Gevo Inc. (NASDAQ: GEVO) Q2 2022 earnings call dated Aug. 08, 2022
Corporate Participants:
John Richardson — Director of Investor Relations
Dr. Patrick R. Gruber — Chief Executive Officer and Director
Timothy J. Cesarek — Chief Commercial Officer
Lynn Smull — Chief Financial Officer
Analysts:
Derrick Whitfield — Stifel — Analyst
Presentation:
Operator
Good day, and thank you for standing by. Welcome to the Gevo Second Quarter 2022 Earnings Call. [Operator Instructions]
I would now like to hand the conference over to your speaker today, John Richardson. Please go ahead.
John Richardson — Director of Investor Relations
Good afternoon, everyone. This is John Richardson, Gevo’s Director of Investor Relations. Thanks for joining us to discuss Gevo second quarter results for the period ended June 30, 2022.
I’d like to start by introducing today’s participants from the company. With us today are Dr. Patrick Gruber, Gevo’s Chief Executive Officer; Tim Cesarek, Gevo’s Chief Commercial Officer; and Lynn Smull, Gevo’s Chief Financial Officer. Earlier today we issued a press release that outlines the topics we plan to discuss. The copy of the press release is available on our website at www.gevo.com.
Please be advised that our remarks today, including answers to your questions contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act. These forward-looking statements are subject to risks and uncertainties that could cause actual results to be materially different from those currently anticipated. Those statements include projections about the timing, development, engineering, financing and construction of Gevo sustainable aviation fuel projects, its sales agreements, it’s renewable natural gas project and other activities described in our filings with this Securities and Exchange Commission, which are incorporated by reference. We disclaim any obligation to update these forward-looking statements.
In addition, we may provide certain non-GAAP financial information in this call. The relevant definitions and GAAP reconciliations may be found in our earnings release and in 10-Q, which can be found on our website at www.gevo.com in the Investor Relations section.
Following the prepared remarks, time permitting, we’ll open the call to your questions. I would like to remind everyone that this conference call is open to the media and we are providing a simultaneous webcast to the public. The replay will be available via the company’s Investor Relations page at www.gevo.com.
I would now like to turn the call over to the CEO of Gevo, Dr. Patrick Gruber. Pat?
Dr. Patrick R. Gruber — Chief Executive Officer and Director
Thanks, John. Good afternoon, everyone, and thanks for joining our call today. We filed our Form 10-Q earlier today, and we ask that you refer to it for more detailed information. Our team had a fantastic momentum as we exited the first quarter of this year. We announced two new SAF supply agreements, one with Delta, another with British Airways, in the first quarter for a combined 105 million gallons per year. We maintain that momentum through the second quarter and beyond. Since the first quarter Gevo’s business development team has done a great job. They’ve closed five additional supply agreements with American Airlines, Alaska Airlines, Japan Airlines, Finnair and Aer Lingus for a combined total volume of 155 million gallons per year of SAF. Collectively then, Gevo now has over 350 million gallons per year of committed SAF off take that as an applied hydrocarbon revenue value estimated at over $2 billion per year inclusive of the market — inclusive of the value of the environmental benefits, and based on current market projections and operating assumptions.
Now, that brings us meaningfully closer to our production goal and sales goal of 1 billion gallons per year by 2030. It’s tremendous progress and I’m proud of our team. And what’s even better is, they’re all — their take-or-pay agreements, and that helps us. Now its good momentum for SAF, and our systematic approach driving down carbon intensity, the customer base buys into what we’re doing. It’s inclusive of our whole supply chain from growing of raw materials to the burning of jet fuel and we continue to believe that Net-Zero carbon negative fuels can be produced profitably. That’s what I would keep saying.
We haven’t slowed down either. Our team continues to discuss and negotiate agreements with other potential partners, including strategic partners. We are very pleased with our Northwest Iowa RNG projects, all three of our dairy partners and the digesters are now producing bio gas and that gas has been set in the upgrading unit and injected in the sales pipeline, where the sales are managed by BP. Over the next several months, gas quality production data will be gathered for Gevo’s application to CARB so that we can apply for LCFS and maximize the value to Gevo in those gas streams — with those gas streams. I look forward to being able to report meaningful revenue and the associated profit for that project in the near future. Our team has done a great job with two start-up issues. Everything is working. So it is very, very good. And these — to remind people, this is a 355,000 million Btu nameplate capacity for third-party dairy project ever constructed, and it is doing really well.
Our Net-Zero 1 project in Lake Preston, South Dakota, which has been designed to produce 62 million gallons a year of low-carbon fuels — 55 million gallons, will be sustainable aviation fuel, that remains on schedule to deliver its first volumes in 2025. The FPL 3 work is expected to be done around year-end, but we already have enough data to move forward on the build-out and we expect to stay on schedule. As you now, past month Gevo closed land purchase for approximately 245 acres in Lake Preston were the N-Z 1 plant is going to be built, and we have planned a groundbreaking ceremony for next month to kick off the initial site work base. We expect to be ordering long lead equipment in the fourth quarter of 2022. We are doing everything we can to stick to our schedule. We’re be monitoring the supply chain issues and attempting to mitigate any that we find as they arise. And we want this happening. I expect this N-Z 1 plant to be really quite something, it’s going to show the world what’s possible. It’s going to show that sustainably produced raw materials can be converted into SAF. With energy efficient production processes, we can displace the fossil based energy that’s the electricity and the heat sources get rid of the methane from fossil base and swap them out with renewable energy and make it all profitable to produce our jet fuel.
We continue to evaluate additional plant locations as we map out the path forward beyond Net-Zero 1. Teams have done such a good job selling stuff that we have so much — so many gallons that we’ve got to really plan these out and get on with it. Remember, we have over 350 million gallons per year of SAF to deliver beginning over the next few years. And then it — multiple plants are going to be required to satisfy those contracts. We expect to take or pay or otherwise financial agreements that we have. They will assist us in securing debt and equity for our projects. Our team has done a great job and our customers have done a great job cooperate with us to make sure that it all works. We’ve discussed previously for future production projects both greenfield sites and existing ethanol plants. They’ll both be likely in the mix for us as we go forward in our build-out strategy. Our focus continues to be on locations with stable low cost feedstocks that are CI score advantaged, and a large part of the footprint from traditional production facilities comes from, where’d you get that electricity, where’d you get that gas. It’s because you don’t want the fossil stuff, you want something else. And so a large part of our effort is around opportunistically fossilize energy sources to drive the production facilities, got a subsidiary electricity to do something about heat sources.
And of course, you have to also choose states and local governments that are business friendly and support the overall goals. We have been achieving our Net-Zero 1 development milestones that we identified in our come — in the update in June, and it’s happening on our timeline that we had planned. We will begin ordering the long lead equipment over the next few months, and we expect to close our DBM contracts for wind power, green hydrogen we need for the energy sources up at our N-Z 1 plant.
In June we issued shares of common stock in order to strengthen our balance sheet in advance for what we believe will be a challenging financial markets over the next few years. Now, we can move forward with our N-Z 1 project and begin initial work at N-Z 2, our next big plant, without significant capital constraints. We are already getting organized putting N-Z 2 plant in place, but I’ve got to say, nothing is going to distract us from executing as N-Z 1. N-Z 1, FID and financial close on the debt to product is expected to occur around mid 2023. We’ll have already been spending and going to build that plant in advance of that. We expect to have one or more equity partners in the project at that time, which preserves Gevo’s capital for the N-Z program development. We expect that N-Z 1 will be the cornerstone for our platform of N-Z projects with debt and equity partners. We met several investors, energy financial strategic, to see what we’re doing it and have expressed an interest in investing in our projects. We did explore and flush it out, still. The combination of our take-or-pay contracts and the proven production technology takes a lot of risk off the table, and people are starting to notice.
Now I’d like to turn the call over to Tim Cesarek, our Chief Commercial Officer. Tim has over 30 years of business development and private equity experience with over 15 of those years in renewable fuels, chemicals and energy. Tim has been with us at Gevos since early 2019, and his team is responsible for building the relationships and growth opportunities that have led to over 350 million gallons per year SAP agreements. I think getting a few words from Tim, describing the current market environment would be helpful. Tim?
Timothy J. Cesarek — Chief Commercial Officer
Thanks, Pat. First of all, I’d like to thank all the airline and trading companies that have joined our crusade for their continued confidence in Gevo’s capability and vision. The importance of sustainable agriculture to the production of both nutrition and ultra-low carbon sustainable aviation fuel and transportation fuels has been acknowledged by these companies through their multi-year commitments to Gevo. We continue to see demand for low carbon SAF exceeding supply for the next decade and beyond, by as much as a factor of 12 times. Based on what we’re seeing, we believe the SAF market size is 10 to 30 billion gallons over the next two decades. On the supply side, currently announced SAF projects total approximately 2.4 billion gallons globally. Gevo’s goal of 1 billion gallons of fuel production by 2030 should be easily absorbed by the level of demand that is expected.
While not distracting from our ethanol-to-jet production build out, it’s important to note that we continue to consider ways to progress our isobutanol platform to supply low carbon renewable gasoline blend stocks in SAF. Additionally, both the ethanol-to-jet and isobutanol platforms can supply chemicals, which is an area of rising interest with our customers. Our chemical products have the potential to be significantly carbon negative based on the GREET model. The world hasn’t seen drop in products that can drive down CI score like this. It will be exciting to see how the markets determines the value of these products. It’s important to note that the ethanol-to-jet and isobutanol platforms also have operational and product synergies and can optimize our cash costs and product position on the same platform over time. In short, they’re complementary. And I anticipate that we’ll also see more on these efforts in the future.
So based on our volume of executed take-or-pay contracts, we have proven the strong demand for SAF exists. We continue to secure additional contracts and we’ll supply the market for volumes beyond 2027. However, going forward, our team will focus attention on securing partners in the energy transition space as well as traditional energy companies and strategic financial groups who can help us grow faster. Further, we continue to screen and secure a greenfield facility builds, and we will also look to partner with existing ethanol producers who are keen to decarbonize we’re it creates value and accelerates our time for production. Finally, I expect our commercial efforts will build off our very tracking platform, which as you know is in development. This will help us secure customers differentiate us and our users who believe in the vision of tracking and counting carbon across every link of the value chain.
Now I’ll turn the call over to Lynn to comment on the quarter’s financial highlights. Lynn?
Lynn Smull — Chief Financial Officer
Thank you, Tim. We ended the second quarter of 2022 with a strong liquidity position of $546.8 million in cash, restricted cash and other liquid investments. We realized $139 million of net proceeds from the issuance of common stock and common stock warrants in the June ’22 offering. Long-term debt outstanding of $67 million is related to the Northwest Iowa RNG project. Our corporate spend, that is SG&A, was approximately $6 million for the quarter net of non-cash stock-based compensation. During the second quarter of 2022, we invested approximately $15 million in capital projects, comprised of $6 million into our Net-Zero 1 project, $8 million into the Northwest Iowa RNG project and approximately $1 million into other capital projects. Construction on our Northwest Iowa project is complete and it is being placed into service in Q3. Depreciation will start flowing through the income statement at that point.
We continue the development and finance efforts around Net-Zero 1. There is substantial interest from lenders in Net-Zero 1’s project financing. The actual debt structure and financing efforts will ramp up later this year to drive towards a debt close in 2023, after the project delivery contracts and final cost have been locked in. We’re also engaged in discussions around equity partners in Net-Zero 1 and our Net-Zero program overall. We’d welcome an equity partner or partners to preserve our development capital for subsequent plans while still giving Gevo meaningful permanent project equity positions.
I’d also note that the Senate passed draft Inflation Reduction Act of 2022 is a positive development for Gevo, given both the SAF blenders tax credit and the clean fuel production credit for SAF or CP — sorry CFPC were included, for a total of five years. The CFPC would take effect for production in 2025. To qualify for this new tax credit, SAF producers must produce fuel with at least a 50% reduction in life cycle greenhouse gas emissions when compared to petroleum jet fuel. The SAF credit has an upside of $1.75 per gallon if a net zero CI score is received. This is all very good for Net-Zero 1, as we expect our SAF will qualify for the CFPC incentive, and we could qualify for as much as a cap of $1.75 a gallon if the EPA uses the Argonne discrete 3.0 model as it’s measurements tool since we plan to be net zero under that model.
Now I’ll turn the call back to Pat. Thank you.
Dr. Patrick R. Gruber — Chief Executive Officer and Director
Thanks, Lynn. Yeah, there’s other great things in that bill as well. There’s things like the funding for overall greenhouse gas reduction programs to build out plants and capacity and things like that. Plus they’ve quoted some of the DOE programs and the USDA smart agriculture, all of those kinds of things that potentially will benefit us. So it’s pretty exciting.
Thanks, Lynn, and Operator, now please open up the call for Q&A.
Questions and Answers:
Operator
[Operator Instructions] We have a question from Derrick Whitfield with Stifel. Your line is open.
Derrick Whitfield — Stifel — Analyst
Thanks, and good afternoon, all. Peter, for my first question I wanted to ask if you could really share your thoughts on potential benefits from the pending legislation, really building on where you ended the conversation. Obviously the SAF PTC is a positive, but it seems like there is also potential on the CCS and ITC elements that could benefit your capital costs. Any thoughts you guys could share about those benefits and the payment mechanism will be greatly appreciated.
Dr. Patrick R. Gruber — Chief Executive Officer and Director
Yes. So the way the CCS has work for us is that there is one of the pipelines being built not too far away from us. We’ll probably look up to that. I would expect us to. And then it will go on. And the deal that’d we make with that would sort — everyone understands we be capturing CO2 that comes up from — so it’s renewable carbon. And it will go to the pipeline and ultimately be geologically sequestered. That improves our CI score along the way. And so it helps to add to the margins of our product. And how much it adds, is dependent upon California LCFS, how it will be treated under RFS and all the rest. Plus, then, there is the blenders tax credit that we just talked about.
So, those are things that’ll be unfolding. If you do see Argonne green model, you’d wind up with carbon negative type CI scores, carbon negative CI scores. There is nobody who is talking about fuels with carbon negative, but I’ll — and that’s because we start with the net zero plan. If you had CCS to it, then it goes negative. That’s a big deal. And that shows people what’s possible here for the future.
The other things that are interesting in that bill, are — part of the DOD programs. Good. Those are about energy transition, they funded the USDA smart climate stuff. That’s awesome because this is about sustainable agriculture. Bring it in to the overall picture. One of the great tools that this country has available to it is captured carbon in the soil. It requires that modern — that people use modern farming techniques like low till and no till with precision agriculture, monitor what’s growing, measure carbon and things like that. Those are the kinds of programs that are put forth in that bill. And that’s a big deal.
The other thing that we see is going to be important is hydrogen stuff got funded, wind tax credits got funded. Those benefit us because what we’re building hydrogen, we’re, of course, are working with dual energies to build out the wind. The bio-gas, I think there’s some stuff in there for that, but I think it will be more important in the farm bill as that gets done because it’s related more towards the manure and how to build things there.
So overall there’s lots of really interesting stuff in here. It’s a question of is it going to get morphed up a little bit, is it goes through the house and then what’s all the language behind it mean. Those things will be interesting to see, but overall it’s pretty encouraging, I’d say certainly.
Derrick Whitfield — Stifel — Analyst
Certainly. And maybe just tacking onto your response, while the plan for decarbonizing your energy sources for N-Z 1 is likely locked, is there — when you critically review that legislation to-date, could that change your potential or preferred pathway for decarbonizing your production process?
Dr. Patrick R. Gruber — Chief Executive Officer and Director
There’s nothing in there that would change it like that. The fundamental issue, for all production plants, this is — all ethanol guys, anyone who makes, manufacturers anything is grid electricity is not green. That’s just a simple fact of life. And so if you could talk about all the great electricity and all of that. Hey, I got news. If we want to use it, it creates the footprint for us. Oh, and you know what’s worse, is fossil based natural gas. That’s where the issues lie for all of us who manufacture things. Those have to be substituted out over time if we’re going to be successful in reducing the greenhouse gases. So what’s interesting about this is, I think that people really are grasping this idea of energy transition that will happen over a period of time. It’s going to require many different sources of renewable electricity, different routes to get there.
Same thing, hydrogen is useful. If we can use — capture excess electrons from wind, put into hydrogen and we can always get the energy back out of the hydrogen. We’ll be doing that up at our plant at Lake Preston. And then I think what — there is a possibility to do techniques where sequestration comes into play, geological sequestration comes into play, where you can do the burning of a natural gas, capture the CO2 from it, sequester it. And so I guess that’s blue energy. And you’d wind up reducing the carbon footprint.
So all those things are touched upon in this bill, but make no mistake, this is all these things awfully market-driven. So the government is nice, good for them, making progress. Great. That will help things, we got to clear up things, we got to clear up grid problems, all those kind of things, but you know what, it’s all market-driven anyway. And so this ain’t going away ever on CI score. And that is a new competitive attribute of which we are 100% focused on.
Derrick Whitfield — Stifel — Analyst
That’s great. If I could just ask one additional question, regarding the chemical products you referred to in your prepared remarks, could you help frame or add some color around the market size and potential petrochemical for the most part of the chemical products?
Dr. Patrick R. Gruber — Chief Executive Officer and Director
Yeah. Here’s a really simple way to think of it is that our business is taking this renewable raw materials and converting them first into building blocks. These building blocks are the primary petrochemical things that you get out of the cracker. Ethylene, propylene and butene. If you know how to make those from renewable and to do it cost effectively, which we do, you can make literally everything that’s in the petrochemical, all the big chemical products, you can make them. The technologies already exist and all in play already in the chemical industry. The thing that’s going to be interesting about our materials is that they’re massively carbon negative.
So think about that. If we burn — if we take in our manufacturing sustainable aviation fuel and then it goes to a jet plane and it burns and we’re measuring CO2 at the tail versus what the farmer took, the CO2 the front and we get the net zero, right? If we’re sitting in — that same fuel sitting in a tank would be about a minus 100 CI score, fully sequester carbon sitting there to take. Likewise, with these chemical products. So it it’d be possible to take and make massively carbon negative polyethylene, polypropylene, polyester, any of those things. So think of all plastics, all large plastics, think of all those things all of those are then enabled. And it’s not doing anything super special advance, it’s just simply eating them into the infrastructure of the chemical industry. That’s all that has to happen. You don’t need new production to go downstream and do the chemical products. It already exits. You just got a substitute the raw material.
Derrick Whitfield — Stifel — Analyst
That’s great. Thanks for your time and responses.
Dr. Patrick R. Gruber — Chief Executive Officer and Director
You bet.
Operator
At this time, this concludes our question-and-answer session. I would now turn the call back over to Dr. Gruber for his closing remarks.
Dr. Patrick R. Gruber — Chief Executive Officer and Director
Thank you all for joining us. It’s an exciting time for us here at Gevo. I’m pleased to be moving forward. Lake Preston feels pretty good after all this time to get on with it. I appreciate all of our partners who are working with us to do the defossilization, decarbonization. That’s going to be a tremendously important thing as we go forth, and the solutions are going to be slightly different in each location. And our customers have been great. They’ve been up the learning about how to do sustainable agriculture, how to think about counting carbon and learning the ins and outs of this whole business because it is different. We have to account for the whole supply chain. And we are off to drive CI score down. And we are trying to change the whole of the business system together. So it’s a pretty interesting game to play. I’m looking forward to it and getting on with it, and I’m glad our teams are doing such a good job of getting things done.
And thank you all, for your support in Gevo. With that, have a good afternoon.
Operator
[Operator Closing Remarks]