Aemetis Inc. Q1 2023 Earnings Call
Welcome to the medical first quarter 2023 earnings Review conference call.
At this time all participants are in a listen only mode.
A question and answer session will follow the formal presentation.
As a reminder, this conference is being recorded.
It is not my pleasure to introduce your host Mr. Todd Waltz, Executive Vice President and Chief Financial Officer of the Medicine, Inc. Mr. Waltz, you may begin.
Thank you Matt welcome to the <unk> first quarter 2023 earnings Review conference call.
Joining us for the call today is Eric Mcafee, founder, Chairman and CEO , where they met us.
And Andy Foster President of a medicine advanced skills any medicine biogas.
We suggest visiting our website at <unk> Dot Com to review today's earnings press release.
The amount of corporate and Investor presentation filings.
Filings with the Securities 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.
Before we begin our discussion today I'd like to read the following disclaimer statement.
During today's call, we will 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.
Investors 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 from the company without charge.
Our discussion on this call will include a review of non-GAAP measures as a supplement to financial results based on GAAP, because we believe these non-GAAP measures serve as a proxy for the company source or use of cash during the periods presented.
A reconciliation of the non-GAAP measures to the most directly comparable GAAP measures is included in our earnings release for the three months ended on March 31, 2023, which is available on our website.
Adjusted EBITDA is defined as net income or loss plus to the extent deducted in 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.
Boston lease termination certain cash grants gain on litigation depreciation expense and share based compensation expense.
Now let's review.
The financial results for the first quarter of 2023.
Revenue during the first quarter of 2023 decreased to $2 $2 million compared to $52.0 million for the first quarter of 2022.
Due to the historically high natural gas prices in December 'twenty two we.
We made the decision to idle the Keyes plant in our North American Division and initiated an extended maintenance cycle, which extended through the end of the first quarter.
Allowing for acceleration of several important ethanol plant energy efficiency upgrades.
Working on the extensive plant maintenance and upgrades during Q1 of 2023 enable the keyes plant to avoid significant loss due to insufficient natural gas storage in the western United States that made continuing operations uneconomical.
From December through March exorbitant pricing for natural gas would have resulted in a significant loss for the ethanol business. So management made the difficult, but necessary decision to temporarily idle production.
Okay.
Dairy natural gas segment produced 21000.
Mm 300, MB tiers from six dairy Digesters and the RNC was placed in underground storage to preserve carbon credits, while waiting for approval of the low.
Carbon fuel standard pathway for each digester.
Okay.
At an expected approval Ci value of minus four twenty-seven this inventory represents meaningful future revenue that will be recognized once the pathways are approved.
India biodiesel recognized $1.5 million of revenue from private customers.
Gross loss for the first quarter of 2023 was $1 $3 million compared with $3 $1 million loss during the first quarter of 2022.
Selling general and administrative expense increased to $10 $8 million during the first quarter of 2023.
Seven $3 million during the same period in 2022, driven primarily by a $2 $7 million of fixed cost of goods sold charged to selling general and administrative at <unk>.
Expense during the idle time.
Operating loss was $12 $1 million for the first quarter of 2023 compared to operating loss of $10 $4 million for the same period in 2022.
Interest expense include excluding ink accretion of series, a preferred units and the <unk> biogas LLC subsidiary increased to $9 million during the first quarter of 2023 compared to $6 $3 million during the first quarter of 2022.
Additionally, our <unk> biogas initiatives.
Recognize $5 $6 million.
Accretion of preferred payment during the first quarter of 2023 compared to $1 $6 million during the first quarter of 2022.
Net loss was $26 $4 million for the first quarter of 2023 compared to net loss of $18 $3 million for the first quarter of 2022.
Cash at the end of the first quarter of 2023 was $4 $1 million compared to $4 $3 million at the close of fourth quarter of 2022.
Investments in capital projects related to the reduction.
Of the carbon intensity of ethanol were $7 6 million for the first quarter 2023.
This completes our review of the first quarter of 2023.
Now I'd like to introduce the Bounder, Chairman and Chief Executive Officer of Bay Meadows, Eric Mcafee for a business update.
Eric Thank you Doug.
Thank you very much hey, medicines focused on producing below zero carbon intensity products and its executing the five year plan that's available to investors on the medicine homepage.
Our activities to achieve the five year plan include extensive energy efficiency upgrades to the Keyes ethanol plant.
The build out of our dairy renewable natural gas project.
And as the ramp up of production at the India biodiesel plant.
Each of these core activities were achieved during Q1, while minimizing the negative impact of temporary.
Ordinarily high natural gas prices during Q1 2023.
During Q1, we completed an extended maintenance and upgrade cycle for our Keyes ethanol plant that avoided significant significant losses during the quarter.
But importantly avoids future plant shutdowns that would've been required to install the upgrades. The result is an acceleration of a reduction of energy costs and driving the lower carbon intensity of our biofuel through a number of plants electrification projects.
We also celebrated an escalation of an entirely new Allen Bradley decision control system with artificial intelligence capabilities, along with several other important process upgrades.
While the top priority for a medicine.
It's to maintain our decade long track record of continuously operating the keyes plant to supply feed and fuel to local markets.
Doing so under the extremely negative conditions that developed late last year and continued into the first quarter of this year in California natural gas markets.
Would have been irresponsible and unsustainable.
It shows us that short time period to instead conduct a significant plant maintenance program and pull forwards many of the critical components of our energy efficiency projects.
In the long run this decision to focus on fundamental improvements in our energy efficiency will save us millions of dollars in project costs through avoided down days in loss production and save time and completing the projects.
We are currently working through plans will allow us to restart the keyes plant in the second quarter.
Despite the temporary low revenues during Q1 2023.
As you completed the plant upgrades and extended maintenance at the Keyes ethanol plant. We are excited about the strong and growing positive cash flow expected from biodiesel and renewable oil feedstock refining facilities coming into full production this year.
Until the California Air Resources Board carbon intensity pathway approvals process, we were able to begin selling into the renewable natural gas market at its full L CFS value.
We will be storing the renewable after gas that we produce.
Grout and carrying it on our books as inventory.
Our sustainable aviation fuel and renewable diesel project continues to make steady progress towards full permitting in 2023, while our first carbon sequestration characterization well drilling permit is now nearing completion due to work during the first quarter of 2023.
Also during Q1, 'twenty Duane Street our.
Our India biodiesel glycerin and feedstock refining bills facilities started production in anticipation of the second quarter of 2023 contracts with the three India government oil marketing companies.
About $34 million of biodiesel contracts were issued to embed us the three India oil market.
In Q2, 2023 and deliveries are on schedule.
The external political and regulatory environment for renewable fuels.
The reduction of carbon pollution in the U S and India as improved significantly during the past year.
The passage of the inflation reduction Act in August 2022 provides.
Provides an estimated $400 billion of funding toward renewable energy and carbon reduction projects.
Whoever.
The IRS has not issued guidance to provide the form for transfer of higher rate tax credits. So the IRA investment tax credit scheme that is biogas business generated during the first quarter of 2023 from placing six digesters 40 miles of biogas pipeline and the renewable natural gas production facility with utility.
X into service in late January was not able to be booked as a sale during the quarter.
We have many interested tax credit purchasers and continued to make progress toward a sale of the credits on hand, as well as several exciting inflation reduction AG sales transactions that would provide funding for medicine projects during construction.
The IRS has stated the guidance is expected to be issued in June 2023.
At which time, we expect to be able to close sales of the tax credits at a discount to the face value of the tax credits.
The sale of the investment tax credits is expected to be booked as other income that would generate a substantial amount of EBITDA.
Cash on hand and earnings.
During the first quarter, the California Air Resources Board held a L. CFS Stoping plan webinar, where their staff stated that carb plans to significantly increase number of credits required under the low carbon fuel standard program starting in 2024.
Significant sufficient significantly expanding the el CFS mandates to increase the price of credits to more than $240 per credits in the next two years.
You'll see a best credit market reacted positively to the news from carb and prices increased more than 20% from about $65 to Yesterdays 86 dollar L CFS credit price.
Which is a price increase trend that we had expected and that card projected would occur.
Believe that Elsea best credit prices will continue to rebound rebound to more than $200 per credit as the market recognized a large number of L. CFS credits that will be required to meet the expanded de carbonization goals set forth by carb.
These credits generate revenues for a medicine all of our U S businesses and indirectly benefit our India business that produces feedstock for U S renewable diesel and sustainable aviation fuel our refineries.
Now Andy Foster the president of and that is biogas medicine advanced fuels will review highlights Andy.
Thanks, Eric with the closing late last year of our first $25 million financing that utilize the U S. D. A renewable energy for America program the.
The <unk> biogas renewable natural gas project in California delivered in service dates in Q1 2023 for several key components.
We completed the installation and final commissioning of the 40 miles of biogas pipeline, we completed commissioning of the biogas to RMG upgraded upgrading facility. We completed commissioning of the RMG interconnection unit with the Pea Genie pipeline.
We also completed four new Digesters and now have six fully operating with the seven stage seventh digester being completed right now.
With the expected funding of our second $25 million U S D. A.
Guaranteed.
Loan this quarter and a third funding planned for later this year. We are scheduled to begin construction of up to 10 more digesters by the end of 2023, depending on the timing of the permitting and USDA financing.
We also signed up a number of new additional dairies and now have approximately 40 dairies in the Hay Meadows RMG network.
After receiving carb L CFS carbon intensity pathways for RMG. These seven dairy digesters are expected to generate approximately 200000 M M btu per year of our N G.
We have already submitted our RMG production data to obtain L. C. F. S pathway approvals to begin generating all CFS credits, while we await the approval of LCR LCR first pathways for credit generation, we're storing the RMG underground and carrying it as inventory.
Operationally, we are focused on executing the construction of dairy digesters to fill the unmet as biogas pipeline the centralized biogas to RMG production facility and the P. Genie interconnection unit all of which are operating now.
Let's briefly discuss progress in our California ethanol plant.
As Erik already discussed we are working on the restarted the keyes ethanol plant to take advantage of strong demand for ethanol and distillers grains in California, creating a highly favorable margin environment.
I would also note that during the Q1 period when the Keyes ethanol plant was idled and an extended maintenance and upgrade period operations for our LNG business remained on an uninterrupted.
Pardon Eric noted that beginning in December of 2022, unusually cold weather, coupled with insufficient natural gas inventory planning by California gas utilities and restrictions in the natural gas pipeline that feed, California caused natural gas prices to spike by more than 500% and stayed elevated.
During Q1 2023, creating an extremely unfavorable margin environment for ethanol production in California.
We decided to turn and we decided to turn this challenge into an opportunity to undertake an extended maintenance cycle and accelerate the implementation of several important ethanol energy efficiency plant upgrades. During Q1 in this period of high natural gas prices.
Our Catholic, California ethanol plant upgrades will now allow us to operate using high efficiency electric motors and pumps powered by low or zero carbon intensity renewable power sources, including our solar micro micro grid in local renewable electricity.
As a strong endorsement of our carbon reduction in energy efficiency projects, a medicine has been awarded $16 million of energy efficiency and other grants by PGD, 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 to put a finer point on it. When these projects are completed in 'twenty 'twenty four we expect that that natural gas usage at the Keyes ethanol production facility will be reduced by over 80%.
This transformation from traditional natural gas to renewable electricity, we will put a modest at the forefront of Decarbonize manufacturing facilities in California and is expected to return reduce the carbon intensity of the fuel ethanol produced at the Keyes plant by double digits.
With the installation of a solar micro grid mechanical vapor recompression operation of the all electric Mitsubishi Z brakes, dehydration unit and the replacement or upgrading of various heat exchangers and process equipment.
A medicine will lead the ethanol industry and energy efficiency and low cost production.
In addition, upon restart at the Keyes plant in the second quarter, we plan to implement the use of ethanol production enzymes that will allow us to recognize a portion of our production of Cellulosic ethanol, which currently qualifies for L. CFS credits through a significantly reduced carbon intensity for the qualified cellulosic gallons produced as.
Well is that one dollar in one cent per gallon federal tax credit.
Additionally, the U S. EPA is working through a rule, making process to potentially qualify the enzyme based process for a D. Three D. Three cellulosic RIN.
In summary, despite some unusual and challenging external headwinds in the first quarter of this year in our ethanol business operational performance and project milestones for the <unk> biogas and ethanol plant business continued to be on track with the five year plan.
Now I'd like to turn the call back over to Eric Eric.
Thank you Andy Let's review, our growing biodiesel tallow feedstock refining and glycerin refining business in India.
The National Biofuels policy in India was updated in 2022 and is now being implemented to achieve a 5% blend of biodiesel does equal to about 1.25 billion gallons per year.
During the first quarter of 2023, the three government oil marketing companies issued tender offers to purchase more than 10 times the entire production capacity of the <unk> biodiesel plant.
Under a feedstock plus pricing formulas that was used very successfully last fall to bring biodiesel plants into full production in India.
The tender offers where for delivery during the second quarter of 2023.
In medicine elected specific deliberate delivery locations in a mouse then received supply contracts with $34 million of biodiesel to be delivered during April may and June of this year.
The pricing formula and timing of the of the tender offer by oil marketing companies 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.
Our plant in India is uniquely situated to benefit from the successful feedstock plus pricing mechanism.
Since importing biodiesel or renewable diesel is now not allowed under India law any medicine owns and operates the largest production facility biodiesel.
Biodiesel plant in India.
We are negotiating the sale of Tullow feedstock that is refined by our Tallo pretreatment unit in India for export to the U S for the production of renewable diesel and sustainable aviation fuel. We recently made breakthroughs in tankage locations at two delivery points in California, and up to renewable diesel customers and late stage contracts.
Discussions.
Since our India subsidiary has no debt and.
And the 50 million gallon per year of biodiesel plant 50 million gallon per year, Tullow refining facility and the glycerin plant are fully constructed we are well positioned for profitable operations at full capacity as we scale up operations this year.
Let's discuss our carbon zero sustainable aviation fuel and renewable diesel projects in riverbank, California.
A year ago, a med is took operational control of the 125 acre riverbank site for construction of our sustainable aviation fuel and renewable diesel plant as well as the riverbank portion of our C O two secret for sequestration well projects.
We have signed and announced more than $3 $8 billion of sales contracts with Delta Airlines American Airlines, Japan Airlines, Qantas and other airlines.
But now completed offtake contracts for about 45 million gallons per year of sustainable aviation fuel to be produced at the riverbank plant.
In addition, we signed a 3.2 billion dollar renewable diesel sales agreement to deliver 45 million gallons per year under a 10 year sales contract with a major travel stop chain for its northern California locations.
Incentives included in the recently passed I R. A legislation expand the market for sustainable aviation fuel by allowing a price to airlines is about 10% higher than petroleum jet fuel and is partially or entirely offset by core sia carbon credits generates generated by the airlines.
During Q1, 2023 we continue to make steady progress toward air permits and other building permits for the 90 million gallon per year riverbank S. A F. R. D plant, we look forward to completing engineering and permitting in order to begin construction of the riverbank renewable jet diesel plant later this year.
Let's review our subsidiary in Meadows carbon capture.
They've met is captures the hundred and 50000 metric tons per year of C. O two emissions from our ethanol plants.
Near Modesto wallet is operating and reuse as the C O two for local customers.
In phase one of the <unk> carbon capture project, we plan to inject up to 400000 metric tons per year of C. O two emissions.
Reduced by our biogas ethanol and jet diesel plants.
Into two sequestration wells, which plan to drilled near our two biofuels plant sites in California.
We expect to construct two seal to injection wells that each have a minimum of 1 million metric tons per year of injection capacity with additional C. O. Two supplied by other initial emission sources to sequester a planned total of more than 2 million metric tons per year of C. O two.
During 2022 and Med has completed the purchase of 24 acres at the riverbank site and built a heavy equipment access road and a well drilling pad for the soil characterization well to provide data for our E. P. A classics injection well permit.
The initial phase of construction includes drilling to characterization wells to provide empirical data with E. P. A class six permits.
Expect to receive our first well drilling permit for the riverbank characterization well in the next month, which is on track with our well development plans.
The direct pay feature of the inflation reduction Act provides a federal tax credit of $85 per metric ton of C. O two as a cash refund.
N medicine, each year for the first five years of production.
The planned 2 million metric tons of Sidoti per year from the meadows carbon capture project would generate an expected $170 million per year from the federal direct pay tax credit as.
As well as an estimated $400 million per year at a projected $200 per ton.
Of sequestered Cotwo, the low carbon fuel standard in California.
We believe the fixed amount of $850 million provided by the direct pay funding under the inflation reduction act over the next.
The first five years of the project.
To support funding the estimated $250 million capital cost to injection wells and related equipment.
In summary, a medicines recovering from the temporary exorbitant pricing of natural gas in California during the first quarter of 2023.
With this extraordinary event behind US we are in the process of restarting the keyes plant and 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 and renewable hydrogen and.
C O two sequestration all of these projects are synergistic and create what we refer to as a circular bio economy was in a met us and which we use byproducts of wastewater its marketability in some local areas as steep stock to produce low.
Negative carbon necessity 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 your questions a few questions from our call participants.
Britain.
Thank you Mr. Mcafee, we will now be conducting a question and answer session. If you have any questions or comments. Please press star one on your phone at this time.
We do asked about posing your question. Please pickup your handset if you're listening on speaker phone to provide optimum sound quality.
Once again, if you have any questions or comments. Please press star one on your phone.
Whole volleyball for questions.
Our first question is coming from Amit Dayal from H C. Wainwright. Please proceed with your question.
Thank you good afternoon, everyone. I appreciate you taking my questions.
Eric just on the R&D side.
How many M M b views by the end of June do you think you'll have in storage and could you maybe share sort of your internal thinking on how much you may get for this once you have the guidance on the ITC.
We reported on the Q1 report how many we have in storage at the end of Q1.
I was talking more about by June you know how much you think you might have sorry.
Yeah, I don't have that in mind, whether it would be it's linear so the six operating digesters would actually be increasing slightly as we get out of the winter, which is colder in California. These are sold solar dairy biogas digesters. So they as a warm up during the summer we get more.
Production much like you would get out of a solar farm so.
We can we can get that data and we'll include that in future communications.
The regarding the the value per and then be to you.
The California, low carbon fuel standard value as we know the white from $65 to today over $86. Just in the last few weeks, probably six weeks of trading but carb itself on slide 51 of their webinar cited that out of the next 22 years. They expect more than 20 years to exceed the price cap, which is over 200 people.
The dollars per per credit, we think as traders realized that's carbs not only intention, but what they're going to actually do a very quickly that the price of the credits will exceed $200. So are we.
We generate a negative 127 carbon intensity.
Over 500, I'll see it best credits about 10 times as much as a landfill project would.
For for an equivalent volume of MB to you. So we will be providing more clarity on this especially as we start pulling out of the ground and shipping it but our focus is on not selling this product at low L. CFS prices and just in the last month or so you've seen a 25% in.
Increase in the value of that inventory and are in the ground, it's because we've been going along.
Projected to ever since a couple of years ago that this recovery would happen, it's now happening and so we are.
Taking a long view not the short view and buy inventory the product as we gotta get carb approval.
The values should end up.
Usually above $100 potentially above $150 as we get the car pathway approvals and start moving product so.
We have some federal D through RIN currently at a roughly $2 next month EPA announces its first government issued.
Mandate, let's call. It the first 15 years of the program since 2007. It was set out in legislation. This is <unk> first opportunity to show that the president is actually committed to decarbonization and we should see a recovery in D. Three RIN prices if that comes to pass. So we think betting again long D. Three rents.
So under the <unk>.
Revisit ministration, there were $3 40 per RIN, they're $2 a day under our president and CEO .
I'd like to support the conversation so we would be looking for a recover those prices again, putting inventory in the ground allows us to preserve that a future opportunity to participate in the price increase.
Understood. Thank you and then do you think you'll get clearance.
Nice revenues for all of the six or seven digesters or will this be staggered.
Through the course of Green tree.
It's going to be staggered because of the physicals coming out of the ground lease.
The biggest uncertainty is the decision we have not announced yet.
When we get an EPA approval, which we expect by the end of this quarter do we just ship with a what's called a temporary pathway in California's negative $1 50, and we generate revenue, but it's going to be short what our revenue potential is when we get our final pathway will make that decision in June or so but.
But we certainly could start generating significant without a significant amount of revenue frankly be positive cash flow from operations just by deciding to not wait for a final carb pathway approval. We are definitely intending to work with carb and make sure that that approval is expedited and so that's one of the reasons. We're waiting till the end of June because if we can get an expedited.
Yeah.
The pathway approval through carb, which we've been successful in doing in the past then we'll just wait until we have a full a pathway approval and there's a significant amount of.
Money I think we're talking millions of dollars.
A benefit for us to wait until we have a negative 44 27 pathway.
Understood. Thank you and then just for the India biodiesel.
Deliveries what can cadence should we think about in terms of.
You know how revenues will potentially come in is it like you know equal amounts spread through the course of greater than three or will it be weighed more towards sort of the near term versus maybe the fourth quarter.
The Indian governments and the three oil marketing companies have all stated their intention to do better at procurement. So that we have the continuous operation of our plant with no with no brakes. We do believe there will be delays basically at the beginning of each quarter as people are getting their their paperwork together.
With our ability to predict that and keep the plant operating and Vista, which is just basically inventory of the product and then ship in the quarter. We do see a evening out of of revenues the $34 million of contracts, which we have one for the second quarter April may and June .
We started production in March so our plant was actually operating first quarter you just don't see it in the revenues because we didn't have the contract to sell or deliver I should say until April deliver.
Deliveries of the contracts are put together in March. So the same we expect to happen in July we'll be producing in June for delivery starting in July we think the paperwork will finally kind of catch up in later July , but we will be delivering with the idea of what the quarterly looks like and this current quarter represents only about.
70% of our total production capacity, we were fairly conservative about what commitments, we wait and they made and as the procurement cycle improves. We'll go from currently roughly 35 million a quarter two more than $50 million a quarter in India. So there's really only.
Frankly, the only uncertainty is whether the paperwork with the OE or M sees is the slow that's it.
Got a stated commitment of goal its working and if they just keep the process working we'll be.
Scaling up revenues every quarter in India, with a slight winter issue and the <unk>.
The hump months there.
At the end of the year.
But with the back when we were running at 70% he might even not even noticed that so we are expecting a ramping up of our India business and then I should note. We are not currently showing any revenues tomorrow feedstock business, which is increasingly becoming understood as the core of profitability of renewable diesel and sustainable the Asian fueled by.
And we are the largest tallo refining plant in India currently showing zero revenue, but it's no debt fully operational.
A capacity play out.
And as we get our contracts in California, and logistics finalized that business could actually be at the same size as our biodiesel business. So it's India is a very very bright spot in what we're doing.
Understood and then with respect to the Keyes plant.
Now that you've had a chance to sort of make some of the improvements that you were looking to make.
How should we think about margins from this facility.
Given that you can recognize some of these improvements in their selling price.
The improvements are going to be recognized gradually over the next.
Five six quarters really the day, we're just getting the benefit of <unk> 15 being approved for this summer that means a lot of ethanol their loved ones would come to California produced by mid Western producers will not it will go to the east coast to those go down in the Gulf.
Or stay in their own states.
This is a second summer that 15% ethanol blending has been allowed in the U P. It already proposed that next year. It would be basically finalized. So we will see a rapid expansion and available with the availability of less expensive less polluting domestic renewable E 15, 15% percent ethanol and what.
What's pretty remarkable is it as an.
Industry Rytary U S capacity was about 17 billion gallons, but you could take the U S gasoline market multi 10, 15%.
It's over 20 billion gallons. So we don't even have the physical capacity to produce 15 across all vehicles in the United States. This is a shift from too much ethanol to too little and the need to invest in additional facilities, primarily driven by low carbon feedstocks. So this.
News was taken sort of with a shrunk by the market I don't think people understand the market dynamics of the.
The commodity in which demand exceed supply, but as they look at margins certainly in our business. The margins in California are at high marks right now and with a lack of supply coming to California. They we should we perceive that there'll be some some future margin expansion just because of the <unk>.
Function and crude oil prices remain elevated so ethanol continues to be a very low cost and low carbon solution for for buyers of gasoline.
Thank you just last one Eric on sort of the cash needs and your balance sheet with respect to all these initiatives you know how are we managing through you know what are your requirements or right. Now are there any plans to sort of tap the capital markets et cetera, just to fill.
Some of these gaps when you have these.
Our LNG revenues.
Coming to preview.
We structured the company so that each project is a project financing in and of itself.
<unk>, we closed $25 million of 20 year financing last October with another $25 million, we've announced we're scheduled to close this quarter.
And then another 25 million later this year, we've already put $53 million of equity in grants in that project. So theres no additional equity required and so when you look at our biogas business plan and investors should understand that there is no need for capital other than US just to you use renewable energy for America program, which we have already qualified for and we continue to ask.
Improve the pace in which we're completing those fundings.
So you can do just kind of take biogas and set it aside, especially as we flip the switch and turn positive cash flow as early as next month, if we decided to go ahead and take the revenue.
Early there's it's operational positive cash flow projects fully funded it's just kind of not needed the ethanol plant with its restart as positive cash flow, there's not no capital required to do to expand that business with $16 7 million of grants were spending so it's primarily grant funded.
Expansion, we put on their equity already so largely our projects are largely grant funded with maybe one little exception, but will be funded through internal cash generated there. So you can take the ethanol plant kind of set aside down to worry about it India's debt free so India biodiesel, India closer in India, Tallo don't have to worry about they've got a large.
Cash balances they are just growing the cash balance it it can be set aside you have to think about that one.
The.
Jet and diesel plant, we have over $30 million are already invested in it.
And we will do one project financing.
The inflation reduction act as an opportunity to support sustainable aviation fuel directly.
In the same way that solar and wind is supported by the tax credits that are generated over time as your solar and wind project works and we have multiple markets not just counterparties, but local markets that have come to us which will enable us to.
Fund, our sustainable jet and diesel plant with no no additional equity from US we put in $40 million in five years of work and that's an end and 7 billion of off take contracts and permits and engineering all of that that's the heavy lifting we need to do so between now and the stall our job is simply to complete engineering and we're looking.
And for support from our existing lines of credit to do that and the inflation reduction tax credits, which we've already created two to assist us in making that easy so existing credit facility and inflation reduction tax credits tax credits.
Allows us to then get to a project passing which has no dilution to the common shareholders who possess.
It's purely a debt financing over a long period of time 20 years plus as a reminder, we have assigned USDA loan guarantee commitment it's called a conditional commitment letter.
For that for that project and the carbon sequestration is very easy.
I know that the in a month or less we're expected to announce that we have a permit for our first well drilling maybe consistent credit facilities in existing.
Tax credits on our balance sheet that were in process of selling that fully funds the characterization well V.
E P.
Permitting process is not very expensive so a year and a half from now is when we actually start talking about financing the capital budget to build out the facility, but what's so unusual as we are our own producer of C O two.
Unlike many other projects that we don't control their C. O. Two we control them. So we're ideally situated for a U S D a or other kinds of debt.
<unk> structure, it's just a perfect structure for the kind of that we're already using another project. So.
Not only the fact that a year and a half way, but it's also one of the simpler projects, we're going to do is taking our feedstock and seeking the ground. So when you break it down that way.
It's really about just getting the operating margin from our existing facilities to two to scale up our India is already showing very strong positives, we generate over eight 5 million of positive cash flow in the fourth quarter last year out of India latter half the third quarter and most importantly, and so India's tallo.
And additional to that our ethanol business of course very additional to that biogas is already positive cash flow just were sticking in the ground and storing the cash.
I would say cellular our focus increasingly is just gonna be operating facilities. We've operated moved already built and continue to do these structured financings that don't have any dilution because we've already spent the money we've already spent the dilution.
Understood. Thank you so much that's all I have.
Sure. Thank you.
Thank you. Your next question is coming from Derrick Whitfield from Stifel. Please proceed with your question.
Thanks, and good morning, Eric and team.
Hi, there.
Eric So today, your stock's down quite meaningfully and while the market response seems a bit aggressive relative to what you announced.
We sense that investors are increasingly focused on resolutions you preferred which is scheduled to convert into a credit agreement in June could you offer any color on your latest action plan with regard to refinancing the preferred or if you plan to use your business to cash flow some element of that.
There are two outcomes to the preferred outcome actually I should say three because we really should recognize the third.
One outcome is an extension and I say that because that's exactly what happened in December when facing the same kind of discussion.
And last fall and we just extended that.
That is probably the most probable outcome here.
Number two would be a partial or full refinance with a debt instrument because of biogas project is operational all the infrastructure is built the USDA is funding the actual projects, we need no cash from anybody to actually build out the project is purely a discounted cash flow calculation and with Lcs that's credits jumping so aggressively.
And next month very possibly RFS.
I'm, sorry, renewable fuel standard D. Three renz also jumping as the EPA announces its new mandates were.
We're very well positioned for a debt refinance of a part or all of it.
And I should mention as an adjunct to that is that we are projected to generate over $150 million of investment tax credits over the course of putting this 380 million dollar project in the ground with a substantial that a portion of that already done so sale of inflation reduction Act tax credits.
Act to offset the <unk>.
The needs for a redemption.
And then the third category is just converting to the note I mean, when you think about it whats is there any dilution at back to converting from our preferred stock to a note. It just moves it up on the balance sheet there both on the rights of the balance sheet.
Both obligations company, we're just moving it from a preferred to a note and I should note for everybody that our accountants already did us that favor.
For the last four years, they've never recognize this as an equity investment it's always been recognized as a debt instrument always been recognized as the cost of the instrument as an interest cost in our profit and loss statement has already incurred the cost of all of the interest and fees for this project as if it was a debt instrument. So.
Fact that we call it a preferred has not been.
The way it's been reflected on our financial statements. So we already have a note and it's already there and it's already being accrued and it's already hitting our P&L, it's kind of a name change.
Let's call it outcome number three which is a conversion into a note occurs so in any one of the three scenarios.
We're fine we just it's and we've said that when you refinance apart Weaver sense apart if we if you pay the holding off with the note. It's it's five any anyone of the three don't result in any dilution any shareholders. The biogas project is very very strong underlying enterprise values, not only strong, but the increasing cash.
Close as we make a decision about when we just want to start revenue.
It's just a very very strong business at <unk>.
Napoli.
And.
It's it's just one of those businesses that institutional investors very quickly come to understand and very quickly we want to be a part of so we wouldn't be surprised at all to you.
The refinancing with some institutional lenders involved but it's not it's.
It's not critical to the success of the project has nothing to do at all with the build out of the project. There's no capital involved involved with with funding natural buildup, that's even a bunch a premarket program and I understand investors concern and the lack of.
They may be personal familiarity with the people involved.
So that has been very supportive to the company in the past and currently is very supportive of the company and I believe it would be in the future. They see a lot of value in our biogas business and they have been willing to cap their participation of that value in exchange for us taking out earlier than what.
Otherwise, we would have the right to take them out of the original arrangement was December of 2024, so they trade at upside in exchange for certainty and our shareholders are going to be the beneficiary of that.
Terrific and with regard to the ITC could you comment on your expectations for timing and amount as you understand it today.
There are two kinds of investment tax credit of two kinds of tax credits investment tax credit, which results from us making investments in our.
Our calculation in our case, it's about 40% of that investment then shows up as tax credit and then second one is production tax credits. So production tax rate start in 2025 under what's called the clean fuels provisions of the inflation reduction act. So today, the things, we talk about or inflation investment tax credits.
Over the course of the project, we expect about 40% of that roughly $380 million. So coming in at $150 million range. There are is some argument that were low that should be 50%, but we're not pushing the envelope on this one the iris is supposed to announce by June of this year, so roughly a month from now.
How to transfer the credit because what's so unique about the IRA is that you don't have to bring the industrial and as a part owner in the project, which was required in solar and wind and other tax credits, we can simply through a certificate process transfer to one taxpayer or one time.
So it's not me NASDAQ trading markets of tax credits, it's going be one relationship between us and one investor because we could have 50 of those investors in a given project is just defining how much each investor base. So the form for doing that.
Has not been issued we literally don't have a form to file with the IRS to say I've sold my tax credit to this fire and so this is being known as the IRS guidance that everybody is looking for and when that is issued.
It is.
It is going to be a market, which any federal taxpayer will wonder why they haven't paid a smaller amount to a inflation reduction act project, whether it be ours or anybody else's because they're paying a tax bill it's a quarterly estimated payment or at the end of year payments. They are definitely going to pay that amount.
Or they could pass along with pharma and they can pay it at the time of the actual obligation to the IRS literally that day instead wearing the IRS the wire to us a smaller amount. So you can see that there's a tremendous amount of sophisticated investors, who would be very aggressive to try to lock down our amounts as quickly as possible so that they would.
Have access to a quality project, which has high de carbonization value.
Especially especially biogas and so our counterparties that we're working with do get this benefit of having a direct investment that includes the de carbonization value.
<unk> four <unk>.
A variety of purposes, ESG or otherwise so I think this market will be very robust, but we need to form.
Very hard to transact when it's.
On a projected document of how the Arris was eventually going to want to do it so we might have.
Upside so I don't want to.
Duly discourage people, we very well might enter into contract this month.
But let's lead with the expectation that we're going to wait until guidance comes out and then we'll just in the ordinary course of course of business probably in the third quarter.
Sales sale of those taxes.
And Eric one last from me if I could just because I want to make sure we cleared the topic today.
And I'm showing it very positive corn crush margin for generic ethanol facility at present to the tune of about 50 cents per gallon.
Understanding that that is a generic number.
How does that square with your calculations and inclusive of plant upgrades at Keyes.
California crush margins are in that range right now and our actual operations in California that are currently going on and generate that kind of number yes.
That's great. Thanks for your time.
Thank you Sir.
Thank you. Your next question is coming from Matthew Blair from T. P. H. Please proceed with your question.
Hey, good morning, Eric and pod I'm, hoping you can provide just a little bit more color and an update on the overall picture I think there were some debt.
It was scheduled to mature in April .
On the revolver.
<unk> term notes, what's the status on that was that extended or refinanced or whats the status there.
Don do you want to talk to that.
Yes, I'd be happy too so the.
Those facilities included.
Provisions that allowed us to pay to extend the notes and we exercise those options and extended the notes.
And did that come up with Fame claim.
Claim rates.
Yeah, so the rates the rates for not changed as a part of the extension.
There was a there was an extension fee that was paid.
For that option at the rates that were stated in the original notes remained.
Okay, and then on the India.
<unk> fulfills four for Q2 are you expecting.
Margin as we saw in Q.
Q3, and Q4 or with lower oil prices will have an impact there and then also how many of the tenders gone through yet for Q3.
And if not when approximately would you expect those to go through.
We expect a lower margin than what we had last time.
<unk>.
Not.
Dramatically lower but Oh, let's call a moderated margin than we have unfortunately, we take the numbers are for it.
Moderated slightly we were in the range, but it's not quite as robust.
And we expect the next procurement cycle should start in June for July August and September and October . So we expect a four month procurement cycle and the reason why is because what's called the winter blend starts in November so we expect that the remaining part of the summer.
Specs specifications will be all in one tender offer.
We as you can imagine we're being very proactive with the oil marketing companies on I'm trying to move the paperwork quickly. So that we don't have a GAAP starting July one but from a.
Production perspective, we continue to produce the product and we just.
<unk> shipped more in the in the three month period or something that there was some delay in the paperwork. It's the if that confidence that they have an underlying demand that has been created through the first tender offer last fall. The second one now the third that's in process.
They definitely want to buy the product and the volumes that theyre requesting or social significantly more than anything that the industry could produce.
We know where we're going which is they want us to expand production to meet the demands are there.
Okay, Great and then last question you mentioned that the dairy.
RMG was put in storage in Q1, so it looks like your your inventory on the balance sheet rose by about $8 million.
From the end of 2022 to the end of the first quarter is that I understand there's probably a lot of things that go into inventory, but is that kind of the starting point that your storage biogas would generate roughly $8 million of revenue.
Let me, let me give you just a.
Perspective on that one.
When we initially injected.
The carbon value that low carbon fuel standard value was in the $65 range.
It today is 86, when we actually pull without turned to revenue it should should be higher I mean, carb is saying, it's getting $250 a week, we're willing to wait for three quarters from now.
So the value of that inventory is changing I would focus on the number of M D to use it.
And then multiplied times, the current valuation in the marketplace or your own feeling of what the market's going to do both D. Three rens and L. CFS credits comprised over 90% of the values that inventory so.
The the actual storage values changing today as <unk> prices go up and frankly in a month is EPA setup in D. Three rent obligations.
Great. Thanks for all the commentary.
Thank you I appreciate your efforts.
Thank you. Your next question is coming from Jordan Levy from Truest. Please proceed with your question.
Hi, guys. This is Jordan Henry on for Jordan. Thanks for taking my question Hi, Henry.
Hi, guys in the past you guys have mentioned a potential spin off of the India Biodiesel segment I'm just curious at this stage in front of that you're still thinking about or might come back to the table or if there are any other kind of strategic transactions youre looking at in that space.
India biodiesel as a very bullish part of our business right now and since it's illegal to import biodiesel into India.
It is obviously a great opportunity for them.
Global companies to get exposure to the India market and in India. There's four domestically owned businesses and those are the only foreign owned.
Biodiesel producer and the largest in the country. We are not currently in discussions on a strategic arrangement with an oil company or private equity firm. We did have a very extensive investment banker meetings and they are standing by waiting for a phone call from us.
To do an IPO in India, and the IPO market in India is very much <unk>.
Structured to favor the offering company with a high valuation and as a result, you can raise a lot of cash very quickly.
In India, we believe we need to put up a couple of quarters and have continued positive trends with our tallo business and we have a very significant opportunity in India, but probably not this year.
I think we're talking next year. So I don't want to lead anybody is your expectation that we're hopping around.
Around looking for a Q3 to Q4 transaction, we'll be looking to do is to shore our scale up and our scale up is very significant.
In India, both revenues as well as margins and our strategic position is just fantastic.
And so we believe it will be probably if not the best beneficiary of the renewable fuels biodiesel business in India will be certainly at the top two I and I don't even know who the other one would be out of the five who we know very very well the other four we're just actually position too.
To to do it at a public transaction in India.
Awesome. Thanks, so much and then just a quick follow up on the garner the digester side I know you mentioned that the plan is to kind of bring online about 10 more digesters by year end. This year any sort of like headwinds or risks, we should be looking at in terms of bringing that on or is that a pretty pretty conservative number from year end.
To be specific will be constructing 10, more so I just want make sure we get that phraseology right perfect.
Yes, so we will have additional ones that are online, but some will be filling some will be you know in the construction phase et cetera.
I do expect the pace to be faster because the hard part which is the pipeline in the R&D facility in the interconnect that's done or are we doing right analyses were attacked rectangular sort of.
Piles of dirt.
With late layers of rubber on it Matt.
You know a skid with some some processing Goldman it's it's a repeatable activity were doing now and so as we move at the pace of USD funding because that's actually what is our pace, we are not putting in $25 million of new equity by diluting shareholders, we're putting in $25 million of USDA funding. This.
Month with no dilution at all to shareholders. So as we move the USDA funding mechanism, better and better and faster and faster than I was on the phone with the USDA. This morning.
A very positive.
We're closing this month kind of tenant discussions.
Our job is to continue to be good and get better at get getting that 20 year financing at low interest rates guaranteed by the USDA, that's what they need to make their program successful. That's what we're doing and so we I I agree have been slower at executing but it's because we're committed to the idea that our business model needs to work in our business model.
<unk> is leveraging this business without dilution of shareholders and we're proving it in the biogas balloons.
Awesome. Thank you so much for that color.
Sure. Thanks Center.
Thank you. Your next question is coming from Ed Woo from <unk> capital. Please.
Please proceed with your question.
Yeah can you talk about the logistics involved with getting the Keyes plant back up and how long or how quickly can you get it back to full capacity.
Andy do you want to respond to that.
For the the logistics are a relatively straightforward it's core.
Corn supply, which currently railroad as is showing.
Showing some improvement over last year.
As far as the physical plant startup is.
Mobley takes about.
You know I would say a week for us to get back to full production, maybe maybe seven days, maybe 10 days, but it should be relatively quick so as we're finalizing our plans we should be able to.
To enter the market.
Relatively quickly and.
So I think it's I think it's pretty straightforward.
Great well. Thank you for answering my questions and I wish you guys. Good luck. Thank you.
Thank you Ed.
Thank you. Your next question is coming from Dave storms from Stonegate capital markets.
Please proceed with your question.
Good afternoon.
My and Dave's questions.
So the Keyes plant can you just kind of quantify how the economic viability of operating that plant has improved after implementing you know all the upgrades you talked about them.
That may even get better as you complete upgrades through point through the end of this year.
Let me, let me take that initially and then I'll have Andy wrap it up.
<unk>.
We have two factors number one is external external commodity price factors in the first quarter. The price of natural gas was tremendously and it hit a high of $83, an intra day trading and it's usually at $5 or $6. So.
That drove us to make decision to accelerate our upgrades and do a basically a 10 year plant maintenance cycle, which is just as it positions us tremendously for lower cost and more.
A sustainable operation.
So that external market has now moved to being very very positive <unk> 15 has created overall demand in the U S. That's much higher over the next three or four months because.
The retail stations are not no longer going to be forced to have to only sell 10% ethanol during the three months summer driving season now they can sell.
50% more of that so the California market is going to not receive as much ethanol in the Midwest as we usually do so the external market for that natural gas prices have recovered down to basically the same level. It was roughly six months ago. So our commodity markets are moving in a positive direction. Good price of death at all reasonable price of corn.
Good pricing natural gas.
Internally, though are upgrade projects, then give us a fundamental lower cost of operation. We spent over you know let's call. It a million a month on natural gas as we get rid of it 80% of that that's a permanent 800000, a month or $10 million a year improvement or economics, Andy you want to talk about the phasing of the adopting the.
Solar N V R and C Brooks process over the next few years old.
Sure so.
To Echo what Eric said, there's there's kind of two ways to look at it the short term, which is really the current market and as Eric mentioned, the you know from the price of corn to the price of ethanol the tight supply in California. The crush margins in California look pretty positive I'd say through the summer, we expect that to continue South Americas.
It's going to show a strong corn crop.
Midwest farmers are planting two early to to predict anything about this year's corn crop at the carrier seems to be pretty significant.
There was some activity in terms of corn purchasing by China in a couple of those were cancelled. So so I think people are pretty comfortable with with the current supply and pricing seems to be calmed down from where it was over the last few years. So in the near term at least through the summer I think we see a pretty positive market from from the ethanol.
All perspective.
In terms of a crush margin as far as the improvements that we're making at the plant we're really.
If you take take it as an extension of what California's working towards this zero carbon goal.
And removing fossil fuels.
We are probably right at the leading edge. If we're not you know the leader on electrifying large manufacturing facilities. So if you just look at it as a manufacturing facility going from using natural gas or electricity is a pretty significant undertaking.
And what we're doing is we've already brought in the Z breaks the Mitsubishi Mitsubishi Z brakes dehydration system.
Which we've run and we're continuing to adjust as we go along because it's it's frankly, it's the largest installation they've ever done.
So it's got some some hiccups along the way, but it's a when we when we've run it we've seen a over 20% reduction in our natural gas consumption, which as Eric mentioned, a pretty significant savings for us.
The next piece will be mechanical vapor recompression, which is replacing you know using our existing cogeneration facility.
<unk>, which uses a lot of natural gas to make steam and instead using these large turbofans to generate heat from the process. So at the end of those two things.
When they are both implemented by by the end of next year, we will have a zebra is already in the plant, but the MPR system is more extensive process and.
When they are both implemented by by the end of next year, we will have a zebra is already in the plant, but the MPR system is more extensive process and.
The lead time on getting the turbo fans is pretty far out, but we're already well down the path in terms of detailed engineering and what we did during this shutdown period was we know that we had to make some mechanical cut in tie ins things that would have required us to actually shut the plant down and say we're in the middle of.
June and we have a 40 <unk> crush margin, we'd have to shut down in order to make these tie ins well, we took advantage of our situation in Q1 because of the natural gas crisis to.
To go ahead and make some of those cut in so that will avoid us having to do that in the future and by doing that it shaves off considerable amounts of money on the implementation of the project cost of those.
Which we would have had to factor in loss production et cetera, So all said and done that.
We also mentioned earlier that we're putting in a two megawatt solar micro grid system.
Which will help us.
Not only from having a battery backup system in case, you know the region loses power.
But it will also allow us on a day to day basis use load shedding to reduce our cost of electricity that is very important to the plant because obviously, we're going from natural gas and increasing our our electricity load.
But at the end of all this along with some other process improvements, we're making and implementing some.
More energy efficient heat exchangers, and pumps and things like that we expect to see a double digit reduction in our C. I for the ethanol produced at the at the Keyes plant, which as Eric mentioned as a as a long term permanent.
Benefit to all these projects and that's you know that's that's the that's the benefit for us of spending the money to electrify. The plan is we're going to get a better value for the ethanol produced because it will be lower carbon.
You add into that eventually the sequestration of our C. O. Two produced at that plant and you could see probably one of the lowest carbon intensity scores of any ethanol producer in the United States maybe in the world.
So it's sort of a two phase get the plant up and running and to take advantage of these margins right now.
But long term these projects will provide meaningful long term.
<unk> four for a medicine, because it's going to it's going to move us away from you.
We're using a lot of natural gas in this plant and recognizing a benefit from the reduced Ci score in the fuel ethanol that we produce.
That's incredibly helpful. Thank you.
Thank you that concludes our Q&A session.
I'd like to turn the floor back over to management for closing comments.
Good. Thank you very much I are we where do we want to thank all of you spending spending time with us with US today and we look forward to further discussions with you about our plans, we really would invite you to review the <unk> company presentation. That's posted on the homepage of the medicine website.
Todd.
Yes.
Thank you for attending today's a medicine earnings conference call. Please visit the Investor section of the <unk> website, where we'll post a written version and a auto and an audio version of this earnings review.
And business update Matt.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.