Today, and thank you for standing by. Welcome to today's conference call. Gevo announces the closing of its acquisition of Red Trail Energy's asset. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a question-and-answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message advising your hand is raised. To withdraw your question, please press star 11 again. Please be advised that today's conference is being recorded. I would now like to hand the conference over to Eric Fry, Vice President, Corporate Development. Please go ahead.
Thank you. Good morning, everyone. This is Eric Fry, Vice President of Corporate Development at Gevo. With me on the call, we have our CEO, Patrick Gruber, Chris Ryan, President and COO, Paul Bloom, Chief Business Officer, and Lindsay Fitzgerald, Executive Vice President of Corporate Affairs. Earlier this morning, we announced the closing of our acquisition of the assets of Red Trail Energy. We will make a few brief remarks on this call and then open it up for Q&A. 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 our sustainable aviation fuel projects, our recently executed agreements, our renewable natural gas project, and other activities described in our filings with the 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 on this call. The relevant definitions and GAAP reconciliations may be found in our press release, which can be found on our website at www.gevo.com in the Investor Relations section. Following the prepared remarks, we'll open the call for questions. I'd like to remind everyone that this conference call is open to the media, and we're providing a simultaneous webcast to the public. A replay of this call and other past events will be available via the company's Investor Relations page at www.gevo.com.
I'd now like to turn the call over to the CEO of Gevo, Dr. Patrick Gruber. Pat?
Thanks, Eric. Good morning, everybody, and thank you for joining us on short notice. We're very excited to talk about this deal. It's a really transformational thing for our company, and we wanted to give you a chance to ask questions, so earlier today, we announced that Gevo has closed on the previously announced acquisition of Red Trail Energy's ethanol production plant, carbon capture plant, and the sequestration assets up at Richardton, North Dakota. The purchase price was $210 million before the customary adjustments, including working capital. The purchase price was funded by a combination of cash from our balance sheet and $105 million, five-year senior secured term loan from Orion Infrastructure Capital. I'll refer to them as OIC. OIC also put $5 million of equity into that deal, making them a minority equity partner with Gevo in our ownership of Net Zero North.
Now, we're very pleased with this outcome, and here's why. One, OIC is a premier partner. Second, the loan provides us with non-dilutive capital. It's secured at the asset level, not the Gevo level. It's flexible. It doesn't come with financial covenants, and it does not have a mandatory amortization. OIC has been around the block. They understand these kinds of businesses. Finally, OIC has indicated interest in providing up to $100 million more debt for projects up at that Net Zero North asset. Now, turning our attention from the financing to the asset itself, I really want to talk about how this acquisition is transformational for our company. Today, without any further modifications, Net Zero North is [uncertain] annually . Part of the reason is because this is one of the lowest carbon ethanol plants in the U.S. CCS makes a major difference.
This is a huge step towards Gevo's goal of achieving positive run rate adjusted EBITDA this year. It's a good step in the right direction to put us on a path of profitability, and that helps us. Now, Chris Ryan, our President and COO, is on the line as well. Chris, would you like to make a few comments before we go on?
Thanks, Pat. I'd like to highlight that Net Zero North is a great set of assets that's made up of an ethanol plant, one, a carbon capture and sequestration facility, two. Capacity for future growth of carbon capture and sequestration. And there's an existing team there that's doing a great job operating those assets at the site. First, the ethanol plant at Net Zero North is producing 67 million gallons a year of ethanol, which includes 2 million gallons of corn fiber ethanol, which has an extremely low CI score or carbon intensity score. It also produces about EUR 420 million a year of low carbon animal feed and EUR 18 million of low carbon corn oil.
So that site at Net Zero North is sitting on top of one of the thickest parts of the Broom Creek Formation, which is about a mile below the surface where CO2 is sequestered. So that enables us to not only sequester all the biogenic CO2 coming off the fermenters today, but provides a lot of future opportunities to sequester much more CO2 as we identify those opportunities. The ability to sequester biogenic carbon directly at the site currently results in over 160,000 tax credits and a significantly lower carbon intensity score for the ethanol and feed products. And that results in revenue streams of tens of millions of dollars per year, which are not typically found in an average ethanol plant. All of this results in a proven revenue stream with lots of opportunity for growth.
We'll pursue growth opportunities which don't require much Gevo capital, and those include, one, getting the low CI pathways for ethanol approved in Canada and California, which opens up those markets for our low CI ethanol. Second, we'll be selling biogenic carbon removal credits. Third, we plan to decarbonize the site further through our partnerships on low carbon energy that we've built up in our Net Zero One project, and ultimately, we expect to implement an ethanol-to-jet facility at the site for SAF production, so we've already begun engineering that SAF plant, and we did that by leveraging the engineering work we've already done for Net Zero One. It's basically a copy-paste.
In fact, in our financing work for Net Zero One, we've met a number of investors and debt providers that want to see multiple SAF plants, and any one of these companies could be interested in financing this Net Zero North SAF plant. So again, not much Gevo capital is required. I'm really excited about Net Zero North and what the future holds there. So back to you, Pat.
Thanks, Chris. It's a really exciting opportunity. So to put this in perspective, Gevo is in an unusually strong position for a technology commercial development company. We have to do marketing as well. We have to go out and sell these high-value carbon credits. The market hasn't seen much of that, not real good stuff. So we are also believers that we have to operate assets in order to stay at the cutting edge of technology in the process. This is all part of what we're trying to do strategically. We know that we have, well, we strongly. Producing SAF, the lowest cost of production. That's huge. And so now it's about how do you form the capital around it, get other people to invest in those projects, and all the rest. Well, Net Zero North can provide a great opportunity because a lot of the infrastructure is already built.
It solves one of the key questions that we had to address, is, "Hey, what are you going to do about CCS for Net Zero One?" Well, great. Now we have an alternative up there that we can bring the carbon dioxide to if we had to. We don't want to, but if we had to, and so all in all, generates more cash, trust, improves our EBITDA position. Overall, it's looking pretty good, and this is all about setting ourselves up for being able to make money independent of these blockbuster projects, so it's an exciting opportunity. Let's turn to questions. Operator.
If you'd like to ask a question at this time, please press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from the line of Derrick Whitfield with Texas Capital.
Good morning, all, and congrats on this transformational transaction.
Thanks, Derrick.
With respect to the $30-$60 million of Adjusted EBITDA referenced in your press release, could you walk through the underlying assumptions driving the bookends of that range?
Yeah. Eric, I'm going to call upon you to do this because we've been working this a lot, and it's a pretty wide range because of some of the uncertainties that are out there. So why don't you give us the foundation of what we're talking about, Eric, and then talk about what might be or what is or what we expect?
Yeah, sure. So Derrick, I'd break it down into two general buckets. The first bucket is if you look at Red Trail's SEC filings over the last three fiscal years and just do the work out their EBITDA from their income statement, it varies depending on corn crush, just like any ethanol plant. But there's sort of a base average EBITDA there of about $18 million a year, okay, if you just look at their last three fiscal years. And that really includes the cost of running CCS, but little to no benefit. And the reason that includes little to no benefit is because the 45Q that was historically generated as a tax credit as a result of the value of the CCS doesn't hit the income statement, okay?
So we think of that as the first bucket, is sort of, okay, there's going to be this variable base EBITDA that just results from it being an ethanol plant in a good corn basis part of the country. That's number one. Number two is, okay, what's the value that you get on top of that from carbon capture? And there's actually several sources of that value. One is the 45Z tax credit, which rewards ethanol and other fuels for having a carbon intensity score below 50. But there's other sources of value too. Let me just focus on the 45Z. The other sources of value are lowering the CI score in California, Oregon, Washington, British Columbia, and those places. But let's just look at the 45Z. So this plant last fiscal year generated about 67 million gallons of ethanol.
If your CI score with CCS is well below 50, kind of somewhere between 0 and 50, if you get down to, let's say, 25, just to pick an example, okay, just to show how the math works, it's $0.02 per CI point per gallon. So if you're at a 25 CI score, that's $0.50 a gallon. If you're above that, maybe you're at $0.40 a gallon. If you get to 0, you're at $1 per gallon. Now, we're not expecting to be close to 0, but we'll be well below 50. So at $0.40 a gallon on 67 million gallons a year of ethanol production, you can then easily see how that's in the $25 million per year kind of ballpark. I'm just using zip code numbers here.
And so you add that to the base EBITDA, that alone, just those two buckets alone, would get you $30 million or more into our range that we're talking about, that $30-$60 million of Adjusted EBITDA. And when we talk about it.
Yeah.
And I just have to put a finer point on it. If the CI scores under 45Z, that's in the green under 45Z, we'd be in the low 20s is what it looks like. And so that's a good place to be. And that's without doing anything special about agriculture or any special spiffs or anything. That's just what it looks like as is, given what it is. And the rule was just published yesterday, so that's interesting too, considering all the noise. So anyway, it's in a pretty good spot. Go ahead, Eric.
Yeah. No, those are the two most certain buckets I wanted to point you to, Derrick. Then the next one is, okay, well, what about voluntary carbon credits for the ethanol that doesn't land in an LCFS market? Or what about the additional state credits if you go into depending on what LCFS state you go to? But those two are the most certain and most kind of easy to kind of get your head around for starters. And so you can easily see how you start to get into that range that we're talking about. And just keep in mind, when we say Adjusted EBITDA, we define that including the value of the tax credits which will be sold.
So historically, what Red Trail did is they would generate a 45Q tax credit and then distribute that to their shareholders, and that would show up as a tax credit on their tax filings. For us, Net Zero One will generate these tax credits, and we will sell and monetize that on the tax credit market to corporate taxpayers to generate cash. So we consider it a form of revenue, if you like, or EBITDA, the non-GAAP measure, but we consider it a form of incoming cash flow because you wouldn't make the CCS if you didn't have that cash flow.
Terrific. Thanks for the color. So really, net-net, your guidance feels quite conservative. And maybe just one clarification to make sure I'm correct in saying this. But that product, that ethanol, has not been sold to California historically with that CI score attached to it. And when we think about the, again, you're firmly in the middle of the range now without counting for LCFS. Once you layer in LCFS, we're really talking about a much bigger upside than what we're currently contemplating.
Yeah, I can talk about that. And Pat, you or Chris can jump in too. But that's exactly right, Derrick. What I would say is that the Red Trail assets, they got their British Columbia carbon intensity score, I think it was early 2024. The California, which is a huge market for ethanol, carbon intensity score, including CCS, is not yet finalized. And so what that tells you is that the historical EBITDA of the asset, there's a lot of upside to it by getting access to those low CI markets where this is some of the lowest carbon ethanol in the United States.
One of the things that I'm going to call upon Paul Bloom. Paul Bloom, we've recently named him to be the Chief Business Officer of Gevo. And he's in charge of all of our products generating the revenue. Paul, you want to give a comment about how we're thinking about these things broadly in that because you got the gallon, it's got carbon attached to it or not detached to it. How does that work, and what are you thinking about? And also then talk about these carbon credits from CCS.
Yeah. Thanks, Pat. And I think this is a really good [one that] creates a lot of optionality for us. We talked a little bit about 45Z. We talked about the LCFS credits. And this creates optionality. How do we monetize and optimize returns by either allowing us to sell that carbon value with the fuel under approved pathways, or we can actually detach that durable carbon dioxide removal value and sell that into the global market? This is a really good way that, as we think about focusing on maximizing returns from low CI ethanol and then SAF in the future, like Chris said, gives us a lot of levers. 45Z is really only part of the equation. LCFS is part of the equation.
The thing that we haven't talked about too much is really the durable, high-quality biogenic carbon removal credits that the CCS site really allows us to go after. And just so everybody's clear, these are durable CDRs or carbon dioxide removals. These are the highest quality, and these are the lower volume end of the spectrum of the carbon market. And when we think about that, these are really the top 0.5% in the global market today. So just to give you a range for when you think about the carbon markets, they start out at about a few bucks a ton. That's not what we're talking about.
We're talking about the durable CDRs, which start at the low end when you think about things like biochar and things like this of $100 a ton all the way up to the highest quality where we're at in the $1,000 a ton range. We'll be probably getting into this, and it's really exciting because we'll have this high quality. The important thing is that this gives us the broadest set of solutions for our customers and companies who are looking for carbon abatement globally. We're out there in the market today with customers. We're already engaged on these solutions, and we're excited. They're excited about having one source with us for the highest quality carbon products.
Thank you for that.
Paul.
Go ahead.
Yep. Pat, if I could add some clarification on that because that's an interesting wrinkle that I wasn't really thinking about before. But with that EBITDA stream from the ethanol, are you guys able to both qualify for 45Z and sell into that durable kind of credit market, or would it need to be one of the others that relates to the 45Z or carbon credit market?
Paul, go ahead.
Yeah. It's a great question. On the 45Z specifically, that's a tax credit, right? So that's a little different. When we're talking about the LCFS credits, this is the optionality that we have. So if you're going to sell into a low-carbon fuel market, you can either attach that extra CCS value, and if you have the approved pathways, which we do, to sell into those markets with that CCS value, or you can detach that CCS value and sell into the carbon market. So there is some optionality there. Like you said, not as much on the 45Z, but it really impacts your LCFS and voluntary market. That's where you see the optionality.
One of the interesting things about these. Everyone gets so focused on the regulatory side of things and just what's the 45Z or what's LCFS in Oregon or Washington or Canada or whatever. That's only part of the story. There's a market demand for true carbon credits or carbon abatement. Companies are not giving up on this. This is not across the world. Companies are recognizing that they're going to be still held accountable for their carbon emissions, and these are people downstream, for example, of airlines. Airlines, of course, have their policies as an industry, but it's the people downstream that care. It's an interesting game, and it's a developing market, so we have to have product to go figure out the market, how to maximize value, and all the rest.
That's why we've organized it now with Paul as the Chief Business Officer because that's inherent to selling both the physical product, and then we also have to maximize the value on the carbon. And regulatory is a part of that, and there's some trade-offs to be made as we think through it.
Pat, if I could ask just one more question, and I apologize for so many questions, but with respect to the carbon capture facility, maybe if Paul could just kind of speak to the broader growth opportunities in the immediate area that you guys see in the market.
Go ahead, Paul.
Yeah, sure. So today, with the carbon capture, again, as Chris mentioned, we've got up to 160,000 metric tons. That's really because of the amount of ethanol production and CO2 that we've got. Going forward, that site has many, many more thousands of tons in capability. So it's great for expansion. But it's really in the carbon market space, we're out working with customers who have a long-term interest in these durable carbon dioxide removal credits that really are independent of the specific compliance markets that where the ethanol goes. So that's really the market we're going after today. Again, it's the highest quality that's out there. And so you can think about us as we get into this market, targeting that mid-range of what I talked about. And then as we focus on kind of selling out and selling up, we'll keep you updated on the market conditions.
Yeah. So new markets. This is a thing that I think people have forgotten is that we don't believe in complete dependence and reliance on government tax credits and stuff like that. That's not a good place to be. So our whole business system, our whole business model for NZ1 is to make really low-cost products, right? Really low-cost production. We have capital to pay for. So our issue is around paying back that capital. Well, tax credits are useful for that. But in the end, what we're trying to do is establish the marketplace that pays for the carbon independent of what happens on the regulatory front. That's the game we're in. That's what we've been talking about for years. I think I always feel like we're the lone voice in the wilderness talking about this, though.
But our business is all about we see that it's possible to do. We want to build these plants that create jobs, that enhance the rural economic development, and all the rest. And it also works. And we like that. It's a good place to be. We have to establish this carbon value in the markets and make them real instead of and it's happening around the world.
Thanks. Congrats again on the transaction.
Thanks.
Our next question comes from the line of Amit Dayal with H.C. Wainwright.
Thank you. Good morning, everyone, and congrats on closing this transaction. To begin with, Eric, maybe can you just confirm whether this $30 -$60 million EBITDA range is a run rate you'll be, say, by the end of 2025, or is this potentially the number for the whole of 2025?
We think in terms of run rate, Amit, but we closed on January 31st. So we're kind of missing one month, and now we're kind of ramping up. We think of it in terms of run rate terms, but if we achieve that, it's likely that that'll be similar to 25. It'll depend on corn crush spread too. Remember the $18 million figure I gave you? That's a three-year through cycle average. That can go up and down depending on corn crush, just like any ethanol plant. But it's a well-running plant that operates, that has good yields, has good uptime. So we'll capture the highs when it's high. We'll be a little lower when the industry's lower. But yeah, we kind of think in run rate terms, but we think we should be able to hit that stride this year sooner rather than later.
Yeah. And there's a couple of other things. Sorry, there's a couple of other things that are interesting here too that shouldn't be lost. There's so much noise these days coming out of DC. But one of the ones is the executive order of Unleashing American Energy. That one's interesting because it talks about E15. Cool. That ought to help ethanol margins. Let's go. And the other thing is that people should pay attention to this. Unleashing American Energy, it had biofuels on the same line as oil. It had refined products, including ethanol.
It had listed aviation fuel as cutting through red tape, make things happen as part of the growth of America and part of the growth of our energy solutions and all the above. These people are serious about this, and it's getting lost with all the other noise. And when it comes to. Lindsay's on the phone.
Lindsay, maybe you can talk for a minute about perspective on 45Z and what's happening. You want to do that?
Yeah. I mean, I think that 45Z is moving along as we expected. So we knew with the change of administration that there would be a delay in how things were implemented, but the conversations are still happening, and it's still on track to move forward. It's something that the industry is supportive of. It's something that, on a bipartisan level, Congress is very supportive of. So I feel good about where it's going, and I think we'll get it done and in place. And I feel confident that there's enough push for an extension.
Yeah. And the question will be in the debate, and it's a legitimate debate. It's this: we should not. The conservative position would be businesses should not have forever subsidies or tax credits for these products. I happen to agree with that. We as Gevo agree with that. They need to have a sunset. And so they shouldn't be forever things. And so I think that's where some of the confusion comes from, is that you have these things that are really mature wind and solar and all those. Do they need subsidies anymore? I don't think so. And what about these new technologies that create jobs? And just put it in perspective, something like ours. It's a big capital investment. It's in rural places, but I'm using an NZ1 project.
But if it's like 100 direct jobs, 1,000-plus construction jobs for three years, it creates 700 regional jobs right around there, $110 million of economic benefit each year over the life of the plant as long as it runs. It returns money back to the general economy for every dollar tax credit, it's like six bucks back to the general economy according to this Charles River study. So it's not like a—U.S. isn't getting a lot for it. Oh, by the way, it's cost-competitive fuel. Plants paid off. It can compete head-to-head with petro-jet, oh, except for its zero carbon footprint. That's the game we're playing. And that resonates about what's going on here, and it's the right direction.
It's capturing the carbon from the surface of land rather than from underneath, and it's making products that are economically work, but also have enormous economic impact regionally.
And strategically too, when you start considering that over the next several decades, got to diversify energy away from the Gulf Coast and spread it around the country. So we feel pretty good about where we're at is what it comes down to. And remember, all of this, remember, there's 22 pounds to 21 and a half pounds of carbon dioxide released for every gallon of jet fuel burned. We're talking about being able to abate all of it so it has a zero footprint. That's a lot of fuel, man, a lot of CO2 emissions that we can abate. And there's a developing market that says they're willing to pay for it. Okay. Let's go pin them down.
Understood. Thank you for that. Any investments needed in improving the existing infrastructure or the production operational infrastructure at Red Trail?
Chris, you want to comment?
Yeah. No, it's a great asset, and we're looking forward to running it as is.
Awesome. There's a lot of unused pore space. And so one of the things that's on our minds is how best we use that. So we're going to go through the work and discuss that. It's a wide range of options. We just got to sort through them all. We're obviously concerned - I'm not concerned is the wrong way. We want to maximize the value and profitability for ourselves. So what do we do? How do we do it? Having an operating CCS plant. We are aware of three in the country. There's two in North Dakota. We're one of those. And then there's the ADM facility. And so there aren't that many that exist. Carbon capture and CO2 infrastructure is going to be really important in the long run.
I think that one of the things that people don't, well, they haven't talked about, we see it for the insiders in the industry, is that CO2 is useful for enhanced oil recovery. So we start thinking about the back end and what's needed up there over the long run. They're going to need CO2 infrastructure, and they're going to get CO2 delivered and need more of it. And so that's interesting because that presents yet more optionality for how we might generate stuff or how we might use it in the long run because we look at it as a pricing thing. We've seen lots of people come to us with technology and say, "Hey, can we use your CO2 as a raw material to make whatever?" I'm like, "Sure.
You got to pay us more than what we get for the carbon abatement value." And so it's going to be an interesting business. It's just a different angle to play. This part of the value of the CO2, remember, a large part of it in the future is not tied up with just simply looking at the carbon credit, sorry, the government policy-driven stuff. No. We want to see it established as true market value straight away. And we see that as developing.
Understood. And the timeline for SAF production at this site, is it in the next 24-36 months, or is it even sooner than that you could have some SAF production available here?
Chris?
It takes a few years to finish engineering and financing and building out a plant, so it'll be at least a few years.
Yeah. And yeah, there's just a practical reality these days with supply chains the way they are. In the old days, what would have taken two years takes three. That's just reality. So from the day you get going and yeah, call it three years. I think three years is a reasonable timeframe, plus or minus. And we'll see, though, this executive order, as they get her going and get her implemented. It's supposed to expedite stuff. That ought to be interesting. And we'll see. But I got to tell you this. North Dakota is a fantastic place to do business. Unbelievable. These people, they do oil and gas and agriculture. And you know what? And they're all friends with each other and work together. And so it's such a refreshing climate to be in up there. It's mind-boggling, actually. They're supportive. They want to see things grow.
They want to grow their economy. They want to create jobs. They recognize the benefit that this brings, that projects like this bring to agriculture, but also to gas and oil. It helps enhance gas and oil. People forget that our stuff gets blended. And when you got a zero-footprint stuff, take a gallon of ours plus a gallon of fossil-based. Now, you got two gallons at 50% CO2 reduction. Show me other technologies that can do that. There aren't many. So everybody gets this, that there's potential here and can see the opportunity. And like I say, we're looking forward to working with the folk up there. The ones that I've met are just, they're excited. They want to help. And it's so refreshing. It's great.
Awesome. That's all I have, guys. I'll follow up with my other questions offline. Thank you so much.
Showing no further questions in queue at this time. I'd like to turn the call back to Patrick Gruber for closing remarks.
Well, we're really excited about this. As you could probably tell from us talking about it, it's going to move us along that path to getting to positive EBITDA in 2025, and when we think about that, part of it is the Red Trail. Part of it is our RNG business too, plus the integrity automation contribution, so all of that should help us. We need some little more dust to settle before we can get down to more accurate predictions, but you know what? It's good. We're going along that path, and the deal with OIC is nice because it, of course, didn't. They made a nice debt investment, not having the covenants and some of the other things that would be typical are really nice, but they're also gamers who wanted to expand the business, and they are a good partner, and we're pleased to work with them.
They did a great job working through all of this to get those deals done. And so it's an exciting time. And the business itself is exciting because this idea of selling carbon abatement, it's sold in $ per ton, not gallons, $ per ton. And so it's a different game to play that we'll have to get used to. And it's going to be a very interesting, fun thing to learn because it isn't just all about being dependent forever on the government. That's not how this works. Thanks for your time and attention and working with us. Bye-bye.
This concludes today's conference call. Thank you for participating. You may now.