Q3 2023 Aemetis Inc Earnings Call
Good afternoon, and welcome to the masses third quarter 2023 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 Air methods incorporated Mr. Waltz, you may begin.
Thank you Ali welcome to the eight minutes third quarter 2023 earnings Review Conference call.
Joining us for the call today is Eric Mcafee, founder Chairman and CEO of a medicine we.
We suggest visiting our website at <unk> Com to review today's earnings press release.
<unk> corporate and Investor presentations.
Please with the security and Exchange Commission recent press releases.
And previous earnings conference calls.
A presentation for today's call is available for review or download on the investors section of the Amyris Dotcom website.
Before we begin our discussion today I'd like to read the following 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.
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 or available from the company without charge.
Our discussion on the call today will include a review of non-GAAP measures as a supplement to financial results based on GAAP, because we believe these non-GAAP measures service a proxy for the company sources and uses of cash during the period presented.
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 32023, 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 on extinguishment loss on lease termination USDA cash grants income tax expense intangible and other amortization expense.
<unk> expense depreciation expense gain on litigation and share based compensation.
Income tax benefit.
Let's review the financial results for the third quarter of 2023.
Revenue during the third quarter of 2023 decreased 4% to $68 $7 million compared to $71 8 million for the third quarter of 2022.
Our India biodiesel operation experienced an increase of 121% in production by delivering 15 5000 metric tons of biodiesel during the quarter of 2023 compared to 7000 metric tons during the third quarter of 2022 our.
Our California ethanol operation experienced a decrease in the volume of ethanol sold from $15 7 million gallons in the third quarter of 2022% to $13 eight gallons in the third quarter of 2023.
Delivered corn price improved from an average price of $9 59 per bushel during the third quarter of 2022 to $7 48 per bushel during the third quarter 2023.
Gross profit for the third quarter of 2023.
Was $492000 compared to $1 $1 million gross loss during the third quarter of 2022.
Our India biodiesel segment provided $2 8 million of this gross income.
Selling general and administrative expenses were $9 million during the third quarter of 2023 compared to $6 $4 million during the third quarter of 2022 as a result of our continued investment in our ultra low carbon initiatives, along with non cash charges for stock compensation.
Operating loss was $8 5 million for the third quarter of 2023 compared to an operating loss of $7 6 million for the third quarter of 2022.
Interest expense during the third quarter of 2023 was 10 eight $2 million.
Excluding accretion and other expenses in connection with series, a preferred units and our embedded biogas LLC subsidiary compared to $7 $1 million during the third quarter of 2022.
Additionally, our <unk> biogas LLC subsidiary recognized $7 $7 million of accretion and other expenses in connection with preference payments on its series a preferred units during the third quarter of 2023 compared to $2 $8 billion during the third quarter 2022.
Along with a loss on extinguishment on series a preferred units with an estimated $49 $9 million during the third quarter of 2022 as a result of a charge related to the redemption of series a preferred units as a part of the amendment to the preferred unit purchase agreement.
Net income was $30 7 million for the third quarter of 2023 compared to a loss of $66 8 million for the third quarter 2022, driven primarily by tax credit sales of $55 $2 million during the third quarter of 2023.
Along with the onetime unitholder redemption charge of 49 $49 $4 million during the third quarter of 2022.
Cash at the end of the third quarter, 2023 was $3 $9 billion compared to $4 $3 million at the close of the fourth quarter of 2022 investments in capital projects of $8 8 million were made during the third quarter of 2023 further highlighting our commitment to build ultra low carbon products projects.
Now I'd like to introduce the founder Chairman and Chief Executive Officer of HAE Medicine, Eric Mcafee for a business update.
Eric.
A medicine is focused on producing below zero carbon intensity products that reduce air pollution and carbon emissions to improving the environment, while providing health and economic benefits to local communities.
We are pleased to report that the medicine has achieved the milestones, enabling the transition to positive cash flow from our three operating businesses in California and in India. During the third quarter. We completed key models key milestones also with our two development businesses in September we received approval to use permit and <unk>.
<unk> for the development of the sustainable aviation fuel plant and we made progress on project development after receiving the construction permit from the state of California for the C O two sequestration characterization well.
And we generated a profit of $37 million in the third quarter.
And we paid down $52 million of high interest rate debt in October.
We are growing and diversifying our existing dairy renewable natural gas at ethanol businesses in California, and expanding our biodiesel and tallow feedstock businesses in India by adding facilities to convert our biofuels and byproducts into sustainable aviation fuel renewable diesel and renewable hydrogen.
To further reduce the carbon intensity of our products and important business that we're developing is a sequestration of C. O two produced by our renewable fuel facilities.
Each of these businesses reduce air pollution, and carbon emissions, while generating valuable federal tax and renewable fuel standard credits, California, low carbon fuel standard credits and the carbon credits that are needed by the energy industry corporations and companies seeking to decarbonize their operations or to offset their carbon emissions.
We are executing on our plan to grow to $2 billion of annual revenues and more than $600 million of annual positive cash flow. We invite investors to review the company presentation on the homepage of the <unk> website, and our press releases to see the steady progress being made on delivering our plan.
The med is biogas business has multiple revenue sources, the renewable natural gas fuel, California, low carbon fuel standard credits needed by oil companies to offset carbon emissions from the sale of petroleum fuels in California.
Federal renewable fuel standard credits required by all companies under federal law.
Inflation reduction act investment tax credits.
And insulation reduction act production tax credits that begin in January 2025.
An example of the type of credits that we generated from our low carbon projects projects is the sale of $63 million of federal tax credits and late Q3 to incorporate purchaser for $55 million in cash.
These credits were generated from a medicine investments in qualified biogas assets under section 48 of the inflation reduction Act, which provides about $400 billion of federal tax credits to projects such as ours that achieved the goals of new jobs, new investment and the decarbonization of energy.
This Irish tax credit sale required extensive third party review and oversight incur.
Including.
A cost segregation consulting firm that issue the verification document and national law firm that issued a tax memorandum setting forth the calculation of the Irish tax credits.
A leading insurance brokerage firm.
Group of insurance companies that provided a tax credit insurance policy.
And a highly profitable corporate buyer that purchased the federal tax credits at a discount.
We expect to continue generate IRA investment tax credits in the <unk> business at the rate of about 40% for eligible project costs, creating more than $100 million of future cash from the sale of IRA investment tax credits related to the investment and production of renewable natural gas.
Beginning in about a year in January 2025.
We plan to generate higher rate production tax credits from the production of renewable natural gas the calculation of the valuation of IRA production tax credits for dairy renewable natural gas under section 45 Z is based upon our expected negative 370 carbon intensity type dairy renewable natural gas.
After selling discount to a purchaser and tax credit insurance costs. The net proceeds to at Madison are expected to be approximately $60 per M. M Btu of renewable natural gas.
The automotive supplies about 80 80, there is an approximately 100000 dairy cows with wet distillers grain animal feed produced fire and ethanol plant and Mezz plans to generate $1 6 million M. N P to use per year from only about 60 dairies.
As a result, it met has plans to grow cash received from the sales IRA production tax credits from prior matters biogas business to more than $100 million per year.
In addition to generating an estimated $120 million of investment tax credits from the construction of the qualified biogas assets over the next few years.
Let's review our five businesses.
In the India biodiesel business.
$21 million of biodiesel contracts were fulfilled by and let us principally for the three India government oil marketing companies during the third quarter of 2023 generating $2 7 million of positive adjusted EBITDA during the third quarter.
We recently announced a $150 million one year allocation for biodiesel from the three oil marketing companies under a cost plus contract structure. We started deliveries under this contract in October the positive impact of cost plus pricing that is now being used by the O M sees to purchase biodiesel.
<unk> is expected to continue for the next year, the India biodiesel is debt free and now generally funds its own operations without outside working capital financing.
Our India plant was expanded to 60 million gallons per year capacity during the third quarter.
We continue to expand the production capacity biodiesel using an enzymatic process.
<unk> technology developed by met US at our India plant that allows lower cost lower grade feedstocks to be used to produce high quality biodiesel.
A medicine believes it has the largest capacity producer in the world using <unk> enzymes to convert low cost feedstocks into biodiesel.
Due to our process technology advantage. The total capital cost of our expansion to 60 million gallons per year was less than $1 million.
And was funded entirely by our operating profits in India.
To meet rapidly expanding demand for biodiesel by the government owned oil marketing companies. We are continuing to expand production capacity in India with a planned about 100 million gallons per year of capacity in 2025.
The India market is about 25 billion gallons of petroleum diesel and the government has set a goal of a 5% blend of biodiesel.
We expect the cost plus contracts from India government oil refineries will support. The addition of a significant amount of new biodiesel production capacity in India over the next five years.
With a medicine continuing to expand capacity beyond 100 million gallons to supply the increasing demand for renewable fuels.
The planned export of refined Hello from the India facility to renewable diesel producers in the U S is making steady progress with.
With feedstock sales to several borrowers refinery customers in active discussions.
And the med is biogas business.
This summer we close the second $25 million USDA guaranteed loan to build dairy biogas digesters for an additional eight areas.
This closing brought our total to $50 million of committed USDA.
E. A pea based project financing known as renewable energy for America program too.
To build 15 fully funded areas that are designed to produce a combined 400000 M M b to use of renewable natural gas each year.
The third $25 million USDA guaranteed loan should be close by the end of the year subject to potential delays from the government shutdown.
The forest through the April 8th alone are in various steps of the process.
When closed these five additional rounds of financing under the renewable energy for America program are scheduled to provide an additional $125 million of 20 year project financing for the construction of a medicine biogas assets.
We now have seven fully operating during desert Digesters and are currently constructing additional digesters for 10 there is.
These dairy digesters are expected to generate approximately 400000 of N V to use per year of renewable natural gas. We expect to have nine does digesters operational by the end of 2023.
And plan to speed up the rate of digester development in 2024, as we closed financing from the <unk> biogas, three four and five for $75 million of new financing.
A few months ago, we received our default negative 150 carbon intensity pathway approval for six dairies to generate low carbon fuel standard credits and we expect more approvals in the next few weeks.
While we await the approvals of our provisional L. CFS pathways for credit generation in California, We store the renewable natural gas underground and carry the RMG as inventory until required to deliver to customers.
A medicine other R&D producers have experienced significant delays in the California Air Resources Board pathway approval process with some at 24 months and counting we expect carb to address this delay and the upcoming Rio Arthur's reauthorization of the Lcs program in 2024.
Sure.
We noted earlier this year that the dairy digesters that were performing above expectations are.
Our updated plan that we expect to release in Q1 2024 will include updated volumes based upon the successful production rates of the biogas digesters during 2023.
We are pleased to have passed the operational startup phase and are now positive cash flow from operations at <unk> biogas.
We're selling federal D. Three renewable identification numbers at a price that is about 75% higher than a few months ago as the price of diesel Rins has increased to $3 50 per RIN compared to $2 per RIN in June of this year.
The U P. A mandate for D. Three runs for the next two years significantly exceeds the expected production from biogas projects. So oil companies are competing to purchase D. D. D. Three returns driving up the price.
But we plan to continue to utilize long term USDA guaranteed reap loans for the construction and operation of the biogas a meadows biogas projects.
We recently paid $30 million to third eye capital pursuant to their financing of the biogas project. In addition, the original financing was extended to the end of December for $3 million after which any remaining balances converted into a simplified promissory note at about eight 8% lower interest rate than the prior.
Conversion promissory note.
In the amount of sustainable aviation fuel and renewable diesel business. We received approval for the primary permit for the construction of the 90 million gallon per year, Saf and R&D plant at the riverbank site.
The use permit in California, Environmental quality Act approval, allowing the use of the 24 acre site for a sustainable aviation fuel and renewable diesel plant was approved on September 12th.
The authority to construct air permit is expected to be approved in early Q1, 'twenty 'twenty four.
We have signed $3 $8 billion of supply contracts with 10 Airlines.
And a $3 2 billion renewable diesel supply contract with the National travel stop company.
We're now obtaining the final permits for the development of this plant.
And due to market conditions, we expect to revise these agreements to reflect updated project timing and terms in 'twenty 'twenty four.
They have their process for Saf production is currently less expensive than the ethanol to jet process when considering the current price of ethanol and the yields of current production technologies.
K medicines deploying the top so hydro flex process that enables the production of sustainable aviation fuel and renewable diesel at any output ratio.
They're more thereby allowing the maximization of pricing by the production and sale of the higher value fuel.
The need for sustainable aviation fuel continues to increase but the overall market supply of SC ups continues to be delayed resulting in significant supply shortages that are expected to continue for the foreseeable future.
The 90 billion gallon per year aviation fuel industry seeks to reduce air pollution and carbon emissions using renewable fuel to replace petroleum jet fuel.
Truck engines are primarily powered by petroleum diesel so renewable diesel is a drop in replacement fuel that does not require any capital expenditure by the truck operator, unlike hydrogen or battery electric trucks. However.
However, renewable natural gas engines allow trucks journey at significantly lower emissions and enjoy approximately 50% or more savings on fuel costs due to the number of credits generated by carbon negative dairy renewable natural gas.
The California Air Resources Board has stated that renewable natural gas is an important source of renewable hydrogen for future truck engines, allowing the trucks to be zero emission using a carbon negative fuel.
We believe that a medicine is very well positioned to supply renewable natural gas hydrogen and below zero carbon electricity to future trucks in Carson, California, enabling the transition to zero emission and below zero carbon intensity heavy duty and light duty vehicles.
For the a medicine ethanol business during Q1 and most of Q2 of this year, we completed an extended maintenance and upgrade cycle for our Keyes ethanol plant, which helped us avoid significant losses during the quarter due to extraordinarily high natural gas prices early this year.
Equally important this pause in production helped us avoid future plant shutdowns it would've been required to install key components of our energy efficiency upgrades.
The result was an acceleration of our planned projects to reduce our biofuels carbon intensity through a number of plant efficiency and electrification projects. We also accelerated the installation of an entirely new Allen Bradley distributed control system with artificial intelligence capabilities, along with several other important process upgrades.
We restarted the Keyes ethanol plant in late May and ramped up production during June and July the plant generated revenues of $47 $4 million during the third quarter and it's been running well with the new systems installed at long term maintenance projects completed.
The goal of our Keyes ethanol plant upgrades is to significantly reduce the use of fossil based natural gas at the plant.
When these projects are completed in 2024, we expected natural gas usage at the Keyes ethanol plant production facility will be will be reduced by more than 80%. This transformation from fossil fuel natural gas to renewable electricity will puts a met us at the forefront of decarbonize the manufacturing facilities in California.
And is expected to reduce the carbon intensity of fuel ethanol produced at the Keyes plant by double digits.
In the next few months, we will be completing the installation of a $10 million solar microgrid with battery backup that will increase the use of renewable electricity at the plant.
Our mechanical vapor recompression known as MVA or unit is now complete the process engineering design and has begun equipment fabrication for installation late next year.
These upgrades as well as the replacement or upgrading at various heat exchangers and process equipment and the installation of the new AI enabled decision control system distributed control system is designed to allow <unk> to achieve meaningful energy cost savings and increase our revenue through the sale of lower carbon intensity fuel hospital.
In summary.
Display despite facing some temporary inherit highly unusual external headwinds in the first and second quarter of this year in our ethanol business operational performance and project milestones for the Meadows biogas and ethanol plant businesses continued to be on track with the company plant.
And the amount is carbon capture and sequestration business. We were awarded the first C. O two sequestration characterization well permit issued by the state of California to a non-governmental project in May.
The C O two characterization well is designed to provide geologic data for the EPA class six injection wells planned for the <unk> site. The recent $5 billion acquisition of Denburg by Exxon is an example of the timeliness and relevance of C. O. Two sequestration two oil refiners and other C O two E meters.
In California Senate Bill 905, established a public engagement process to resolve specific issues related to C. O two sequestration projects, including royalty rates and the unit does Asia, a poor space rights.
We continue to focus on the development of project, but we are supported by the legislative and political process in California that is implementing the regulations for the capture of Sidoti to achieve carbon emission reduction target set by Governor Newsome and a letter to the California Air Resource Board last year.
The California Air Resources Board has held several low carbon fuel standard public events, where staff stated the carb plans to significantly increase the number of credits required under the program by significantly expanding L. CFS mandates.
One model estimates that the increased mandates will raise the price of L. CFS credits to more than $220 per credit in the next two years.
We expect that El CFS credit prices will begin to increase after the January 'twenty 'twenty four carb board approval of the revised regulations that are expected to implement an automatic ratchet mechanism and a one time increase in the number of El CFS credits in order to reduce the inventory of credits.
You'll see a best credits generate revenues and medicine, all of our U S businesses and indirectly benefit our India business that can produce feedstock for U S renewable diesel and sustainable aviation fuel bio refineries.
Currently the meadows captures the 150000 metric tons per year of C. O two emissions from our Keyes ethanol plant and reuse as the C O two for local customers.
This reuse of C. O two can generate 45, Q transferable tax credits under the inflation reduction Act.
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 for our biogas ethanol and jet diesel plants into two sequestration wells that 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 planned 2 million metric tons of C. O two per year sequestered by the amount of carbon capture projects are expected to generate an expected $170 million per year.
From federal direct pay tax credits.
Or about $85 per metric ton of C O two.
As well as an estimated $400 million per year at a projected $200 per ton of sequester Institute.
C C O two from the low carbon fuel standard.
We believe the fixed about of $850 million.
Provided by the direct pay funding over the next over the first five years of projects operation should support funding the estimated $250 million capital costs, but the two injection wells and related equipment.
In summary.
All of the five <unk> businesses are synergistic and create what we refer to as a circular bio economy within a met us we use the biofuels byproducts of waste products from our facilities and local areas.
As feedstocks to produce low and negative carbon intensity renewable fuels to meet government mandates for air quality improvement and carbon emissions reductions the.
The strong demand for dairy renewable natural gas and the rapidly growing sustainable aviation fuel market are key areas of investment and project development at a met us are existing facilities are focused on private products.
Next I'm, sorry that improve energy efficiency reduce carbon intensity to increase revenues at lower cost.
And technologies, enabling the use of lower cost feedstocks at our existing production facilities.
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 Ali.
Thank you Mr. Mcafee.
We will now be conducting a question and answer session.
If you would like to ask a question. Please press star one on your telephone keypad.
A confirmation tone will indicate your line is in the question queue.
You May press Star two if you would like to remove your question from the queue.
And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
One moment, please while we poll for questions.
Thank you.
Our first question is coming from Manav Gupta with UBS.
Your line is live.
Morning, Eric and team. So the first question would be on the Carb staff proposal. We believe Youll also played a key role in getting across the line.
It looks like or is it very positive program, 50% increase in compliance by 'twenty, Turkey, and then obviously the rapid mechanic then we split the program forward what the bids are saying here is that given where the levels are currently and given that we would continue to build a probably pretty grateful and that carbon.
It may or may not move even into late 2024 or early 2025 and you. Obviously on the call said you know what do you expect the earlier movement. So first of all can you comment a little bit more on the program. What you like and then why do you believe that the carbon prices would actually start moving in 2024 versus 2025.
I think that the traders that worked for major oil companies.
Our very smart people.
And what they are looking for is certainty not just for a month or for a quarter. There actually like we are investing in long term capital projects that have an impact on carbon intensity.
And they know that if they can't cover the are there are obligations related to those projects that there are significant compliance costs that frankly have to be considered in their operations over a long period of time and so having spent a lot of time with those traders.
Unfortunately, what they see right now with Carb has a lot of political confusion between environmental groups when other voices.
And what the Carb staff is proposing and so they've taken a wait and see attitude.
The Carb staff is expected to present to the board in January of 'twenty 'twenty four and the board has stated that they intend to approve the implementation to be effective in the second quarter and I think that kind of certainty is going to immediately allow people to calculate what they each entity will require in future L. C.
S credit mandates and if the automatic ratchet mechanism is written the way that they've proposed it's going to be very clear that the.
Morrell CFS credits generated the more rapidly the unmake ratchet mechanism will move you to a few additional compliance it'll move forward one year and for example in year 'twenty 30, it drops and vary significantly between 2030 in 2031, and so though the ratchet mechanism.
It doesn't have to wait until 2030, I think that the calculations could easily be at that first ratchet it might be as early as 2026, so as people game out okay. How many I'll say a best credits. We're gonna knee are we going to need they're gonna included conclude exact what carb put on slide 51 of their February 2023, webinar, which was.
Under any scenario the ratchet mechanism plus the.
The one time step down there will not be enough L. CFS credits.
<unk> by renewable diesel and Scf et cetera, coming to the market and once you conclude that then you need to conclude that you're gonna go by as much as you can to minimize your future compliance liability because the price is going to be triple what it is today. So what I. Just said took me a lot longer the will it take for a trader to conclude.
This and say just by what you can and let's see how fast the price moves and once you get that momentum. It yeah. I don't think it's going to take a year and a half for those the market too to say, we just need to get to the cap and we need to be there as fast as possible because we need to cover our future liabilities as the price moves up you are going to get this.
Kind of a panic.
Among the folks that are late to the party as they see their compliance costs dramatically increase and of course that panic will drive for further buying the good news.
As there is already built in cap, there's a built in Mecca.
Mechanism to make sure the market doesn't get overheated in terms of price. It will not go to 300 or $400. It will stop at a cap and we saw that we were very close to the cap in August 2020.
The reality is we probably will be there again in 2024 I wouldn't be surprised at all if these traders.
Very quickly moved the price one certainty is a bliss.
Thank you and let's hope that plays out exactly as you said my second follow up is moving from California to federal level, you still haven't got the full guidance on 45 Z, but for a company like you were the RMB.
<unk>.
Carbon intensity can drop closer to like 275 400 like if they don't cap. It does that mean, you could like seven or $8 a gallon in 45 Z credits on top of what you make on L. CFS plenty on LNG projects and even you are looking to target to top off zero carbon intensity, that's like a dollar a gallon.
Does that math sound right.
It does each one of our businesses have different carbon intensity renewable natural gas is going to be the big winner not just us, but any dairy renewable natural gas producer.
Under the place reduction Act forty-five Z section is going to be able to in our case be about a $68 per M. M. Beats you. Each M. NB to you is 7.2 diesel gallon equivalents excuse me <unk> 68, and divide by seven point to obviously that's a.
A very attractive amount per diesel gallon equivalent.
But its based upon having a negative 370 carbon intensity, which youre not going to achieve with renewable diesel or other fuels anytime soon so the big winner in the 45 Z is dairy renewable natural gas landfill renewable natural gas the numbers I've seen as positive 30 were negative $3 70, Theyre positive 30, so yes, we're going to generate 45 Z, but.
Probably at one.
You know one fifth the rate at which one of our programs in some some of their cases, 110th the rate of what we're doing.
The calculation 45, correct listener forty-five Z is by the way done by the same people that we just closed this the $55 million cash proceeds from tax credit sale. It's the same team. The same lawyers the same accountants. It's frankly, the same legislative process that they're dealing with the inflation reduction act. So this is not <unk>.
Something brand new it's something we've been working on for more than a year and we are fairly comfortable that this has been thoroughly vetted by a wide number of our advisers and they will come up with roughly the same calculation. So we are we're expecting after a discount for sale about $60.
And then beach you it would be the net proceeds to us.
Thank you for a detailed responses. Thank you.
Thank you manav. Thanks.
Thank you Sir our next question is coming from Derrick Whitfield with Stifel. Your line is life.
Thanks, and good morning, Eric and team.
Hi, Derik.
Eric I wanted to started with I wanted to start with the refinancing of your preferred if I heard correctly in your prepared remarks, it will be converted to a promissory note at year end at a rate that's 8% lower than present.
Could you confirm that that's correct in and also the absolute level of the principal amount and interest rate.
Sure.
The refinancing the biogas preferred is structurally and extension, which is what we did December last year may of this year and now August of this year. So this is the third extension of the existing financing the extension, which includes the months of September October November and December for months.
Is it additional increase of $3 million so.
The $135 million will be $138 million, but we just paid $30 million down. So it's a $108 million would be the balance at the end of December we have additional.
Payments expected under this program over time. So after December it's currently papered to convert into a promissory note that's got a floor price of about 16%.
Prior to <unk> was 24%. So we're it's about 8% interest rate. It's it's it's.
It's one third lower interest rate than what it was in the prior terms of the prior extension we did in May.
If we extend again.
We would then probably do exactly what we did here, which is just increase the amounts like a buzz and a certain amount.
But it is paper to automatically convert so in the absence of us agreeing with third eye to extend then it would just automatically converted into this interest interest bearing note.
And the amount of $108 million at the end of the quarter. We do have a number of counterparties were.
Working on right now that would substantially change this with.
With a substantial pay down and some other things. So there is ongoing discussion and due diligence and negotiation.
That would reduce that 108 very significantly.
That's great and for my follow up I wanted to confirm a couple of points from your prepared remarks on dairy orangey.
First I think you heard I think I heard you say a new Ci score of 370 negative 370 is that due to R&D volume over performance and then second yeah. Secondly regarding the non projects that are online by year end.
Could you comment I think theres, a slight delay with some some of the projects you were expecting to come on just maybe comment on the source of those delays.
Yeah actually you are exactly right. The the the increased volume of biogas production and the way that impacts us He had score cause our highest score to decrease from roughly $4 15 to $3 70. It's just frankly just reflects that there's only a certain amount of carbon intensity reduction per cow and so our.
Processes, producing more biogas molecules unexpected means that the overall carbon intensity per molecule is slightly less so the overall economics by the way pretty much unchanged from the perspective of the number of credits you get but the when you do get more revenues and more D. Three rents and the <unk> events, having increased from two.
$2 to $3 50 means that more deeply rens is a very very good thing.
The.
The reason for timing is largely our USDA loan process, we are very committed to.
Getting better and better.
At applying for renewable energy for America programs lining up all the consultants all the advisors all the permitting everything that goes involved.
Is involved with them, giving us a commitment letter and then executing on the loan.
First one took 20 months. The second one is roughly eight months, we expect to be able to execute on these in the five to six months time schedule on a go forward basis.
So there is there's education involved there's new staff members at USDA et cetera that that.
That need to be educated and so we are committed to doing it right, though because we ended up with 80% of the loan guaranteed by the U S taxpayer and more important than interest rate.
Yes, it is true the interest rates lower than market got it but.
But far more important is a 20 year amortization of the loan that is not available in the bond market the commercial lending market the tax free or taxable municipal market or any other market. You can find there is not a 20 year loan available for bio fuels projects other than a U S guaranteed transaction.
<unk>.
In this particular environment. So we are very pleased with our USDA relationship and intend to continue to commit ourselves to supporting that relationship and executing on their business model and they similarly have the goal of doing this quicker and more efficiently.
That's great. Thanks for your time.
Thank you.
Okay.
Thank you. Our next question is coming from Amit Dayal with H C. Wainwright your line of sight.
Thank you good afternoon, everyone.
If you don't mind can we go with some of the biogas numbers you provided in your commentary so you're saying you'll be at nine digesters at the end of 2023.
You know how many should we expect.
By the end of 'twenty 'twenty, four and then how does that number.
Alongside.
You know your comments about generating over $130 million in PTC.
The nineties.
Great great.
Yeah, the $120 million of investment tax credits is actually over the course of the build out of the project the <unk> the <unk>.
Data plan, which will put out in Q1 will show you what the actual impact of that is on a quarterly basis.
The.
The average number of M. <unk> is about 25000 per dairy.
What's happening is we're getting much bigger dairies and were actually getting dairies that are consolidating with dairies next door and we're finding that the language of one dairy equals 25000 them in beta use is not reflecting accurately what's going on in the field.
So we're going to be transitioning this language to talking about how many cows, we're going to be processing. The waste from that was much more accurately reflect what is for people's calculation purposes. So when you say, we're adding another 10000 cows, you'll be able to then say oh by the way that means X number of.
<unk> so between this call and the next call and certainly in the five year plan Youre going to see a transition to what's called wet cow equivalents. So different kinds of calls you can get to in the industry. All calculated by one simple number and at the WC E. And then the number of <unk> to use per year and then it just.
They're easy math for everybody and so the answer is in 'twenty 'twenty four we have some very very large digesters I think some of the industry's largest dies or digesters or being built by <unk> right now, which takes multiple areas of waste and at a very efficient process and we have one that's that's Ford areas. We're building one large.
<unk> died yesterday, but were bringing forward areas online all at the same time. So the pace of the dairy development is very rapid in 2024 digester development is larger digesters and in several cases and so I think the language. We're gonna start changing too is just how many cows and that'll make it much much easier for them.
Ready to think about it and calculated so we'll be coming out with those numbers certainly in that in the first quarter and our updated plan.
We'll be sitting you'll be seeing it in press releases will probably do a year end wrap up press release on some of the achievements of the year in a met us and talk about using these wet Cal equivalent calculations. So I'm, let me hold back until we put those things on paper because we're rapidly.
Celebrating the program and as we expect to close the third a.
$25 million funding from the USDA announced fourth fifth sixth and seventh all in process. Those are all feeding into the pace of 2024.
Okay. Thank you for that.
Keep it up we'll keep an eye out for it.
And then you know in relation to the monetization.
Well from the I already before the fire.
Yes.
Credits.
Is this going to be lumpy in the future Eric or you know going forward will this be a more sort of you know quarterly numbers that will.
Show up in the financials.
It's a very good question, it's actually I would say a core question about the valuation of the company today.
Or a particular customer in this situation as a company that really would prefer a $50 million or more per transaction. They have a very large tax liability on.
On a monthly basis and so.
We.
We transacted this in a very efficient way in which we aggregated them altogether and ended one transaction for $63 million of tax credits.
We do not expect to be transacting quarterly until 2025, roughly a year from now.
The reason why is because these investment tax credits are spread out over a longer period of time are not $50 million a quarter of numbers. So I would expect over the next year to probably see two transactions my projection would be first one probably in the second quarter and the next one probably in the fourth quarter.
We've largely are going to time those transactions based upon just the aggregate volume. So it will not be every quarter for the four quarters of 2024, but when we get to 2025 every single quarter, we will want to monetize and I think I talked about the volumes you're talking about in excess of $15 million.
Per quarter from the production tax credits and the investment tax credits together in our various businesses.
In the first quarter and thereafter in 2025. So we have stated publicly it's a total of about $800 million coming into the company.
And so you mean other than 2024, it does end up being a bit of a quarterly after tax benefit and cash benefit to the company and it's just it's going to be lumpy in 2024.
Okay. Thank you for that.
And by the way.
Let me Amit.
Amit Let me, let me mention to you.
The way that the production tax credits that are represented is there. Another source of revenue just like low carbon fuel standard credits, our revenue and the federal <unk> Renzo revenue and the molecules revenue. The production tax credits will not be shown on our income statement the way that our investment tax credit.
Are they will show up just like revenue. So every quarter revenues higher they're an after tax benefit. So earnings is higher EBIT cause higher it will just be like an L. CFS RFS.
Even a molecule sale, it's a source of revenue.
The the investment tax credits show up.
As a uh huh.
Other income it's a tax benefit is when it shows up as and though we get in cash most people don't think about taxes as being cash that comes to you.
It's cash on our balance sheet, but it shows up in our P&L below operating income. It does of course as we know show up is after tax income. So our earnings per share goes up but it doesn't come up come into EBITDA is as investment tax credit is not coming to EBITDA. It comes into cash and it goes into earnings and it's confusing too many <unk>.
<unk> I know, but that's what it is it's like EBITDA plus cash because most people don't think of taxes actually creating any catch in this case it does.
Yeah, I guess, you know folks will have to start looking at the cash flow profile from a valuation standpoint going forward on this.
Yeah, well I think when we get the production tax credits that can be very easy because they won't have to do much calculating it will just be in revenue will be in earnings it will be in operating income, it's going to be very easy.
That's primarily it was $120 million of future investment tax credits and we do have some other things we're doing that we expect to generate investment tax credit I think that's where people are going to get views, we got the cash but its not revenue right. We got the cash but not in EBITDA. So what is it well. It's it's it's it's people are going to be confused about that part of the business.
Something that.
We're gonna have to deal with.
It's what it really is is this reduction of high interest rate debt.
We had $120 million more a reduction of high interest rate debt. That's one clean way to think about it is that your earnings go up because your debt goes down.
Alright, well I get it.
And we saw that.
I mentioned this thing already.
Yes, we paid.
$2 million of debt that's one.
Yeah go ahead.
On the India biodiesel capacity around 200 million.
How much investment is needed and you know the.
Cash flows from that operation basically fund that expansion.
It's a good question it is going to be funded from India. We do have cash flow certainly under this cost plus contract that will largely fund all the activities needed to do it we will probably incur a small amount of debt near the end of the year, but that will be paid off in 2025. So the reality is it's.
Just gonna, albeit they get paid by cash flow and in India.
Now how does that set you up.
Some you previously you said you might monetize that asset.
Fashion, So now that you know that.
You bet, but facilities operating.
Sort of more regular fashion.
Are you considering.
Some of those options you had previously highlighted.
We are currently hiring at the executive level in India.
We will be well prepared in 2024 for what I believe is going to be an attractive public market opportunity. The real question for us is whether the sensex in India is the right market I personally strongly.
Prefer the sensex the structure for four companies going public is very very favorable.
So if for some reason that.
That does not appear to be as attractive for whatever market conditions. There are a number of opportunities we have including obviously NASDAQ, but we have other exchanges that are excited about India and.
Certainly there's other other places we could do a public offering.
Understood. That's all I really thank you so much.
Sure. Thank you Matt.
Thank you. Our next question is coming from Matthew Blair with T. P. J Your line is life.
Hey, good afternoon, Eric.
Hey, Matthew but more about.
I was hoping you can talk a little bit more about the California ethanol segment, what was the EBITDA for that segment in the quarter.
It looks like your realized ethanol pricing.
Might've been a little bit softer than expected could you talk about the drivers there and then you've court a fair amount of investment into the plant or some of these projects up and running or is it is it really 2024, when we would expect to see the upside from things like the <unk> plant and the solar grid.
Sorts of investments.
Let's talk projects versus them over back to EBITDA.
The carbonization of an ethanol plant is a new idea for many folks unless you're getting a low carbon fuel standard credit, which means you are delivering your product in California pretty much 100% of your product you don't really get paid for it.
Many plants benefit from coal fired electricity for example, just really cheap and many plants are built specifically because they have access to cheap coal fire.
Kind of a double.
Of electricity, so our projects will move us to renewable electricity, we have a $10 million solar project, which is literally doing the cut overs here in the next couple of weeks and then we have the the tuning process. So we will be fully operating in in the months and be doing the final adjustments.
Looking for an early first quarter full operation of that that unit, we got an $8 million grant from the California Energy Commission to do that decarbonization, but in order to fully utilize that renewables renewable electricity, we need to have systems in the plant that do not run on petroleum natural gas so.
The mechanical vapor Recompression concept, which is widely used in industry, specifically in the dairy industry and <unk>.
<unk> compresses your steam by using large electric fans like powered plant fans to force the air into higher pressure, which increases.
It's temperature so re compressing using electricity. It means that we can significantly reduce literally by 80% our petroleum natural gas use that comes from very carbon intensity of energy source that de carbonization will not fully be in place until we have implemented our MBR, which is currently structured to be at the end of 2010.
For so we're upgrading the energy sources that solar that's online literally next month and tweaked and fully saw acceptance in Q1, and then we want to use that renewable electricity to actually change the physical processes in the plant with mechanical vapor recompression the <unk> economics.
Generate in excess of $1 million, a month of improved margin by saving us today about 800000, a month of natural gas and then through a lower carbon ethanol generating almost the equivalent amount of increased ethanol value. So after the increased cost of electricity and subtracted.
It's a $15 million per year increase in cash flow at the ethanol plant.
We have some other things that are smaller artificial intelligence system and some other things that are just optimizing what we're doing so our overall initiative here, though is.
Is reduce costs increase revenue and in so doing be able to you know pretty consistently generate.
A couple of million dollars a months, even if all of our competitors are breaking even we're still making a couple of million dollars.
Okay.
It sounds good and do you have the EBITDA for that segment in the quarter.
It was roughly breakeven this was a startup this was the completion of our startup so that for the though we ended up positive cash flow on a monthly basis.
Near the end of the quarter, we were at the.
Going into the quarter, we're still doing the startup.
Okay and then my follow up is on <unk>.
Mentioned, the PFS halfway of delays that you experienced came in just wanted to see is that is that something that's unique to the complexity and low ci of dairy LNG or is that.
Is that something that's affecting everyone across the board and as your best guess now that you would receive that pathway by Q2 24, and that's when you can start to show EBITDA for the dairy R&D segment.
The.
There are tier one in their tier two pathways, one of which is a relatively formulaic and quick for example.
An ethanol plant decarbonising.
Calculation that it might take three to four months for that pathway to be approved because it's fairly standard and is changing a couple of elements.
The.
Biogas industry in general is all stacked on a pile of more than 50 projects. According to what we've been told by Carb staff.
And many of those projects have developers that are not very familiar with this process and require a lot of handholding by carb staff that has been their explanation for why there's been such a long delay in getting approvals.
And.
Unfortunately, the current process does not allow more experienced developers such as us we're the largest cell CFS ethanol producer in the history of California.
At our plant and so.
We are.
R R.
Our experience and our Knowhow is not giving us any benefit we're literally in a pile with a bunch of people that may never done this in their entire life. So our problem is it.
We're waiting for card to fix this and they're in the next go around a very easy fix is this changed your default pathway to negative $3 50.
So during this time period, which we're waiting where we're already generating these look or feel centered credits we generate them at the rate. It's more accurate currently there negative 150 default rate is just not accurate is just wrong and so we are.
I've got public statements you want to Google.
And Andy Foster or Eric Mcafee, Youre going to find that we are very active on this topic and entered interfacing with the top people all the way through the number one top person at carb on this particular topic and they're generally sponsors yep, we need to fix it yeah. It's a good solution, yes, we need to do something about it so.
January 2024, we expect that to be an element of what they're doing they have changed staff.
Management in the in the program within the last month. So it may be theres going be some breakthrough just by having some new management, but this is an unacceptable underperformance.
By a regulator that's directly damaging the financing and performance of the entire.
Tire process of Decarbonization it is absolutely a.
A problem like carb needs to focus on and as far past fixing they should've fixed at two years ago.
Got it thank you very much.
Thank you. Our next question is coming from Dave storms with Stonegate capital markets. Your line is nice.
Good afternoon.
Hello, Steve how are you doing.
I'm.
Just curious if you could talk a little bit about the pathway to increasing capacity at the biodiesel plant I know that <unk> do a lot of gatekeeping over there, but just curious as how you see that playing out over 24.
Absolutely.
We.
Are very fortunate in that.
Unlike California, which has a very long long permitting cycle permitting in India is not really a <unk>.
Strained on our timeframe, it's mostly equivalent fabrication that is the lead time on what we're doing there so.
Our vendor and this matter is the same vendor we used for the original construction of the plant. They had the last time I checked over 600 employees in India, They actually fabricate equipment in India. So the supply chain. There is relatively straightforward and we have an excellent relationship with some of the other fabricators in India. So it's largely a matter of us just.
To invest in this capacity increase we are committed to the idea that India is largely a debt free entity. So as it generates cash we can use it for capacity increase and when we get to 100 million gallons, it's quite a large business in India, that's a $400 million plus revenue business in India and it.
The margins that we get with enzymatic biodiesel, which is roughly 10% higher margins than our regular business because of lower cost feedstock.
We were going to be very pleased with the outcome of that capacity expansion. So it's going to be gradual process.
It's a process that we're expecting mature in 2025 and very possibly might include some other growth initiatives of which we haven't announced yet but initially this is a.
Just the first step in trying to meet this more than 1 billion gallon gap in India production that the India government is trying to have us be a part of fixing.
Understood. Thank you and then just a question of a similar nature now that you have the permit at River Bank can you just talk us through kind of fluid logistics and timelines look like for next steps any milestones that we should keep an eye out for going forward.
Sure we have what's called the authority to construct the ATC permit that is issued by the air.
Pier District, and that's in process right now we expect to announce it in early Q1, and then at that point in time, we're just in full.
Completion mode on the project financing.
E P C. The engineering procure construct agreement, which sets all pricing will be completed in order to then have the solid financing numbers in place. So that that all is happening first quarter second quarter next year and we have active discussions.
Literally.
On a regular basis with equity investors and debt investors, there's a lot of interest in Mcf and so there's a number of peer financial players as strategic players there's technology providers that we already do business with Theres a lot of people who are very very interested in being.
Direct investors at.
The entire site right side of the balance sheet, some of whom are global names everybody would know and other ones are more strategic interests. We've also mentioned that our 10 airlines that we have contracts with.
Some of them have created funds to invest in Saf and so we have active discussions with those guys, but those discussions are basically lining up for the.
Air permit the authority construct and then the EPC agreement.
The actual fully full rap guaranteed contract with our contract or we have already announced that we intend to use a $2 billion revenues per year company called CTC I, who does have experience in renewable diesel plant in California and has proven himself to be a contracted this willing to two.
Get in there and really work when the going gets tough.
And we think that it's a.
It's a great opportunity to work with a proven California contractor in our industry.
Understood. Thanks for taking my questions and best of luck in Q4.
Thanks, Dave I appreciate the time.
Thank you our final question today will be coming from Ed Woo with <unk> capital Your line is life.
Congratulations on the quarter. My question is on the inflation reduction Act tax credit that you sold.
You saw a $63 million or $55 million as you move forward and get more experience selling do you would you be able to do you think you'll be able to lower the discount window and also to I guess I'm not sure how much time was involved but to speed up the I guess the organizing of completing the sale of these tax credits.
The discount is primarily driven by the.
Non buyer discount the buyer discounts only a part of the transaction costs, the insurance policy and other costs and this one transaction.
Were reflective of the first time kind of kind of transaction costs. So it's roughly a 15% amount all in between 63 and our net amount that we received.
So we do expect a tightening or.
Is that as that goes forward.
In what timeframe and what area I would say I'd be less certain but I do expect it to be tightening certainly down to 12% maybe as small as 10%.
And it's the tax credit so we could just sit there and use it ourselves and get 100% and so at some point in time, we'll just make that determination and we will not have a discount at all because we'll just apply it to our own income tax obligations.
Great well, that's definitely a great opportunity. Thank you for taking my question and I wish you guys. Good luck. Thank you. Thank you Ed I appreciate your time.
Yeah.
Yeah.
<unk> there are no further questions at this time, so I would like to turn the floor back over to management for closing comments.
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