Aemetis Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 9, 2023

There are 8 speakers on the call.

Operator

Good afternoon, and welcome to the Aemetis Third Quarter 2023 Earnings Review Conference Call. At this time, all participants are in a listen only mode and 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 Aemetis Incorporated.

Operator

Mr. Waltz, you may begin.

Speaker 1

Thank you, Holly. Welcome to the Aemetis Third Quarter 2023 Earnings Review Conference Call. Joining us for the call today is Eric McAfee, Founder, Chairman and CEO of Aemetis. 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 1

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 limitations, statements with respect to our future stock performance, plans, opportunities and expectations with respect to financing activities and 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 Securities and Exchange Commission filings, which are posted on our website and are 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 serve as a proxy for the company's sources and uses of cash during the period presented, A reconciliation of the non GAAP measures to the most directly comparable GAAP measures is included in our earnings release For the 3 9 months ended September 30, 2023, which is available on our website.

Speaker 1

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, Accretion expense, depreciation expense, gain on litigation and share based compensation, plus Income tax benefit. Let's review the financial results for the Q3 of 2023. Revenue during the Q3 of 2023 decreased 4% to $68,700,000 compared to $71,800,000 for the Q3 of 2022. Our India Biodiesel operation experienced an increase of 121 percent in production by delivering 15,500 metric tons of biodiesel during the quarter of 2023 compared to 7,000 metric tons during the Q3 of 2022. Our California ethanol operation experienced a decrease in the volume of ethanol sold from 15,700,000 gallons in the Q3 of 2022 to 13.8 gallons in the Q3 of 2023.

Speaker 1

Delivered corn price improved from an average price of $9.59 per bushel during the Q3 of 2022 to $7.48 per bushel during the Q3 of 2023. Gross profit for the Q3 of 2023 was $492,000 compared to $1,100,000 gross loss During the Q3 of 2022, our India Biodiesel segment provided $2,800,000 of this gross income. Selling, general and administrative expenses were $9,000,000 during the Q3 of 2023 compared to $6,400,000 during the Q3 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 $8,500,000 for the Q3 of 2023 compared to an operating loss of $7,600,000 for the Q3 of 2022. Interest expense during the Q3 of 2023 was 10 point $2,000,000 excluding accretion and other expenses in connection with Series A preferred units in our Aemetis Biogas LLC subsidiary, compared to $7,100,000 during the Q3 of 2022.

Speaker 1

Additionally, our Aemetis Biogas LLC subsidiary recognized $7,700,000 of accretion and other expenses in connection with preference payments on its Series A preferred units During the Q3 of 2023 compared to $2,800,000 during the Q3 of 2022, Along with a loss on extinguishment on Series A preferred units of an estimated $49,900,000 during the Q3 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 $30,700,000 for the Q3 of 2023 compared to a loss of $66,800,000 for the Q3 of 2022, driven primarily by tax credit sales of $55,200,000 during the Q3 of 2023, Along with the one time unitholder redemption charge of $49,400,000 during the Q3 of 2022. Cash at the end of the Q3 of 2023 was $3,900,000 compared to $4,300,000 at the close of the Q4 of 2022. Investments in capital projects of $8,800,000 were made during the Q3 of 2023, further highlighting our commitment to build ultra low carbon projects. Now, I'd like to introduce the Founder, Chairman and Chief Executive Officer of Aemetis, Eric McAfee for a business update.

Speaker 1

Eric?

Speaker 2

Thank you, Todd. Aemetis is focused on producing below 0 carbon intensity products that reduce air pollution and carbon emissions to improve the environment while providing health and economic benefits to local communities. We are pleased to report That Aemetis has achieved the milestones enabling the transition to positive cash flow from our 3 operating businesses in California and in India. During the Q3, we completed key milestones also in our 2 development businesses. In September, We received approval of the use permit and CEQA 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 CO2 sequestration characterization well, and we generated a profit of $30,700,000 in the 3rd quarter and we paid down $50,200,000 of high interest rate debt In October, we are growing and diversifying our existing dairy, renewable natural gas and 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.

Speaker 2

To further reduce the carbon intensity of our products, An important business that we are developing is the sequestration of CO2 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 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 a plan to grow to $2,000,000,000 of annual revenues and more than 6 to see the steady progress being made on delivering our plan. The Aemetis 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 oil companies under federal law, Inflation Reduction Act Investment Tax Credits and Inflation Reduction Act production tax credits that begin in January 2025. An example of the type of credits that we generate from our low carbon projects is the sale of $63,000,000 of federal tax credits in late Q3 to a corporate purchaser for $55,000,000 in cash.

Speaker 2

These credits were generated which provides about $400,000,000,000 of federal tax credits to projects such as ours that achieve the goals of new jobs, new investment and the decarbonization of energy. This IRA tax credit sale required extensive third party review and oversight, Including a cost segregation consulting firm that issued a verification document, a national law firm that issued a tax memorandum setting forth The first question comes from the line of the IRA Tax Credits, a leading insurance brokerage firm, a 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 to generate IRA investment tax credits in the Aemetis Biogas business at the rate of about 40% for eligible project costs, Creating more than $100,000,000 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 IRA 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 45z is based upon our expected negative 370 carbon intensity At Dairy Renewable Natural Gas.

Speaker 2

After selling discount to a purchaser and tax credit insurance costs, the net proceeds to Aemetis are expected to be approximately $60 per MMBtu of renewable natural gas. Though Inmaz supplies about 80 dairies and approximately 100,000 dairy cows with wet distillers grain animal feed produced by our ethanol plant, Aemetis plans to generate 1,600,000 millimeters millimeters millimeters

Speaker 3

millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters

Speaker 2

millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters

Speaker 3

millimeters millimeters Btus per year

Speaker 2

from only about 60 dairies. As a result, Aemetis plans to grow cash received from the sale of IRA production tax credits from our Aemetis Biogas business to more than $100,000,000 per year, in addition to generating estimated $120,000,000 of investment tax credits from the construction of the qualified biogas assets over the next few years. Let's review our 5 businesses. In the India biodiesel business, dollars 20,100,000 of biodiesel contracts were fulfilled by Aemetis, Principally for the 3 India government oil marketing companies during the Q3 of 2023, generating $2,700,000 of Positive adjusted EBITDA during the Q3. We recently announced a $150,000,000 1 year allocation for biodiesel from the 3 oil marketing companies under a cost plus contract structure.

Speaker 2

We started deliveries under this contract in October. The positive impact of cost plus pricing that is now being used by the OMCs to purchase biodiesel 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 60,000,000 gallons per year of capacity during the Q3. We continue to expand the production capacity of biodiesel Using an enzymatic process, a technology developed by Aemetis at our India plant that allows lower cost, lower grade feedstocks To be used to produce high quality biodiesel, Aemetis believes it is the largest capacity producer in the world Using Novozymes enzymes to convert low cost feedstocks into biodiesel.

Speaker 2

Due to our process technology advantage, The total capital cost of our expansion to 60,000,000 gallons per year was less than $1,000,000 and was funded entirely by our operating profits in India. To meet rapidly expanding demand for Hi, these are owned by the government owned oil marketing companies. We are continuing to expand production capacity in India with a plan of 100,000,000 gallons per year of capacity In 2025, the India market is about 25,000,000,000 gallons of petroleum diesel and the government has set a goal of 5% blend of biodiesel. We expect the cost flights contracts from India government oil refineries will support the addition Of a significant amount of new biodiesel production capacity in India over the next 5 years, with Aemetis continuing to expand capacity beyond 100,000,000 gallons to supply the increasing demand for renewable fuels. The planned export of refined tallow From the India facility to renewable diesel producers in the U.

Speaker 2

S. Is making steady progress with feedstock sales to several biorefinery customers In active discussions, in the Medis Biogas business, this summer we closed the second $25,000,000,000 USDA guaranteed loan To build dairy biogas digesters for an additional 8 dairies. This closing brought our total to $50,000,000 Of committed USDA REAP based project financing, known as Renewable Energy for America program, To build 15 fully funded dairies that are designed to produce a combined 400,000 MMBTUs of renewable natural gas each year. The 3rd $25,000,000 USDA guaranteed loan should be closed by the end of the year, subject to potential delays from a government shutdown. The 4th through the 8th loan are in various steps of the process.

Speaker 2

When closed, these 5 additional rounds of financing Under the Renewable Energy for America program, our schedule to provide an additional $125,000,000 of 20 year project financing for the construction of Aemetis Biogas assets. We now have 7 fully operating dairy digesters and are currently constructing additional digesters For 10 dairies, these dairy digesters are expected to generate approximately 400,000 MMBt per year of renewable natural gas. We expect to have 9 digesters operational by the end of 2023 and plan to speed up the rate of digester development in 2024 As we close financing from the Aemetis Biogas 3, 45 for $75,000,000 of new Financing. A few months ago, we received our default negative 150 carbon intensity pathway approval for 6 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 LCFS ways for credit generation.

Speaker 2

In California, we store the renewable natural gas underground and carry the RNG as inventory until required to deliver to customers. Aemetis and other RNG producers have experienced significant delays in the California Air Resources Board Halfway approval process with some at 24 months and counting. We expect CARB to address This delay in the upcoming reauthorization of the LCFS program in 2024. We noted earlier this year that the dairy digesters were performing above expectations. 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.

Speaker 2

We are pleased to have passed the operational startup phase and are now positive cash flow from operations at Aemetis Biogas. We are selling federal D3 renewable identification numbers at a price that is about 75% higher than a few months ago, As the price of D3 RINs has increased to $3.50 per RIN compared to $2 per RIN in June of this year. The EPA mandate for D3 RINs for the next 2 years significantly exceeds the expected production from biogas projects. So oil companies are competing to purchase D3 RINs driving up the price. We plan to continue to utilize Long term USDA guaranteed REIT loans for the construction and operation of Aemetis biogas projects, we recently paid $30,000,000 to Third Eye Capital pursuant to their financing of the biogas project.

Speaker 2

In addition, the original financing was extended to the end of December for $3,000,000 after which any remaining balance is converted into a simplified promissory note at about 8% lower interest rate than the prior conversion promissory note. In the Aemetis Sustainable Aviation Fuel and Renewable Diesel Business, We received approval for the primary permit for the construction of the 90,000,000 gallon per year SAF and RD plant at the Riverbank site. The use permit and 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 12. The authority to construct air permit is expected to be approved in early Q1 2024. We have signed $3,800,000,000 of supply contracts with 10 airlines And a $3,200,000,000 renewable diesel supply contract with the National Travel Stop Company.

Speaker 2

We are now obtaining the final permits for the development of the plant And due to market conditions, we expect to revise these agreements to reflect updated product timing and terms in 2024. The HEPA process or 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. Aemetis is deploying the topso hydroflex process that enables the production of sustainable aviation fuel and renewable diesel at any output ratio, 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 SAF continues to be delayed, Resulting in significant supply shortages that are expected to continue for the foreseeable future as the 90,000,000,000 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.

Speaker 2

However, renewable natural gas engines allow trucks to generate 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 Renewable natural gas is an important source of renewable hydrogen for future truck engines, allowing the trucks to be 0 emission using a carbon negative fuel. We believe that Aemetis is very well positioned to supply renewable natural gas, hydrogen and below 0 carbon electricity future trucks and cars in California, enabling the transition to 0 emission and below 0 carbon intensity heavy duty and light duty vehicles. For the Aemetis 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 that would have been required to install key components of our energy efficiency upgrades.

Speaker 2

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 July. The plant generated revenues of $47,400,000 during the Q3 and has been running well with the new systems installed and 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.

Speaker 2

When these projects are completed in 2024, we expect that natural gas usage at the Keyes ethanol plant production facility will be reduced by more than 80%. This transformation from fossil fuel natural gas to renewable electricity will put Aemetis at the forefront Decarbonized 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 $10,000,000 solar micro grid with battery backup It will increase the use of renewable electricity at the plant. Our mechanical vapor recompression known as MVR unit Has now completed process engineering design and has begun equipment fabrication for installation late next year. These upgrades as well as replacement or upgrading of various heat exchangers and process equipment and the installation of the new AI enabled decision control system Distributed control system is designed to allow Aemetis to achieve meaningful energy cost savings and increase our revenue through the sale of lower carbon intensity fuel ethanol.

Speaker 2

In summary, despite facing some temporary and Highly unusual external headwinds in the 1st and second quarter of this year in our ethanol business, operational performance and project milestones for the Aemetis Biogas and Ethanol Plant Businesses Continue to be on track with the company plan. In the Aemetis Carbon Capture and Sequestration business, we were awarded the 1st CO2 sequestration characterization well permit Issued by the State of California to a non governmental project in May. The CO2 characterization well is designed to provide geologic data For the EPA Class 6 ejection well planned for the Rubbank site, the recent $5,000,000,000 acquisition of Denbury by Exxon It's an example of the timeliness and relevance of CO2 sequestration to oil refiners and other CO2 emitters. In California, Senate Bill 905 established a public engagement process to resolve specific issues related to CO2 sequestration projects, including royalty rates and the unitization of pore space rights. We continue to focus on the development of project, but we are by the legislative and political process in California that is implementing the regulations for the capture of CO2 To achieve carbon emission reduction targets set by Governor Newsom in a letter to the California Air Resources Board last year.

Speaker 2

The California Air Resources Board has held several low carbon fuel standard public events where staff stated that CARB plans Estimate that the increased mandates will raise the price of LCFS credits to more than $2.20 per credit in the next 2 years. We expect that LCFS credit prices will begin to increase after the January 2024 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 LCFS credits in order to reduce the inventory Of credits. LCFS credits generate revenues for Aemetis in all of our U. S. Businesses and indirectly benefit our India business that can produce feedstock for U.

Speaker 2

S. Renewable diesel and sustainable aviation fuel biorefineries. Currently, Aemetis captures 150,000 metric tons per year of CO2 emissions from our Keyes ethanol plant and reuses the CO2 for local customers. This reuse of CO2 can generate 45Q transferable tax credits under the Inflation Reduction Act. In Phase 1 of the Aemetis Carbon Capture Project, we plan to inject up to 400,000 metric tons per year of CO2 emissions from our biogas, ethanol and jet diesel plants Into 2 sequestration wells that we plan to drill near our 2 biofuels plant sites in California.

Speaker 2

We expect to construct 2 CO2 injection wells that 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 2,000,000 metric tons per year of CO2. The planned 2,000,000 metric tons of CO2 per year sequestered by the Aemetis carbon capture projects are expected to generate an expected $170,000,000 per year from federal direct pay tax credits Or about $85 per metric ton of CO2, as well as an estimated $400,000,000 per year At a projected $200 per ton of sequestered CO2 from the low carbon fuel standards, We believe the fixed amount of $850,000,000 provided by the DirectPay funding over the next over the 1st 5 years of project operation should support funding the estimated $250,000,000 capital cost for the 2 injection wells and related equipment. In summary, all of the 5 Aemetis businesses are synergistic and create what we refer to as a circular bioeconomy within Aemetis. We use the biofuels, byproducts and waste products from our facilities and local areas as feedstock to produce low and negative carbon intensity renewable fuels To meet government mandates for air quality improvement and carbon emissions reductions, 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 Aemetis.

Speaker 2

Our existing facilities are focused on products projects, I'm sorry, that improve energy efficiency, Reduced 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 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. Oli?

Operator

Thank you, Mr. McAfee. We will now be conducting our question and answer session. Thank you. Our first question is coming from Manav Gupta with UBS.

Operator

Your line is live.

Speaker 4

Good morning, Eric and team. So the first question would be on the CARB staff proposal. We believe you also played a very key role in getting across the line. Looks like a very positive program, 50% increase in compliance by 2,030 and then obviously the ratchet mechanism which pulls the program forward. What the bears are saying here is that given where the levels are currently and given that we would continue to build probably till 2024 end, That carbon prices may or may not move even into late 2024 or early 2025.

Speaker 4

And you obviously on the call said you expect Earlier movement. So first of all, can you comment a little bit more on the program, what you liked? And then why do you believe that the carbon prices would actually start moving in 2024 This is 2025.

Speaker 2

I think that the traders that work for major oil companies are very smart people. And what they're looking for is certainty, not just for a month or for a quarter. They're 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 their 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 is a lot of political confusion Between environmental groups and 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 2024 and the Board has stated that they intend to approve the implementation To be effective in the Q2 and I think that kind of certainty is going to immediately allow people to calculate What they each entity will require in future LCFS credit mandates and if the automatic Ratchet mechanism is written the way that they proposed.

Speaker 2

It's going to be very clear that the more LCFS credits generated, The more rapidly the automatic ratchet mechanism will move you to further additional compliance. It will move forward 1 year. And for example, in year 2030, it drops very significantly between 2,030 and 2001. And so Though the ratchet mechanism doesn't have to wait until 2,030, I think that the calculations could easily be that the first ratchet might be as early as 2026. So as people game out, okay, how many LCFS credits we're going to need are we going to need, they're going to conclude exactly what Karp put on Slide 51 Of their February 2023 webinar, which was under any scenario, the ratchets mechanism plus The one time step down, there will not be enough LCFS credits presented by renewable diesel and SAF, etcetera, Coming to the market and once you conclude that, then you need to conclude that you're going to go buy as much as you can to minimize future compliance liability because the price is going to be triple what it is today.

Speaker 2

So what I just said took me a lot longer than will take for a trader to conclude this And say just buy what you can and let's see how fast the price moves. And once you get that momentum, I don't think it's going to take a year and a half For the market to say we just need to get to the cap and we need to be there as fast as possible because we need to As the price moves up, you're 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 is there's already a built in cap, there's a built in mechanism to make sure the market doesn't Overheated in terms of price, it will not go to $300 or $400 It will stop at a cap. And We saw we were very close to the cap in August 2020.

Speaker 2

The reality is we probably will be there again in 2024. I wouldn't be surprised at all if these traders very quickly move the price once certainty is in place.

Speaker 4

Thank you, Ash. Let's hope that plays out exactly as you said. My quick second follow-up is moving from California to federal level, We still haven't got the full guidance on 45z, but for a company like you where the RNG Carbon intensity can drop closer to like $375,000,000 $400,000 Like if they don't cap it, does that mean you could like make $7 or $8 a gallon In 45z credits on top of what you make on LCFS for your RNG projects and given you're looking to target SAP of 0 carbon intensity, that's like a Dollar a gallon, does that math sound right, sir?

Speaker 2

It does. Each one of our businesses have different carbon intensity. The renewable natural gas is going to be the big winner, not just us, but any dairy renewable natural gas producer under the Flaseless Reduction Act 45 Z section is going to be able to, in our case, be about a $68 per MMBtu. Each MMBtu It's 7.2 diesel gallon equivalents. So if you take 68 divided by 7.2, obviously that's A very attractive amount per diesel gallon equivalent, but it's based upon having a negative 370 carbon intensity, which you're not going to achieve with Renewable diesel or other fuels anytime soon.

Speaker 2

So the big winner in the 45C is dairy renewable natural gas, landfill renewable natural gas. The numbers I've seen is positive 30. We're negative 3.70. They're positive 30. So yes, they're going to generate 45z, but probably at 1 5th the rate at which one of our programs in some other cases 1 10th the rate of what we're doing.

Speaker 2

The calculation of 45z is by the way done by the same people that we just closed this $55,000,000 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 something brand new. This is something we've been working on for more than a year and we are fairly comfortable That's been thoroughly vetted by a wide number of our advisors and they all come up with roughly the same calculation.

Speaker 2

So We are expecting after a discount for sale about $60 per MMBtu, it would be the net proceeds to us.

Speaker 4

Thank you for detailed responses. Thank

Speaker 2

you. Thank you, Manav.

Operator

Thank you, sir. Our next question is coming from Derrick Whitfield with Stifel. Your line is live.

Speaker 5

Thanks and good morning, Eric and team.

Speaker 2

Hi, Derek.

Speaker 5

Eric, I wanted to start it with 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 and also the absolute level of the principal amount and interest rate?

Speaker 2

Sure. The refinancing of the biogas preferred is structurally an extension, which is what we did December last year, May of this year and now August of this year. This is our 3rd extension of the existing financing. The extension, which includes the months of September, October, November December 4 months is an additional increase of $3,000,000 So the $135,000,000 will be $138,000,000 but we just paid $30,000,000 down. So It's $108,000,000 will be the balance at the end of December.

Speaker 2

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%. The prior note was 24%, so it's about 8% interest rate. It's 1 third lower interest rate than what it was in the prior In 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 in a certain amount, but it is papered automatically conferred.

Speaker 2

So In the absence of us agreeing with Third Eye to extend, then it would just automatically converge into this interest bearing note In the amount of $108,000,000 at the end of the quarter. We do have a number of Counterparties we're working on right now that would substantially change this 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.

Speaker 5

That's great. And for my follow-up, I wanted to confirm a couple of points From your prepared remarks on dairy RNG, first, I think you heard I think I heard you say a new CI score of 370, negative 370. Is that due to RNG volume over performance? And then secondly regarding the non projects that are online by year end, Could you comment, I think there's a slight delay with some of the projects you were expecting to come on, just maybe comment on the source of those delays?

Speaker 2

Yes. Actually, you were exactly right. The increased volume of biogas production and the way that impacts our CI score Caused our CRI score to decrease from roughly at 415 to 370. It's just frankly just reflects that there's only a certain amount of carbon intensity reduction per cow. And so our process is producing more biogas molecules than expected means that the overall carbon intensity per molecule is Slightly less.

Speaker 2

The overall economics by the way pretty much unchanged from the perspective of the number of credits you get, but we do get more revenues and more D3 rents And the D3 RINs having increased from $2 to $3.50 means that more D3 RINs is a very, very good thing. 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. The first one took 20 months. The second one is roughly 8 months.

Speaker 2

We expect to be able to execute on these in the 5 to 6 months time schedule on a go forward basis. So there's education involved. There's new staff members at the USDA, etcetera, that need to be educated. And so we are Committed to doing it right though because we end up with 80% of loan guaranteed by the U. S.

Speaker 2

Taxpayer and more important than interest rate. Yes, it's true. The interest rate is lower than market. Got it. 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.

Speaker 2

There is not a 20 year loan available for biofuels projects other than a U. S. Guaranteed transaction 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 the business model and they similarly have the goal Of doing this quicker and more efficiently.

Speaker 5

That's great. Thanks for your time.

Speaker 2

Thank you.

Operator

Thank you. Our next question is coming from Amit Vail with H. C. Wainwright. Your line is live.

Speaker 6

Thank you. Good afternoon, everyone. So Eric, if you don't mind, can we go over some of the biogas numbers you provided in your commentary? So you're saying you'll be at 9 digesters at the end of 2023. How many should we expect By the end of 2024?

Speaker 6

And then how does that number play alongside your comments about generating over $120,000,000 in PTC and $100,000,000 in ITC in 2025, I believe?

Speaker 2

Yes. The $120,000,000 of investment tax credits is actually over the course of the build out of the project. The updated plan which we'll put out in Q1 will show you what the actual impact of that is on a quarterly basis. The average number of MMBTs per dairy is about 25,000 per dairy. What's happening is we're getting much bigger dairies and we're actually getting dairies that are consolidating with Dairies Next Door.

Speaker 2

And we're finding that the language of 1 dairy equals 25,000 millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters BTUs 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 were going to be processing the waste from. That much more accurately reflect What is for people's calculation purposes. So when you say we're adding another 10,000 cows, you'll be able to then say, oh, by the way, that means X Number of MMBQs. So between this call and the next call and certainly in the 5 year plan, you're going to see a transition to what's called wet Cow equivalents.

Speaker 2

So different kinds of cows you get to in the industry all calculated by one simple number at the WCE And then the number of MMBTUs per year and then it's very easy math for everybody. And so the answer is in 20 We have some very, very large digesters. I think some of the industry's largest digesters are being built by Aemetis right now, Which takes multiple dairies, a waste and in a very efficient process, we have one that's 4 dairies. We're building 1 large digester, but we're bringing 4 dairies online all at the same time. So the pace of dairy development It's very rapid in 2024.

Speaker 2

Digester development is larger digesters in several cases. And so I think the language we're going to start changing to is just how many cows and that will make it much, much easier for everybody to think about and calculate it. So we'll be coming out with those numbers certainly in the Q1 in our updated plan. You'll be seeing it in press releases. We'll probably do a year end wrap up press release on some of the achievements of the year in Aemetis And talk about using these wet cow equivalent calculations.

Speaker 2

So let me hold back until we put those things on paper Because we're rapidly accelerating the program and as we expect to close the third $25,000,000 funding from the USDA and have 4th, 5th, 6th and 7th all in process. Those are all feeding into the pace of 2024.

Speaker 6

Okay. Thank you for that. We'll keep an eye out for it. And then in relation to the monetization From the IRA for the biogas credits.

Speaker 3

Is this

Speaker 6

going to be lumpy in the future, Eric? Or going forward, will this be a more sort of Quarterly number that will show up in the financials?

Speaker 2

It's a very good question. It's actually, I would say, a core Question about the valuation of the company today. Our particular customer in this situation is a company That really would prefer $50,000,000 or more per transaction. They have a very large tax liability On a monthly basis. And so, we transacted this in a very efficient way In which we aggregated them all together and did one transaction for $63,000,000 of tax credits.

Speaker 2

We do not to be transacting quarterly until 2025, roughly a year from now. The reason why is because these investment tax credits Our spread out over a longer period of time are not $50,000,000 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 Q4. We largely Again, time those transactions based upon just the aggregate volume.

Speaker 3

So, it

Speaker 2

will not be every quarter for the 4 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 $15,000,000 per quarter from the production tax credits and the investment tax credits Together in our various businesses in the Q1 and thereafter in 2025. So We have stated publicly it's a total of about $800,000,000 coming into the company.

Speaker 2

And So other than 2024, it does end up being a bit of a quarterly after tax benefit and cash benefit to the company And just it's going to be lumpy in 2024. Okay. Thank you for that. Amit, let me mention to you, the way that the production tax credits are represented is They are another source of revenue. Just like low carbon fuel standard credits, our revenue and the federal D3 RINSR revenue and the molecules revenue, The production tax credits will not be shown on our income statement the way that our investment tax credits are.

Speaker 2

They will show up just like revenue. So every quarter revenue is higher. They're an after tax benefit. So earnings is higher, EBITDA is higher. It will just be like an LCFS, RFS Or even a molecule sale, it's a source of revenue.

Speaker 2

The investment tax credits show up As a it's not it's an other income. It's a tax benefit is what it shows up as. And that 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 and L below operating income. It does, of course, as we know, show up as after tax income.

Speaker 2

So our earnings per share goes up, but it doesn't come into EBITDA as investment tax credit does not come into EBITDA. It comes into cash and it goes into earnings. And it's confusing to many investors I know, but that's what it is. It's like EBITDA plus cash because most people don't think of tax actually creating any cash? In this case, it does.

Speaker 6

Yes, I guess, folks will have to start looking at the cash flow profile from a valuation standpoint going forward on this.

Speaker 2

Yes. Well, I think when we get the production tax rate, it's going to be very easy because they won't have to do much calculating. It will just be in revenue, it will be in earnings, It will be in operating income. It's going to be very easy. It's primarily this $120,000,000 of future investment tax credits and we do have some other things we're doing We expect to generate investment tax, but it's I think that's where people are going to get confused.

Speaker 2

We got the cash, but it's not revenue, right? We got the cash, but it's not an EBITDA. So what is it? Well, it's people are going to be confused about that part of the business. It's just something that we're going to have to deal with.

Speaker 2

It's you know what it really is? It's this reduction of high interest rate debt. We have $120,000,000 more of reduction of high interest Trade debt, that's one clean way to think about it, is that your earnings go up because your debt goes down.

Speaker 6

Right. No, no, I get it. And we saw that in the financial testing already.

Speaker 2

Yes, we paid $50,200,000 of debt on this one. Yes. Go

Speaker 6

ahead. On the India biodiesel capacity ramp 200,000,000 How much investment is needed and will the cash flows from that operation basically fund that expansion?

Speaker 2

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 going to all be paid by cash flow in India.

Speaker 6

And then how does that set you up, So you previously said you might monetize that asset in some fashion. So now The facility is operating in a sort of more regular fashion. Are you considering Some of those options you had previously highlighted?

Speaker 2

We are currently hiring at the executive levels in India. So 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 It is the right market. I personally strongly prefer the SINCEX. The structure for companies going public is very, very favorable.

Speaker 2

So if for some reason 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 places we could do a public offering. Understood.

Speaker 6

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

Speaker 2

Thank you, Amit.

Operator

Thank you. Our next question is coming from Matthew Blair with TPH. Your line is live.

Speaker 7

Hey, good afternoon, Eric. Hey, Matt. Hi. I was hoping you could talk a little bit more about the California Ethanol segment. What was EBITDA for that segment in the quarter?

Speaker 7

It looks like your realized ethanol pricing Might have been a little bit softer than expected. Could you talk about the drivers there? And then you've poured a fair amount of investment into this plant. Are some of these projects up and running? Or is it really 2024 when we'd expect to see the upside from things like the Zebrex plant and the solar grid and those sorts of investments?

Speaker 2

Let's talk projects first and we'll revert back to EBITDA. The decarbonization of the ethanol plant is a new idea for many folks unless you're getting a low carbon fuel standard credit, means you're delivering your product in California, pretty much 100% of your product. You don't really get paid for it. So many plants Benefit from coal fired electricity, for example, just really cheap and many plants were built specifically because they have access to cheap coal fired Kind of electricity. So our projects was move us to renewable electricity.

Speaker 2

We have a $10,000,000 solar project, Which is literally doing the cutovers here in the next couple of weeks and then we have the tuning process. So we'll be fully operating In a month and be doing the final adjustments. So we're looking for an early Q1 full operation of that unit. We got an $8,000,000 grant from the California Energy Commission to do that decarbonization. But in order to fully utilize that renewable electricity, we need to have systems in the plant that do not run on petroleum natural gas.

Speaker 2

So the mechanical vapor recompression concept, which is widely used in industry, specifically in the dairy industry at creameries, Recompresses your steam by using large electric fans like the powered fans to force the air Into higher pressure, which increases its temperature. So recompressing using electricity means that we can Significantly reduced literally by 80% our petroleum natural gas use that comes from very carbon intensive energy source. That decarbonization will not fully be in place until we have implemented our MDR, which is currently structured to be at the end of 2024. So we're upgrading the energy sources that's solar that's online literally next month and tweaked in full 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.

Speaker 2

The MDR economics generate in excess of $1,000,000 a month of improved margin By saving us today about $800,000 a month of natural gas and then through a lower carbon ethanol generating almost equivalent amount of increased ethanol value. So after the increased cost of electricity is subtracted, It's a $15,000,000 per year increase in cash flow at the ethanol plant. We have some other things that are smaller, the artificial intelligence Some other things that are just optimizing what we're doing. So our overall initiative here though It's reduced costs, increased revenue and in so doing be able to pretty consistently generate A couple of $1,000,000 a month. Even if all of our competitors are breaking even, we're still making a couple of $1,000,000

Speaker 7

Sounds good. And do you have the EBITDA for that segment in the quarter?

Speaker 2

It was roughly breakeven. This was the start up this was the completion of our start up. 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 start up.

Speaker 7

Okay. And then my follow-up is on, you mentioned the LCFS pathway delays that you're experiencing and Just wanted to see, is that something that's unique to the complexity in low CI of dairy RNG? Or Is that something that's affecting everyone across the board? And is your best guess now that you'd receive that pathway by Q2 'twenty four That's when you start to show EBITDA for the dairy RNG segment?

Speaker 2

There are Tier 1 and there are Tier 2 pathways, one of which is a relatively formulaic and quick, for example, In ethanol plant decarbonizing calculation that might take 3 to 4 months for that Pathway to be approved because it's fairly standard and it's changing a couple of the elements. The biogas industry in general It's 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 Developers that are not very familiar with this process and require a lot of handholding by card 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 the largest LCFS ethanol producer in the history of California at our plant. And so We are our experience and our know how is not giving us any benefit.

Speaker 2

We're literally in a pile With a bunch of people that may never have done this in their entire life. So our problem is that we're waiting for CarB To fix this in the next go around, a very easy fix is just change your default pathway to negative 350. So during this time period in which we're waiting, we're already generating these local and fuel standard credits. We generate them at the rate that's More accurate. Currently, their negative 150 default rate is just not accurate.

Speaker 2

It's just wrong. And so We I've got public statements. You want to Google Andy Foster or Eric McAfee, you're going to find that we are Very active on this topic and interfacing with the top people all the way to the number one top person at carb on this particular topic and their general response is, Yes, we need to fix it. Yes, it's a good solution. Yes, we need to do something about it.

Speaker 2

So January 2024, we expect that To be an element of what they're doing, they have changed staff management in the program within the last month. So maybe there's going to 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 process of decarbonization. It is absolutely A problem that Carve needs to focus on and it's far past fixing. They should have fixed it 2 years ago.

Speaker 7

Got it. Thank you very much.

Operator

Thank you. Our next question is coming from Dave Storms with Stonegate Capital Markets. Your line is live.

Speaker 7

Good afternoon.

Speaker 2

Hello, Steve. How are you doing?

Speaker 3

I'm good. Just curious if you could talk a little bit about the pathway to Increasing capacity at the biodiesel plant. I know the OMCs do a lot of gatekeeping over there, but just curious as how you see that playing out over 2024?

Speaker 2

Absolutely. We are very fortunate in that Unlike California, which has a very long, long permitting cycle, permitting in India is not really a constraint on our timeframe. It's mostly equipment fabrication that is the lead time on what we're doing there. So our vendor in this matter is the same vendor we used the original construction of the plant, they had last time I checked over 600 employees in India. They actually fabricate equipment in India.

Speaker 2

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 continuing to invest in this capacity increase. We are committed to the idea that India is largely a debt free And indeed, so as it generates cash, we can use it for capacity increase. And when we get to 100,000,000 gallons, it's quite a large business in India. That's a $400,000,000 plus revenue business in India and at the margins that we get with enzymatic biodiesel, which is roughly 10% higher margins than our regular business because of lower cost feedstock.

Speaker 2

We're going to Be very pleased with the outcome of that capacity expansion. So it's going to be a gradual process. It's a process that we're expecting to mature in 2025 and very possibly might include some other growth initiatives of which we haven't announced yet. But initially, this is Just the first step in trying to meet this more than 1,000,000,000 gallon gap in India production that the India government is trying to have us Be a part of fixing.

Speaker 3

Understood. Thank you. And then just a question of a similar nature. Now that you have the permit at Riverbank, Can you just talk us through kind of what logistics and timelines look like for next steps, any milestones that we should keep an

Speaker 2

eye out for Going forward? Sure. We have what's called the authority to construct the ATC permit that is issued by the Here in district and that's in process right now. We expect to announce that in early Q1. And then at that point in time, we're just in full Completion mode on the project financing, the EPC, the Engineering Procure Construct Agreement, which Sets all pricing will be completed in order to then have the solid financing numbers in place.

Speaker 2

So that all is happening Q1, Q2 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 SAF. And so there's a number of peer financial players, there's strategic players, there's Technology providers that we already do business with, there's a lot of people who are very, very interested in being direct investors at The entire side, 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.

Speaker 2

But those discussions are basically lining up for the air permit, the authority to construct And then the EPC agreement, the actual fully full wrap guaranteed contract with our contractor, we've already announced that we intend to use a $2,000,000,000 revenues per year company called CTCI, Who does have experience in renewable diesel plants in California and has proven themselves to be a contractor that's willing to Get in there and really work when the going gets tough. And we think that it's a great opportunity to work with a proven California Contractor in our industry.

Speaker 3

Understood. Thanks for taking my questions and best of luck in Q4.

Speaker 2

Thanks, Dave. Appreciate the time.

Operator

Thank you. Our final question today will be coming from Ed Woo with Ascendiant Capital, your line is live.

Speaker 5

Yes, congratulations on the quarter. My question is on the Inflation Reduction Act tax credit that you sold. You sold $63,000,000 for $55,000,000 As you move forward and get more experience selling these, would you be able 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 and completing the sale of these tech credits?

Speaker 2

The discount is primarily driven by the Non buyer discount, the buyer discount is only a part of the transaction costs. The insurance policy and other costs In this one transaction, we're reflective of the first time 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 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%.

Speaker 2

And it's a 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'll not have a discount at all because we'll just apply it to our own income tax obligations.

Speaker 5

Great. Well, that's definitely a great opportunity. Thank you for answering my question and

Operator

Thank you. There are no further questions at this time. So I would like to turn the floor back over to management for closing comments.

Speaker 2

Thank you to the Aemetis shareholders, analysts and others for joining us today. Please review the Aemetis Company presentation that is posted on the homepage of Aemetis website. We look forward to talking with you about participating in the growth opportunities here at Aemetis.

Speaker 1

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

Operator

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

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Key Takeaways

  • In Q3 2023, Aemetis reported revenue of $68.7 million (down 4% y/y) with a gross profit of $0.5 million and net income of $30.7 million versus a $66.8 million loss a year ago, driven by $55.2 million in U.S. tax credit sales.
  • The India biodiesel segment ramped production 121% to 15,500 MT, expanded to 60 million gallons capacity debt-free under cost-plus contracts, and plans to reach 100 million gallons by 2025 under a $150 million government allocation.
  • Aemetis Biogas achieved positive cash flow with seven dairy digesters online (nine by year-end) producing ~400,000 MMBtu of RNG annually, and expects to generate over $100 million in IRA investment tax credits plus $100 million in production tax credits from its negative CI of –370.
  • At the Keyes California ethanol plant, completion of a $10 million solar microgrid, AI-driven control system and mechanical vapor recompression unit will drive full operation in Q1 2024, cutting natural gas use by over 80% and lowering carbon intensity.
  • The Riverbank sustainable aviation fuel and renewable diesel project secured use and CEQA permits for a 90 million gallon/yr facility with $7 billion in offtake agreements, and anticipates its air permit in Q1 2024 to advance EPC contracting and financing.
AI Generated. May Contain Errors.
Earnings Conference Call
Aemetis Q3 2023
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