Aemetis, Inc. (AMTX) on Q3 2022 Results - Earnings Call Transcript
Operator: Welcome to the Aemetis Third Quarter 2022 Earnings Review Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Mr. Todd Waltz, Executive Vice President and Chief Financial Officer of Aemetis, Inc. Mr. Waltz, you may begin.
Todd Waltz: Thank you, Paul. Welcome to the Aemetis Third Quarter 2022 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, filing 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. Before we begin our discussion, I'd like to read the following disclosure -- disclaimer statement. During today's call, we'll be making forward-looking statements, including, without limitation, statements with respect to our future stock performance, plans, opportunities and expectations with respect to financing activities and the execution of our business plan. These statements must be considered in conjunction with the disclosures and cautionary warnings that appear in our SEC filings. 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 available from the company without charge. Our discussion on this call will include a review of non-GAAP measures as a supplement to financial statements based on GAAP. A reconciliation of the non-GAAP measures to the most directly comparable GAAP measures is included in our earnings release for the three and nine months ended September 30, 2022, which is available on our website. Adjusted EBITDA is defined as net income or loss, plus to the extent deductible in calculating such net income, interest expense, loss or gain on debt extinguishment, income tax expense, intangible and other amortization expense, accretion and other expenses of Series A preferred units, loss on lease termination, gain on litigation, depreciation expense and share-based compensation expense. Now I'd like to review the financial results for the third quarter of 2022. Revenue during the third quarter of 2022 increased 44% to $71.8 million compared to $50 million for the third quarter of 2021. Our California Ethanol business experienced steady sales pricing with an increase in the volume of ethanol produced and sold at 15.7 million gallons in the third quarter of 2022, up from 13.8 million gallons in the third quarter of 2021. Delivered corn price increased 15% from an average price of $7.99 per bushel during the third quarter of 2021 to $9.59 per bushel during the third quarter of 2022. Our India Biodiesel segment began delivering product under a tender offer to governmental oil marketing companies in mid-September, delivering $11 million of biodiesel in about two weeks under this tender offer. Gross loss for the third quarter 2022 was $1.1 million compared to $4.8 million gross loss during the third quarter of 2021. Our California Ethanol segment accounted for $3.8 million of gross loss with offsetting gross profits of $2.8 million from our India Biodiesel segment. Selling, general and administrative expenses were $6.9 million during the third quarter of 2022 compared to $5.1 million during the third quarter of 2021 as a result of investments in our ultra-low carbon initiatives and noncash charges for stock compensation. Operating loss was $7.6 million for the third quarter of 2022 compared to an operating loss of $9.9 million for the third quarter of 2021. Interest expense for the third quarter of 2022 was $7.1 million, excluding accretion and other expenses in connection with Series A preferred units and our Aemetis Biogas subsidiary, compared to $5.5 million during the third quarter of 2021. Additionally, our Aemetis Biogas subsidiary recognized $1.3 million of accretion and other expense in connection with preference payments on its Series A preferred units during the third quarter of 2022 compared to $2.2 million during the third quarter of 2021, along with a loss on extinguishment on Series A preferred units of $53.9 million during the third quarter of 2022 as a result of a charge related to the redemption of Series A preferred units as part of the amendment to the preferred unit purchase agreement. The redemption charge reflects the expected valuation premium for the redemption of Series A preferred units by Aemetis. Management engaged third parties to assist with the accounting and fair value calculation. Management is completing our final review of the accounting and related charges. At this time, we do not believe the amounts will materially change during the third quarter as a result of filing the Form 10-Q, which will be subsequently filed to this earnings release. Net loss was $69.8 million for the third quarter of 2022 compared to a net loss of $17.6 million for the third quarter of 2021, driven primarily by the one-time unitholder redemption charge of $53.9 million or $1.55 per share. Absent this one-time charge, the net loss was $16 million, representing $0.46 per share. Cash at the end of the third quarter of 2022 was $251,000 compared to $7.8 million at the close of the fourth quarter of 2021. Investment in capital projects of $13.7 million were made during the third quarter of 2022, further highlighting our commitment to execution of multiple low-carbon products -- projects. This completes our review of the third quarter of 2022. Now I'd like to introduce the Founder, Chairman and Chief Executive Officer of Aemetis, Eric McAfee, for a business update. Eric?
Eric McAfee: Thank you, Todd. Aemetis is focused on producing below zero carbon intensity products, including negative carbon intensity renewable natural gas and renewable aviation and diesel fuel with renewable hydrogen and carbon sequestration. Our projects generate sustainable and innovative renewable fuels that benefit our communities and restore our environment, while generating tax and other credits from federal and state carbon reduction programs. We seek to reduce feedstock and operating costs by using waste materials and zero carbon intensity energy for the production of renewable fuels. Let's start by talking about the estimated $55 million unitholder redemption charge in the third quarter related to our Aemetis Biogas business. The unitholder redemption charges related to the repurchase of preferred units from the preferred investor in the Aemetis Biogas subsidiary. Before counting the redemption charge, Aemetis had a loss of $0.46 per share in the third quarter, which is within the range of expectations. The unitholder redemption charge is a noncash accounting entry that was taken in Q3 2022 related to an agreement that was reached between Aemetis and the biogas preferred equity investor to repurchase 100% of the outstanding preferred equity in Aemetis Biogas. The motivation for the expected redemption of the preferred equity by Aemetis includes several factors, including biogas industry transactions at high valuations that increased the value of the Aemetis Biogas preferred units as well as a discussion of whether a spin out of the subsidiary into a SPAC, IPO or sale should be considered. As most of you know, OPAL went public at a pre-money valuation of about $1.2 billion last year. And recently, Archaea was sold for $4.1 billion to BP, which included $800 million of Archaea debt. We believe these transactions are interesting comparables to Aemetis Biogas, especially considering the dairy renewable natural gas generates an estimated 10x more California Low Carbon Fuel Standard credits compared to the landfill renewable gas primarily produced by both OPAL and Archaea. Aemetis Biogas with a carbon intensity score of negative 426 is expected to generate about 500 LCFS credits, compared to landfill gas at a positive 30 carbon intensity, which generates only about 50 LCFS credits. After considering the future value of over 60 digesters planned by Aemetis Biogas to generate an expected 1.65 million MMBtus per year, compared to the approximately two million MMBtus of landfill RNG currently produced by Archaea at 1/10 the number of LCFS credits. Aemetis has made a strategic decision to acquire the preferred equity Aemetis Biogas from our investor who was seeking a liquidity event -- liquidity event without waiting for the completion of project development. In the third quarter of 2022, Aemetis negotiated a redemption of all of the preferred equity of the Aemetis Biogas subsidiary and booked an estimated $55 million noncash Series A preferred unitholder redemption expense in Q3. This $55 million charge was not paid in cash, but represents an expected future transaction in which a Aemetis has the right to redeem 100% of the Aemetis Biogas preferred equity. Usually, the redemption of preferred equity is shown as a dividend, not as a nonoperating charge on the income statement that reduces earnings per share. In this case, the accounting guidance determined that the certainty of the redemption and other known features of the buyout of the preferred unitholder supported recognizing the $55 million as debt that was redeemed at a premium, rather than as a dividend to the preferred equity owners that would have been shown on the balance sheet, not on the income statement, and would not have reduced earnings per share. Let's discuss our financing plan and the progress we're making in funding the growth of Aemetis. In early 2022, we announced an updated five-year plan, which projected revenues to grow to about $1.5 billion and projected annual EBITDA to increase to more than $460 million per year by year 2026. In 2021 and 2022, Aemetis repaid more than $80 million to Third Eye Capital to reduce higher interest rate bridge loans, which has now expanded our access to lower interest rate funding. Our plan is to fund growth by using positive cash flow from our ethanol, biogas and India biodiesel and glycerin production facilities. Enhanced by a new up to $100 million working capital and project development, financing credit facility that was signed with Third Eye Capital in March of this year. After completing preliminary engineering, permitting and site control for each project, we then plan to obtain project financing at the project level using low interest rate, U.S. government guaranteed long-term 20-year loans to fund project construction and operations. This financing model minimizes or eliminates shareholder dilution, while enabling rapid growth in revenues and earnings as projects are built. And this financing model is working, even with rising interest rates, creating difficult debt market conditions and currently low LCFS credit prices. In the past two quarters, we have received funding of about $50 million from the two credit facilities provided by Third Eye Capital at interest rates at only 8% and 10% per year. This new $50 million of growth lending has supported the construction of a solar energy system and many other carbon reduction projects at the Keyes ethanol plant, the financing land purchases, the engineering, permitting and related equipment for the renewable aviation and diesel fuel plant and the pre-project engineering and drilling pad construction for CO2 characterization and sequestration wells. As an example of our long-term financing strategy, Aemetis recently closed a $25 million project financing, supported by the U.S. Department of Agriculture, Renewable Energy for America, known as REAP program, to fund dairy biogas digesters and biogas pipelines to produce renewable natural gas. The financing this month was completed at a 6.2% interest rate that is fixed for five years and has a highly favorable 20-year repayment of principal. Let me clarify that, that was the month of October. Regarding regulatory credit price trends. In August of this year, California Governor Newsom issued a letter to the Chairman of the California Resources Board, specifically requesting a significant increase in the pace of decarbonization in California. The letter stated a 100 million metric tons of total CO2 sequestration as a specific goal. The release of the Draft California Resources Board LCFS scoping plan in early 2023 is expected to increase the number of credits required under the Low Carbon Fuel Standard program. We expect that LCFS credit prices will rebound as traders learn more about the number of LCFS credits that will be required to meet the expanded decarbonization goals set forth by CARB. In addition, the federal Inflation Reduction Act was passed recently and is expected to have a significant positive impact on renewable energy in general and our businesses specifically. We are completing a review process of the IRA with our tax advisers and expect to release a revised 5-year plan in Q1 2023. That will include the impact of legislation on our business. We are investing a significant amount of tax lawyer and tax accounting resources into the IRA review process to develop and implement specific business structures that should maximize the value of the tax credits available under the Inflation Reduction Act. As a reminder, the provisions of the Inflation Reduction Act related to Aemetis. First, a 30% investment tax credit for renewable natural gas capital investments. The ITC for renewable natural gas projects is expected to result in up to $180 million of cash received by Aemetis at the rate of approximately $30 million per year for the next five years from Inflation Reduction Act investment tax credits. Next, a $1.25 to $1.75 tax credit for sustainable aviation fuel and a $1 tax credit for renewable diesel. The IRA sustainable aviation and renewable diesel fuel tax credit is expected to result in up to $112 million per year to support the construction and operation of the 90 million-gallon per year Aemetis Carbon Zero Plant in Riverbank, California. If extended over the 10-year period of our contracts with certain airlines and monetized efficiently, the SAF and RD tax credits in the Clean Fuel program of the Inflation Reduction Act could provide more than $1 billion of cash to repay an estimated $400 million of project funding. This potential $1 billion from IRA tax credits over 10 years is in addition to the revenues from California Low Carbon Fuel Standard credits, federal renewable fuel standard D5 RINs and the sale of the aviation and diesel fuel. Next, an increase in the carbon sequestration tax credit from $50 to $85 per metric ton of CO2, but paying the credit in cash as an IRS tax refund to companies in a process called Direct Pay for the first five years, followed by seven years of additional tax credits. We are developing two injection wells located at the two Aemetis biofuels plant sites in California to sequester a planned 2 million metric tons per year of CO2 into a saline formation approximately 7,000 feet underground. A planned two million tons times $85 per ton equals $170 million per year of cash that could potentially be paid to Aemetis by the IRS each year for the first five years of the project, providing approximately $850 million of IRS funding in the aggregate to repay the capital costs and operating costs of the two projects. With another seven years thereafter, the same yearly rate, generating an expected aggregate amount of tax credits valued by management at an additional $1.2 billion, the total value of the $85 per metric ton tax credit would be $2 billion in the first 12 years of operation of the two Aemetis carbon sequestration wells. And lastly, several provisions in the IRA legislation are valuable to the Aemetis Ethanol business, including a tax credit for low carbon intensity ethanol, $500 million for biofuels fueling infrastructure to support 15% to 85% ethanol blends, and adopting the Argonne Lab's GREET model to correctly calculate the carbon intensity of ethanol and other renewable fuels. These regulations are driven by initiatives to decarbonize transportation, the need to reduce the cost of fuels as petroleum prices increase, a renewed interest in energy security and greenhouse gas reductions. Let's review our biodiesel business in India. The National Biofuels Policy in India was updated in 2022, and is now being implemented to achieve a 5% blend of biodiesel that's equal to about 1.25 billion gallons of biodiesel per year. This summer, the three government oil marketing companies issued a tender offer to purchase up to 180 million gallons per month of biodiesel. For the past 15 years, the pricing formulas have largely been driven by petroleum diesel prices. For the first time, a feedstock plus pricing formula was used for the OMC tender, reflecting the actual cost for feedstock to produce biodiesel in India. The pricing formula and timing of the two month tender by the oil marketing companies is expected to be the ongoing format for sales to the oil marketing companies. We expect the formula to be a successful mechanism for the rapid growth of biodiesel production in India due to the predictability of the pricing formula. After a 45-day delay from August 1 to September 15 due to a requirement by the India oil marketing companies for two rounds of laboratory testing and documentation, we began deliveries of biodiesel from our India biodiesel plant in mid-September and shipped biodiesel for the last two weeks of the quarter. Despite the delay in testing approvals to September 15, we delivered $11 million of biodiesel in 15 days by the end of September. Production and deliveries have continued to the end of October after the OMCs extended the delivery period for the biodiesel purchase orders. We believe the revised OMC purchasing process based on the cost-plus calculation will allow us to maintain ongoing production, though the OMCs continue to generate uncertainty by slow and burdensome procurement processes. The glycerin unit is operational now, converting about 10% of the product from the biodiesel plant into high-grade glycerin for sale in India. The feedstock pretreatment unit is expected to be utilized for the refining of crude tallow for export to the U.S. and Europe to produce renewable diesel and sustainable aviation fuel. Negotiations of refined tallow offtake agreements has been underway since early Q3 of this year and refined tallow production is expected to begin in early 2023 with export shipments soon thereafter. Since our India subsidiary has no debt and the 50 million-gallon per year biodiesel plant, the glycerin plant and the tallow refining facility are fully constructed, we are well positioned for continued operations at high yields. Now Andy Foster, the President of the Aemetis Biogas and Aemetis Advanced Fuels businesses, will review highlights.
Andrew Foster: Thanks, Eric. With the recent closing of our first $25 million financing that utilized the USDA Renewable Energy for America program, the Aemetis Biogas renewable natural gas project in California is on track to deliver -- to deliver on in-service dates in Q1 2023 for several key projects. We are completing construction and commissioning of five additional dairy digesters. Our contractor has installed 40 miles of biogas pipeline and is now completing feeder pipeline interconnections as well as testing and commissioning of the final sections. We have completed construction and are now in the final testing for the centralized dairy biogas to RNG operating facility and accompanying PG&E gas interconnection unit. The new digesters pipeline, upgrading facility and utility interconnection are expected to be fully in service in Q1 2023. After receiving CARB LCFS carbon intensity pathways for the RNG, the five new digesters plus the original two digesters that have been in service since 2020 are expected to generate approximately 200,000 MMBtus per year of RNG. While we await LCFS pathways for credit generation, we plan to store the RNG produced underground to preserve maximum credit value. Due to the high volume of LCFS applications, the CARB review process and approval process can take from six to nine months. We anticipate working closely with CARB staff to help facilitate a timely approval. We are currently in the advanced stages of closing a second $25 million USDA REAP financing. Operationally, we are focused on briskly executing the construction of dairy digesters to fill the Aemetis Biogas pipeline and the centralized cleanup facility and interconnection unit. We have signed almost 30 dairy leases or participation agreements and have multiple additional dairies in process. While continued supply chain challenges for items such as compressors or rainy winter weather could temporarily slow down project schedules, our existing backlog of new dairy digesters carries us into 2024. During 2023, we expect to be on track with the dairy digester rollout as described in the five-year plan. To date, Aemetis has been awarded $23 million of grants related to the biogas project from the California Department of Food and Agriculture, the California Energy Commission, Pacific Gas and Electric, and other government agencies for the dairy biogas project and the production of renewable natural gas. Let's briefly discuss progress at our California Ethanol plant. As Todd mentioned earlier, we generated a 14% year-over-year increase in revenues from ethanol sales in Q3 2022 compared to Q2 -- Q3 of 2021. However, higher energy and corn prices, combined with volatile rail pricing and ongoing poor railroad operational performance, have increased the delivered cost of corn to about $10 per bushel. Ongoing labor and operational issues with the major rail carriers continue to cast a negative shadow on our industry and the economy as a whole. Additionally, the drought-stricken Mississippi River has disrupted rail operations in the U.S. and is likely to cause ongoing challenges for corn delivery and pricing. On a positive note, continued strong demand and favorable pricing for ethanol in California, steady wet distillers grains pricing, and increasing value for distillers corn oil used as animal feed or for renewable diesel production are helping to offset the increased cost of corn and energy. As I previously outlined, our California Ethanol plant is being upgraded to operate using high-efficiency electric motors and pumps powered by low or zero carbon intensity renewable power sources, including our solar micro grid and local renewable electricity. As a strong endorsement of this strategy, Aemetis has been awarded $16 million worth of energy efficiency grants by PG&E and the California Public Utilities Commission and other entities to supplement our own funding to complete these projects. Our goal is to significantly reduce or completely eliminate the use of petroleum-based natural gas at the Keyes ethanol plant. And this year, we've achieved meaningful steps toward decarbonization. Let me take a moment to provide a few key updates on the Keyes ethanol plant projects that are expected to materially increase cash flow when the projects are fully completed. First, the Mitsubishi ZEBREX ethanol dehydration unit has been installed and operated at -- in full production mode for over two months. While we continue to work closely with our partners at Mitsubishi to refine the ongoing operation of the ZEBREX unit, our early results are extremely positive. In August and September, the ZEBREX unit reduced our natural gas usage by over 20%, which when annualized, is expected to save Aemetis millions of dollars in energy costs on an annual basis. Just last week, we began construction of our solar microgrid. Working closely with our EPC and technology provider, Total, we are installing a $12 million solar array with battery backup for load balancing and emergency operations. This project is supported by an $8 million grant from the California Energy Commission. The solar unit is designed to generate approximately 1.9 megawatts of zero carbon intensity electric power at low cost for operation of the ethanol plant. We expect to complete the solar installation in Q2 of 2023 to lower energy costs and reduce the carbon intensity of our ethanol. The mechanical vapor recompression, or MVR system, will further reduce petroleum natural gas and steam use, and is in the final detailed engineering and equipment procurement phase. We expect the MVR system to reduce our fossil natural gas use by approximately 65% at the Keyes plant when the system becomes operational in late 2023. Currently, natural gas costs for the Keyes plant is more than $10 million per year so an approximate 65% savings in natural gas costs and a significant reduction in ethanol carbon intensity is expected once the MVR system is fully operational. These expected cost and carbon intensity reductions are in addition to the 20% natural gas reduction expected from the ZEBREX dehydration system. One additional item of note. In January, we will begin the process of changing ethanol production enzymes that will then allow us to recognize a portion of our ethanol production as cellulosic. This will add additional LCFS value, and with the recent rule announced by the EPA, is expected to qualify the cellulosic gallons for valuable D3 RINs worth about $3 per gallon and the federal tax credit of $1.01 per gallon of cellulosic ethanol. The overall financial impact of this change is expected to be between $6 million and $12 million annually. In summary, operational performance and project milestones for Aemetis Biogas and the ethanol business continue to be on track with the five-year plan. Eric?
Eric McAfee: Thanks, Andy. Let's discuss our Carbon Zero sustainable aviation fuel and renewable diesel project in Riverbank, California. In December 2021, after three years of negotiations with the City of Riverbank and the U.S. Army, Aemetis signed the acquisition of the 125-acre Riverbank Industrial Complex under a sale and lease agreement. The Riverbank site is a former U.S. Army ammunition production facility with 710,000 square feet of existing manufacturing space, a rail loop with storage base for 120 railcars on site, a 20-megawatt electricity substation and 100% zero carbon intensity renewal power with a direct power line connection to a hydroelectric dam. Earlier this year, Aemetis took operational control of the Riverbank site for construction of our sustainable aviation fuel and renewable diesel plant as well as the construction of the Riverbank portion of our CO2 sequestration well project. Additionally, Aemetis has completed the purchase of 24 acres at the Riverbank site and built a heavy equipment access road and well drilling pad for the soil characterization well and the carbon capture and sequestration CO2 injection wells. We have signed and announced more than $3.8 billion of sales contracts with Delta Airlines, American Airlines, Japan Airlines, Qantas and other airlines. We've now completed offtake contracts for about 45 million gallons per year, a blended sustainable aviation fuel to be produced at the Riverbank plant. Under the sustainable aviation fuel sales agreements, the Neat SAF will be trucked from the Riverbank production plant to the San Francisco Bay Area for blending with jet fuel. The blended SAF will then be delivered via pipeline to the San Francisco Airport for use by airlines. Incentives included in the pending federal legislation, I should say, that now past federal legislation, expand the market for sustainable aviation fuel by allowing a price to airlines that is competitive with petroleum jet fuel. We look forward to completing engineering and permitting in order to begin construction of the plant early next year. In addition, we signed a $3.2 billion renewable diesel sales agreement to deliver 45 million gallons per year under a 10-year sales contract with a major travel stop chain for its Northern California locations. Let's review our subsidiary, Aemetis Carbon Capture. In October 2020, the Aemetis ethanol plant in California was identified in the study issued by the Stanford University Center for carbon capture as one of three ethanol plant CO2 sources in California that have the highest potential return on investment from building a carbon capture and sequestration facility, compared to the oil refineries, cement plants and natural gas power plants that comprise the 61 largest CO2 emission sources in California. 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 two sequestration wells, which we plan to drill near our two biofuels plant sites in California. We expect to construct two CO2 injection wells, and each have a minimum of 1 million metric tons per year of injection capacity, with additional CO2 supplied by other emission sources to sequester a planned total of 2 million metric tons per year of CO2. The initial phase of construction includes drilling two characterization wells to provide empirical data for the EPA Class 6 permit. The injection wells will then be drilled at the same site after receiving EPA and other permits. We are currently in the engineering and permitting process for the two characterization wells with an expectation that we will drill the first characterization well at the Riverbank site. The direct pay feature of the Inflation Reduction Act provides a federal tax rate of $85 per metric ton of CO2 as a cash refund to Aemetis each year for the first five years of production. The planned 2 million metric tons of CO2 per year from the Aemetis carbon capture project will generate an expected $170 million per year from the Federal direct pay tax credit as well as an estimated $400 million per year at a projected $200 per ton of sequestered CO2 from the Low Carbon Fuel Standard. We believe the fixed amount of $850 million provided by the Direct Pay funding over the first five years of the project should adequately support funding the estimated $250 million capital cost of the two injection wells and related equipment. In summary, Aemetis is expanding a diversified portfolio of negative carbon intensity projects, dairy renewable natural gas, biodiesel in India, sustainable aviation and renewable diesel fuel, low-carbon ethanol using zero carbon intensity electricity, renewable hydrogen and CO2 sequestration. All of these projects are synergistic and create what we refer to as a circular bioeconomy within Aemetis in which we use byproducts and waste products of our own facilities and local areas as feedstock to produce low and negative carbon intensity renewable fuels. 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. Now let's take a few questions from our call participants. Paul?
Operator: Thank you, Mr. McAfee. We will now be conducting a question-and-answer session. And the first question is coming from Derrick Whitfield from Stifel. Derrick, your line is live. Please proceed with your question.
Derrick Whitfield: Thanks and good morning, Eric and team.
Eric McAfee: Thank you, Derrick. Good morning.
Derrick Whitfield: Good morning. First and foremost, congratulations on closing the USDA REAP. I know it was a lengthy process for you guys and complex based on our discussions with the industry. Perhaps for the benefit of investors, could you share with us some of the lessons learned from the first loan and then your expectations on timing for the next few? It seems to us that, that process is truly earned out financing the expansion of biogas business as significantly derisked. And finally, if I could ask, maybe if you could also touch on financing plans and the levers you have at your disposal for the Riverbank RDA SAF facility?
Eric McAfee: Good. We look at the first round that we closed of $25 million as being a onetime education process, both of Aemetis as well as, frankly, introducing the project to the commercial lender as well as USDA staff. And what we're doing now is just repeating the project documents, but not really doing a reeducation of the array of environmental consultants and other kind of feasibility study consultants, all the people that work on our side, as well as the USDA who's now very familiar with our project, and we don't have to replicate that process for sure, and the commercial lender who is very familiar with our entire project now with the 40-mile pipeline and other kind of things that are sort of onetime learning opportunities. The paperwork itself is largely just changing locations and amounts. It's not really changing the structure of our documents, and all these are special purpose entities that are set up that we borrow $25 million, which is a max under the REAP program per entity, and we contribute about $8 million of equity. This one, we contributed about $11 million of equity to the SPV in form of assets we've already built. So we are ahead of this equity investment significantly. We have about $53 million of both our preferred equity that's been invested as well as the grant center in the project. So that's a whole lot of SPVs at only $8 million of equity required for SPV, and SPV is $25 million of additional capital. So as Andy mentioned, we're working on closing the second funding here in the next month or 2, and then we'll do the third thereafter and a fourth and fifth. And it's just something we've already put the equity in. We're ahead of it on the construction and signing up dairies. I would say the one item that is necessary for any developer looking at this project is that onetime education is a lengthy process. The environmental issues, the -- just going up through USDA's committee process to the federal level all requires a onetime education. In our case, we started in January of 2021, and it closed October of 2022. So you have to have a long-term commitment, and the USDA definitely has long-term commitment. Our bank has a long-term commitment. And Aemetis proved that we have a long-term commitment. And now that we are over that first learning cycle, I think we'll be looking at what we're doing now, which is only a few months between fundings. Regarding SAF, we have a signed $125 million biorefinery assistance program under 9003 document with the USDA. We are already in the process of completing our EPC agreement, which is a full wrap EPC agreement with a $2 billion contractor and the -- with some of the authority constructed the necessary permits to be able to break ground. Those are the two documents necessary for us to then go back and wrap up the completion of our project financing. In addition to the USDA, the California municipal tax exempt bond market is a very attractive market for us with very low interest rates. The Department of Energy has been very proactive at supporting sustainable aviation projects. And certainly, I'll be presenting November 9 in Washington, D.C. Our -- my panel has a couple of airlines on the panel. But Jigar Shah, the head of the loan programs office at the DOE is actually introducing our panel, and is moderated by Kate Gordon, who is the White House Head of SAF and related fuels issue. So we have a strategic interest from the White House as well as the DOE in our project. And then lastly, it's frankly just monetizing this Inflation Reduction Act. When you look at the value of $1 billion over 10 years in these various incentives, monetizing that into debt and equity instruments is one of the great opportunities we have. So we have not one or two open markets, I would say we have four open markets for our growth of SAF. And right now, we're doing the simplest ones. And certainly, the USDA having closed with only a 6.2% interest rate and a 20-year amortization is a very, very attractive partner for us in our growth. But we're in a difficult debt environment. I don't want to anyway make that sound like it's easy. And for us to complete a transaction in this market and have another transaction closing in this market at very attractive interest rates and long-term amortizations. That's key. If it's a seven-year amortization, you have troubles. So a 20-year amortization is fantastic. And then we're proving that we can deliver on those kind of financings.
Derrick Whitfield: Eric, just to clarify on the USDA loan, if I recall, that comprehended a 45 million-gallon facility and is expandable. Am I thinking about that correctly?
Eric McAfee: That's correct. And we're building a 90 million-gallon facility. So your math is accurate, and that we'll be doing a larger transaction than the original because that was only for -- we were originally going to do this in two phases, but the amount of interest from our customers caused us to actually double the capacity and build in just one phase rather than two phases.
Derrick Whitfield: And as my follow-up regarding India, it was certainly nice to see a contribution from the business even if it was only for a couple of weeks. Could you comment on your expectation for biodiesel sales in Q4 and your view on when refined tallow production could start to show up in your financials and how that business can grow over the coming years?
Eric McAfee: Q4 is already one-third done. And as I described, the orders we got for August, September got shifted to the middle of September and into October. So we have very good visibility on -- our October deliveries are done. And so we're looking at -- we announced a total revenues from all sources of $41 million, and we have shipped a majority of that already, and we still have two months to go in the quarter. So the quarter is looking very strong from a revenue perspective. We are waiting for the oil marketing companies who were expected to come out with the November tender. So we could just keep on shipping, right? And so we are expecting that to happen in November, and that will materially increase the Q4 revenues that we've already booked. So we are seeing, as I have mentioned, sort of a burdensome procurement process, but they are definitely making progress and continuing to move forward and something that will allow us to run our plant at full capacity. And I think as the OMCs learn how to do this, they'll be more proficient at it. And we won't see this sort of a start-and-stop situation that we see now with a couple of weeks of delays coming in. The tallow business is a -- facility has already completely constructed and capable of operating. We're currently just running our offtake agreement negotiations. There are approximately five renewable diesel companies in the United States that are currently under discussion. So we're working on getting that worked out in the first quarter next year and begin shipments.
Derrick Whitfield: Thanks Eric, thanks for your time.
Eric McAfee: Thank you.
Operator: Thank you. The next question is coming from Jordan Levy from Truist Securities. Jordan, your line is live. Please proceed with your question.
Jordan Levy: Thanks so much for taking the questions. Maybe starting on the biogas side, exciting announcement about the pref deal there. But I think it makes a lot of sense given the activity in the market, could you just provide a little more detail on the financing for that transaction and how we should expect that to kind of play out from a timing perspective?
Eric McAfee: The financing of the buyout or the financing of the underlying project?
Jordan Levy: Yes. Yes, the buyout.
Eric McAfee: Yes. We have a debt instrument opportunity, and we have an equity instrument opportunity. We have a number of large counterparties starting with oil companies, but going to strategic trading and other companies who are very interested in that preferred. This is negative 426 carbon intensity product. It's a dairy renewable natural gas. It's not positive 30 landfill natural gas. And I would actually say we're -- we're just managing which relationship we want to have, maybe even extend into other factors of our business because our counterparties all have strong interest in sustainable fuel and renewable diesel as well as even low carbon ethanol. And so we've been spending a lot of time building long-term relationships. And I think this preferred is really the first opportunity people have to come in, in a meaningful way. And I expect there will be potentially 100% preferred structure, maybe 100% debt structure. But either way, it's going to be very accretive to our interest in the biogas subsidiary. What we're doing is we're cashing in on the comparables of that OPAL and then Archaea created for us. And this is the first opportunity for institutional operational companies to get into this business in a meaningful way with Aemetis.
Jordan Levy: Got you. That makes sense. Maybe bouncing over to the SAF side. Given the provision in the IRA for sustainable aviation fuel, I think it might be helpful if you could remind us how the offtake agreements you've signed for SAF and renewable diesel are generally priced and how the federal and state incentive flow through those?
Eric McAfee: The structure is a clean structure in which until the fuel passes the flange into the customer's tank, any tax credits, Low Carbon Fuel Standard California credits, federal renewable fuel standard credits, other incentives, even ones in the future we don't want to know about, all 100% in near to the account of Aemetis. Oh, I forgot the actual value of the molecule that we're selling, the $3 plus dollar per gallon, all that is to Aemetis' account. And we received approximately a 10% premium above the price of jet fuel. So the value of this contract structure for our customer is they can hedge jet fuel, add 10% as the premium, but they get all of the airline incentives starting with CORSIA, C-O-R-S-I-A, which is the airlines trading among themselves, if they're -- let's say, somebody has access to SAF from Aemetis and they have more than what the CORSIA requirements are, they can sell those credits to other airlines. And so doing that 10% increase, let's call it, $0.30, $0.35 per gallon, for every 10 million gallons, it's about $3 million or more being paid to Aemetis, can be offset by the sale of credits by our customer to other companies. So there's a mechanism which they're paying us a premium, but then they have their own trading markets, some voluntary, some not so voluntary that, for example, boarding penalties in Europe, that can help them actually get back to the price of jet fuel. So at the end of the process, it's possible that our customers actually are largely paying the price of jet fuel, which is fully hedgeable and of course, extremely attractive to have Scope 1, Scope 2 and even Scope 3 emissions reduced from buying SAF from us.
Jordan Levy: Very helpful. Thanks for taking my questions, Eric.
Eric McAfee: Sure. Thank you Jordan.
Operator: Thank you. The next question is coming from Amit Dayal from H.C. Wainwright. Amit your line is live. You may proceed with your question.
Amit Dayal: The 180 million-gallon per month, is that for the kind of a merit that is out there? And they're .
Eric McAfee: Amit, we're getting about 25% of your question, but the part that I got was whether the customers in India will continue to have the 100-plus million gallons per month of demand. They're seeking a 1 billion -- 250 million per year supply of biodiesel in India, which is a 5% blend of the 25 billion gallons of diesel in the country. And there is a tax passed into law earlier this year that is currently scheduled to go into place in April of 2023, so approximately five months from now, that actually taxes diesel an additional $0.10 per gallon equivalent if it's not blended with biodiesel. So if you blended a 5% blend, that is equal to $2 per gallon of biodiesel additional price that could be paid to us in order to avoid the payment of that $0.10 per gallon tax. So we do perceive that there will be this ongoing demand by oil marketing companies as well as the private refiners in India to not have to pay a $0.10 per diesel gallon penalty for failure to blend biodiesel at 5%, and that will help this be a much smoother market, especially with a cost-plus structure in procurement by the OMCs.
Amit Dayal: That was my another equation. just these seven are completed .
Eric McAfee: As Andy described, the end of this year, we'll have seven digesters in the commissioning and testing process expected to be what's known as in-service. We accepted from our contractor as meeting performance specifications in the first quarter of next year. We have an additional five that are already in the process of construction, permitting, environmental approvals, that sort of thing. So we're not waiting until these are in service in Q1 before we do the next five. We're actually in the process of those next five. What's really important for all of us to recognize though is a long lead time item here was the gas utility interconnection unit with Pacific Gas & Electric, which is in commissioning and testing now and expected to be in service in the first quarter and the centralized gas cleanup and the 40-mile pipeline. Those are the long lead time items. It took us probably three years to get the PG&E unit that had to be built by them, permitted by them, managed by them. It's their project. We just put up the many millions of dollars to build it, but they actually had to do it. That's behind us. What we are doing now is building rectangular dirt football field-sized digesters in these locations that have already been signed with customers. It's a much more rapid process. And with the same contractors doing the same thing they've already done 7x. So our ability to accelerate now, especially with the financing relationship with USDA working smoothly, I think is going to meet or exceed expectations in 2023.
Operator: Thank you. And the next question is coming from Matthew Blair from TPH. Matthew your line is live.
Matthew Blair: Hey Eric, congrats on the India biodiesel program going again. Could you share the EBITDA margin on those gallons in Q3? And I know it's just going for a couple of weeks, is that EBITDA margin, is that going to be a good run rate for Q4 and beyond?
Eric McAfee: We're operating under the same contract for the Q4 deliveries we've already completed. So that was the contract that was slated for August and September got pushed back to 15th September and through the end of October. And so yes, it's the same margin, so you could just apply the number that was applied there, 11 million for the quarter, 2.8 million. That's all linear to what we continue to ship in October. We have approximately 1.5x of month's revenue in October is what we saw in the two weeks in September. So easy math to do there. We do have winter specifications. So in the winter, we use a different feedstock in order to have lower cold flow plugging point, which is the ability to handle colder weather. So we do expect lower margins in the winter time. We have, however, expectation that we'll see the revenue flow continue. And in about time we're in mid-February, we're out of the winter specs. India is a very warm country. And many of our companies -- customers start actually buying early on that. So there's a -- just a -- it's actually the procurement process is our primary issue in India, just moving smoothly to an ongoing process of every two months getting purchase orders on time is really the only issue. It's not really production for us, or even the winter specs, it's really getting the OMCs to deliver on these tender offers.
Matthew Blair: Great. Thanks. And then on the RNG side, if I heard you correctly, the long-term target is 60 dairies and 1.65 million MMBtu of dairy RNG production. And then it sounds like you have seven digesters running by the end of the year with another five under construction. Do you have any more digesters that you've won, projects that you've won that you haven't started construction on yet? I'm just trying to get a sense of how far along are you on the 60 digester target?
Eric McAfee: Andy commented, we have about 30 signed. There's let's call it a participation agreement. We have three side, we have additional working -- right now, actually, it's the opposite frustration. Our dairies are signing and then saying, but wait a minute, you can't start building this thing for mid-2024. You're 18 months plus out before you're going to be building this thing. Can't you guys hurry this thing up? We are targeting 66 in our 5-year plan that was published earlier this year. We'll be updating that in February. But about half of that is already signed in some phase of these agreements, and we're rapidly looking to fill out the other half of it over the next couple of years. But again, the frustration by the dairy owners is exactly the opposite, which is wait a minute, it's a five year plan, that means I got to wait four years before you're going to build this thing. Can't you guys hurry up, and we have every intention of doing so. Just to clarify the numbers, the seven operating in final commission and test go in service in Q1 as in-service run rates, we expect approximately 200,000 MMBtus per year. And that would then be incremented by an additional five plus whatever we start next year. So our 5-year plan has an annual number, and that annual number would be seven at the end of this year and then it increases next year.
Matthew Blair: Got it. Thank you very much.
Eric McAfee: Yes, thank you Matt.
Operator: Thank you. The next question is coming from Dave Storms from Stonegate. Dave your line is live. Please proceed with your question.
Dave Storms: Perfect. Thanks for taking my question. Just touching back on the current credit environment. How are you seeing the -- being able to get on things like the USDA REAP program as either a competitive advantage against industry peers or conversely, again, that same credit environment being maybe an issue for end users going forward?
Eric McAfee: We have credit in the way of loan guarantees. So we use the loan guarantee process to build the project. And then the tax credit, specifically production tax credits and investment tax credits, basically reimburse us for the cost of construction. In biogas, we're eligible for up to a 50% investment tax credit. So as we make investments to build assets, we then can submit for up to 50% tax credit for that onetime investment of building the asset. On a go-forward basis, we then get production tax credits for producing natural fuels. Our ethanol plant on the clean fuels initiative is expected to be eligible for some tax credit. Certainly, biogas, as a low carbon fuel, has potential for that sustainable aviation fuel, et cetera. These are production tax credits. And then in carbon sequestration, we have a different set of tax credits with Direct Pay features and the like. So now those tax credits are separate from the loan guarantees. Loan guarantees basically make our debt much less expensive, and far more important than that is about the time that we have to repay it. Most commercial banks today would be talking a 5- to 7-year term. That's almost impossible to build a biofuels facility and have it economic that you pay back all your debt in five to seven years. So a 20-year term and a year or so during construction did not even have to pay any principal is an extremely attractive structure for building these assets. And that's exactly what we closed with the USDA in the Renewable Energy for America program, and that's what we're going to continue to do in multiple phases of that program.
Dave Storms: That's perfect. Thank you.
Eric McAfee: Thank you, Dave.
Operator: Thank you. The next question is coming from Ed Woo from Ascendiant Capital. Ed your line is live. Please proceed with your question.
Ed Woo: Yes, congratulations. My question is, what is your outlook for oil price and gasoline prices and its impact on demand for ethanol?
Eric McAfee: We think that oil prices are largely under the control of OPEC+, which means OPEC plus Russia. And there are only a couple of guys that have to cooperate to make that happen, and they're sitting in Saudi Arabia and in Russia largely. And they have expressed deep concern about letting the price of crude oil fall below $80. And they said that two weeks ago when they told Joe Biden, nope, I'm not going to increase production. I'm going to actually decrease the production by 2 million barrels per day in order to drive the price of crude oil up. It has fallen down into late $70s and they wanted to push it up above $85. So I think we're in an environment in which as long as those entities are reasonably cooperative, we've got $80 plus crude oil prices. And in the United States, we have refining capacity. Remember, it's not crude oil that you buy at the pump. It's actually gasoline, diesel or sustainability fuels, you have to add the profit of the refineries. Well, in California alone, we went from 22 to 15 refineries. So refineries have tremendous pricing power as you see in the, I think, it was 500% increase in profitability of the major oil companies announced here in the last week or 2. So that oil refining margin is an additional price at the pump, which is comparable to what is actually relevant to selling our biofuel. So put in crude oil prices at $80 or higher and then high refining margins according to the CEO of Chevron for at least three years, and that's a relatively stable oil pricing model for us to produce against. And then, of course, with the Inflation Reduction Act, we're getting encouraged to make lower and lower carbon fuels, which is the point of those incentives. It's to make dramatically lower carbon intensity fuels compared to these petroleum products.
Ed Woo: Great. Thanks for answering my questions. And I wish you guys good luck. Thank you.
Eric McAfee: Thank you.
Operator: Thank you. There are no further questions at this time. I would like to turn the floor back over to management for closing comments.
Eric McAfee: Perfect. Thank you. Thanks for Aemetis shareholders, analysts and others who joined us today. Please review the company presentation and the investor presentation that's posted on the homepage of the Aemetis website. We look forward to talking with you about participating in the growth opportunities at Aemetis.
Todd Waltz: 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 audio version of this Aemetis earnings review and business update. Paul?
Operator: This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
