Aemetis Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 4, 2023

There are 9 speakers on the call.

Operator

Welcome to

Speaker 1

the Aemetis First 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.

Speaker 1

Todd Waltz, Executive Vice President and Chief Financial Officer of Aemetis Inc. Mr. Waltz, you may begin.

Speaker 2

Thank you, Matt. Welcome to the Aemetis First Quarter 2023 Earnings Review Conference Call. Joining us for the call today is Eric McAfee, Founder, Chairman and CEO of Aemetis and Andy Foster, President of Aemetis Advanced Fuels and Aemetis Biogas. We suggest visiting our website at aemetis.com to review today's earnings press release, the Aemetis corporate and investor presentations, 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 the aemetis.com website.

Speaker 2

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 For additional information, please refer to the company's Securities and Exchange Commission filings, which are posted on our website and available from the company without charge. Our discussion on this call We'll 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's source or use of cash during the periods presented.

Speaker 2

A reconciliation The non GAAP measures to the most directly comparable GAAP measures is included in our earnings release for the 3 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 we conducted 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, Series 8 preferred units, Loss on lease termination, certain cash grants, gain on litigation, depreciation expense and shared base compensation expense. Now let's review the financial results for the Q1 of 2023. Revenue during the Q1 of 2023 decreased to $2,200,000 compared to $52,000,000 for the Q1 of 2022. Due to historically high natural gas prices in December 2022, we made the decision to idle the Keyes plant in our North American division and initiate an extended maintenance cycle, which extended through the end of the Q1, allowing for acceleration of several important ethanol Working on the extensive plant maintenance and upgrade during Q1 of 2023 Enable the Keyes plant to avoid significant loss due to insufficient natural gas storage in the Western United States It made continuing operations uneconomical.

Speaker 2

From December through March, exorbitant pricing for natural gas would have resulted in Significant loss for the ethanol business, so management made the difficult but necessary decision to temporarily idle production. The Dairy Natural Gas segment produced 21,300 MMBTUs from 6 dairy digesters And the RNG was placed in underground storage to preserve carbon credits, while waiting for approval of the low Carbon fuel standard pathway for each digester. At an expected approval CI value of minus 4.20 7, this inventory represents meaningful future revenue that will be recognized once the pathways are approved. India Biodiesel recognized $1,500,000 of revenue from private customers. Gross loss for the Q1 of 2023 was $1,300,000 compared to a $3,100,000 loss during the Q1 of 2022.

Speaker 2

Selling, general and administrative expense increased to $10,800,000 during the quarter of 2023 from $7,300,000 during the same period in 2022, driven primarily by a $2,700,000 of fixed cost of goods sold charge to selling, general and administrative Expense during the idle time. Operating loss was $12,100,000 for the Q1 of 2023 compared to operating loss of $10,400,000 for the same period in 2022. Interest expense Excluding accretion of Series A preferred units in the Aemetis Biogas LLC subsidiary Increased to $9,000,000 during the Q1 of 2023 compared to $6,300,000 during the Q1 of 2022. Additionally, our Aemetis Biogas initiative recognized $5,600,000 of accretion of preferred payment during the first Cash at the end of the Q1 of 2023 was $4,100,000 compared to $4,300,000 at the close of Q4 of 2022. Investments in capital projects related to the reduction of the carbon intensity of Aemetis ethanol $7,600,000 for the Q1 of 2023.

Speaker 2

This completes our review of the Q1 of 2023. Now, I'd like to introduce the Founder, Chairman and Chief Executive Officer of Aemetis, Eric McAfee for business update. Eric?

Operator

Thank you, Todd. Thank you very much. Aemetis is focused on producing below 0 carbon intensity products and is executing the 5 year plan that's available to investors on the Aemetis homepage. Core activities to achieve the 5 year plan Include extensive energy efficiency upgrades to the Keyeds ethanol plant, build out of our dairy renewable natural gas project and 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 extraordinarily high natural gas prices During Q1, 2023.

Operator

During Q1, we completed an extended maintenance and upgrade cycle for our Keyes ethanol plant that avoided significant losses during the quarter, but importantly avoids future plant shutdowns that would have been required to install the upgrades. The result is an acceleration of our reduction of energy costs and driving the lower carbon intensity of our bio Fuel through a number of plant electrification projects. We also accelerated the installation 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 Aemetis is 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 Q1 of this year in California natural gas markets Would have been irresponsible and unsustainable. We chose to use that short time period to instead conduct a significant plant maintenance program and pull forward many of the critical components of our energy efficiency projects.

Operator

In the long run, this decision to focus on fundamental improvements in our energy efficiency We'll save us 1,000,000 of dollars in project costs through avoided down days and lost production and save time in completing the projects. We are currently working through plans to allow us to restart the Keyes plant in the Q2. Despite the temporary low revenues during Q1 2023, As we 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 We will be storing the renewable natural gas that we produce underground 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 Q1 of 2023. Also during Q1 2023, our India biodiesel, glycerin and feedstock refining Facilities started production in anticipation of the Q2 2023 contracts with the 3 India government oil marketing companies.

Operator

About $34,000,000 of biodiesel contracts were issued to Aemetis of the 3 India oil market in Q2 2023 and deliveries are on schedule. The external political and regulatory environment for renewable fuels And the reduction of carbon pollution in the U. S. And India has improved significantly during the past year. The passage of the Inflation Reduction Act in August 2022 provides an estimated $400,000,000,000 of funding toward renewable energy and carbon reduction projects.

Operator

However, the IRS has not issued guidance that provides the form for transfer of IRA tax credits. So the IRA investment tax credits to the Aemetis Biogas business generated during The Q1 of 2023 from placing 6 digesters, 40 miles of biogas pipeline and the renewable natural gas production facility with utility interconnect 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 continue to make progress toward the sale of the credits on hand as well as several exciting Inflation Reduction Act sale transactions that would provide funding for Ometis 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 investment tax credits It's expected to be booked as other income and would generate a substantial amount of EBITDA, cash on hand and earnings.

Operator

During the Q1, the California Air Resources Board held a LCFS stoping plan webinar, where their staff stated that CARB plans to Significantly increased number of credits required under the low carbon fuel standard program starting in 2024 By significant significantly expanding the LCFS mandates to increase the price of credits to more than $2.40 per credit in the next 2 years. The LCFS credit market reacted positively to the news from carb and prices increased more than 20% from about $65 to yesterday's $86 LCFS credit price, which is a price increase trend that we have expected and that carb projected would occur. We believe that LCFS credit prices We'll continue to rebound to more than $200 per credit as the market recognize the large number of LCFS credits that will be required to meet the expanded Decarbonization goals set forth by CARB. These credits generate revenues for Aemetis in all of our U. S.

Operator

Businesses and indirectly benefit our India business that produces feedstock for U. S. Renewable diesel and sustainable aviation fuel tire refineries. Now Andy Foster, the President of Aemetis Biogas and Aemetis Advanced Fuels will review highlights. Andy?

Speaker 3

Thanks, Eric. With the closing late last year of our first $25,000,000 financing that utilized the USDA Renewable Energy for America program, The Aemetis 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 RNG upgrading facility. We completed commissioning of the RNG interconnection unit with the PG and E pipeline.

Speaker 3

We also completed 4 new digesters and now have 6 fully operating with the 7th digester being completed right now. With the expected funding of our second $25,000,000 USDA Guaranteed loan this quarter and a third funding plan 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 Aemetis RNG network. After receiving CARB LCFS carbon intensity pathways for RNG, these 7 dairy digesters are We have already submitted our RNG production data to obtain LCFS pathway approvals to begin generating LCFS credits. While we await the approval of LCFS pathways for credit generation, we are storing the RNG underground and carrying it as inventory.

Speaker 3

Operationally, we are focused on executing the construction of dairy digesters to fill the Aemetis biogas pipeline, The centralized biogas to RNG production facility and the PG and E interconnection unit, all of which are operating now. Let's briefly discuss progress at our California ethanol plant. As Eric already discussed, we are working on the restart of 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 in an extended maintenance and upgrade period, operations for our RNG business remained uninterrupted. Todd and 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 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 California ethanol plant upgrades will now allow us including our solar microgrid and local renewable electricity.

Speaker 3

As a strong endorsement of our carbon reduction and energy efficiency projects, Aemetis has been awarded $16,000,000 of energy efficiency and other grants by PG and E, 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 2024, We expect 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 will put Aemetis at the forefront of de Carbonized manufacturing facilities in California and is expected to return reduce the carbon intensity of the fuel ethanol produced at the Keyes With the installation of a solar microgrid mechanical vapor recompression, operation Of the all electric Mitsubishi Zebrex dehydration unit and the replacement or upgrading of various heat exchangers and process equipment, Aemetis will lead the ethanol industry in energy efficiency and low carbons production. In addition, upon restart of the Keyes plant in the 2nd quarter, We plan to implement the use of ethanol production enzymes that will allow us to recognize a portion of our production as cellulosic ethanol, which currently qualifies for LCFS credits through a significantly reduced carbon intensity for the qualified cellulosic gallons produced as well as a $1.01 per gallon federal tax credit.

Speaker 3

Additionally, the U. S. EPA is working through a rulemaking In summary, despite some unusual and challenging external headwinds in the Q1 of this year in our ethanol business, Operational performance and project milestones for the Aemetis Biogas and Ethanol Plant Business continue to be on track with the 5 year plan. Now I'd like to turn the call back over to Eric. Eric?

Operator

Thank you, Andy. Let's review our growing biodiesel, Talo 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 that is equal to about 1,250,000,000 gallons per year. During the Q1 of 2023, the 3 government oil marketing companies issued tender offers to purchase more than 10 times the entire production capacity of the Aemetis biodiesel plant under a feedstock plus pricing formula that was used very successfully last fall to bring biodiesel plants into full production in India. The tender offers were for delivery during the Q2 of 2023.

Operator

Aemetis selected specific delivery locations and amounts, then received supply contracts for $34,000,000 of biodiesel to be delivered during April, May June of this year. The pricing formula and timing of the tender offer by oil marketing companies We expect it 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 not allowed under India law And Aemetis owns and operates the largest production facility biodiesel plant in India. We are negotiating the sale of tallow feedstock that is refined by our tallow pretreatment unit in India for export to the U.

Operator

S. For the production of renewable diesel and sustainable aviation fuel. We recently made breakthroughs in tankage locations at 2 delivery points in California and have 2 renewable diesel customers in late stage contract discussions. Since our India subsidiary has no debt And the 50,000,000 gallon per year biodiesel plant, the 50,000,000 gallon per year TELO 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 0, Sustainable Aviation Fuel and Renewable Diesel Project in Riverbank, California.

Operator

A year ago, Aemetis took operational control of the 125 Acre Riverbank Site for construction of our sustainable aviation fuel and diesel plant as well as the Riverbank portion of our CO2 sequestration well projects. We have signed and announced More than $3,800,000,000 of sales contracts with Delta Airlines, American Airlines, Japan Airlines, Qantas and other airlines. We've now completed offtake contracts for about 45,000,000 gallons per year of sustainable aviation fuel to be produced at the Riverbank plant. In addition, we signed a $3,200,000,000 renewable diesel sales agreement to deliver 45,000,000 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 IRA 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 CORSEA carbon credits generated by the airlines.

Operator

During Q1 2023, we continued to make steady progress toward air permits and other building permits for the 90,000,000 gallon per year Riverbank SAF RD 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 Aemetis Carbon Capture. Aemetis captures The 150,000 metric tons per year of CO2 emissions from our ethanol plants near Modesto, while it is operating and reuses the CO2 for local customers. In Phase 1 of the Aemetis Carbon Capture Project, we plan to inject up to 400 1,000 metric tons per year of CO2 emissions produced by our biogas, ethanol and jet diesel plants Into 2 sequestration wells, which we plan to drill near our 2 biofuels plant sites in California.

Operator

We expect to construct 2 CO2 injection wells at each have a minimum of 1,000,000 metric tons per year of injection capacity with additional CO2 supplied by other emission sources to sequester a planned total of more than 2,000,000 metric tons per year of CO2. During 2022, Aemetis 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 EPA Class 6 injection well permit. The initial phase of construction includes drilling 2 characterization Well to provide empirical data for the EPA Class 6 permits. We 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 CO2 as a cash refund to Aemetis each year for the 1st 5 years of production.

Operator

The planned 2,000,000 metric tons of CO2 per year from the Aemetis Carbon Capture Project would generate an expected $170,000,000 per year from the Federal Direct Pay Tax Credit as well as an estimated $400,000,000 per year at a projected $200 per ton I've sequestered CO2 from the low carbon fuel standard in California. We believe the fixed amount of $850,000,000 Provided by the direct pay funding under the Inflation Reduction Act over the next over the 1st 5 years of the project could support funding the estimated $250,000,000 capital cost The 2 injection wells and related equipment. In summary, Aemetis is recovering from the temporary exorbitant pricing of natural gas in California during the Q1 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 0 carbon intensity electricity and renewable hydrogen and CO2 sequestration. All these projects are synergistic and create what we refer to as a circular bioeconomy Within Aemetis, in which we use byproducts of waste products from our facilities and local areas as feedstock to produce low and negative carbon intensity renewable fuels.

Operator

Our company's values include a long term commitment to building value for shareholders. The empowerment of and respect for our employees and business partners and making significant and positive contributions to the communities we serve. Let's take a few questions from our call participants. Operator?

Speaker 1

Thank you, Mr. McAfee. We will now be conducting a Our first question is coming from Amit Dayal from H. C. Wainwright.

Speaker 1

Please proceed with your question.

Speaker 4

Thank you. Good afternoon, everyone. I appreciate you taking my questions. Eric, just on the RNG side, How many MMBTUs 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?

Operator

We reported on the Q1 report how many we had in storage at the end of Q1. I was

Speaker 4

Talking more about by June, how much you think you might have, sorry.

Operator

Yes, I don't have that in mind, but it would be a 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 solar Dairy biogas digesters, so they as they warm up during the summer, we get more production much like you would get out of a solar So, we can get that data and we'll include it in future communications. Regarding the value per MMBtu, California low carbon fuel standard value, as we know, they went from $5 to today over $86 just in the last few weeks, probably 6 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 $2.50 per credit.

Operator

We think as traders realize that that's carbs not only intention, but what they're going to actually do, very quickly the price of the credits will exceed $200 So we generate at a negative 127 carbon intensity, over 500 LCFS credits, About 10 times as much as a landfill project would for an equivalent volume of MMBtu. So we will be providing more Clarity on this, especially as we started pulling out of the ground and shipping it. But our focus is on not selling this Product at low LCFS prices and just in the last month or so, you've seen a 25% increase in the value of that inventory in the ground. It's because we've been going long. We have projected ever since a couple of years ago that this recovery would happen.

Operator

It's now happening. And so we are taking a long view, not the short view. And by inventorying the product as we get CARB approval, The value should end up easily above $100 potentially above $150 as we get CAR pathway approvals and start looking at product. So we also have the federal D3 RIN currently at roughly $2 Next month, the EPA announces its first Government issued mandate, let's call it, the 1st 15 years of the program since 2000 and 7, it was set out in legislation. This is the EPA's first opportunity to show that the President is actually committed to decarbonization and we should see a recovery in D3 RIN prices if that comes to pass.

Operator

So we think betting again long on D3 RINs. So under the previous administration, they were $3.40 per RIN, they're at $2 today Under a President who would like to support decarbonization, so we would be looking for recovery of those prices again, putting inventory in the ground Allows us to preserve that future opportunity to participate in the price increase.

Speaker 4

Understood. Thank you. And then Do you think you'll get clearance to recognize revenues for all the 6 or 7 digesters or will this be staggered through the course of 2023?

Operator

It's going to be staggered because of the physicals coming out of the ground. The biggest uncertainty is a 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 what's called a temporary pathway in California, it's negative 150 and we generate revenue, but it's going to be short what our revenue potential is when we get our final pathway. We'll make that decision in June or so, But we certainly could start generating significant amount of revenue, frankly, be positive cash flow from operations just by deciding to not wait for final CARB pathway approval. We are definitely intending to work with CARB and make sure that that approval is expedited.

Operator

And so that's one of the reasons we're waiting until the end of June because if we can get an expedited pathway approval through CARB, which we've been successful doing in the past, Then we'll just wait until we have our full pathway approval. And there's a significant amount of money. I mean, we're talking 1,000,000 of dollars a benefit for us to wait until we have our negative 4 27 pathway.

Speaker 4

Understood. Thank you. And then just for the India biodiesel Deliveries, what kind of cadence should we think about in terms of how revenues will potentially come in? Is it like Equal amounts spread through the course of 2023 or will it be weighed more towards sort of the near term versus maybe the Q4?

Speaker 3

The India government

Operator

and the 3 oil marketing companies have all stated their intention to do better Add procurement, so that we have a continuous operation of our plant with no breaks. We do believe there will be delays Basically at the beginning of each quarter as people are getting their paperwork together, but with our ability to predict that and keep the plant operating and Just basically inventory the product and then ship in the quarter. We do see an evening out of revenues. The 30 $4,000,000 of contracts, which we have won for the Q2, April, May June. We started production in March.

Operator

So our plant was actually operating in the first 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 delivery, even though the contracts were put together in March. So the same as 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'll 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 made and as The procurement cycle improves, we'll go from currently roughly $35,000,000 a quarter to more than $50,000,000 a quarter in India.

Operator

So this is really only frankly, the only uncertainty is whether the paperwork or whether the OMCs is Slow. That's it. They've got a stated commitment, a goal, it's working. And if they just keep the process working, we'll be scaling up revenues every quarter In India with a slight winter issue in the hump months there at the end of the year, But with the fact that we're only running at 70%, you might even not even notice that. So we are expecting a ramping up of our India business.

Operator

And then I should note, We are not currently showing any revenues from our feedstock business, which is increasingly becoming understood As the core of profitability of renewable diesel and Sustainability Fuel Plants and we are the largest tallow refining plant in India, Currently showing 0 revenue, but it's no debt, fully operational capacity plant. And as we get our contracts in California logistics finalized. That business could actually be at the same size as our biodiesel business. So it's a India is a very, very bright spot in what we're doing.

Speaker 4

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 How should we think about margins from this facility given that you can recognize some of these improvements in your selling price?

Operator

The improvements are going to be recognized gradually over the next 6 quarters really. Today, we're just getting the benefit of E15 being approved for this summer. That means a lot of ethanol that otherwise would come California is produced by Midwestern Producers will not. It will go to the East Coast to go down to the Gulf or stay in their own states. This is the 2nd summer that 15% ethanol blending has been allowed and the EPA had already proposed that next year it would be basically finalized.

Operator

So we'll see a rapid expansion in availability of less expensive, less polluting domestic renewable E15, 15 percent ethanol. And what's pretty remarkable is that as an industry, Our charter U. S. Capacity is about 17,000,000,000 gallons, but if you take the U. S.

Operator

Gasoline market, multiply 10% to 15%, it's over 20,000,000,000 gallons. So we don't even have the physical capacity to produce E15 across all vehicles in the United States. This is a shift from Too much ethanol to too little and a need to invest in additional facilities, primarily driven by low carbon feedstocks. So This news was taken sort of with a shrug by the market. I don't think people understand the market dynamics of The commodity in which demand exceeds 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 perceive that there'll be Some future margin expansion just because the E15 function and crude oil prices remain elevated.

Speaker 4

Thank you. Just last one, Eric, on sort of the cash needs and your balance sheet with respect to all these initiatives, How are we managing through what your requirements are right now? Are there any plans to sort of tap the capital markets, etcetera, Just to fill some of these gaps while we have these RNG revenues

Operator

Coming to play for you. We structured the company so that each project is a project financing in and of itself. Biogas, we closed $25,000,000 of 20 year financing last October. We have another $25,000,000 we've announced we're scheduled to close this quarter and another $25,000,000 later this year. We've already put $53,000,000 of equity and grants in that project, so there's no additional equity required.

Operator

And so when you look at our biogas business plan, an investor should understand there is no need for capital other than us just to Renewable Energy for America program, which we have already qualified for and we continue to actually improve the pace in which we're completing those fundings. So you can 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 decide to go ahead and take the revenue early. It's operationally positive cash flow, projects fully funded, it's just kind of not needed. The ethanol plant with this restart is There's no capital required to expand that business. We have $16,700,000 of grants we're spending.

Operator

So it's primarily grant funded Expansion we put in our equity already. So largely our projects are largely grant funded with maybe one little exception, but We'll be funded through internal cash generated there. So you can take the ethanol plant kind of set it aside, don't have to worry about it. India is debt free. So India Biodiesel, India Glycerin and India Talo Don't have to worry about it.

Operator

They've got a large cash balance and they're just growing the cash balance. It can be set aside. Don't have to think about that one. The jet and diesel plant, we have over $30,000,000 already invested in it and we'll do one project financing. The Inflation Reduction Act has 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 And we have multiple markets, not just counterparties, but multiple markets that have come to us, which would enable us to Fund our sustainable jet and diesel plant with no additional equity from us.

Operator

We've put in $40,000,000 in 5 years of work and that's And $7,000,000,000 of Opdivo contracts and permits and engineering and all that, that's the heavy lifting we need to do. So Between now and this fall, our job is simply to complete engineering and we're looking for support from our existing lines of credit to do that and Inflation Reduction Tax Credits, which we've already created to assist us in making that easy. So existing credit facilities and inflation reduction tax credits Allows us to then get to a project financing, which has no dilution to the common shareholders who's us. It's purely a debt financing over a long period of time, 20 years plus. As a reminder, we have a signed USDA loan guarantee commitment.

Operator

It's called a conditional commitment letter for that project. And the carbon sequestration is very easy. I know that in a month or less, We're expected to announce that we have permits for our 1st well drilling with existing credit facilities and existing tax credits on our balance sheet that we're in The process of selling that fully funds the characterization well, the EPA 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. What's so unusual is we are our own producer of CO2.

Operator

So unlike many other projects that really don't control their CO2, we control them. So we're ideally situated for a USDA or other kind of debt structure. It's just a perfect structure for the kind of debt We're already using another project. So not only the fact it's a year and a half away, but it's also one of the simpler projects we're going to do is Taking our feedstock and sticking to the ground. So when you break it down that way, it's really about just getting the operating margin Our existing facilities to scale up, India is already showing very strong positives.

Operator

We generated over 8,500,000 Positive cash flow in the Q4 last year out of India, latter half of the third quarter and mostly 4th quarter. And so India's tallow Add additional to that, our ethanol business, of course, is very additional to that. Biogas is already positive cash flow just for sticking at the ground and storing the cash. I would tell you our focus increasingly is just going to be operating facilities we've operated, we've 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.

Speaker 4

Understood, Eric. Thank you so much. That's all I have.

Operator

Sure. Thank you.

Speaker 1

Thank you. Your next question is coming from Derrick Whitfield

Speaker 5

Eric, so today your stock is 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 resolution to your 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?

Operator

There are 2 outcomes to the preferred. Outcome actually, I should say 3, because we really should recognize a third. One outcome is extension. And I say that because that's exactly what happened in December. We faced the same kind of discussion last fall and we just extended.

Operator

That is probably the most probable outcome here. Number 2 would be partial or full refinance with a debt instrument Because the 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. It's purely a discounted Cash flow calculation and with LCFS credits jumping so aggressively and next month very possibly RFS, I'm sorry, Renewable Fuel Standard D3 RINs also jumping as the EPA announces its new mandates. 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 $150,000,000 of investment tax credits over the course of putting this $380,000,000 project in the ground with a substantial of that a portion of that already done.

Operator

So sale of Inflation Reduction Act, Tax Credits Act to offset the needs for redemption. And then the 3rd category is just converting to the note. I mean, when you think about it, what's is there any dilution effect to converting from the preferred stock to a note? It just moves it up on the balance sheet. They're both on the right side of the balance sheet.

Operator

They're 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 4 years, they've never recognized us as an equity investment. It's always been recognized that the debt instrument Always been recognized as the cost of the instrument as an interest cost and our profit and loss statement has already incurred the Cost of all the interest and fees for this project as if it was a debt instrument.

Operator

So the fact that we call it a preferred has not been The way it's been reflected on our financial statements, so we already have it out and it's already there and it's already being accrued and it's already hitting our P and L. It's Kind of a name change if, let's call it outcome number 3, which is a conversion into a node occurs. So in any one of the three scenarios, we're fine. If we just extend, we just extend. If we refinance a part, we refinance a part.

Operator

If you pay the whole thing off with a note, it's fine. Any one of the threes don't result in any dilution, any shareholders. The biogas project is very, very strong. The underlying enterprise value is not only strong, but the increasing cash flows as we make a decision about when we Want to start revenue. It's just a very, very strong business.

Operator

It's a monopoly. And It's just one of those businesses that institutional investors very quickly come to understand and very quickly want to be a part of. So We wouldn't be surprised at all to see a refinancing with some institutional lenders involved, but 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 with funding the actual build out. That's even the BlendShape for America program.

Operator

I understand investors' concern and the lack of maybe personal familiarity with the people involved. But, Phil and I has been very supportive of the company in the past and currently is very supportive of the company and I believe would be in the future. They see a lot of value in our biogas business and they have been willing to cap their participation in that value in exchange for us taking them out earlier than what otherwise we would not have the right to The original arrangement was December of 2024. So they've traded upside in exchange for certainty and our shareholders are going to be the beneficiary of that.

Speaker 5

Terrific. And with regard to the ITC, could you comment on your expectations for timing and amount as you understand it today?

Operator

There are 2 kinds of investment tax credit, 2 kinds of tax credits. The investment tax credit, which results from us Making investments and a calculation, in our case, is about 40% of that investment then shows up as tax credit. And then second one is production tax credits. So production tax credits start in 2025 under what's called the clean fuels provisions of the Inflation Reduction Act. So today, The things we talk about are inflation investment tax credits.

Operator

Over the course of the project, we About 40% of roughly $380,000,000 So, coming in at the $150,000,000 range, there is some argument that we're low. It should be 50%, but we're not pushing the envelope on this one. The IRS 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 as a part owner in the project, which was required in solar and in wind and other tax credits. We can simply through a certificate process transfer To one taxpayer or one time, so it's not going to be NASDAQ trading market to tax credits.

Operator

It's going to be one relationship Between us and one investor, we could have 50 of those investors in a given project. It's just defining how much each investor buys. So the form for doing that Has not been issued. You literally don't have a form to file with the IRS to say, I've sold my tax credit to this buyer. And so this is being known as The IRS guidance that everybody is looking for and when that is issued, it is going to be a market in 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 payment.

Operator

They're definitely going to pay that amount or they could pay us a smaller amount and they could pay it at the time of the actual obligation to the IRS literally that day instead of wearing the IRS, they wire it to us So you can see that there's a tremendous amount of sophisticated investors who would be very aggressive at trying to lock down our amounts as quickly as possible, so that they would have access to a quality project which has high decarbonization value, especially in biogas. And so our counterparties that we're working with do get this benefit of having a direct investment that includes the decarbonization value for 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 iris is eventually going to want to do it. So, we might have an upside, so I don't want to unduly discourage people.

Operator

We very well might enter into contract this month, but, let's leave with the expectation that we're going to wait until guidance comes out and then we'll just in the ordinary Of course, the business probably in the Q3, sales of those tax benefits.

Speaker 5

And Eric, one last for me, if I

Speaker 4

could, just because I want to make sure

Speaker 5

we clear the topic today. I'm showing a very positive current crush margin for generic ethanol facility at present to the tune of about $0.50 per gallon. Understanding that that is a generic number, how does that square with your calculations inclusive of plant upgrades at Keyes?

Operator

California crush margins are in that range right now. And actual operations in California that are currently going on generate that kind of number. Yes.

Speaker 5

That's great. Thanks for your time.

Operator

Thank you, Derek.

Speaker 1

Thank you. Your next question is coming from Matthew Blair from TPH. Please proceed with your question.

Speaker 6

Hey, good morning, Eric and Todd. Hoping you could provide just a little bit more color and update on the overall debt picture. I think there was some debt That was scheduled to mature in April, a revolver, some term notes. What's the status on that? Was that Extended or refinanced or what's the status there?

Operator

Todd, do you want to talk to that?

Speaker 2

Yes, I'd be happy to. So those facilities included provisions that allowed us To extend the notes and we exercised those options and extended the notes.

Speaker 6

And did that come at the same rates?

Speaker 2

Yes. The rates were not changed as a part of the extension. There was an extension fee that was paid for that option, but the rates that were stated in the original notes remained.

Speaker 6

Okay. And then on the India biodiesel sales For Q2, are you expecting a similar margin as we saw in Q3 and Q4 Or would lower oil prices have an impact there? And then also have any of the tenders gone through yet for Q3? And if not, when approximately would you expect those to go through?

Operator

We expect A lower margin than what we had last time, not dramatically lower, but, what's called a moderated margin Then we have unfortunately, we take the numbers before it, moderate and slightly. We're in the range, but it's not quite as robust. And we expect the next procurement cycle should start in June for July, August September October. So we expect a 4 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 Specifications will be all in one tender offer.

Operator

As you can imagine, we're being very proactive With the oil marketing companies, I'm trying to move the paperwork quickly so that we don't have a gap starting July 1. But from a production perspective, We continue producing the product and we just would ship more in the 3 month period or something if there was some delay in the paperwork. It's the it's 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 the process. They definitely want to buy the product and the volumes that they're requesting are so significantly more than anything the industry could produce. We know where we're going, which is they want us to expand production to meet the demand that they have.

Speaker 6

Okay, great. And then last question, you mentioned that the dairy RNG was Put in storage in Q1. So it looks like your inventory on the balance sheet rose by about $8,000,000 From the end of 2022 to the end of the Q1, 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 stored biogas would generate roughly $8,000,000 of revenue?

Operator

Let me give you just a perspective on that. When we initially injected The carbon value, the low carbon fuel standard value was in the $65 range. Today is $86,000,000 when we actually pull it out in terms of revenue, it should be higher. I mean, CARB is saying it's going to be $2.50 if we We're willing to wait for 3 quarters from now. So the value of that inventory is changing.

Operator

I would focus on The number of MMBTUs and then multiply it times the current valuation in the marketplace or your own feeling of what the market going to do both D3 RINs and LCFS credits comprise over 90% of the value of that inventory. So The actual storage value is changing every day as LCFS prices go up and frankly in a month as EPA

Speaker 6

Great. Thanks for all the commentary.

Operator

Thank you. Appreciate your efforts.

Speaker 1

Thank you. Your next question is coming from Jordan Levy from Truist. Please proceed with your question.

Speaker 7

Hi, guys. This is Henry on for Jordan. Thanks for taking my question. Hi, Henry. Hi, guys.

Speaker 7

In the past, you guys have mentioned a potential spin off of the India biodiesel segment. Just curious at this stage, is this something that you're still thinking about or might come back to the table or if

Speaker 3

there are any other kind of strategic transactions you're looking at in that space?

Operator

India biodiesel is 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 global companies to get exposure to the India market. And in India, there's 4 domestically owned businesses and there's us. We're the only foreign owned biodiesel producer and we're the largest in the country. We are not currently in discussions on a strategic arrangement with an oil company or a private equity firm.

Operator

We did have a very extensive Investment banker meetings and they're standing by waiting for a phone call from us, to do an IPO in India. And the IPO market in India is very much 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 tallow 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's expectation that We're hopping around looking for a Q3 or Q4 transaction.

Operator

What we're looking to do is to show 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 we'll be probably, if not the best Beneficiary of the Renewable Fuels Biodiesel Business in India will be certainly the top 2. And I don't even know who the other one would be. Out of the 5 who we know very, very well, the other 4, we're just excellently positioned to do a public transaction in India.

Speaker 7

Awesome. Thanks so much. And then just a quick follow-up on the going to the digester side. I know you mentioned The plan is to kind of bring online about 10 more digesters by year end this year. Any sort of like Headwinds or risk we should

Speaker 3

be looking at in terms of bringing that on or is that a pretty conservative number from year end?

Operator

To be specific, we'll be constructing 10 more. So I just want to make sure we get that phraseology right. Perfect. Yes, and we'll have additional ones that are online, but some will be filling, some will be In the construction phase, etcetera, I do expect the pace to be faster because the hard part, which is the pipeline, the RNG facility and the interconnect. That's done.

Operator

All we're doing right now is these rectangular sort of Piles of dirt with layers of rubber on it and a skid with some processing equipment. It's a repeatable activity we're doing now. And so as we move at the pace of USDA funding, because that's actually what is our pace. We are not putting in $25,000,000 of new equity by diluting shareholders. We're putting in $25,000,000 of USDA funding This month with no dilution at all to shareholders.

Operator

So as we move the USDA funding mechanism better and better and faster and faster, and I was On the phone with the USDA this morning on a very positive, hey, we're closing this month kind of discussion. Our job is to continue to be good and get better at 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 agree, have been slower at executing, but it's because we're committed to the idea But our business model needs to work and our business model is leveraging this business without dilution of shareholders and we're proving it in the biogas business.

Speaker 7

Awesome. Thank you so much for that color.

Operator

Sure. Thanks, Henry.

Speaker 1

Thank you. Your next question is coming from Ed Woo from Ascendiant Capital. Please proceed with your question.

Speaker 8

Yes. 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?

Operator

Andy, do you want to respond to that?

Speaker 3

Sure. The logistics are relatively straightforward. It's Corn supply, which currently railroad is showing some improvement over last year. As far as the physical plant startup, it's probably takes about, I'd say, a week for us to get back to full production, Maybe 7 days, maybe 10 days, but it should be relatively quick. So as we're finalizing our plans, we should be able To enter the market relatively quickly and so I think it's pretty straightforward.

Speaker 8

Great. Well, thank you for answering my questions and I wish you guys good luck. Thank

Operator

you. Thank you, Ed.

Speaker 1

Thank you. Your next question is coming from Dave Storms from Stonegate Capital Markets. Please proceed with your question.

Speaker 5

Good afternoon. My first question is with regards to the Keyes plant. Can you just kind of quantify how the economic viability of operating that plant has improved After implementing all the upgrades you talked about and how that may even get better as you complete the upgrades through point or through the end of this year?

Operator

Let me take that on initially and then I'll have Andy wrap it up. We have two factors. Number 1 is External commodity price factors in the Q1, the price of natural gas was tremendously high. It hit a high of $83 intraday trading and it's usually $5 or $6 So that drove us to make decision to accelerate our upgrades and do to accelerate our upgrades and do basically a 10 year plant maintenance cycle, which just positions us tremendously for Lower cost and more sustainable operation. So that external market has now moved To being very, very positive, E15 has created overall demand in the U.

Operator

S. That's much higher over the next 3 or 4 months because The retail stations are no longer going to be forced to have to only sell 10% ethanol during the 3 month summer driving season. Now they can sell 50% more of that. So the California market is going to not receive as much ethanol from 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 6 months ago.

Operator

So our commodity markets have moved in a positive direction, good price of ethanol, reasonable price of corn, good price of natural gas. Internally though, our upgrade projects then give us a fundamental lower cost of operation. We spend over, let's call it $1,000,000 a month on natural gas As we get rid of 80% of that, that's a permanent $800,000 a month or $10,000,000 a year improvement in our economics. Andy, you want to talk about the phasing of adopting the solar NVR in Zebrax process over the next year or so?

Speaker 3

Sure. So to echo what Eric said, there's kind of 2 ways to look at it. The short term, which is really the current market and as Eric mentioned, the From the price of corn to the price of ethanol, the tight supply in California, crush margins in California look pretty positive. I'd say through the summer, We expect that to continue. South America is going to show a strong corn crop.

Speaker 3

Midwest farmers are planting, too early To predict anything about this year's corn crop, but the carry seems to be pretty significant. There were some activity in terms of Corn purchasing by China, a couple of those were canceled. So I think people are pretty comfortable with the current supply and pricing seems to be I've 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 the ethanol perspective in terms of a crush margin. As far as the improvements that In terms of a crush margin, as far as the improvements that we're making at the plant, we're really, if you Take it as an extension of what California is working toward this 0 carbon goal and removing fossil fuels.

Speaker 3

We are probably right at the leading edge if we're not the leader on electrifying large manufacturing facilities. So if you just look at it as a manufacturing Going from using natural gas to electricity is a pretty significant undertaking. And what we're doing is, we've already brought in the Zebrex, the Mitsubishi Subishi's Zebrex dehydration system, which we've run and we're continuing to adjust as we go along because it's Frankly, it's the largest installation they've ever done. So it's got some hiccups along the way, but it's When we run it, we've seen a over 20% reduction in our natural gas consumption, which is, as Eric mentioned, a pretty significant savings for us. The next piece will be mechanical vapor recompression, which is replacing using our existing cogeneration facility, which uses a lot of natural gas to make steam and instead using these large turbofans to generate heat from the process.

Speaker 3

So at the end of those two things, when they're both implemented by the end of next year, we'll have Zebrex is already in the plant, but The MVR system is a more extensive process and the lead time on getting the turbofans 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 ins, tie ins, things that would have required us to actually shut the plant down, say we're in the middle of June and we have a $0.40 press 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 go ahead and make some of those cut ins. 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, the project cost of those, which we would have had to factor in lost production, etcetera.

Speaker 3

So All said and done that we also mentioned earlier that we're putting in a 2 megawatt solar microgrid system, which will help us not only from having a battery backup system in case 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's very important to the plant because We're going from natural gas and increasing 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 CI for the ethanol produced at the Keyes plant, which is, as Eric mentioned, is a long term permanent Benefit to all these projects and that's the benefit for us of spending the money to electrify the plant is we're going to get Better value for the ethanol produced because it will be lower carbon. You add into that eventually the sequestration of our CO2 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.

Speaker 3

So It's sort of a 2 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 Value for Aemetis, because it's going to move us away from 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.

Speaker 5

That's incredibly helpful. Thank you.

Speaker 1

Thank you. That concludes our Q and A session. I would like to turn the floor back over to management for closing comments.

Operator

Good. Thank you very much. I, we really want to thank all of you for Spending time with us today and we look forward to further discussions with you about our plans. We really would invite you to

Speaker 2

Thank you for attending today's Aemetis Earnings Conference Call. Please visit the Investors section of the Aemetis website, where we'll post a written version and an audio version of this earnings review and business update. Matt?

Speaker 1

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Earnings Conference Call
Aemetis Q1 2023
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