Good day. Thank you for standing by. Welcome to the Gevo third quarter 2022 earnings conference call. 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 one one on your telephone keypad. Then you will hear an automated message advising you that your hand is raised. Due to time, we would only like to ask one question and one follow-up. Please be advised that today's conference is being recorded. I would now like to hand the conference over to our speaker today, John Richardson. Go ahead, John.
Good afternoon, everyone. This is John Richardson, Gevo's Director of Investor Relations. Thanks for joining us to discuss Gevo's third quarter results for the period ended September 30th, 2022. I would like to start by introducing today's participants from the company. With us today are Dr. Patrick Gruber, Gevo's Chief Executive Officer, and Lynn Smull, Gevo's Chief Financial Officer. Earlier today, we issued a press release that outlines the topics we plan to discuss. A copy of this 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's sustainable aviation fuel projects, its sales agreements, its 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 in this call. The relevant definitions and GAAP reconciliations may be found in our earnings release and 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. We are providing a simultaneous webcast to the public. A 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?
Thanks, John. Good afternoon, everyone, and thanks for joining us on our call. We filed our Form 10-Q earlier today, and we ask that you refer to it for more detailed information. It's been a tumultuous year so far in the financial markets, and there will likely be more to come over the next few quarters. Although our stock price is disappointing to me and to our shareholders, our balance sheet is in great shape, and Gevo's team is focused on pushing forward with our net zero development plans, which I'll talk about shortly. I'm confident that the value of what we are doing will begin to be reflected in Gevo's stock price as we continue to move forward with the growth of our business and the deployment of our net zero plants, starting of course, with Net-Zero 1.
In the meantime, our business development team continues to see strong demand for low-carbon drop-in fuels from the commercial airline industry, as well as from trading arms of some large integrated oil and gas companies. It doesn't look like there is enough supply coming in the future based on the publicly announced projects that we know of. I believe the airline industry will need every gallon of low-carbon drop-in fuels that can be produced and more, as demand will likely grow exponentially over the next few years. Scalability, substantially de-risked and low-cost technology, and verifiably low greenhouse gas emissions across the value chain are what's important, and we have all that at Gevo. It's a strong position to be in.
As we noted in our company update several weeks ago, Gevo has more than 375 million gallons per year of predominantly take-or-pay fuel supply agreements in place with high-quality third parties. These agreements represent approximately $2.3 billion in expected annual revenue based on current market projections and assumptions. These agreements are critically important to satisfy the requirements of potential lenders that we are working with to provide project-level debt financing for our net zero build-out. I'm pleased to tell you that we have begun to generate revenue from our Northwest Iowa RNG project. The biogas production has been going well, and we are still debottlenecking equipment to maximize volumes. We have begun collecting data on gas quality and production volumes, which are needed by CARB to get an approved pathway under LCFS. We already have approval for RINs.
I expect that the project will begin generating a meaningful volume of RINs in January 2023. However, LCFS credits will probably lag that by at least six months because of the backlog at CARB to get the necessary approvals. Our RNG team has worked tirelessly to ensure this project stayed on schedule, and I believe that we have built a state-of-the-art RNG operation in northwest Iowa, and it's performing well. In September, we had the groundbreaking ceremony at our Net-Zero 1 project location in Lake Preston, South Dakota. NZ1 is our first commercial-scale, net zero carbon sustainable aviation fuel plant. Construction has begun, as it always does, with site preparation. We want to get the ground prepared so that we can move quickly in 2023 once engineering has progressed far enough to start full construction and once the ground thaws out.
We expect to start construction early next year with a limited notice to proceed, even in advance of the full financial closing, which itself should happen sometime in the middle of 2023. We intend to keep the project on schedule by beginning construction with Gevo paying the bills as needed before the financial close. That will ultimately fund the complete construction of Net-Zero 1. We currently project that we are on track for a 2025 full production startup. We've had some good news of late. The supply chain bottlenecks seem to have plateaued for now, while most of the issues around transportation delays have improved and are projected to continue to improve. Obviously, this is really important for a capital project. Additionally, costs of some materials and long lead items look like they are starting to stabilize.
Think about steel and the other components that can go into a project like ours. It's starting to flatten out. This is good. Our capital cost projections look reasonable, and I expect a more stable price environment and materials availability as we move through next year. At NZ1, in addition to using renewable energy to drive our CI score down, we intend to use carbon sequestration. The plan is to capture the CO2 produced during fermentation from biomass carbon and geologically sequester it. We recently reached an agreement with Summit Carbon Solutions, one of the leaders in the space. Summit is expected to provide NZ1 with a CO2 pipeline, access to transport, and to safely dispose of the CO2 produced and captured during our SAF production process. When combined with sustainable agricultural practices, we believe our SAF will have a negative CI score as measured using Argonne GREET. Negative.
That's real good. We expect to be the leader in low-carbon SAF production. Given the offtake agreements that we've signed up, it's clear that we're going to need capacity beyond Net-Zero 1. We have a good plan in place upon which we're executing. This plan includes greenfield and brownfield sites, along with partners who are interested in developing advancing projects. We aren't ready to disclose the details of this effort yet, but it's really exciting. We believe we are developing a reliable path to growth with ready access to the capital that we will need for these projects while minimizing dilution to Gevo shareholders by deploying capital at subsidiaries below Gevo, Inc. We expect that the capital for these projects will be gathered at one or more project or platform companies below Gevo, Inc. level.
We expect Gevo will maintain a controlling interest in these companies, and the only balance sheet impact to Gevo would be its equity interest in the project and platform companies. Our Net-Zero 2 site selection process has been active for several months, and we have narrowed down the potential locations to a handful of very attractive sites based on a variety of factors. Key among these factors is reliable access to low-carbon energy for process energy needs and abundant low-carbon feedstock for ethanol that's sourced from farms with favorable farming practices. We're not ready to discuss the details around the status of these projects yet because many of the fundamental details still need to be finalized, and we don't want to tip our hand too early anyway. We are excited to have such a strong portfolio of locations identified for future NZ projects.
Tracking of carbon and proving carbon reduction is essential and critically important to our business. To that end, we've been making progress on Verity Tracking. Verity Tracking is a system to track carbon beginning from the farm practices through land use, the energy used production across the whole of the value chain, and out to the wing of a jet, and even after it's burned. Verity uses distributed ledger technology, also known as blockchain technology. The idea is to make our carbon values completely traceable, trackable, immutable, and valuable. The USDA agrees it's a good idea, and they have selected us for a grant of $30 million to help develop the system. We're still negotiating the final details of the grant. We expect to accelerate the programs with this money. I can tell you that Verity resonates in the marketplace.
The idea of tracking carbon from farm level forward into products has been discussed by lots of people, but the question is then how best to do it? We think we have a good answer for that, and that's Verity Tracking. We recognize Verity Tracking has relevance beyond our own ATJ process and can provide value to other jet processes, biofuels, and even food. I think Verity Tracking has potential to be an attractive standalone business in its own right, and we plan on further investing and developing this business. I am pleased with the progress we have made over the last year and a half on Gevo's goal to decarbonize the aviation industry. This inflationary environment has been unsettling, and it has impacted our expected capital costs for NZ1. They've gone up some. We have it budgeted now.
The macro environment for low carbon fuels has stayed strong, and project returns appear to even be better than we originally thought. The project returns are even better than we expected before. The momentum behind our efforts has never had such a level of broad-based support as we do now, and I believe that it won't change with any potential political reshuffling that happens over the next few years. The need for net zero fuels is undeniable, and the goal to reduce carbon emissions has been generally acknowledged, included by those in the fossil fuels industry. We know the path to success, and I'm confident that we have the right people internally and the right partnerships externally to achieve our billion gallon per year goal by 2030. Now I'll turn the call over to Lynn to comment on the quarter's financial highlights. Lynn?
Thanks, Pat. We ended the third quarter of 2022 with a strong liquidity position of $500.4 million in cash, restricted cash, and other liquid investments. Restricted cash totaled $76.9 million and is associated with the Northwest Iowa RNG bonds and certain collateral related to the development of Net-Zero 1. Long-term debt outstanding of $67 million is related to the Northwest Iowa RNG project. Our corporate spend, that is SG&A, was approximately $7.5 million for the quarter, net of non-cash stock-based compensation of $3.6 million. During the third quarter of 2022, we invested and capitalized $22.5 million in cash in capital projects, comprised of $15 million into our Net-Zero 1 project, $7.3 million into the Northwest Iowa RNG project, and approximately $0.2 million into other capital projects.
Earlier in the year, we began the process of suspending production at the Luverne facility in order to focus our attention on the Net-Zero Program planning, design, and financing. During the third quarter, Luverne was idled and placed in a care and maintenance status to be used for marketing, testing, and R&D purposes. This change, combined with Luverne's history of operating losses, drove an accounting requirement to perform an impairment testing on the value of the asset. Those tests indicated that an impairment existed and required that the assets be written down to their estimated fair value. For the three and nine months ended September 30th, 2022, the $24.7 million impairment charge represents a large portion of the basic and diluted net loss per share, accounting for $0.10 and $0.11 respectively.
We are progressing our Net-Zero Build Program and are in the process of seeking debt and equity partners for Net-Zero 1 and projects beyond the flagship project. Third-party debt and equity financings for the program are being structured on a non-dilutive basis at the asset level rather than at Gevo, Inc. The equity outreach is going well with a substantial market interest. We expect to secure one or more investors as a result of those efforts. The Net-Zero 1 debt process is underway with a dual tracking of commercial debt sourcing and DOE guaranteed loan sourcing. Both tracks are progressing well, and we expect to secure non-recourse debt for the plant construction sometime around mid-2023. As Pat mentioned, we continue to spend development and engineering capital to progress the project and maintain its timeline in advance of securing the debt. I'll turn the call back to Pat.
Thanks, Lynn. Operator, please open the call for Q&A.
All right. Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star one one on your telephone and wait for your name to be announced. With limited time, we only have time for one question and a follow-up, so please stand by while we compile the Q&A roster. Okay. Our first question comes from the line of Derrick Whitfield from Stifel. Go ahead, Derrick.
Thanks all, good afternoon.
Hey, Derrick.
My first question, I wanted to ask if you could offer a general update on the ADM and Chevron partnerships.
Sure. With Chevron, we've had the discussion, we extended the contracts with them or the letter of intents with them, that'll be an ongoing discussion. We just didn't want to put it out there as a public device given the turmoil that's gone on and all the rest, plus we don't want to get boxed into it. Those are still ongoing discussions. Regarding ADM, same kind of thing. We're working with those guys and making progress on things. Those projects are really big, we can't do that by ourselves, that one's going to be slightly more complicated to do. It's plugging along and making progress. Our fate doesn't depend upon either one of those. It isn't intended to.
Our fate depends upon NZ1, NZ2, building those out, along with the other sites where we work with brownfield ethanol plants, and there's a number of those that are attractive. We look at it as a point of view of those big ADM assets are great, love to see them happen, but you know what? Those are giant projects, and I'm not betting the ranch on those because of the timeframes of things. I got to go get stuff built. We have actually close to 400 million gallons of contracted take-or-pay jet fuel. You know what? We got to go get her done and get her built out and play with people who are going to get it done in time for the network.
Terrific. As my follow-up, wanted to ask on the Summit Carbon Solutions agreement, are there any general economic parameters you could share with us on your take of the environmental attributes inclusive of the Section 45Q?
I don't think it's appropriate to comment on it because they've done so many deals with so many people, and I don't want anything misinterpreted, but it's a good deal. It's a fair deal for us and satisfies our needs to make sure that we have the CI scores and the value associated with that that we need.
It works out economically, it's attractive. For both of us, both them and us.
Perfect. Thank you for your question. Our next question comes from the line of Shawn Severson from Water Tower Research. Go ahead, Shawn.
Hey, good afternoon, everyone. Pat, I was wondering, I know you can't talk about specifics, but can you give some color on how the strategics are viewing this? As you're looking for investors and the equity side and even on the debt side, what's the buzz from people that's of interest on this versus ?
One of the very important points that I want all shareholders to understand is that we don't like our stock price up here at Gevo, and I don't want to do more dilution. Right? How do you skin that cat? We have to raise a bunch of money to go build out plants and projects. The good news is that we have lots of demand for the product that's firm and committed in these offtake agreements. We intend to raise money at what we call a platform level. It's beneath Gevo, it's a private company level. There, we would take funds into a private company, and that private company beneath us would go about building these projects and adding debt to each project. Guggenheim and Citi are co-leads on this banking exercise. We're in the midst of the process. It's going good.
There's lots of interest. It gives great comfort to everyone that we're working with Axens, which is the most proven technique, alcohol into jet. They like how we think about it, with how to drive the carbon scores down and even negative, and we're adding the partnerships together. Those people interested can see the pipeline of sites and the potential economics, which are attractive. I predict we're going to be successful at this and raise money and bring in some really good partners. The debt solutions, we'd expect these people to participate in Net-Zero 1 to a degree, and we're making progress on the debt as well. We've brought in bankers in addition to Citi for that.
Citi and Nomura Greentech.
Yeah, Nomura Greentech. That's going well, too. There's lots of interest in the space. People don't know what to do with their money. There aren't that many solutions that can work. It's about showing that it all can be properly de-risked, put into a project format, getting the financing. As I said, this isn't selling stock at the Gevo level. That's not what this is. This is about investing down beneath Gevo in projects or groups of projects.
My follow-up to that is when you look at the equity side of it on the NZ1 and going forward, is this something that we should expect to have multiple equity partners, or does this seem like it could have one big check written from a strategic or whoever? Are they going to be composed of two or three? Just the nature of what we're seeing out there for testing these waters.
Well, I think that would be the check. I don't know exactly how we'll structure that yet. Excuse me. I think it would come from the platform company. We push some of our money down to the platform company. The other investors in the platform company, collectively, they push money down to the project of the NZ1. That's how I think it would work.
Right. That's, I guess what I'm trying to understand is you put your equity in and then would you expect to have two or three other partners per plant, or do you think this goes with various strategics writing big checks along with you at the plant level for the equity?
I think what it would be is the platform itself, a platform company. As investors, we're committed to investing in NZ1 and additional NZ projects. How that mix of capital goes in, how much actually gets spent specifically of how much is ours versus theirs, and how many people participate, well, that's part of the sausage-making that we're doing. Everybody says, "Gosh, we got to build out 400 million gallons over the next five years," and that's like, what? Eight plants the equivalent size of NZ1. That's one heck of a lot of money. That's going to take-
Right
not just one partner. That's going to take multiple partners working together to go deploy that.
Yeah.
Maybe three.
Hang on. I think it's useful to have Lynn.
I was just going to say it's $3 billion-$4 billion, $3.5 billion of equity. The parties we're talking to, many of them can certainly write a check for Net-Zero 1 on their own, we're getting quite a bit of interest, we'll have to accommodate as many people as we can on terms that work for us.
All right. Just a reminder to ask a question, to please press star one one on your telephone keypad to be put into the queue. Our next question comes from Amit Dayal. Hold on one second. Amit, go ahead, Amit. Go ahead.
Thank you. Good afternoon, everyone. Pat, just in terms of the cash outlay for the next, say, 12 months, how should we think about your needs on that front coming up, what are your plans in terms of the cash usage over the next few quarters?
I'm going to have Lynn ask that question. Lynn, would you address what our rough expected cash spending would be on NZ1 and corporate, too?
Corporate, it'd be something in the order of we're running at a rate of about $33 million a year of run rate for a corporate burn. We'll also invest some in Verity and the Grower Program, although the bulk of that investment will come with our DOE, USDA grant, which will help defray a lot of the cost of the development of Verity and Grower Program that supports Net-Zero 1 to start and other projects down the line. RNG is completed, so that shouldn't be a cash drag. It should start generating cash. We get to Net-Zero 1, and I believe that we'll probably enter into a limited notice to proceed to do detailed engineering and further site work to take us to the expected close date, the debt and third-party equity close date.
I could see us putting another probably $90 million or so into Net-Zero 1 to take it to financial close. We don't intend to leave all of that in the project. We intend to be reimbursed by the project's sources of funding for a portion of our development expense, so that what we're leaving in the project is a smaller percentage of the total equity of the project. That's kind of the equity needs for Net-Zero 1. We're also going to be spending money on Net-Zero 2, possibly Net-Zero 3 development work, engineering and such. A little too early to know exactly the pace and the quantities around those two projects. Those are two and three.
The levers we have to moderate things is that we're going to wind up driving hard for NZ1, get it all de-risked, get the engineering, hold the schedule, get the site work going, make sure we're getting equipment ordered that needs to be ordered, moving it ahead so we hold the overall timelines and get ourselves a close kind of the mid-year of 2023. In that, we'll have a decision to take how much money do we take back out of that project, because we'll have quite a lot in, given what we've spent so far over the years, plus what we're about to spend. Do we leave it in there and let it ride? We could do either one. It depends upon how we're feeling about the world at the time. Lynn's right. We've got to do development work at NZ2.
We've already begun that. We're already spending real money on that because we can taste it and we know that other people are interested in it. We'll make that happen, too. There's other sites that we have to do, too. This is about when you think about our problem that we have, a good problem, is that we have lots of demand that's contracted with big contracts. We've got to go fulfill those. We got to go build it out. They're right for project financing. We just got to go get that whole system figured out how we go about doing that with the EPC firms and the financing and the debt layered on there. The flavor that Gevo takes is that we're going to look more and more like a developer and licenser, which is good. Those are good.
They give higher returns for dollars. Maybe someday the world will change and we can have money up at our corporate balance sheet. The reality is we're going to use our money wisely and leverage the heck out of it with others and attempt to grow. That's what we're going to go do.
Understood. Thank you for that, Pat and Lynn. Just one final one from me. With respect to the RNG revenues and cash flows, should we assume 2023 is where you can get that $12 million-$16 million that you have been expecting from this deployment?
That's an annualized run rate expectation of EBITDA. Because of delay in receipt of cash through the LCFS in particular, because CARB is pretty slow and a pathway takes time, that annualized run rate probably won't be fully realized in 2023 because of that delay.
We won't see all that money, it won't be the full annualized run rate. We'll see a chunk of it. We don't have a clear view as to how much of the chunk that we'll see in 2023. It's going to contribute. It'll be noticeable. That's what I would expect. It's not going to be the full amount in 2023, given the timing of everything and the way that all the accounts work for the LCFS.
All right. Thank you for your question. If you would like to ask our presenters some questions, please press star 11 on your telephone right now to be brought up on stage to ask them a question. We have Derrick Whitfield again asking for another question. Go ahead, Derrick.
Yes. Wanted to ask another question just on the offtakes and the contractual obligation associated with those agreements. Given your commercial success in signing those, what are your thoughts on the progression of plans beyond NZ1? While clearly the investor would have a say, would it make sense to scale the second plant beyond the size of NZ1 once you de-risk the first project?
Yeah. Here's how I think about it, is our problem is how do we grow big, how do we grow? There's lots of these partners that we're negotiating with who want even to grow faster. It makes for an interesting time. Remember, the point of view of everybody is like, look, you all know how to make the ethanol. You know how to decarbonize that. You've shown that how to do it. You know how to the ATJ looks like that's de-risked, technically. This is all about capital deployment and growth. How do we do that best? You still got the issue to go build things first and all that. NZ1 is based on 100 million gallon ethanol plant design.
It's going to be a modified ethanol plant where we've really decarbonized the ethanol plant to lower the CI score through all kinds of little techniques, that trade secret know-how stuff that we're doing. It's integrated to the ATJ plant that's based on an Axens design that we're modifying, and that all looks really good. You know what? That's going to be designed as cookie cutter. It could go apply that plant design right straight to any other 100 million gallon plant. However, that other 100 million gallon ethanol plant at some other site would also need to get decarbonized because ethanol plants generally are not decarbonized. We have that design, so think of it as a turnkey type plant that we could deliver.
In fact, we were just talking with engineers today about how to build that in modules in such a way that we can do that sort of thing, build it really quickly. That's one path these things take. The trick is you got to have people, got to have partners then on the ethanol side who have true decarbonized plants. We're going to have to help them do that by bringing in renewable energy. That's one thread of growth that we see that's viable, and we have projects in development on that front. We have another one, which is NZ2, that we refer to it. It's planned to be three times bigger than NZ1. The reason we're doing that is because we want to get to scale quicker, and there's some certain sites that we've identified that are way the heck better than others in our opinion.
They're suitable for much, much bigger plants, given all things considered in the access to defossilized energy. Of course, that same size plant design applies to those ADM type plants too. It's the same size. We see that there's leverage in that three times the size scale. There's leverage in that we can use with others here and ex-U.S. That's how we think about it. Think about it as NZ1 is based on 100 million gallons of ethanol, making 60-plus million gallons of hydrocarbons. The NZ2 would be three times that, 300 million gallons of ethanol converted into 180-plus million gallons of hydrocarbons. We have those two designs that pretty much can accommodate whatever's needed anywhere, and that's how we're thinking about it. The answer is yes. NZ2 is going to be the plan is three times bigger.
That's what we're working on. Because then we already have the 100 million gallon version in the bag.
Pat
we're working on the next bigger.
Pat, just on that 3x design, is there capital efficiency gains to be had with that incremental scale that you guys can quantify at this point?
No, it's not worth it. Whatever I say, I'm going to be wrong, and everyone's going to go, "Pat said this," and it's wrong. Yes, there is. It's not worth A few standard engineering rules, you could figure it out, but it'll come down to details of how we do it. The answer is yes, there is. It's going to be advantage, and it gives very attractive economic returns.
In general, I think the ATJ portion scales better than ethanol. Ethanol has got some efficiencies, but ATJ has substantial efficiencies.
All right. Thank you. That's all the time we have for questions right now, so I would like to turn it back over to Patrick R. Gruber for closing remarks.
Sure. Thanks. Thanks again for joining us this afternoon, and look forward to seeing you folk, crossing paths with you at the conferences in the coming quarters. It'll be Lynn and I on the road along with John Richardson, talking to folks and educating people. It's going to be very interesting to see how our platform fundraising turns out. There's lots of interest. There's been a lot of money sitting on the sidelines. Hopefully, people get it going and get it deployed. Our NZ1 projects making very good progress. The engineering's coming together. The engineering firms are all working well with us, so I feel really good about that. Where I turn my attention is to how do we grow big, and how do we play big, and who are we playing with, and what strategic play, what financial strategic play?
It's a very interesting game that we have to sort out. That's what's in front of us that we've got to go make happen. It's bigger than little old Gevo. We just got to go play the game. We are lucky and fortunate, and we did a good job in getting ourselves a position where we have very good technologies to make SAF, and they're proven, and that'll hold up to scrutiny to anyone. We feel really good about all of that, and we can get on with it. Look forward to seeing you guys in person wherever we can. With the onset of the holiday season directly ahead, I wish you all happy holidays, even though it's a bit early. In the meantime, if you have further questions, please reach out to John Richardson.
John can corral Lynn or myself and follow up with you if needed. With that, we conclude the conference call. Thank you.