Q3 2022 Aemetis Inc Earnings Call
Okay.
Welcome to the Amyris.
Third quarter 2022 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 a medicine.
Mr. Waltz, you may begin.
Thank you Paul welcome.
Welcome to the <unk> third quarter 2022 earnings review conference call.
Joining us for the call today is Eric Mcafee, founder Chairman and CEO of a medicine and Andy Foster President of a medicine advanced fuels any meadows biogas.
We suggest visiting our website at <unk> Com to review today's earnings press release, the <unk> corporate and Investor presentations filing with the security and Exchange Commission recent press releases and previous earnings Conference calls.
The presentation for today's call is available for review or download on the investors section of <unk> Dot Com website.
What would be a nice discussion I'd like to read the following disclosure.
Disclaimer statement.
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 to financing activities and the execution of our business plan. These statements must be considered in conjunction with the disclosures and cautionary warnings that appear in our SEC filings.
<unk> are cautioned that all forward looking statements made on this call involve risks and uncertainties and that 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 available for the company without charge.
A discussion on this call will include a review of non-GAAP measures as a supplement to financial statements based on GAAP, a reconciliation of the non-GAAP measures to the most directly comparable GAAP measures is included in our earnings release for the three and nine months ended September 32022, which is available on our website.
Adjusted EBITDA is defined as net income or loss plus to the extent deductable and calculating such net income interest expense loss or gain on debt extinguishment income tax expense intangible and other amortization expense accretion and other expenses of series a preferred units lost on lease.
Termination gain on litigation depreciation expense and share based compensation expense.
Now I'd like to review the financial results for the third quarter of 2022.
Revenue during the third quarter of 2022 increased 44%.
71, $8 million compared to $50 million for the third quarter of 2021, our California ethanol business experienced steady sales pricing with an increase in the volume of ethanol produced and sold at $15 7 million gallons in the third quarter of 2022 up from <unk>.
$18 8 million gallons in the third quarter of 2021 delivered corn price increased 50, 15% from an average price of $7.99 per bushel during the third quarter of 2021 to $9 59 per bushel during the third quarter of 2022, our India buyout.
Useful segment began delivering product under a tender offer to governmental oil marketing companies.
In mid September delivering $11 million of biodiesel.
Two weeks under this tender offer.
Gross loss for the third quarter of 2022 was $1 1 million compared to $4 8 million gross loss during the third quarter of 2021.
Our California ethanol segment accounted for $3 8 million.
Dollars of gross loss with offsetting gross profits of $2 8 million from our India biodiesel segment.
Selling general and administrative expenses were $6 9 million during the third quarter of 2022 compared to $5 $1 million during the third quarter of 2021 as a result of investments in our ultra low carbon initiatives and noncash charges for stock compensation.
Operating loss was $7 6 million for the third quarter of 2022 compared to an operating loss of $9 $9 million for the third quarter of 2021.
Interest expense for the third quarter of 2022 was $7 $1 million.
Excluding accretion and other expenses in connection with series, a preferred units and our <unk> biogas subsidiary compared to $5 $5 million during the third quarter of 2021.
Additionally, our.
<unk> biogas subsidiary recognized $1 $3 million of accretion and other expense in connection.
With preference payments.
Its series a preferred units during the third quarter of 2022 compared to $2 $2 million during the third quarter of 2021.
Along with a loss on extinguishment on series a preferred units.
$53 $9 million during the third quarter of 2022.
As a result of a charge related to the redemption of series a preferred units as part of the amendment to the preferred unit purchase agreement.
The redemption charge reflects the expected valuation premium for the redemption of series a preferred units by a medicine.
Management engaged third parties to assist with the accounting and fair value calculation management is completing.
Our final review of the accounting and related charges.
At this time, we do not believe the amounts will materially change.
During the third quarter.
A lot of filing the Form 10-Q.
Which will be subsequently filed to this earnings release.
Net loss was $69 $8 million for the third quarter of 2022 compared to a net loss of $17 6 million for the third quarter of 2021, driven primarily by the one time.
Can it hold a reset redemption charge of $53 $9 million.
Or $1 55.
Her share absent this onetime charge the net loss was 16 $16 million representing.
<unk> 46 per share.
Cash at the end of the third quarter of 2022 was 251000 compared to $7 $8 million at the close of the fourth quarter of 2021.
Investment in capital projects of $13 7 million were made during the third quarter of 2022 further highlighting our commitment.
Two execution of multiple low carbon products projects.
This completes our review of the third quarter of 2022.
Now I'd like to introduce the founder Chairman and Chief Executive Officer of any medicine, Eric Mcafee for a business update Eric.
Eric Thanks.
Todd.
A medicine is focused on producing below zero carbon intensity products, including negative carbon intensity renewable natural gas.
Renewable aviation and diesel fuel with renewable hydrogen and carbon sequestration or.
Our projects generate sustainable and innovative renewable fuels that benefit our communities and restore our environment, while generating tax and other credits from federal and state carbon reduction programs.
We seek to reduce feedstock operating costs by using waste materials and zero carbon intensity energy for the production of renewable fuels, let's start by talking about the estimated $55 million unitholder redemption charge in the third quarter related to our med as biogas business.
The unit holder redemption charges related to the repurchase of preferred units from the preferred investor and the Meadows biogas subsidiary.
Before counting the redemption charge a med has had a loss of 46 cents per share in the third quarter, which is within the range of expectations.
The unit holder redemption charge is a non cash accounting entry that was taken in Q3 2022 related to an agreement that was reached between a medicine that biogas preferred equity investor to repurchase 100% of the outstanding preferred equity any meadows biogas.
The motivation for the expected redemption of the preferred equity by a medicine includes several factors, including biogas industry transactions at high valuations that increase the value of the medicine biogas preferred units.
As well as discussion of whether it's spin out of the subsidiary into a spec IPO or sale should be considered.
As most of you know.
<unk> went public at a pre money valuation of about $1 $2 billion last year.
And recently Arcadia was sold for $4 $1 billion to BP, which included $800 million of archaea debt.
We believe these transactions are interesting comparables to a med as biogas.
Especially considering the dairy renewable natural gas generates an estimated 10 times more California, low carbon fuel standard credits.
Third to the landfill renewable gas primarily produced by both Opal and Arcadia.
A medicine biogas with a carbon intensity score of negative 426.
It is expected to generate about 500 L. CFS credits compared to landfill gas at a positive 30 carbon intensity, which generates only about 50 L. CFS credits.
After considering the future values of over 60, Digesters planned biomed is biogas to generate an expected 1.65 million <unk> to use per year compared.
Compared to the approximately $2 million and it would be to use of landfill R&D currently produced by our Kea at 110th the number of L. CFS credits.
Hey, Matt has made a strategic decision to acquire the preferred equity and Mezz biogas from our Investor who was seeking a liquidity event.
Liquidity event.
Without waiting for the completion of project development.
In the third quarter of 2022, and medicine negotiate a redemption of all of the preferred equity of the <unk> biogas subsidiary.
And booked an estimated $55 million noncash series, a preferred unit holder holder redemption expense in Q3.
This $55 million charge was not paid in cash but represents an expected future transaction in which a medicine has the right to redeem a 100% of the embedded biogas preferred equity.
Usually the redemption of preferred equity is shown as a dividend not as a non operating charge on the income statement that reduces earnings per share per share in this case, the accounting guidance determined that the certainty of the redemption and other known features of the buyout of the preferred unit holder supported recognizing the 55.
As death that was redeemed at a premium rather than as a dividend to the preferred equity owners that would've been shown on the balance sheet not on the income statement and would or would not have reduced earnings per share.
Let's discuss our financing plan and the progress we're making in funding the growth of the medicine.
In early 2022, we announced an updated five year plan, which projected revenues to grow to about $1 5 billion and projected annual EBITDA to increase to more than $460 million per year by year 2026.
In 2021 and 2022.
<unk> repaid more than $80 million to third eye capital to reduce higher interest rate bridge loans.
Which is now expanded our access to lower interest rate funding.
Our plan is to fund growth by using positive cash flow from our ethanol biogas and India biodiesel and glycerin production facilities.
Enhanced by a new up to $100 million working capital that project developing development financing credit facility that was signed with third eye capital in March of this year.
After completing preliminary engineering permitting and site control for each project. We then plan to obtain project financing at the project level using low interest rate U S. Government guaranteed long term 20 year loans to fund the project construction and operations.
This financing model minimize or eliminate shareholder dilution, while enabling rapid growth in revenues and earnings as projects are built.
And this financing financing model is working even with rising interest rates, creating difficult debt market conditions and currently low L CFS credit prices.
In the past few quarters, we have received funding of about $50 million from the two credit facilities provided by third eye capital at interest rates of only 8% and 10% per year.
This new $50 million of growth funding has supported the construction of the solar energy system and many other carbon reduction projects at the Keyes ethanol plant.
The financing land purchases, the engineering permitting and related equipment for the renewable aviation and diesel fuel plant.
And the pre project engineering and drilling drilling pad construction for C O two characterization and sequestration wells.
As an example of our long term financing strategy and Medis recently closed a $25 million project financing.
Supported by the U S Department of Agriculture, renewable energy for America, known as reap program.
To fund dairy biogas, Digesters and buy biogas pipelines to produce renewable natural gas.
The financing this month was completed at a six 2% interest rate that is fixed for five years and has a highly favorable 20 year repayment are cleared up.
Principal let me clarify that that was the month of October .
Regarding regulatory credit price trends.
In August of this year, California, Governor Newsome issued a letter to the chairman of the California Air Resources Board, specifically requesting a significant increase in the pace of de Carbonization in California.
The leather stayed at a 100 million metric tonnes of total C O two sequestration as a specific goal.
The release of the draft, California Air Resources Board L. CFO Scoping plan in early 2023 is expected to increase the number of credits required under the low carbon fuel standard program.
We expect that L. CFS credit prices will rebound as traders learn more about the number of L. CFS credits that will be required to meet the expanded de carbonization goals set forth by carp.
In addition, the federal inflation reduction Act was passed recently and is expected to have a significant positive impact.
Renewable energy in general and our businesses specifically.
We are completing a review process of the IR, a with our tax advisors and expect to release a revised five year plan in Q1 2023.
It will include the impact of the legislation on our business.
We are investing a significant amount of tax lawyer in tax accounting resources.
Into the eye or a review process.
To develop and implement specific business structures that should maximize the value of the tax credits available under the inflation reduction Act.
As a reminder of the provisions of the inflation reduction act related to a medicine.
First.
A 30% investment tax credit.
For renewable natural gas capital investments.
The ITC for renewable natural gas projects as expected result in up to $180 million of cash received biomet us at the rate of approximately $30 million per year for the next five years from inflation reduction Act investment tax credits.
Next.
$1.25 to $1 75 tax credit for sustainable aviation fuel and a $1 tax credit for renewable diesel.
The I R. A sustainable aviation and renewable diesel fuel tax credit is expect to result in up to $112 million per year to support the construction and operation of the 90 million gallon per year, a medicine carbon zero plant in riverbank, California.
If extended over the 10 year period of our contracts with certain airlines and monetized.
Efficiently.
The Scf and R&D tax credits and the clean fuel program of the inflation reduction act could provide more than $1 billion of cash to repay an estimated $400 million of project funding.
This potential 1 billion from irate tax credits over 10 years is in addition to the revenues from California, low carbon fuel standard credits.
Federal renewable.
Fuel standard D five rens and the sale of the aviation and diesel fuel.
Next an increase in the carbon sequestration tax credit from $50 to $85 per metric ton of C O two.
But paying the credit and cash is an IRS tax refund to.
To companies a process called direct pay for the first five years, followed by seven years of additional tax credits.
We are developing to injection wells located at the two way minutes Biofuels plant sites in California to sequester, a planned 2 million metric tons per year of C. O two into a saline formation approximately 7000 feet on the ground.
A planned 2 million tons times $85 per ton equals $170 million per year of cash that could potentially be paid to <unk> by the IRS each year for the first five years of the project.
Providing approximately $850 million of IRS funding in the aggregate to repay the capital costs and operating costs of the two projects.
With another seven years thereafter, the same yearly rate generating an expected aggregate amount of tax credits valued by management at an additional $1 2 billion.
The total value of the $85 per metric ton tax credit would be $2 billion in the first 12 years of operation of the two <unk> carbon.
Wells.
And lastly, several provisions in the Iowa legislation are valuable to the ethanol business <unk>.
Including a tax credit for low carbon intensity ethanol.
$500 million for Biofuels, fueling infrastructure to support 15% to 85% ethanol plants.
And adopting the Argonne labs greet model to correctly calculate the carbon intensity of ethanol and other renewable fuels.
These regulations are driven by initiatives to Decarbonize transportation the need to reduce the cost of fuels as petroleum prices increase a renewed interest in energy security.
And greenhouse gas reductions.
Let's review, our biodiesel business in India.
The National Biofuels policy in India was updated in 2022 is now being implemented to achieve a 5% blend of biodiesel is equal to about 1.25 billion gallons of biodiesel per year.
This summer the three government oil marketing companies issued a tender offer to purchase up to 180 million gallons per month of <unk>.
Diesel for.
For the past 15 years, the pricing formulas have largely been driven by petroleum diesel prices for.
For the first time a.
A feedstock plus pricing formula was used for the film see tender, reflecting the actual cost for feedstock to produce biodiesel in India.
The pricing formula and timing of the two months tender by the oil marketing company says is expected to be the ongoing format for sales to the oil marketing companies. We expect the formula to be a successful mechanism for the rapid growth of biodiesel production in India due to the predictability of the pricing formula.
After a 45 delay day delay from August one to September 15th due to requirement by the India oil marketing companies for two rounds of laboratory testing and documentation.
We began deliveries of biodiesel from our India biodiesel plant in mid September and ship biodiesel for the last two weeks of the quarter.
Despite the delay in testing approvals to September 15th we delivered $11 million of biodiesel and 15 days by the end of September <unk>.
Production and deliveries have continued to the end of October after the O M sees extended the delivery period for the biodiesel purchase orders, we believe the revised AUM see purchasing process based on a cost plus calculation will allow us to maintain ongoing production.
Though the AUM sees continued to generate uncertainty by slow and burdensome procurement processes.
The Glycerine unit is operational now converting about 10% of the products of the biodiesel plant into high grade glycerin for sale in India.
The feedstock pretreatment unit is expected to be utilized for the refining of crude tallow for export to the U S and Europe to produce renewable diesel and sustainable aviation fuel.
Negotiations have refined tallo off take agreements has been underway since early Q3 of this year and refined tallow production is expected to begin in early 2023 with exports shipments soon thereafter.
Our Indian subsidiary has no debt and a 50 million gallon per year of biodiesel plant.
Glycerin plant and the Tallo refining facility are fully constructed we are well positioned for continued operation at high yields.
Now Andy Foster the president of the Meadows biogas and the most advanced fuels businesses will review highlights.
Thanks, Eric with the recent closing of our first $25 million financing that utilize the USDA renewable energy for America program the.
The <unk> biogas renewable natural gas project in California is on track to deliver on to deliver on in service dates in Q1 2023 for several key projects. We are completing construction and commissioning of five additional dairy digesters or contractor is installed 40 miles of biogas pipe.
Blind and is now completing feeder pipeline interconnections as well as testing and commissioning of the final sections.
We have completed construction and are now in the final testing for the centralized dairy biogas to RMG upgrading facility and accompanying P. Jeanie.
Gas interconnection unit.
The new Digesters pipeline upgrading facility in utility interconnection are expected to be fully in service in Q1 2023.
After receiving carb L CFS carbon intensity pathways for the RMG to five new Digesters plus the original two digesters that have been in service. Since 2020 are expected to generate approximately 200000 M. N B T M M b to use per year of RMG.
While we await L CFS pathways for credit generation, we plan to store the RMG produced underground to preserve maximum credit value.
Due to the high volume of L. CFS of applications. The Carb review process and approval process can take from six to nine months, we anticipate working closely with carb staff to help facilitate the timely approval.
We are currently in the advanced stages of closing a second $25 million of USDA refinancing.
Operationally, we are focused on briskly as executing the construction of dairy digesters to fill the <unk> biogas pipeline and the centralized cleanup facility and interconnection unit.
We have signed almost 30 dairy leases or participation agreements and have multiple additional dairies in process.
While continued supply chain challenges for items, such as compressors or rainy winter weather could temporarily slow down project schedules, our existing backlog of new dairy digesters carries us into 2024.
During 'twenty 'twenty three we expect to be on track with the dairy digester rollout as described in the five year plan.
To date <unk> has been awarded $23 million of grants related to the biogas project from the California Department of food and Agriculture, The California Energy Commission.
Pacific gas and electric and other government agencies.
For the dairy book Biogas project and the production of renewable natural gas, let's briefly discuss progress in our California ethanol plant.
As Todd mentioned earlier, we generated a 14% year over year increase in revenues from ethanol sales in Q3 2022 compared to Q2 Q3 of 2021. However.
However, higher energy and corn prices combined with volatile rail pricing and ongoing poorer railroad operational performance have increased the delivered cost of corn to about $10 per bushel.
Ongoing labor and operational issues with the major rail carriers continue to casts a negative shadow on our industry.
And the economy as a whole.
Additionally, the drought stricken Mississippi River has disrupted rail operations in the U S and is likely to cause ongoing challenges for corn delivery and pricing.
On a positive note continued strong demand and favorable pricing for ethanol in California.
Steady wet distillers grains pricing and increasing value for distillers corn oil used as animal feed or for renewable diesel production are helping to offset the increased cost of corn and energy.
As I previously outlined our California ethanol plant is being upgraded to operate using high efficiency electric motors and pumps powered by low or zero carbon intensity renewable power sources, including including our solar micro grid in local renewable electricity.
As a strong endorsement of this strategy a medicine has been awarded $16 million worth of energy efficiency grants.
Pete P G knee and the California public Utilities Commission and other entities to supplement our own funding to complete these projects. Our goal is to significantly reduce or completely eliminate the use of petroleum based natural gas at the Keyes ethanol plant and this year, we've achieved meaningful steps toward de carbonization.
Yeah.
Let me take a moment to provide a few key updates on the Keyes ethanol plant projects that are expected to materially increase cash flow when the projects are fully completed.
First.
The midst beach Mitsubishi Z breaks ethanol dehydration unit has been installed and operated.
In full production mode for over two months, while we continue to work closely with our partners at Mitsubishi to refine the ongoing operation of the <unk> unit. Our early results are extremely positive in August and September the <unk> unit reduced our natural gas usage by over 20%, which when annualized is expected.
To save a modest millions of dollars in energy cost on an annual basis.
Just last week, we began construction of our solar micro grid working closely with our EPC and technology provider to a tall, we're installing a $12 million solar array with battery backup for load balancing and emergency operations.
This project is supported by an $8 million grant from the California Energy Commission.
The solar unit is designed to generate approximately 1.9 megawatts of zero carbon intensity electric power at low cost for operation of the ethanol plant.
We expect to complete the solar installation in Q2 of 2023 to lower energy costs and reduce the carbon intensity of our ethanol.
The mechanical vapor recompression or MTR system will further reduce petroleum natural gas and steam use and is in the final detailed engineering and equipment procurement phase, we expect the MBR system to reduce our fossil natural gas used by approximately 65% at the Keyes plant when the system becomes.
Operational in late 2023.
Currently natural gas costs for the Keyes plant is more than $10 million per year. So an approximately an approximate 65% savings in natural gas cost and a significant reduction in ethanol carbon intensity is expected once the MPR system is fully operational.
These expected cost and carbon intensity reductions are in addition to the 20% natural gas reduction expected from the zebra dehydration system.
One additional item of note in January we will begin the process of changing ethanol production enzymes that will then allow us to recognize a portion of our ethanol production as cellulosic.
This will add additional L. C F S value and with the recent rule announced by the EPA is expected to qualify the cellulosic gallons for valuable D. Three rens worth about $3 per gallon in the federal tax credit of $1.01 per gallon of Cellulosic ethanol.
The over overall financial impact of this change is expected to be between 6 million and $12 million annually.
In summary, operational performance and project milestones for a medicine biogas and ethanol and the ethanol business continue to be on track with the five year plan Eric Thanks, Andy.
Let's discuss our carbon zero of sustainable aviation fuel and renewable diesel project in riverbank, California.
In December 2021 after three years negotiations with the Citigroup Bank and the U S. Army a meta signed the acquisition of the 125 acre riverbank industrial complex under a sale and lease agreement there.
The riverbank site as a former U S Army ammunition production facility with 710000 square feet of existing manufacturing space, a rail loop with storage base for 120 railcars onsite, a 20 megawatt electricity substation and 100% zero carbon intensity renewable power with a direct power.
Line connection to a hydroelectric dam.
Earlier, this year and met US took operational control of the roof rack site for construction of our sustainable aviation fuel and renewable diesel plant as well as the construction of the riverbank portion of our C. O two sequestration wall project.
Additionally, a med has completed the purchase of 24 acres at the riverbank site and built a heavy equipment access road and well drilling pad for the soil characterization, well and the carbon capture and sequestration C O two injection wells.
We have signed and announced more than $3.8 billion of sales contracts with Delta Airlines American Airlines, Japan Airlines Qantas and other airlines. We've now completed offtake contracts for about 45 million gallons per year of blended sustainable aviation fuel to be produced at the riverbank plant.
I'll go the sustainable aviation fuel fuel sales agreements.
Neat S. A F will be trucked from the riverbank production plant to the San Francisco Bay area for blending with jet fuel. The blended Saf will then be delivered via pipeline to the San Francisco Airport for used by Airlines.
Instead. It is included in the pending federal legislation I should say that now past federal is a legislation expand the market for sustainably Asian aviation fuel by allowing it priced to airlines that is competitive with petroleum jet fuel.
We look forward to completing engineering and permitting in order to begin construction of the plant early next year.
In addition, we signed a $3 2 billion renewable diesel sales agreement deliver 45 million gallons per year under a 10 year sales contract with a major travel stop chain for its northern Northern California locations.
Let's review our subsidiary <unk> carbon capture.
In October 2020.
Meta stats on all plant in California was identified in the study issued by the Stanford University Center for carbon capture as one of three ethanol plants C. O. Two sources in California that have the highest potential return on investment from building a carbon capture and sequestration facility.
Compared to the oil refineries cement plants and natural gas power plants that comprise the 61 largest C O two emissions horses in California.
And phase one of the medicine carbon capture project, we plan to inject up to 400000 metric tons per year of C. O two emissions from our biogas ethanol and jet diesel plants into two sequestration wells, which we plan to drill and there are two biofuels plant sites in California.
We expect to construct two C O two injection wells at each have a minimum of 1 million metric tons per year of injection capacity with additional C. O. Two supplied by other emission sources to sequester a planned total of 2 million metric tons per year of C O two.
The initial phase of construction include.
Includes drilling to characterization wells to provide empirical data for the EPA classics permit.
The injection wells will then be drilled at the same site after receiving EPA and other permits.
We're currently in the engineering and permitting process for the two characterization wells with an expectation that we will drill the first characterization well at the riverbank site.
The direct paid feature of the inflation reduction Act provides a federal tax credit of $85 per metric ton of C. O two as a cash refund to <unk> each year for the first five years of production.
The planned 2 million metric tons of C. T O two per year from the <unk> carbon capture project would generate an expected $170 million per year from the federal direct pay tax credit.
As well as an estimated $400 million per year at a projected $200 per ton of sequester T O two from the low carbon fuel standard.
We believe that fixed amount of $850 million provided by the direct pay funding over the first five years of the project.
Should adequately support funding the estimated $250 million capital cost of the two injection wells and related equipment.
In summary, a medicine is expanding a diversified portfolio of negative carbon intensity projects dairy renewable natural gas biodiesel in India sustainable aviation and renewable diesel fuel low carbon ethanol using zero carbon intensity electricity.
Renewable hydrogen and Cotwo illustration.
All of these projects are synergistic and create what we refer to as a circular bio economy within a met us and which we use byproducts of waste products of our own facilities and local areas as feedstock to produce low and they get the carbon intensity of renewable fuels.
Our company's values include a long term commitment to building value for shareholders.
The empowerment of in respect for our employees and business partners.
And making significant and positive contributions to the communities we serve.
Now, let's take a few questions from our call participants Paul.
Thank you Mr. Mcafee.
We will now be conducting conducting a question and answer session. If you have any questions or comments. Please press star one on your phone at this time, we ask that while posing your question you. Please pick up your handset of listening on speaker phone to provide optimum sand quality. Once again. Please press star one if you have any questions.
Please hold while we poll for questions.
And the first question is coming from.
Derrick Whitfield from Stifel.
Derrick Your line is life. Please proceed with your question.
Thanks, and good morning, Eric and team.
Thank you Eric morning morning.
First and foremost congratulations on closing the USDA.
With a lengthy process for you guys and complex based on our discussions with the industry.
Perhaps for the benefit of investors could you share with us some.
The lessons learned from the first loan and then your expectations on timing for the next few.
It seems to us at that process is truly ironed out financing the expansion of biogas of biogas business and significantly derisk and buy it if I could ask maybe if you could also touch on financing plans and the levers you have at your disposal for the riverbank RDA, let's say a facility.
Good.
We look at the first round that we closed a $25 million.
As being a onetime education process both of it a medicine was frankly, introducing the project too.
The commercial lender as well as the USDA staff at what we're doing now is just repeating.
The project documents, but not really doing a reeducation of the.
Array of environmental consultants and other kinds of feasibility study consultants all of the people that work at our side as well as the USDA is now very familiar with our project and we don't have to replicate that process for sure.
The commercial lender, who is very familiar with our entire project now with a 40 mile pipeline or other kind of things that are sort of one time learning opportunities. The paperwork itself is largely just changing locations and amounts it's not really changing the structure of our documents at all of these are special purpose entities that are setup that we borrowed 25.
Which is the Max ended the repo program per entity.
And we contribute about $8 million of equity that's one and contributed a loss of $11 million of equity to the SPV in form of assets. We've already built. So we were ahead of this equity investment significantly we have about $53 million of.
Both our preferred equity that's been invested as well as the grants that are in the project. So that's a whole lot of SB visa only $8 million of equity required for SPV and SBB is 25 million of additional capital So as Andy mentioned.
Mentioned, we're working on closing.
The second funding here in the next month or two and then we'll do the third thereafter at fourth and a fifth and it's just something we've already put the equity in we're ahead of it on the construction and signing up there is I would say that the one item that is necessary for any developer looking at this project is that one.
Time education is a lengthy process the environmental issues. The just going up through Usda's committee process to the federal level are all requires a onetime education in our case, we started in January of 2021.
And it closed October of 2022, so you have to have a long term commitment.
And the USDA definitely is launch a commitment our bank has a long term commitment and embed us prove that we have a long term commitment to now that we're over that first learning cycle I think will be.
Looking at what we're doing now which is only a few months between between funding regarding S. A F. We have assigned $125 million.
By refinery assistance program number 903 document with the USDA.
We are already in the process of completing our EPC agreement, which is a full wrapped EPC agreement with a $2 billion contractor.
And the.
The authority constructed the necessary permits to be able to break ground. Those two documents necessary for us to then go back and wrap up the completion of our project financing. In addition to the USDA the California municipal tax.
Tax exempt bond market is a very attractive market for us very low interest rates.
The department of energy has been very proactive.
Proactive at supporting sustainable aviation.
Projects in and certainly I'm I'll be presenting November 9th in Washington D. C. There are my my panel has a couple of airlines on the panel, but sugar shop, they head up the.
Loan programs office at the D. O is actually introducing our panel and it's moderated by Cade Gordon Who's the White House.
Head of S. S AF and related fuels issue. So we have a strategic interests from the white house as well as the deal we had in our project.
And then lastly, it's frankly just monetizing this inflation reduction act when you look at the value of $1 billion over 10 years and these various incentives monetizing that into debt and equity instruments as one of the great opportunities. We have so we have.
Not one or two open markets I would say we have four open markets for our growth of S. A F.
And right now we're doing the simplest ones and certainly the USDA, having closed with only a six 2% interest rate and a 20 year amortization is a very very attractive partner for us in our growth, but we're getting it we're in a difficult difficult debt environment I don't want in any way to make that sound like it's easy and for us to complete a transaction.
In this market and have another transaction closing in this market at very attractive interest rates and long term amortization, that's key but it's a seven year amortization, you've got troubles. So 20 year amortization is fantastic and we're proving that we can we can deliver on those kind of financings.
Eric just to clarify on the USDA loans, if I recall that comprehended, a 45 million gallon facility is expandable am I thinking about that correctly.
That's correct and we're building a 90 million gallon facility. So your your math is accurate and that we'll be doing a larger transaction than the original because that was only for the we were originally going to do this in two phases, but the amount of interest from our customers caused us to actually double the capacity and building just one phase rather than two days.
And as my follow up regarding India. It was certainly nice to see a contribution from the business. Even if it was only for a couple of weeks.
Could you comment on your expectation for biodiesel sales in Q4, and your view on when refined tallow production could start to show up in your financials, and how that business could grow over the coming years.
Q4 is already one third done and as I described.
Orders, we got for August September got shifted to the middle of September and into October . So we have very good visibility on our October <unk>.
Deliveries are done and and so we're looking at.
We announced our total revenues from all sources of $41 million and we have shipped a majority of that already.
And we still have two months to go in in the quarter. So the quarter is looking very strong from a revenues perspective, we are waiting for the oil marketing companies who were.
<unk> to come out with the November tender. So we can just keep on shifting right and so we're expecting that to happen in November and that will materially increase the the Q.
Q4 revenues that we've already booked so we are seeing as I mentioned sort of a a burdensome procurement process, but they are definitely making progress and continuing to move forward in and something that will allow us to run our plant at full capacity and I think as the Umc's learn how to do this they'll be.
The more proficient at it and we won't see this sort of a start stop situation that we see now with a couple of weeks of delays are coming in.
Hello business is a facilities already completely.
Structured and capable up operating we're currently just running our off take agreements negotiations there are approximately five renewable diesel companies in the United States that are currently under discussion. So we're working on on getting that worked out in the first quarter next year and begin shipments.
That's great. Thanks for your time.
Thank you.
Thank you. The next question is coming from Jordan Levy from a truism securities.
Jordan Your line is live. Please proceed with your question.
Thanks, so much for taking my questions, maybe starting on the biogas side exciting announcements about the Prefs deal there.
Figure it makes a lot of sense given the activity in the market could you just provide a little more detail on the financing for that transaction and how we should expect that to kind of play out from a timing perspective.
The financing of the buyout or the financing of the underlying project yeah, yeah. The buyout.
Yeah.
We have a.
Our debt instrument opportunity and we have an equity instrument opportunity we have a number of large counterparties, starting with oil companies, but go into strategic trading at other companies.
Who are very interested in that preferred this is negative 426 carbon intensity product at the dairy renewable natural gas, it's not positive 30.
Landfill natural gas and I would actually say were.
Uh huh.
We're just managing which relationship we want to have maybe even extend into other factors of our business because our counterparties all have strong interest in St. Louis I should fuel and renewable diesel as well as even low carbon ethanol and so.
We've been spending a lot of time building long term relationships and I think this preferred is really the first opportunity people have to come in in a meaningful way and.
I expect you will be potentially 100% preferred structure may be 100% debt structure, but either way, it's going to be very accretive to our interest in the in the biogas subsidiary. What we're doing is we're cashing in on the Comparables of that Opel and then RK accretive for US and this is the first opportunity for institutional operational.
<unk> to get into this business in a meaningful way.
With a medicine.
Gotcha that makes sense, maybe bouncing over to the SaaS side, given the provision in the IRA Ria firms in Bolivia.
And fuel.
It might be helpful. If you could remind us how the off take agreements you've signed for F. N. Renewable diesel are generally priced and how the federal and state and so it does flow through those.
The structure is.
A clean structure in which until the fuel passes the flange into the customers' tank.
Any tax credits low carbon fuel standard, California credits federal renewable fuel standard type credits.
Other incentives even ones in the future, we don't know about all 100% and nurture the academy of Medicine, Oh, I forgot the actual value of the molecule.
The $3 plus dollar.
Per gallon all that is to medicines account.
And we receive approximately a 10%.
A premium above the price of jet fuel so the value of this contract structure for our customer is they can hedge jet fuel at 10% as the premium but they get all of the airline incentives starting with core C. S. C. O R. S. I E, which is the airlines trading among themselves if there.
Let's say somebody has access as of yet from a met us and they have more than what they are of course are your requirements or they could sell those credits to other airlines and so doing that 10% increase let's call. It 30 to 35 cents per gallon from 10 million gallons, its about $3 million or sport more being paid to about us can be offset by the sale of credits by our COO.
Customers of other other companies. So there is a mechanism, which they are paying us a premium but then they have their own trading market. Some voluntary some not so voluntary that.
For example, avoiding penalties in Europe that can help them actually get back to the price of jet fuel. So at the end of the process. It's possible that our customers actually are are largely paying the price of jet fuel, which is fully hedgeable and of course extremely attractive to have scope, one scope two and even scope three emissions reduced from for buying us out for us.
Very helpful. Thanks for taking my questions.
Sure. Thank you Doug.
Thank you. The next question is coming from Amit Dayal from H C. Wainwright.
I meet your line of sight you May proceed with your question.
Okay.
Okay.
The.
The 180 million gallons per month.
Another matter that is out there and there.
Yes.
Uh huh.
Okay.
Yes.
So.
So target.
So.
Amit, we're getting about a matter again.
About 25% of your question, but the part that I got was whether the customers in India will continue to have the 100 plus million gallons per month of demand their.
They're seeking a $1.250 billion per year supply of biodiesel in India, which is a 5% blend of the 25 billion gallons of diesel in the country and there was a tax passed into law earlier. This year that is currently scheduled to go into place in April of 2023, So approximately five months from now that actually <unk>.
Axes diesel and additional.
10 cents per gallon equivalent if it's not blended with biodiesel. So if he blended a 5% blend that is equal to $2 per gallon of biodiesel additional price that could be paid to us in order to avoid the payment of about 10 cents per gallon tax. So we do perceive that there will be this ongoing demand.
By oil marketing companies as well as the private refiners in India to not have to pay a 10 cent per diesel gallon penalty for failure to blend biodiesel at 5% and that will help this be a much smoother market, especially with a cost plus structure and procurement by the M series.
Thanks.
Hum.
That's my one.
I would tell you that.
Yes.
These 700 completed.
Yeah.
SKU next year.
Ooh Ooh.
Uh huh.
The next set of.
Yes.
Good.
Yeah.
We've got as Andy this is.
As Andy described the end of this year, we will have seven.
Digesters in the commissioning and testing process is expected to be what's known as in service way, we accepted from our contractor as meeting performance specifications and the first quarter next year. We have an additional five that are already in the process of of construction permitting environmental approvals that sort of thing so we're not.
Waiting until these are in service in Q1 before we do the next five or actually in the process of those next five whats really important for all of us to recognize though is a long lead time item here was the gas utility interconnection with Pacific gas and electric which is in commissioning and testing now and expected to be in service in.
In first quarter, and the centralized gas cleanup and a 40 mile pipeline. Those are the long lead time items and it took us probably three years to get the P. G knee unit that had to be built by them permitted by them.
Vantage by them. It's their project, we just put up the many millions of dollars to build it but they actually had to do it.
That's behind US what we're doing now is building rectangular dirt.
Football field sized die.
Digesters in these locations that have already been signed with customers. It's a much more rapid process. It would the same contractors doing the same thing they've already done seven times, so our ability to accelerate now, especially with a financing relationship with USDA working smoothly.
I think is going to meet or exceed expectations in 2023.
Thank you and the next question is coming from Matthew Blair from T. P. H Matthew Your line is live.
Hey, Eric Congrats on getting the India biodiesel fuel biodiesel program going again could you share the EBIT margin on those gallons in Q3 and you know.
I know, it's just growing for a couple of weeks is that EBIT margin is that going to be a good run rate for Q4 and beyond.
We're operating under the same.
Contract for the <unk>.
Q4 deliveries we've already completed so that was the contract that was slated for August and September got pushed back to the 15th of September and.
At the end of October and so yes, it's the same margins. He can just apply the the number that was applied there are $11 million for the quarter $2 8 million.
That's that's all.
Linear to what we continue to ship in October .
We have approximately one five times that much revenue in October is what we saw in the two weeks in September so easy math to do there.
We do.
Do have a winter specifications. So in the winter we use of different feedstock in order to have a <unk>.
Lower co blow plugging point, which is the the ability to handle call cold weather. So we do expect lower margins in the wintertime.
We have however expectation that we'll see the revenue flow continue and and by the time. We're in mid February were out of the winter specs, Indeed, very warm country and many of our companies network customers.
Actually buying early in that so there there is a just a it's actually the procurement processes are our primary issue in India is moving smoothly to our ongoing process of every two months getting purchase orders on time is really only issue, it's not really production for us.
The winter specs is really getting the O M seized to deliver.
On these tender offers.
Great. Thanks, and then on the R&D side.
If I heard you correctly. The long term target is 60, dairies and 1.65 million Btu of dairy RMG production and then it sounds like you have seven digesters running by the end of the year with another five under construction do you have any more.
Digesters that you've.
One you know projects that you've won.
But you haven't started construction on yeah, I'm, just trying to get a sense of how how far along are you on the 60 digester target.
Sure.
Andy commented, we have about 30 signed.
There's what's called participation agreement with 30 side, we have additional working right now actually it's the opposite frustration are dairies are signing and then saying, but wait a minute you can't start building. This thing for you know mid 'twenty 'twenty four here 18 months plus out before you're going to be building a Saint Kate you guys heard this thing up.
We are targeting 66, and our five year plan that was published earlier this year.
We'll be updating that in February but.
About half of that is already signed in some phase of these agreements and we are rapidly looking to.
Fill out the other half of it over the next couple of years, but again, the frustration that the dairy minutes exactly the opposite which is wait a minute the five year plan that means.
I Gotta wait for years before you're going to build this thing get to kindergarten hurry up and we have every intention of doing so well disclosure by the numbers the seven.
<unk>.
Operating income final commissioning test go in service in Q1 as in service run rates, we expect approximately 200000, they might be to use per year.
And that.
That would then be incremented by an additional five plus whatever we start next year. So our five year plan has the annual number and that annual number would be seven at the end of this year and then increases next year.
Got it thank you very much.
Yeah. Thank you Matt.
Thank you. The next question is coming from Dave storms from Stonegate.
Dave Your I S life. Please proceed with your question.
Perfect. Thanks for taking my question just touching back on the current credit environment. How are you seeing.
When it gets on the things like the USDA program as either a competitive advantage.
I guess industry peers, or Conversely, again that same credit environment being maybe in tissue for end users going forward.
We have credits in the way of loan guarantees. So we use the loan guarantee process to build the project and then the tax credits specifically production tax credits and investment tax credits.
Basically reimburse us for the cost of construction and biogas, we're eligible for up to 50%.
Investment tax credit so as we make investments to build assets. We then can submit for up to 50% tax credit for that one time investment of building the asset.
On a go forward basis, we then get production tax credits for producing actual fuels, our ethanol plant under the clean fuels initiative is expected to be eligible for some tax credits certainly biogas.
As a low carbon fuel has potential for for that sustainable aviation fuel et cetera. These are production tax credits and then in carbon sequestration, we have a different set of tax credits with direct pay features and alike. So.
Now those tax credits are separate from the loan guarantees loan guarantees basically make our checks are that much less expensive.
And far more important to that.
Is that by the time, we have to repay it most commercial banks today, we'd be talking a five to seven year term.
It's almost impossible to build a biofuels facility and habit economic that you pay back all your data in five to seven years.
So a 20 year term and in a year or so during construction and not even have to pay any principle is an extremely attractive structure for building. These assets and that's in fact will be closed.
With the USDA and the and the renewable energy for America program and that's what we're going to continue to do in multiple phases of that program.
That's perfect. Thanks.
Thank you Dave.
Thank you once again, ladies and gentlemen, if there are any other questions. Please press star one on your phone to enter the Q&A queue.
The next question is coming from Ed Woo from Ascendant capital.
Ed Your line.
With your question.
Yeah. Congratulations my question is what is your outlook for oil price and gasoline prices and its impact on demand for ethanol.
We think that oil prices are.
Largely under the control of OPEC, plus which means OPEC plus Russia.
And.
There are only a couple of guys that have to cooperate to make that happen and they're sitting in Saudi Arabia, and Russia, largely and they have expressed deep concern about letting the price of crude oil fall below $80 and they said that two weeks ago. When they told Joe Biden Nope I'm not going to increase production I'm going to actually decreased production by.
2 million barrels per day in order to drive the price of crude oil up it had fallen down to the late seventies and they wanted to push it up above 85. So I think we're in an environment in which as long as those entities are reasonably cooperative, we've got $80 plus crude oil prices.
And in the United States, we have refining capacity remember its not crude oil did you buy at the pump. It's actually gasoline diesel are sustainable aviation fuels you have to add the profit of our refineries well in California alone. We went from 22 to 15 refineries. So refineries have tremendous pricing power as you see in the I think it was 500% increase in profit profitability of the major <unk>.
Oil companies announced here in the last week or two so that oil refining margin is an additional price at the pump, which is comparable to what is actually relevant to selling our biofuel. So put in crude oil prices at $88 or higher and then high refining margins.
The CEO of Chevron for at least three years and that's a relatively stable.
Oil pricing model for us to produce against and then of course with the inflation reduction Act, we're getting encouraged to make lower and lower carbon fuels, which is the point of those.
So its a make dramatically lower carbon intensity fuels compared to these petroleum products.
Great. Thanks for answering my questions and I wish you guys. Good luck. Thank you.
Thank you we'll talk soon.
Thank you there are no further questions at this time I would like to turn the floor back over to management for closing comments.
Perfect. Thank you.
Thanks for the shareholders analysts and others, who joined US today. Please review the company presentation and the Investor presentation, that's posted on the homepage of <unk> website.
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