgraded and compressed to produce renewable natural gas to fuel our LNG trucks at our fueling station at the Keyes plant two.
To carry our wet distillers grains to the 80 series.
Trucks can also be fuel that any RMG station connected to a utility pipeline.
Since our RMG interconnection to the PGD pipeline enables us to send renewable natural gas to other RMG fueling stations that we build or are owned by others.
The full system is scheduled to be operating by the end of 2021.
And in September 2020, we completed construction of the first two out of 17 covered lagoon Digesters and the <unk> biogas central dairy Digester project.
Including on site dairy biogas cleanup and pressure pressurization, a four mile pipeline owned by <unk> and a boiler unit to utilize the biogas to operate the Keyes plant.
We are now of generating dairy biogas with an estimated carbon intensity of negative $4 16.
That is being used at our ethanol plant displacing petroleum natural gas with the carbon intensity of positive 100.
Methane, commonly known as natural gas.
As a potent greenhouse gas that is up to 80 times more destructive and carbon dioxide and warming our planet.
Atmosphere, approximately 25% of California's methane emissions come from the newer waste ponds on dairy farms to reduce damaging methane emissions, California passed the law, commonly known as Senate Bill $30 83.
The mandates of 40% reduction and methane emitted by large dairy lagoons by the year 2035.
Biomethane sourced from dairies can be used directly in the form of renewable compressed natural gas to replace gasoline or diesel fuel and cars trucks and buses to significantly reduce carbon emissions and air pollution.
To support the state mandate, California is funded through the California Department of Agriculture, and other agencies matching grants to dairies to build biogas digesters and related systems to.
To date and <unk>.
<unk> has applied for or been awarded about $23 million of grants for biogas and energy efficiency to support our conversion to low carbon and below zero carbon intensity power to operate our California, bio refinery and produce renewable natural gas.
We believe the capturing biogas from dairies and converting it into renewable natural gas to generate negative carbon intensity transportation fuel is an excellent way to reduce climate change and create value for dairies and reduce costs for diesel truck fleets and.
And potentially for electric vehicles by conversion of dairy renewables renewable natural gas to electricity.
A medicine is uniquely positioned as one of only two ethanol plants in California that can maximize the value of biogas due to our proximity the dairies and.
And we were able to use biogas in our plant until our planned utility pipeline of interconnection and gas upgrading is completed.
In addition, we were awarded a $1 million grant to install our own renewable natural gas dispensing system at our Keyes plant for CMG trucks supplying fuel for the approximately 75 truckloads per day of animal feed and ethanol at the Keyes plant.
And 2019 after more than a year of project development and financing work, we announced $30 million of equity financing to fund our biogas project our.
Institutional investors working with us to expand this funding with $25 million of additional equity funding to complete the total of 17 dairies by the end of Q2 2022.
In addition to about $75 billion of USDA guaranteed debt funding that is in process with one of the largest USDA letters and the U S.
The 17 dairy project is scheduled to generate more than $40 million per year of operating cash flow under 25 year dairy supply contracts.
Let's discuss progress at our California ethanol plant.
Revenues from ethanol production were approximately flat at 125 to 112 million of I'm, sorry in 2020 compared to $115 million for 2019 and.
And as higher ethanol prices offset our decision to respond to the low margins by reducing production to $60 2 million gallons in 2020, instead of the $64 7 million gallons produced in 2019.
Our decision to slightly reduced production by about 7% enabled us to operate the plant while managing finished goods inventory during the temporary decline and ethanol demand in 2020.
Currently the <unk> ethanol plant is operating at Maxwell maximum sustainable production rates due to increased demand related to the winter weather in the Midwest debt reduced ethanol production at some plants and created a shortage and California, along with the loosening of many state and local COVID-19 restrictions the increased demand for gasoline and ethanol.
During 2020 gross profit percentage margins improved about 6%.
From six 2% of six 6% of revenues compared to 2019.
SG&A expenses were actually reduced.
And earnings per share were basically unchanged, while EBITDA decreased only slightly for year 2020 compared to 2019.
New higher margin businesses, largely offset the adverse impact of the COVID-19 pandemic on ethanol and biodiesel revenues and margins for the year.
And may of this operates and three of the.
The federal essential critical infrastructures we.
We were able to continuously operate our California ethanol plant this past year in order to provide transportation fuel.
<unk> for sanitizer products Sidoti for food production and animal feed.
By implementing stringent PPE and worker safety policies, we were able to continue to operate our ethanol facility.
On the construction of the plant upgrades and build our dairy renewable natural gas project without interruption.
This work progress was achieved despite COVID-19 shutdowns and operating restrictions that impacted many other companies and California and the Midwest.
To increase the value of our ethanol and high grade alcohol and to reduce the cost of operation of our production plant. We are currently implementing several upgrade product projects related to the California ethanol plant, including.
Number one <unk>.
Constructing the dairy biogas cluster and.
And pipeline to deliver renewable natural gas to the Keyes ethanol plant from an additional I'm sorry from the initial two dairies that became operational in September of 2020 with planned expansion to an additional 15. There is by the end of Q2 of next year, along with gasoline up unit and interconnection to the utility gas pipeline.
And and RMG fueling station of the Keyes plant the <unk>.
The R&D will be used to eventually significantly reduce or potentially eliminate the use of petroleum natural gas at the Keyes ethanol plant.
As well as replace diesel use and trucks related to Keyes plant operations.
To compete.
Completing the installation of the new $8 million zeolite membrane dehydration unit from Mitsubishi that will reduce natural gas you use at the ethanol plant by replacing our molecular sieves, which use of significant amount of petroleum and natural gas to operate.
With the electrically powered equipment.
This upgrade to an electric dehydration system will reduce the carbon intensity of our fuel ethanol and is partially funded by a $1 5 million energy efficiency Grant.
And number three and.
Installing the solar panel Microgrid array with battery backup backup to further reduce natural gas consumption by replacement with solar electricity, while optimizing energy use throughout the of ethanol plant, which is primarily funded by an $8 million, California Energy Commission Grant.
And number four designing and building a mechanical vapor recompression or known as MBR system to significantly reduce petroleum natural gas use partially funded by a $6 million, California Energy Commission grant.
Number five.
Building, new distillation columns and related systems to produce high purity U S. Pharmacopeia grade alcohol for Sanitizers known as USP grade expected to begin in operation and Q1 2022.
Number six.
Installing five new stainless steel tanks for U S P and high grade alcohol storage and load out increasing our storage capacity by more than 250000 gallons and providing flexibility for operation of the new systems at the plant.
When completed these upgrades are designed to potentially eliminate petroleum and natural gas use at the alcohol plant saving up to $7 million per year of natural gas and utility pipeline transmission costs, the California bio refinery will primarily operate using high efficiency electric motors and pumps powered by renewable.
The power sources, including solar.
These projects at the Keyes plant are targeted to significantly reduce carbon intensity by reducing petroleum natural gas usage and costs, while increasing the number of California, California, low carbon fuel standard credits generated each year.
The potential combined the impact of these projects is expected to be more than $20 million per year increase and operating cash flow at the Keyes plant.
Not including the increased value of high grade alcohol produced by the new distillation unit.
Let's review of our biodiesel business in India.
Last quarter, our Universal biofuel subsidiary and India did on a portion of the newly issued $900 million biodiesel purchase order for about 225 million gallons by the three India government oil marketing companies.
And the past the Oems see bidding process required a one year fixed price for biodiesel. However.
However, the UMC bidding process for biodiesel was not successful in 2020 due to a high level of volatility and crude oil and other markets.
In response to requests by biodiesel producers, including a medicine.
The OFC contracting process has been changed to a monthly bid instead of a one year contract with a fixed price we.
We expect that the new monthly OFC bidding process will be successful during 2021, allowing large volumes of biodiesel the blended into petroleum diesel to improve air quality and reduce carbon emissions and India.
Our production capacity of the India plant is about 4 million gallons of biodiesel per month, the large oil marketing companies tender offer that was issued in late 2020.
As an indication of the rapidly expanding government demand for biodiesel in India to reduce dependence on imported crude oil improve air quality and reduce carbon emissions and.
Entire production capacity of the approximately five India biodiesel production plants is about one third of the amount of biodiesel requested to be purchased by the government oil marketing companies last year.
Signaling to the market that additional biodiesel capacity as needed to meet India biofuels consumption needs.
Importing biodiesel into India is not allowed under the National Biofuels policy. So only domestic production can meet the approximately 125 billion gallons per year of biodiesel blending which is the goal set by the government.
Currently there is about 250 million gallons of India domestic biodiesel production capacity and we believe that and that is produced and sold the largest amount of any operating biodiesel plant in India. During 2020, while the industry weighted for government owns the purchasing which was delayed for nine months due to the COVID-19 shutdowns and India.
So the global price of diesel declined along with the price of crude oil as crude fell below $30 per barrel. The domestic price of diesel in India remained largely unchanged due to increased India government taxes that offset crude oil price declines as.
As global crude oil prices increased to more than $64 per barrel today. The price of diesel has also increased and India as the government is maintaining the same level of taxes.
Since our biodiesel is sold at a price linked to India domestic diesel prices are biodiesel prices and India have increased as global crude oil prices have increased.
The rising cost of the feedstock relative to the price accepted by the government <unk> is the remaining primary barrier to operation of our India biodiesel plant at full capacity, which will generate more than $150 million of annual revenues.
Due to the Covid related increase in demand the refined glycerine prices received by our India plant have increased and response to the need for hand, sanitizer and other consumer products.
Let's.
Discuss our carbon zero renewable jet and diesel fuel project using negative carbon intensity hydrogen and riverbank, California.
We were pleased that the <unk> carbon zero by refinery underdevelopment and riverbank, California near Modesto continues to achieve major milestones, including an expected issuance of the initial authority to construct under our original air permit application.
And so further amendments are planned as a part of final construction engineering the authority to construct air permit will allow us to move forward with final EPC agreements and financing.
The California Central Valley has about $1 5 million acres of almond and Walnut orchards almond orchards have about a 20 year life, and then must be removed, creating about 3 billion pounds per year of wastewater and that is usually burned and large piles in the field. Since there is no market for most of the waste material.
The <unk> riverbank project signed the 20 year fixed price low cost Orchard wood waste contract to supply of feedstock to the renewable jet and diesel plant for the production of negative carbon intensity cellulosic hydrogen to be used with distillers corn oil and other renewable oils to produce below zero carbon intensity.
Renewable jet and diesel fuel.
The riverbank plant is designed to produce 45 million gallons per year of renewable jet and diesel generating more than $230 million of annual revenue and more than $65 million per year of positive cash flow.
We plan to expand production to 90 million gallons per year at the riverbank site by year 2025 in our five year plan.
The riverbank plant is designed to use waste orchard wood and other waste biomass such as debt Forest Wood, which has become a major issue for California as the state has prioritized force management to reduce damaging wildfires.
Let's wrap up with a quick review of of newly issued exclusive patent.
And the milestone achieved by our technology development group and fueling and ethanol engine with Cellulosic ethanol producer of sugar extracted from waste Orchard wood.
The <unk> technology development and strategic projects teams worked with the federally funded joint Bioenergy Institute, and Berkeley, California for three years and the development of a patented process to extract sugars from low cost waste Orchard and forest Wood feedstocks. The process has been exclusively licensed to of Medis.
And for wood and other biomass from Noncommercial force.
The negative carbon intensity sugars can then be used to produce high value of cellulosic biofuels in the and that is keyes ethanol plant displacing expensive and carbon intensive cornstarch as feedstock to produce ethanol.
A $3 million, California Energy Commission Grant was awarded to Jae Bae and the met us.
Which partially funded the years of collaborative work and lab testing.
And then in Q2 2020 resulted and the production of the first carbon negative fuel ethanol from California, Orchard wood using ionic liquids.
During the third quarter of 2020, our Cellulosic ethanol was used to fuel the operation of the ethanol engine that generated the same performance.
And low emissions as the traditional ethanol Houston testing.
The ethanol engine technology was originally developed at Stanford University and is a modified diesel engine design.
The engine takes advantage of the high octane content of ethanol to generate about 30% more torque or pulling power then and engine running on diesel.
While creating almost no particulars and very low emissions since ethanol contains the low level of contaminants compared to the petroleum.
And the patented sugar extraction process allows the sugar component of low cost wastewater to be used to replace corn starch and and existing corn ethanol plants, such as the Keyes plant.
Producing both high grade alcohol as well as Cellulosic ethanol.
That are each currently valued at more than $5 per gallon.
Importantly, this process innovation to extract sugar from Westwood is scheduled to be implemented at our existing California ethanol plant and keys decreasing the cost of corn feedstock and substantially increasing the value of our value of our ethanol. We expect to move forward with the pilot project to extract sugars from locally sourced orchard and and forest wood waste during 2021.
With the expectation of commercial operations to pre extracts sugars from wastewater.
And the riverbank renewable jet and diesel plant becomes operational.
In summary.
<unk> is a leading diversified negative carbon intensity.
<unk> and low carbon renewable fuels producer.
That is rapidly deploying new projects and adopting new technology to reduce carbon intensity and input costs, thereby significantly.
Difficultly increase and the value of renewable natural gas and fuels by.
And by maximizing L CFS, RFS and IRS 45 Q credits.
Now, let's take a few questions from the call participants Kate.
Thank you Mr. Mcafee, we will now be conducting and.
Question and answer session.
If you have any questions or comments. Please press star one on your phone at this time, we do ask that if you are listening on a speakerphone. Please pick up your handset. Please pickup your handset for optimum sound quality.
Please hold the moment and while we poll for questions.
Our first question today.
And is coming from Amit Dayal at H C. Wainwright Your line is live.
Thank you Hi, Eric Hi, Todd.
I meant just alright.
And the renewable natural gas effort could you talk about contribution from the two completed dairy digesters and the.
Fourth quarter, if any and.
How should we think about deployments for the addition of <unk>.
15, and 16 for the next year or so.
And any color on.
Changes to expectations around capex requirements et cetera related to this.
Just an update would be very helpful. Thank you.
Sure. Thank you Amit.
The process of recognizing revenue.
Our dairy renewable natural gas is as a.
The three months process of of actually measuring the amount of biogas produced then about a three to six month process of the California Air Resources Board during their verification and approval process and then.
And you get your actual approval, but you go back to.
In the earlier quarter to begin revenue generation. So it's going to show up as an upside surprise. When we currently expect the second quarter of 2021 to reflect revenue starting October one.
So there is a the.
We did not currently show any revenues of any material sort and the fourth quarter of 2024.
At the show and the first quarter of 2021.
Unless there's some sort of and accrual we'd make or something but.
Practically speaking there is a six month delay before you show up it doesn't mean, you're not getting the revenues, but the way we're doing it and we're getting a lot of cooperation from carb within a few weeks of our startup and the middle of September we would start generating credits as of October one and the California Resources Board has been tremendously helpful and.
Working with us and understands the importance of not running these projects for half a year of three quarters of year with no revenues at all and.
So the ability to tack back to the original startup date is extremely important to the rapid expansion of these projects and the carbon.
Team has been very helpful and do that.
We are expanding this as you know by an additional 15 dairies, which we're building in 2021 and will be online by the end of Q2 2022. The each one of these areas will go through the same six month process and then tack back to the original production date approximately.
There is about.
It's in the quarter, they think and quarters. There. So if you are middle of the quarter there might be a few weeks of of startup.
The startup revenue youre not picking up but in general we're strategizing. This so that we can have revenue begin within a few weeks after startup and the.
And the markets will mostly just the six months behind the won't they won't actually see a show of our financial statements and it'll be mostly of.
Mechanism, maybe some accrual as we get nearer to the actual approval.
But by Q2 2022.
And we would expect to have all 17 of the dairies operational and.
And.
Expecting cash flow and excess of $40 million. It does ramp up we do have dairies coming online in the next.
The 12 months or so so we don't all wait until 2000 and the middle of 'twenty two before we see the cash flow, but there is the six month process of verification that is involved and the process.
Understood and.
And I know you previously sort of indicated the funding for the phase one of them to probably you already have.
But for phase III of the 25 day.
Just as in phase III.
How are you thinking about funding those deployments.
Certainly phase III of is in the aggregate 35, dairies and whether we decided breakdown in the two parts of not we'll make a decision on later on this year, but.
To simplify what we will be generating over $40 million of cash flow from phase one and phase two.
And we are expecting $75 million of USDA debt funding.
Which enables us actually to not only fund fully phase one and phase two but also prepare ourselves well for phase three because of the infrastructure. We're putting in place you don't have to rebuild the pipeline that is will be at the time 35 miles of pipeline, so adding additional areas of that pipeline and <unk>.
Some cases might be only a matter of running a quarter mile of pipeline and you don't have to put 35 miles of pipeline in place and centralized dairy hub.
Gasoline up interconnection of the utility all of those are already in place that renewable natural gas dispensing station the already in place so our capital expenditure for the phase III is.
Somewhat.
Less.
And is driven by the cash flow, we're getting from phase one of the phase III, which enables us to use basically debt instruments currently of USDA renewable energy for America program is ideally suited for the $75 million of build out that we're doing over the next 18 months, but our existing institutional investor is strongly supportive of the project is.
Already funded $30 million and is already working with us to extend us and additional $25 million on the same terms. This is equity.
And we have and expectation that that would.
Certainly be available to us at any time of <unk>.
<unk> been extraordinarily supportive of the project and continue to be very bullish about our.
And how important it is frankly that we execute on time and so I would say that in addition to the $75 million to have their $25 million and place. It gives us over 120 $100 million of capital and if you look at our budget. We don't we only need about half of that so we are substantially over funded by probably $50 million more than what we actually need to deploy.
<unk>.
To do a phase one of the phase III, which positions us very well to make strides on phase III and the next five quarters.
Understood.
Eric how should investors think about offtake agreements or supply agreements with customers potentially buying this renewable and natural gas for me.
Currently our strategy is to capture all of the $137 to $142 of revenue per <unk>.
<unk> Btu millions of British thermal units.
By putting it into our own renewable natural gas trucks through our own dispensing.
Sorry.
Fueling station on site.
We of course can sell into the utility pipeline and the market any of anybody and in California, but the economics of that are are less attractive the margins are excellent. It's certainly.
Line situation of find yourself in but we think that there is.
Equally another.
Net probably at full project scale $15 million per year of revenue that we don't have to give to us.
Other parties in order to dispense RMG and so we're working on the business model that would allow us to use as much of it is possible internally and then have one or two outside parties, who would be able to use whatever's leftover.
We're looking at this as 52 dairies over 60 months and when we're done with 50 to the areas, where we're looking to optimize the return on investment, which potentially would mean that we consume all of the renewable natural gas with our.
Internal requirements for truck fueling and.
Even potentially some of the ethanol plant because we will need small amount and the ethanol plant. So our model is to optimize the return on investment and to minimize dependence on third parties.
Okay.
So with respect to sort of the debt side of the story I know you've previously highlighted.
Efforts to convert a large portion of the existing debt to low interest debt.
Is that something of that.
And turning to anyone.
And some of that would be helpful.
There are two primary paths that we're taking are for our existing bridge loan debt, which is what we've been using to build these projects.
Number one is we have an ongoing program we've already raised about $39 5 million under which is approximately 1% interest rate program under <unk>, five and we have and an additional $172 million.
Approved under the exemplar under that.
Program and yes, it's true.
Could make tremendous strides on that.
Of our $425 million of 175 $172 million of that could be funded this year. Its all really dependent mostly on how immigration policy is going in and of the previous administration. There were some significant concerns related to immigration policy and so investors were reluctant to put themselves of the situation of having invested but then.
Couldnt get the paperwork process.
Think that.
And that tone has changed significantly and so there is an upside opportunity where some amount of the $172 million and funded this year and it all goes for <unk>.
Senior debt and <unk>.
<unk> and two 1% interest rate subordinated debt and that was that valuable because we can put senior debt and place. It just that senior debt would have $172 million of additional equity underneath it from the perspective of lenders and.
And so thats a process thats ongoing again, we have almost 40 million of that capital you've already received it.
Approximately 1% interest rate the.
The second.
Is that we have.
Expected restructuring arrangement with the potential new refinancing could be easily tax free bonds over 20 year amortization.
Certainly there is.
And expectation of the department of energy is actually serious about carbon reduction and with the Jennifer Granholm and Jigger Shah now and control of $40 billion of federal money.
And looking for them to demonstrate with with cash that theyre actually serious about their proposal spot carbon intensity reduction and the United States and as you know from our company.
We are one of the few diversified carbon below zero carbon and companies in the market today and.
Half of $1 billion Doa funding similar to Tesla is $475 million funding.
Would be the appropriate.
Indication.
By the current administration that Theyre actually serious about carbon reduction, so, we're giving them that opportunity and we'll see whether they have the foresight and.
The appetite to respond to that opportunity.
No.
A debt restructuring with expansion capital stretched out over a very long period of time at low interest rates would be certainly the goal of what kind of do that.
Just going back to the renewable natural gas the day digest of deployments Eric.
Have you had any issues et cetera.
Those deployments of true deployments, you've completed as everything has been running smoothly and relatively.
Everything has been running very smoothly the nice thing about the dairy renewable natural gas businesses and if there is functionally no operations as basically electric motors running doing.
Pushing gas around and through filters and that sort of thing. So we've had really no significantly.
Significantly operate significant operational activities to tell you about because compared to running and ethanol plant, where you actually physically moving.
Mash around of <unk>.
$4 5 million gallons of of permutation and this is a very very simple business. So we already have a full maintenance team of full operations management team and everything and so nothing gears and.
It's been very good.
Very difficult growth.
And I'll take my other questions off line. Thank you so much.
Thank you Amit I appreciate it.
Thank you. Our next question is coming from Derrick Whitfield at Stifel. Your line is live.
Thanks, and good afternoon all.
Good afternoon. Thanks Derek.
Eric perhaps the high level with my first question as you think about your five year outlook on page 11.
What are the greatest execution of regulatory risk embedded in this plan and your view and I.
I ask this because the market and seemingly over risk and this plan in light of your valuation versus market peers.
Yes.
The risk of execution here is.
Really just frankly built around whether the U S Federal government and places.
Poised the renewable fuel standard of the way of Congress intended the law.
Last time, the federal renewable fuel standard was enforced was in two.
2013, and and the last four quarters in which the RFS was enforced our existing ethanol plant.
Got corn from the same suppliers sold ethanol to the same customers and made $40 million of positive cash flow.
Over four quarters of about $10 million per quarter and.
And that is the structure under which further investment and the expansion of low carbon and below zero carbon renewable fuels was designed to occur.
For a combination of political reasons the renewable fuel standard was just not enforced at all for three years. They just didn't announce the renewable volume obligations and then under the last administration the actively.
Issued waivers to oil companies that were deemed to eventually be illegal just has not issuing revolt volume obligations was deemed to be illegal. So theres two federal court cases that said the EPA violate the law and not one way, but twice and.
In total of $7 2 billion gallons of ethanol demand disappeared as a result, so the current administration has an opportunity and that opportunity is just simply don't violate federal law for renewable fuels and you will have a very strong.
And cycle of investment in the over 1 billion tons of <unk>.
Waste biomass at Ava.
Billable and the U S under $40 per ton and.
And that.
That's the cycle, we're in and our company, we believe is a leader and that cycle.
Great and.
My follow up regarding the Cellulosic sugar extraction process from Orca and waste wood.
Could you speak to the event path for the commercialization of this.
The development and also speak to the downstream constraints, if any and the utilization of sugar of this sugar and place of cornstarch at your keys plant.
First of all of this the economics of this are not reflected in our five year plan.
So we are just the disc.
Disclosing patents along the way to additional profitability of our Keyes plant and if you look at our Keyes plant over the next five years, we're not <unk>.
Expecting.
The rapid margin expansion and that business. So this is all upside to the five year plan.
The first I should say the next step of scaling this up as a pilot plant and we already have two different grants pending.
And the application process with the U S Forest service.
The division of the U S Department of Agriculture to fund the pilot plant and we would be looking to get that construction going this year the up and operating next year and then after the pilot plant. The next scale up would be the commercial production. This is a pre extraction of sugar from waste.
So think of that is coming in from the field and the first thing you do is you put it through a free traction process extracts sugars and then the reason why this isn't used widely in the industry is it up to 75% of your wastewater is still.
Remaining it's a waste product from the sugar extraction and unless you have something to do with just tons of of wood waste Wood you never can do the sugars traction and economically while we happen to have it and it's called the jet and diesel plant and we use that wastewater to make the renewable hydrogen.
That is used and hydro treating.
Edible oils, and and animal oils to make renewable jet and diesel. So we have an enormous use four are enormously valuable use which is make renewable cellulosic hydrogen from the remaining wastewater. So it's not of waste for us it actually becomes a very valuable feedstock for of jet and diesel plant. So our commercial operations would be scale too.
At the same time, as our jet and diesel plant operation startup.
Okay, and just to clarify and speak with every 10% increase and utilization Cellulosic sugar, which again is not your numbers there are $30 million EBITDA increase.
Are there any limitations around how much of the sugar can be used at the Keyes plant.
Yes, our Keyes plant is basically a facility to speed sugar to east.
And what we're doing it happens to be today, we're getting the sugar from starch that comes from corn.
But if that sugar came from the six carbon sugar or the five carbon sugar Thats and wood, which comprises about 55% of the biomass and wood is C five and six ex sugars.
And the east actually would not.
There was it six carbon sugar from corn or six carbon sugar for more of its biomass that originally was carbon dioxide from the atmosphere absorbed by either a true material or a corn material and then those sugars are used by the yes. So the answer to your questions. It's linear and other words, there is no tapering off whereas we passed.
20% something of the yield goes down or something we're physically just not using corn starch based sugars, we take starch.
Treated with enzymes that breaks down into the sugars.
Not using that for our six carbon sugar, we're actually using wood to produce the sixth carb and sugar and then the five carbon sugars as well. So there is some modification of the east if we were going to use for example of 50% of wood material of the a higher percentage of five carbon sugars and so we would be using.
And upgraded east, but those are currently in the marketplace as well.
It is directly linear and what I think most people don't appreciate is that we.
And we spend almost $15 million per month by and corn, that's the variable price. So it goes around but when you can displace 10% of <unk>.
And as costs of 15 million of months.
$18 million per year, just and corn savings.
And then you have carbon intensity reduction, which means that our ethanol of worth more so we're selling our ethanol, including a $1 one per gallon tax credit that over and over $6 50 per gallon.
So instead of selling ethanol at a $1 80 of $2 of gallon youre selling at $6 plus the gallon same molecule, but it just came from a different feedstock with lower carbon intensity and then the last point.
Is that Youre getting a D. Three cellulosic renewable identification number which as of yesterday was worth $2 90 per gallon versus the six corn ethanol, which as of yesterday. It was worth about 30 <unk> of $1 60 of additional value in the <unk> RIN.
That is a driver of the so low carbon fuel standard <unk> rins are driving a $6 50, plus molecule instead of the $1 80 of $2 molecule.
It's extremely impactful.
Very helpful. Thanks for your time.
But I want to just repeat for everybody that is not and in our five year projection. It is all upside and as we get closer over the course of the year and into next year, We will we'll update people about timing all of that.
The $30 million per 10% is going to be.
And upgrade to our five year plan.
Thank you. Our next question today is coming from Ed Woo Edison net capital your line of lives.
Great.
Regulations on all of the progress that you've made on all of the various projects Youre working on.
And recently decided.
And now that you made the investment and.
EV company do we are we going to expect you guys to do more and that area.
We are.
We're in the business of electric vehicles, the market just doesn't understand it yet.
And here's why.
When you make electricity it doesn't just magically show up it is actually is a molecule that's converted to electron what are the molecules. We currently use we use carbon intensive coal and worldwide that is the most rapidly growing source of our electricity is actually coal, which produces a tremendous amount of carbon that goes and the atmosphere and I think everybody.
Recognize that that's not a great idea.
And we use petroleum natural gas, which again was carbon to the ground and the form of petroleum.
And once it's combusted ends up and the atmosphere and I think most people would agree a positive 100 carbon intensity, which is higher than gasoline and higher than diesel is probably not a great way to make electricity either.
But over 50% of electricity and the America and the United States is made by coal our petroleum and natural gas.
So our dairy renewable natural gas, which is negative 416 carbon intensity.
As an offset to the greenhouse gas is going up and the atmosphere from coal and from petroleum and natural gas. So the more electricity, we make from natural gas, but the it comes from Sidoti and that was absorbed from the atmosphere into our plant.
And by it and animal in this case, the dairy cow captured as biogas from the waste and then converted into electrons and the more of that we do the greener the Tesla Motorcars and lucid cars and electric trucks are going to be because that's actually how you actually help carbon emissions you don't help carbon <unk>.
<unk> by running your Tesla motorcar on coal, our petroleum natural gas, which is actually worse than gasoline or diesel.
No.
We believe the work in the middle of the electric car Revolution, because you don't actually get any environmental benefit and running of Tesla and coal.
And our expectation is the market will increasingly understand that those carbon negative.
Biogas molecules are tremendously aligned with the electric car Revolution, I don't want to say the necessity in order to expand electric car adoption and truck.
Now, let me give you the second and more important and more direct and more immediate application.
And that is batteries are heavy <unk>.
Batteries are expensive batteries take up space patterns and take a long time to charge.
So if you call if you solve one or two of them likely quick charging still expenses, they still take up space and there is still heavy.
You've got to solve all four of those before you really have long haul trucking like class eight trucks out and.
And the highway.
And then delivery trucks.
The other carrying.
Substantial amount of cargo that are going to be willing to displace that cargo for batteries that are heavy expensive and difficult to charge. So what is your solution while the solution is.
<unk> electric drivetrain very efficient high torque powerful drivetrain have batteries the carry the energy to power of the drivetrain.
Instead of having it as part of that truck for hours and hours and hours every day, finding some charging station that doesn't exist.
A dense 100% renewable.
Carbon.
Low or negative cheap molecule that you can fuel that vehicle within a few minutes. So what does that molecule and the United States. There is only really three fuels.
There is gasoline and diesel made from crude oil, which we all know is positive and 93 and positive 95 carbon intensity and then theres ethanol.
Which we all know is 40% to 60% lower carbon intensities and gasoline. According to current studies, even from corn and with the <unk> of ethanol, we're actually going to be probably the lowest carbon intensity of corn ethanol in the world and then carbon negative ethanol from our Cellulosic ethanol.
If you know theres three fuels two of them are nonrenewable and heavy carbon and the other ones cheap readily available and it's called ethanol what should be the range extender engine.
On your truck or other vehicle that really needs to go farther and the 100 of 200 miles, it's pretty easy to understand its going to be ethanol.
<unk> ethanol is the only one molecule and has no sulfur theres no sulfur dioxide.
Unlike gasoline, which has over 400 molecules and it when the can bus instruments is tremendous and the number of issues.
If youre going to run and ethanol truck, what's the range extender going to be is going to be renewable natural gas carbon negative very low emission or it's going to be ethanol low carbon and very low emission actually with what we announced this morning.
Of this engine could could be.
Zero meet the zero emission vehicle standards, even though it's an internal combustion engine because of fuel ethanol is one molecule and does not create all of these different emissions. So.
Our relationship to the electric vehicle industry includes the strategic holding in vivo motors, which stands for new electric vehicle optimization. The optimization part is that the range extender needs to be a renewable natural gas.
Engine, if youre going 1000 miles or so.
Or and ethanol engine, where you could go up to 2000 miles of one tank of fuel running very low cost renewable low emission and last little point for everybody to kind of just appreciate.
As if you have and the ability to run 100 miles on batteries that means when you go to urban areas you come in from Texas, you're calling and something into L. A and they have restricted air requirements, just turn off your range extender and euro of 100% zero emission vehicle I call It zero emission urban.
Why because if you can drive around and the La basin and they have zero emissions of your battery operated vehicle and go to the port pick up your load and then head all the way the Louisiana and take it to your destination by just lighting up your range extender, which is fueled by ethanol our renewable natural gas. So we think that what we're producing is required in order to.
Electrified future not an option not a temporary bridge. It is the future of how you can have and electric and electrified infrastructure between the electrons we make as well as of the range extenders, we make.
Great. Thank you for that exploration wish you guys. Good luck. Thank you.
Okay.
Thank you. Our final question today is coming from Marco Rodriguez Stonegate capital Partners. Your line is live.
Good afternoon. Thank you for taking my questions.
Sure.
Okay.
Yeah, and likewise, Eric I was wondering if maybe you could spend a little bit more time just on the.
Kind of five year plan that you guys of sketched out and Youre in your presentation, just kind of wondering if you can maybe help frame the.
The total capex.
And the necessary for you guys too.
Ramp that particular plan and if you can maybe talk a little bit of the timing of that capex would be kind of helpful.
Certainly, we havent put out of balance sheet to lineup with the five year plan, we will be working on doing that just to provide some guidance for everybody. We did include all of those and our financial projection of in terms of interest calculations and everything else. So the numbers of their derivative Lee through the income statement, but.
We think about it on a business unit basis, the dairy renewable natural gas as we've discussed and described as basically just using USDA funding, which is about 10 year funding and has very low interest rate.
And every day.
The renewable energy of America program has limited the $25 million blocks. So you put let's say five series and a given project they get of senior loan loan against it and then you amortize it out over 10 years, but because of the cash flow of stroke. So strong.
You easily of just building up a lot of cash from that entity. So what do we do with that cash we use at the fund the next five areas and the next five areas. So essentially we're fully funded for the entire project just on the FERC.
$75 million and the USDA and going to go back and get another 25 or $50 as needed, but it's a self funding mechanism.
Using debt.
So the Capex is kind of interesting factor, but what's more interesting to me is there of dilution to shareholders involved and the answer is no. There is no dilution to our parent company shareholders at all even and our preferred stock structure.
And is automatically redeemable by cash flow and there is no interest rate or a dividend.
The substantial.
Related to our preferred stock so.
It's the self financing entity without any dilution of the parent company and the numbers that you see and our five year projections take into consideration of the interest costs and et cetera.
The renewable jet and diesel plant. Similarly, structured we've invested about $15 million of actual cash we have some additional assets for example, the 142 acre site.
A portion of that site is where the ethanol plant will go and that site has 710000 square feet of buildings on it. So we will contribute additional assets to that that that project and our goal is simply to use either tax free bond 20 year device or a USDA.
The Doe funding to complete that financing without any additional equity because we have sufficient equity to meet the requirements.
Based on our analysis, so the renewable jet and diesel plant phase one would be fully equity funded.
Already and just use debt phase II would be to take cash flow, which we described as being in excess of $65 million per year and use that as the ex.
Xtra.
Equity and if any is required to do the expansion. So it's and operating plant that's going to build the second unit just use cash flow from the first unit plus additional debt to do the second unit.
So again, no dilution to the parent company and of.
Really the our net contribution of this is all of the development funding, which in that case was $15 million and.
Almost five years, we funded debt and we will have some additional development funding that we will put in place, but the overall plan is is to build our business without having to dilute parent parent company shareholders and by achieving that.
Using intelligent debt instruments, we think we're going to maximize shareholder value and.
And by the way is debt free fully built out for 50 million gallons Theres no capital expenditures required there at all.
Understood very helpful. Thank you very much and I appreciate your time here.
Thank you I appreciate it.
Thank you we do have a question coming from Jordan Levy at true Securities Your line of lives.
Good afternoon, Eric just wanted to quickly get your thoughts on the potential for the renewable hydrogen and outside of feeding into the renewable diesel renewable jet plant and how you see that kind of structure and the technology is putting into a lot of the news flow, we see on the hydrogen side of things.
We seriously considered whether we should just produce renewable hydrogen from orchard waste wood and have carbon negative renewable hydrogen as a product that we would sell to the market.
We have some.
The industry leaders that are.
And our on our board of directors and.
And our shareholder base and after analyzing it and we determined there were less than 10000 hydrogen vehicles, and California and less than 50 fuelling stations.
We met with several of the large automotive companies that have hydrogen vehicles and got a good sense of the timing of their fueling stations and their vehicle rollouts.
And determined debt.
The amount of renewable hydrogen we can produce with the significantly exceed.
What the market actually physically needs and.
And we would have to be.
Betting that in some time and the future <unk>.
1234 years, whatever it is that the market dramatically growth.
So our decision was to instead use of waste product.
A byproduct I guess it would be more property per se.
And our Keyes ethanol plant.
Which is a very low carbon and non edible distillers corn oil and.
And use very standard technology used by every single oil company and the world that the oil refining and <unk>.
<unk> called hydro treating to take that hydrogen and injected into corn oil as you guys are familiar down there and so we just made a business decision that we should spend the extra time energy and money to end up with.
Low carbon slash and they get.
The carbon jet and diesel.
With no blend wall there is.
Approximately 12 billion gallons of diesel use by trucks and the U S. And you can displace every single gallon and get <unk> credit for any of those that are in California, and federal renewable standard.
Reinsurance for the rest of it.
Basically of California loans of 4 billion gallon market with noble and well. It's the diesel molecule of just happens to be a new carbon rather than the old carbon and so we made the determination we rather go after.
And that that market the <unk>.
Global jet fuel markets, approximately 79 billion gallons and over time I think we will see very supportive policies for aviation fuel So we decided to.
Add a unit that will enable us to make jet fuel.
Specifically up to sustainable aviation fuel up to 50% of our total capacity. This is positioning us and what I believe to be of very very low risk.
Scenario, because we will probably have the lowest carbon content renewable diesel and the world.
And probably the same with our SaaS and we certainly have had a lot of airlines expressed high levels of interest and how our scf is so low low carbon because most of the scf is made with petroleum hydrogen which is positive 170 carbon intensity and art petroleum.
And as carbon negative so.
We just we have a lot of value to bring to the market, we decided to make the extra investment of time energy and money to be in that large growing market rather than.
Exposing our shareholders to what could be a slow growing market with the lack of of vehicles and the lack of dispensing stations as hydrogen kind of finds its way and the market.
Great. Thanks, so much for putting my question then.
Sure. Thank you.
Thank you that's all the time, we have for questions today.
I would like to turn the floor back over to management for closing comments.
Yes.
Thank you Kate I appreciate it thanks, everybody for listening today, and we will be posting on our website the.
<unk> as well as of the transcript and I do invite you to our industrial segment of the web site. We do have a earnings focused of presentation for you. There that has slide five and slide six the talk specifically to 2020, but also has a number of slides the describe our five year.
Plan and I would like our shareholders to be.
Well informed about what the plans of the company over the next five years I think it will make you.
Much more effective and the shareholders and the company and I also would look forward to talking to you feel free to send me an email and if possible.
And the type of get on the phone and have discussion.
Thank you for attending todays <unk> conference call. Please visit the investors section of the <unk> website, where we'll post a written version and the auto version of this earnings.
The <unk> earnings review and business update.
Thank you.
This concludes today's teleconference event you may disconnect your lines at this time and thank you for your participation.