Gevo, Inc. (GEVO) Q2 2023 Earnings Report, Transcript and Summary

Good day, and thank you for standing by. Welcome to the Gevo Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to turn the conference over to Eric Frey, Vice President of Finance. Please go ahead.

Good afternoon, everyone. This is Eric Frey, Vice President of Finance, I’m also responsible for Investor Relations here at Gevo. Thanks for joining us to discuss Gevo's second quarter results for the period ended June 30, 2023. 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 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 earnings 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 to your questions. I would like to remind everyone that this conference call is open to media, and we're providing simultaneous webcast to the public. A replay 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 afternoon, everyone, and thanks for joining us on our call. We are filing our Form 10-Q today, and we ask that you refer to it for more detailed information after this call. Today, I'll explain what we have been investing in, what it means, how we think about further investments, our use of capital and progress against milestones. At the core of Gevo is a whole lot of technology. We got multiple technology platforms that we developed. These include the net zero plans for IBA and ethanol and conversion of those alcohols into net zero hydrocarbon fuels and chemicals. We are already tracking and even our version of dairy RNG. We have to drive all of these things to commercialization, larger commercialization. That's our primary mission now to get these technologies commercial, we think that it's most valuable to shareholders for us to take on roles other than just being an investor in projects to make technologies commercial, someone has to take on the role of project developer. Well, that's us. Let me explain further. Now we've been investing in the technology engineering and the plant design to convert corn kernels into SAF, protein, vegetable oil, all with the potential of a net zero carbon footprint. We work with multiple technology suppliers in addition to using our own proprietary technology, we use multiple engineering firms because of their expertise and capabilities. Our plant designs are well thought through by our strong team of engineers and operators for operability, efficiency and troubleshooting. We need these plans to work well. We've got a deep bench here of people who are good at this, having designed plans in the past. We are now investing in the engineering and design of modules. We want modules because we believe it will be more cost-effective way of derisking plants and allows more rapid build-out of additional plants. Now we, Gevo, owned the plant designs and details. We are the owners of the designs or the kits as they're sometimes referred to. It's hard fought and expensive. It's taken us two years more than $100 million to get where we are today on Net-Zero One. There is no single technology supplier out there that has the expertise to design an NZ plant. It's Gevo who brings that capability. For example, it is our innovative integrated designs that reduced the consumption of natural gas for the integrated NZ-1 plant by about 70%, which makes that a lot more practical and realistic to achieve a net zero footprint or even drive it to negative footprint. The NZ plant designs are ours. No one else has its RIP, and yes, we filed patents on that. We won't have to do this heavy engineering and design lift more than once for an NZATJ plant that is based on 100 million gallons of ethanol input. We can copy and paste that for use with other sites, that's what we've been working on. Now to monetize our investment in engineering, we need to get something built and operating. So how does that happen? Well, to do this, someone needs to play the role of a developer, someone who gets the project lined up for investment gets it derisked, so investors can make that investment with confidence. The developer typically obtains land or a range of the utilities in licenses, plan designs, pays for the construction and engineering, lines up additional investment needed to get that plant built and otherwise takes care of all the details needed to get that plant built derisking the whole project along the way. As a reward for taking the risk of development of a project, it is common for a developer to recover development capital upon financial close. It is also common for our developer to obtain what is called a carried interest in the project. Carried interest is an ownership position in the project usually in the 5% to 20% range with no cash required. It's just made a carried interest. Project developers also have the option to invest additional capital and with their investment gain more return than a common project investor. Developers frequently take the reimbursement money that got back at the financial close and use it to develop more projects, recycling the money, if you will. Projects also need infrastructure investors in the project. These investors usually want to see a derisked project matured by the developer. Debt is also part of the game of project financing, project that requires additional capital above what we call the hard cost that is the cost of equipment and installation of the plant in order to file the prepaid accounts that mitigate risks of various types. However, debt also enables lower levels of equity and incrementally higher levered IRRs. Debt also requires an EPC contractor gives a guaranteed price to the project. The problem is that EPCs typically boost costs and fees and CapEx surcharges to mitigate risks. We have a very good engineering team with lots of project experience. So we're very good at covering a reasonable cost. So why should a shareholder care about what role we take? Well, the short version is, is that we can generate higher returns and generate more cash flow faster at less risk than if we hand it off development or just did a serial investment. Now I'm going to step through it. Number one, we expect a high return on capital. Well, why do we expect a higher return on capital? Well, to answer that, let me describe a little bit about what it means for us to be developer projects in sustainable aviation fuel or SAF and related low carbon products. As a developer, we have been putting our capital into things like site selection, purchasing of land, front-end engineering, the detailed design engineering, permitting, contracting with SAF offtakers, finding out discovery, the value in the marketplace, working with carbon capture partners, setting up those contracts, ranging utilities, the wind and the green hydrogen partners, setting that up. So it's done on a depot basis over the fence in a contract and we have arranged EPC agreements. We've also arranged to have the option we've created RNG from our own dairy RNG project that has the ability to take RNG up to that plant Net Zero 1. We have an option. We've done the work of identifying the best of ethanol and ethanol to jet technologies, improving them and then integrating them into a design. We've led the engineering and specifications of the process. We've been signing up the farmers to work with our very carbon tracking platform so that we can measure, verify and audit carbon reduction at the individual field level effect all the way through the whole value chain, including our plants. And finally, we've been putting all these pieces together to a simple product, namely a modularized repeatable alcohol-to-jet kit and by kit I mean a combination of existing technologies and they are turning to a turnkey plant design. And this all achieves a low-carbon SAF and other products. We, at Gevo, own the kit, the design and the specifications, it's intellectual property. I expect that the engineering and design time and money that we have spent will pay off. We are the owners of the NZ plant designs. People will be licensing the plant designs to the projects, we'll get paid for that. And so we are actually more than just typical developers. We also do technology and innovation. Given that this market is so big, we may even license our plant designs to other developers for fees or royalties. Number two, less of our capital is required. So what do I mean by this? Again, it's commensurate with our role of a developer, the amount of capital that we is required is lower compared to the amount of later-stage project level capital that would come in to complete our projects. I already mentioned that it is common that developers get carried interest. That means we get an ownership position before we contribute any additional capital from Gevo. It is common for projects to have multiple classes of stocks with different returns. Developer shares in a project commonly get more return in the dividend as a reward for the work in creating the project and derisking it. Said differently, we expect higher returns on our capital that goes into the project. By doing good development work, we enable something much bigger, namely infrastructure capital to come into the project because we've derisked it. And we are working and it shows up in things like our success in getting the term sheet phase with the DOE. Consider our recent announcement that we've entered into due diligence and the teams are in negotiation phase, were up to $950 million of debt on our NZ1 project in the USDA loan guarantee program. One of the things that I liked in that letter that we got it said that Gevo's Net Zero-1 Project is highly qualified and suitable. That's actually a quote. Number three, we are also a licensor of technology know-how and IP. This can enable more rapid EBITDA growth, capturing value from our IP. So when I was talking about our progress with the DOE and NZAE and NZ1 a moment ago, I said we enabled something much bigger. Well, what does bigger mean? It means that the end markets for these projects are so enormous and they're ripe for disruption from a drop in low-carbon carbon-negative alternatives. No single individual company can meet the market needs and the demand. Regarding SAF, consider that jet fuel demand in the U.S. alone is about 20 billion gallons per year and growing, and there are nearly 200 ethanol plants in the U.S. with a collective capacity of roughly 17 billion gallons per year. This presents Gevo with many opportunities, namely enabling ethanol to jet plants using our modularized standardized NZ1 kit. You want lots of the ethanol from these plants converted to SAF with our kit. We plan on developing plants, but we may just license plants to others too. It's all about the growth and bringing in the money. In addition to the ATJ kit, we've also developed a different set of kits to lower the CI of existing ethanol plants. We need ethanol from existing plants decarbonized, our NZ innovations that we've just spent this time and engineering money on and bringing in our innovations will apply there too. Those learnings can be transferred. More decarbonized ethanol needs more ethanol that may be suitable as a feedstock for our NZ ATJ Kit and innovations. We also have the development opportunities like what we see with P66 and ADM, where we enable them for ethanol to jet. We use our knowledge to catalyze something we couldn't do ourselves. And the good news is that they agreed to pay us up to $125 million over the course of the next several years as they execute their projects. We'll gladly help them be successful. We want to see that $125 million come to Gevo and hopefully, starting sooner rather than later. We are also addressing another enormous end market, plastics and chemicals. There's tons of interest from the marketplace about this type of thing. The market size here is more than 400 million tons and hundreds of billions of dollars. We have proprietary technology to make olefins, the building blocks for most chemicals and plastics. The plastics and chemicals made from our olefins would be massively carbon-negative if they're made in NZ style of plant. We think that we have an outstanding position on CI and cost to deliver ethylene propylene and butane and other intermediates that the world just hasn't seen before. Lots of companies have technology to convert ethanol into ethylene. Ethylene goes into chemicals, plastics and fibers. Everyone has heard of polyethylene, normally it's made from petroleum, but people have long ago figured how to make ethanol into ethylene. We have chosen access technology as part of our ATJ process. In that process, one of the steps takes ethanol and makes it into polymer grade ethylene, so we could supply that market, too. It's built into the NZ-1 process. If we chose to supply ethylene to chemicals and plastics, we'd expect our ethylene to be massively carbon negative, the lowest in the industry, and we think probably the lowest cost given the scale of what we're doing and the infrastructure that's built in. Now in addition to that, for the last decade, we've been developing proprietary ethanol olefin technology or ETO, as we call it, with a focus on butene and propylene. ETO is proprietary technology owned by Gevo that reduces the capital and operating cost to convert ethanol to olefins using proprietary catalysts. We filed patents on this. It's our piece, it's our intellectual property. We believe that ETO will save money on OpEx and CapEx for fuel plants sure, but this proprietary ETO technology also enables conversion of ethanol to carbon-negative polymer grade propylene and butene. In ATJ, a net zero plant that has ETO installed, we could simply convert the olefins to SAF or diesel, but we would also have the ability to selectively produce propylene and serve it to the chemicals, plastics and materials markets. Propylene is a key ingredient for a range of polymers and plastics and fibers used today in everything from car components to consumer goods, carpet, diapers and packaging. Propylene made in NZ plant with an ETO kit will be massively carbon negative. We think it's going to be valuable. It's very interesting for the chemical industry at large. We're solving a problem that other people have tried to do, but we have that technology. Now we have to commercialize it. Well, we're not alone. LG Chem thinks we're on to something, too. That's why they've done a license and development deal with us. Our agreement with LG Chem is specifically designed to develop biopropylene for the production of drop in low-carbon alternative to the typical polypropylene products. We want to drive the carbon negative products. Our agreement with LG Chem includes a license and development agreement, we've already received the first payment from them under this agreement. We've already outlined the terms for investing in the projects. LG Chem is a great partner, hugely committed to decarbonization and our ETO helps that. We can create something much bigger and faster by playing the role of a licensor and developer. ETO is real and gives us an entry into another giant market, that of carbon-negative plastics, chemicals and fibers, leveraged off NZ plants and their designs. I think it's going to be a really big deal. We look forward to announcing more examples of being a developer and technology licensor related to our very carbon tracking platform, our NZ projects, of course, and that includes isobutanol and other projects. Those things are still alive and kicking. We just don't talk much about them. The fourth advantage of our approach is creating the optionality on how to use our capital. This is super important. We have the option to invest in the development of projects, and we can also invest directly in those projects like other investors. Obviously, we want to take as much of the cash flow streams we possibly can. We want that EBITDA, but we also have to accrue it in our use of capital. We aren't going to over commit our balance sheet. We also don't want to be forced to raise net dilutive capital at the Gevo level. We're going to be careful about this. As we make choices on how we put our capital to work, the choice will depend upon us weighing the availability and attractiveness of third-party project level capital and the availability and attractiveness of new projects that we can develop at those higher developer returns for less of our capital. Remember, we get a disproportionate reward if we've been the developer. As we look forward from today, it may make the most sense for Gevo to recycle so much capital to develop new projects. But we also like our projects, and we want to invest in them. It's not one or the other. It's both developer and investor. We want as much of that EBITDA as fast as we can get it. This means a balancing act of being a licensor, developer and co-investor in the project. As we go forward, I would be surprised we take a significant stake in NZ-1 above what we would get just by taking the development carry. That's actually driven by options available to us at the time as the decisions and financings get made. Another more subtle point is that getting NZ plants built is not the only way Gevo becomes profitable. We don't have to have those plants built to become profitable. We like them and want them because we'll get much bigger, faster growth. Between RNG dairy specialty chemicals and fuels as well as other initiatives, we have multiple pathways to becoming EBITDA positive in the near future. Like I said, though, we want those NZ projects built out, not just by us, but by others as well. Now let's talk about key milestones we've achieved year-to-date. I'm working off of the milestone slide in our investor deck. We have four business areas that we bucketed things into. What is the hydrocarbon projects and their development. So first part, progress in NZ-1 financing. While we still need to secure the equity investors, we can make progress on that more now that we have an indication from the DOE that should help us. We still need to know what the rules are for SAF and ethanol from the IRS in the rule making under 45Z suite can update the carbon value and therefore, the returns on the project. We have been in close contact with our airline partners who understand that time lines are changing. We don't anticipate any issues regarding time lines and contracts with them. This is very much of a partnership approach, and they've been very, very good about it. We will have to start out any economic issues that might arise from the rule making on an IRS on a 45Z, none of us knows exactly what it's going to include, we are told it should be favorable, but you just never know until it's done. We've been discussing all of this with them and with potential equity partners as to how to solve the issues should they arise. So we see a little more information, we'll get this thing done and figure it out. Second one under this section is finalize the price and schedule for the EPC contracts. Well, we had a contest. We worked with several companies who had the potential to become EPC contractors looking at how they work and what they do. And we selected our lead horse that's McDermott. The EPC terms look good. They're still working through pricing. They promised to be transparent with no game plan. My team is going to make sure that, that happens. The next milestone was enter the diligence process for the DOE loan, done. As I mentioned, we're invited in the term sheet phase. We announced this on August 7. And this term sheet negotiation is for up to $950 million of loan guarantee to finance the NZ-1 projects. This is a really big deal for us and our shareholders. As a reminder, in January this year, the DOE invited Gevo to submit a part 2 application to DOE's title 17 loan guarantee program. We completed that application and all the qualifying work that went with it. It's a lot of work. And getting through this successfully is a huge milestone towards DOE's conditional commitment for the project debt of Net Zero-1 and the financial close. We still, by the way, to get this closed done with the DOE, this is going to take until probably in the second quarter of next year. Complete the design of ATJ critical modules. This is all about derisking the build-out of the ATJ plant, and we're taking a modularization approach. We're doing much more heavily modularized than you would have done, say, five years ago. This is all about derisking the build. It's underway. The design is being worked on. This is a strength of both McDermott and Praj with whom we work. The next milestone we had listed was signed the agreement with existing ethanol plants for ATJ. This looks on track, although it is slower than we would like because of the lack of clarity around the IRA bill in the 45Z. I expect this will still happen with the focus of decarbonizing ethanol first as a prerequisite to building out ATJ, complete the FEL-2 design for NZ-2, that's the 300 million gallon ethanol input, 295 million gallons of ATJ, done. This was done by Burns & McDonnell, one of our other engineering firms with whom we work. No more money is being spent on this right now. It's shelved. It's going to sit idle for a while as we finish financing on NZ-1. One other item on the NZ ATJ front, we verbally agreed with Actions (ph) to extend our relationship for two years. We like each other as partners. It's a great relationship. They're really good. We still have to paper up this agreement, but we work together well all over the world. The next business area is Verity. Huge (ph) the milestone. First milestone is to sign up additional customers and partners for Verity. We already have SIRE with 135 million gallons per year ethanol plant. Now we have an additional ethanol partner that has signed up, has more than 100 million gallons per year. The goal of Verity here is to capture carbon value that's been left on the table and monetize it. And so we want our partner companies to make a lot of money, and we will make money as they make money. Progress looks good. We expect to add more companies this year. The next milestone expand Verity acres track to 100,000 and acres or more. This was slowed a bit because the USDA grant process has taken longer. We just got the final award notice and the final contract last week. So this should get going soon and we should have the money in the bank and be able to spend it. That $30 million is going to be useful. And with the USDA money in hand, we'd expect to have 100,000 acres by next season. One that we added as a milestone is that get the very tracking carbon tracker applications working at launch. That's been done. It works to track carbon in CI, field by fuel and should help farmers make better decisions on how to lower CI. There's very good progress by the Verity team. The results look good. We can see field-level differences in CI. This is going to be very, very important in the future as we make the case as to why improved agricultural practices can be measured and reported. We actually, believe it or not, we run into people in the government, they're told, oh, no, it's not possible to measure. Wow, we've got the data that says, yes, you can, and we have it here, and it's straightforward. It took a lot of work to create it and its proprietary, but you know what, it works. The next milestone is provide guidance for 2024 and beyond for Verity revenue and do this by year-end. I'm looking forward to seeing this, too. I'm sure Paul Bloom who is in charge of Verity. We'll wait until the end of the year to give this to us, but that's okay. His team is making progress. Gevo RNG, first milestone, complete the expansion of RNG and achieved greater than 90% of 400,000 million BTUs by the end of the year. This project is on track. Equipment is already being delivered. The expansion is going. We also have a milestone to produce more than 300,000 million BTU in 2023. Our team has achieved 90% of capacity already. And the RNG plant is running incrementally positive cash flow basis even with temporary CI score of minus 150, which is low and, of course, low LCFS carbon values. We expect the profitability to improve once the score of minus 350 is approved and capacity increases. The next business segment that we have is chemicals and specialty fuels. The goal has been [indiscernible] IBA and isooctane (ph) sales. Well, those plans are being put into place, the interaction of customers is occurring already. We're out there working on it. We're seeing a lot of interest for IBA and isooctane. It will start off as a specialty business, specialty products, specialty fuels. And I think it will grow from there. It's time to get the contracts in place for the IBA and isooctane. And in the long run, we'd expect to be a really big business, too. Next milestone is to scale up ETO to the pilot plant stage. Well, this is on track. So we've developed a lot of proprietary technology here at Gevo. It's showing up in our NZ plant designs for ATJ for methanol and IBA. We have proprietary technologies like ETO and IBA. I like the opportunities that are opening up for chemicals and plastics because of our technology, intellectual property. We are excited about Verity, both about what it can do and the intellectual property that's being created as we do it. The more we get into it, the more potential we see. This isn't just about tracking carbon. It's all about monetizing that carbon. That's where we want to get to. Now at the core of Gevo are several technology platforms, I have just listed some, by taking on the roles of a developer, licensor in addition to project investment, we think we can optimize the use of our capital and grow EBIT not faster, leveraging those technology platforms. So overall, we'll stay focused driving towards a positive EBITDA sooner rather than later in managing our balance sheet, optimizing the use of capital. We are keenly interested like you in seeing our share price be maximized. Now I'll pass it off to Lynn to talk through the operations and numbers, including our dairy RNG asset.

Thanks, Pat. Gevo's Q2 combined revenue and interest income was $9.3 million, with the interest income benefiting from higher interest rates. Our corporate spend that is SG&A was $6.7 million for the quarter, excluding non-cash stock-based compensation of $3.9 million, which is a $0.2 million decrease from Q1 as a result of our cost control efforts. Debt related to the Northwest Iowa RNG project was $67.6 million, consisting of $68.2 million face value less unamortized premiums and issuance costs. We ended the second quarter of 2023 with a strong liquidity position of $426 million in cash, restricted cash and other liquid investments. The restricted cash portion is associated with our Northwest Iowa RNG bonds and certain collateral related to the development of Net Zero-1 and totaled $77.8 million. During the second quarter of 2023, we invested and capitalized $17.7 million cash and capital projects, comprised of $9.8 million into Net Zero-1, $3 million into Northwest Iowa RNG and $4.9 million into other NZ projects. As has been discussed, we intend to finance the majority of NZ-1 capital necessary to fully construct and start up the facility at the Net Zero-1 Project level with debt and third-party equity. It's also worth noting that while the DOE loan is the primary track to secure construction debt, we are exploring a syndicated bank loan process in parallel, so as to keep our options open. Our dairy RNG asset in Northwest Iowa has been injecting into the pipeline since June of 2022. This last quarter, the project achieved impressive year one performance against its design capacity with onstream injection of 97% and uptime of 91%. RNG revenue realized for the quarter was $2.9 million using the low carbon fuel standard temporary pathway approval of negative 150 CI. Despite being constrained to the temporary CI score, we achieved positive stand-alone RNG EBITDA in Q2, and we expect to improve results with the CARB's final approval of the project's negative 350 CI applications middle anticipated to occur in 2024. We can't say when exactly in 2024 as timing is dependent on the CARB process. But achieving the permanent pathway will substantially improve LCFS credit revenues under the California program itself as well as per the terms of our marketing agreement. In addition to the project having approached its full design capacity with an annualized production rate of 355,000 MMBtus last quarter, we are expanding the project's capacity to 400,000 MMBtus per annum expected to be completed in Q4. Regarding our ETO technology, we received payment of $1.3 million for the second quarter and expect to get another $1.2 million over the next two years associated with joint development efforts. We expect other payments upon commencement of commercialization, including royalties on net sales from future production volumes. Overall, I'm really pleased that we have a pathway to positive cash flow. We've trimmed back our corporate burn from what was originally planned, and our project spend is expected to decrease. Cash flow from RNG and fees and licenses have helped put our net burn on a downward trend. With that, I'll turn it back to Pat.

Thanks, Lynn. We're making really a lot of progress. It's good to see some of these things come through. I'm looking forward to our success. Great. Let's go forward. Let's open up for questions.

[Operator Instructions] The first question comes from Sameer Joshi with H.C. Wainwright. Your line is open.

Yes. Thanks. Good afternoon, everyone. Thanks for taking my question. Just a clarification on the RNG revenues. The $2.9 million amount on 77,000-odd MMBtu, does that also include the LCFS and the 3 Ms (ph) and LCFS with a score of negative 150 or are there some other exclusions?

No, it has the LCFS at minus 150 value in there.

Okay. And I know Lynn confirmed, but the 400,000 MMBtu capacity, what are the additional steps needed to or additional money needed to reach that capacity over the next two quarters?

It's small. So small enough that I don't recall. So it's stuff that we had already done as part of the project. So it's a few million dollar expansion. And some of it probably be subsidized by the, I forget what part of the 40 of the IRA bill, what section of 45, it is, the investor tax credit, is probably covers some of it, too. We'll see. But it's a small amount of money. The equipment is on site. It's about optimization work. We have rextra room to inject more into the pipeline. And so we want to take advantage of that. So it's going along pretty well. That to get that project up to 400,000 million Btu rate that will happen in the fourth quarter is what the team goal is. I expect it to happen that way. And we should be in pretty good shape as we head into 2024. The RNG business is actually a pretty exciting business. We have figured out stuff that no one else seems to know about how to really optimize the heck out of this, we did throw quite a few engineers at this and a lot of data scientists to sort things out and it's paying off for us. If you like it.

Yeah. No. It's good to see actual revenue on that front over the last couple quarters. On the NZ-1 front, is there sort of EPC process that needs to happen before the DOE loan can be finalized? Are there any like interconnections and interdependencies between the two?

No, there is because you have to have an EPC, you have to have price done to finalize the loan. The trick is that we like McDermott, and we like the potential and how they operate and compared to the other guys who we've been talking about for EPC lump-sum turnkey in that the terms are reasonable. They're pragmatist. They want to see this done. They want to work closely with us. That's good. One of the problems that we have in an inflationary environment, if you ask for the lump-sum turnkey price now or suppose you ask about six months from now, I guarantee you it have been padded to beat heck like crazy amount of padding and so it doesn't make sense. Inflation has moderated in some places, equipment supplies have loosened up and so perspectives are changing. So if you don't ask for it at the right time or you don't work through that and you get it premature, you get a crazy number. And so we have been keeping track of all the capital all the way along. My team is actually capable of doing that itself. And so it has been very useful for us as we work with different potential EPCs. We can know when to call somebody, we know how to call somebody out. And so it's a balancing act that we do. We have to have the final updated numbers, but you don't want to ask them too soon because it will be wrong. And so we'll be working through that pinning down the lump-sum turnkey price with the [indiscernible], we have a backup already. And we'll get there in the right time frame for the DOE loan close. I mentioned this point, the other thing we're watching carefully is what happens and when on the 45Z, for the 45Z is that section of the IRA bill that talks about the credits that would be applied to in what method. The thing is that they're going to give initial guidance on a part of that 45 section anyway. And the IRS is going to come out with some rules about how this is supposed to work. We've been told it should come out favorable for people like us. But you never know what it is. But we do need to know what the value is and how to calculate it so we can plug it into the economics. And we're not alone in this. This is everyone's got the same issue. So we're all kind of watching and waiting and see how this all works out. And they have heard input from all kinds of us. We've been up with the administration in the Capitol Hill all the departments. And lots of people, and there's really getting to clarify to use our [indiscernible], and there might be slight variations of it. But it should come out in pretty good shape is what I would expect at this point from what I'm told. Nothing counts until it's done. And you know what, we still need it done or at least indicated in what direction it's going, so we can plug the economics into the overall equation.

Understood. Thanks for that color. Interesting development on the ETO front, meaning the amounts that have been talked about from this seems small. But I'm sure this is a much, much bigger opportunity in the mid- to long term. Do you have like a sense like on a business plan, maybe like what are the next steps on this once you finish work our initial work with LG Chem?

Well, the ETO technology is something that we have worked on, we've been doing, people often said, gosh, why are you guys switching your technology from alcohol from isobutanol and ethanol? For us, they're all alcohols and the chemistry on them is very related. So we've been doing this for years, and we have a bunch of patents on this hundreds. What's interesting about ETO is it looks like it cuts out a huge amount of capital out of the alcohol-to-jet process that is typical from whether it's Actions or UOP or anyone else who's out there. It saves steps and it saves operating cost and capital. That's what it appears and looks like. And so we have been looking at it from that standpoint. But we also recognize that we can adjust the catalyst or operate it so we can make propylene or butylene. Propylene is one of the ones that's one of the hardest molecules to make from a biobase in high yield. And it's also one of the most valuable products in the marketplace in terms of its overall volume and what it's useful for because it is a typical thing in consumer goods, typical ingredient for consumer goods or plastics or fibers and clothing, and there's a whole bunch of stuff. What's interesting about this is our propylene would be somewhere approaching maybe a minus 100 CI score. That's interesting. We haven't seen that before. That's what attracted LG. And they see that there's an opportunity there. So we have to go work through it, scale it up, figure out what we don't know yet, but that's all going along pretty well. We've been operating it in many plants for a long time, and we just got to go through the work of figuring out what is it, if there's anything we don't know and work through any of the operability issues, if there are any. We don't see any. That's what has to be done next. And then it would get rolled out, I think, pretty quickly in plans to get built, and it would be a long in that Net Zero-1 style plant. It'll be right along the same exact same concepts that we just engineered we reapply here. And I think you'll see on the fuel side, we're going to turn up with a pretty interesting partner there, too, who wants this and sees the value of it. And two, it's a good technique, saves money, saves production costs, saves capital. I wish it was ready for prime time today. It just doesn't. We got a little more work first.

Yeah. And I'm sure there too, you will have other carbon reduction technologies, energy usage point of view that would further reduce that...

Yeah. You hit on an interesting point. One of the things that we look at is people are all interested in these materials. We were the first to do PET, fully renewable PET. I've seen others claim it to be first. We did it first. We did like a decade ago, a big deal. We can do that. We have technology for it. It's about putting the business system together. And we want big business systems that leverage each other. The fundamental thing that we're doing is we can make these basic building blocks for the petrochemical industry, right? Basic building blocks, same building blocks that they use, and we derisk the hell out of them to make them from renewables and make them carbon negative. And they will be, I believe, the lowest cost that can be made because of how efficient they are with economies of scale and the whole business system approach that we're taking. So even though we focus on fuels, I think sometimes people put us as it's a one-trick pony, no, no, no, no, that's the wrong thing. Nobody does that. That's stupid. What you do is you use the fuels to drive economies of scale. But you open up all the chemical opportunities along the way. That's important. That's what we're doing. That's how we think about it. And as this all becomes more real, I think people in chemicals go, that is going to happen. That's interesting.

Yeah. No, it is very interesting what you're doing there. Just a bookkeeping question, last one for me. This line item, the factory handling cost, should we expect it to be around $1 million for the next few quarters or do we see any change in that depending on, I guess, ethanol prices and so.

What cost was that? I'm sorry.

Sorry, the line item in the income statement called facility idling cost.

That will stay the same. That's for our Luverne plant. It's sitting there, and we're going through the process of when to start it up, how to start it up, how do we use it? It's a very good development site. I think that total cost for the year is like a couple of million dollars. So that's something we should confirm with you on a follow-up call. But it's not a huge amount of money. It's not a huge amount of money, and it's just basically idling it. We're actually using that plant right now to educate customers. So we've had more than 65 airline customers. So these are customers of airlines, the people downstream of them, up to our plant sites, showing them what we're doing, how we're doing in taking them out the farm, showing them how modern planting equipment works because it's an usually the result is their minds are blown about the state of art of what's actually happening versus if you just listen to the press and the doom and gloom, it's wrong. It's just playing wrong. And so it's quite impressive to see. And so we've been using it for stuff like that. But I think what will happen its future probably is that we've got to finish cooking the plans, but it will be at some point, we'll probably start it back up and use it for making specialty products. That's what I would expect.

Yeah. Understood. Okay. Thanks, Pat. Thanks, Lynn. That’s all I had.

Please standby for the next question. The next question comes from Derrick Whitfield with Stifel. Your line is open.

Thanks. Good afternoon, Pat and team, and congrats on your updates.

Thanks.

Regarding your Northwest Iowa RNG project, the expected negative 350 CI pathways considerably by the new temporary and the previously noted negative 240. Could you comment on what's driving the variance between the current and previous expectations? And if that delta is the result of the optimization work of your engineering team?

Yeah. The answer is yes, it is. It's the optimization work. We did some modifications to the gestures (ph), now they operate also [indiscernible]. And then it's more of having real data available to us, and that all went into the calculation for it. So that's what should happen, should be a minus 350. You never know what CARB will do, though. But that's actually what it pencils out to be with real data. Now we are data hogs. You know this already because you spent enough time with us, but we feel like we count stuff, and we got sensors all over the place. So our stuff is more instrumented than what you would find at other operations from what we've been told or what we have seen as we've met with other people. And we take it, we believe that RNG should be treated like a manufacturing plant. It's a manufacturing operation. There's a lot of value here to be operated right, managing it like you would a plant with operating discipline is a concept that for people who are operators and run plants, they understand what I'm talking about. But you do it with engineering approaches and plant operations approaches with discipline in measuring and improving along the way. And that's what you're seeing here. And we also have a bunch of stuff of equipment that we put in how to think about how do you make things work properly and do it as robust because you don't want plants that are going up and down, that screws things up royally. You want them to be steady. And that's what we've been able to achieve. We have a question in front of us, and we're starting it through, and I don't know what the answer is yet. But how do you best expand this, capitalize on it further? How do you do that in a way that balances against our other capital needs at Gevo. That's stuff we're looking at right now. And I think there will be some dust settling here in the near future where people who have haven't taken, they didn't have maybe the engineering capability or have, I don't know, whatever their problems are. There might be some deals out here. So we're paying attention to that. I don't know what, I don't have a firm opinion yet, but it's prudent to take a peek and see what's out there and what we can apply our knowledge to and fix and make it work and get paid for it, of course.

With that said, Pat, and that's exactly where I was going to go with my follow-up question, does it behoove you to lean more into RNG given the expertise you've picked up through that operation? And would that be in an operating development perspective where you invest or would that just be in a similar developed licensing type approach?

I think it's that in RNG, yes, we want to expand there and do want to operate assets is what we want to do, not just help people because it takes discipline to do to operate this stuff. You really got to be a plant operator mentality. And we want to find those opportunities. Now the problem that we're seeing is that there was so much euphoria over RNG and all the stuff that might occur, people bid up the cost of manure and they bid up the cost of access to farms, and they bid up everything. And so people, it's irrational. Now the price in California being low is going to help to adjust those people out. And so I think there's going to be some development projects that are failed. People who had projects planned. They were developers trying to push them, I think they'll fail. And so I think there's going to be opportunities. So part of this is trying to find out what those are. I think we're just beginning to see some of those guys go by the wayside. And there's only a few of these technologies that work well. There isn't like there's I'm talking about the actual digesters. People are finding out that there's lots of problems with the European style digesters. So it's one of these things where there really is no how here, and we're going to take a peek and see where we can fit and how do we expand. But we have to do it in a way that balances against our other capital lines. I really do want to see, I want my money into an NZ-1 project, too, the actual investment of the project, too. And so we're looking for the right opportunities. And so if you know them, Derrick, you got to tell us because I'm interested in those, and we'll look at them and see how we play and how we can add value and make it accretive for us.

That's great. And then maybe shifting over to your licensing and development business model that you articulated during this call and similar to what you have with LG Chem. How should we think about the returns and capital requirements for this approach? And more specifically on the revenue side, will it be recurring and linked to the carbon credit markets?

Well, I think it will almost always be related to carbon value. So the ball truth of it is, there is no technology on earth that compete with low-cost petrochemicals, if we're making renewables that are decarbonized and low carbon, no, the petrochemicals are cheaper. So it is the carbon value that has to come into play. Now the thing is we can get the cost pretty darn close. You've seen our economics, so you know this, that our economics, they can come pretty darn close, and they're good. But to justify on a cash cost basis anyway. But on the capital cost basis, where you got to include those economic returns, that we have to deploy new capital. So that has to be supported by somebody's perception of carbon value that can be done in the market directly by placing the products with the right channels. Those tend to be specialty products at this point or it has government support. Well, this is why people are chasing fuels because that has government support, both at the state and federal level. And in the chemicals market, it's interesting because the chemicals market, you've done the math, you probably, you know this, is that a plant like ours, a 65 million gallon hydrocarbon plant, that's like when you put that in tons, it's big. It's in the hundreds of thousands of tons. It's giant chemical plant. And so even though for us, we sound like, well, it's just a 65 million gallon plant. Well, that's pretty small in the grand scheme of fuel. So that's true, it's small in the grand scheme of fuels. But in the world of chemicals, it's a world-scale plant. And that's the disconnect that occurs. So this is why we like our approach of being able to leverage off of stuff we're already doing. We're already making olefins in a Net Zero-1 design. We're not making the olefins. We can add incremental units to make even different kinds of olefins, and we should divert those at least some of that stream into the chemical market because that is a significant size or at least potential size and you know what? It's flexible, too, because we don't have to send it here just on an onward of fuels anyway. That's how we think about it. In terms of the value of it, I think that there really are specialty markets that make a lot of sense. We'll just have to figure them out.

Pat, maybe lastly for me. Just with kind of what's going on inside the Beltway, what's the latest unexpected timing on 45Z rule making from U.S. Treasury?

Yeah. I think what they'll do is, I think it's going to be in the fall here sometime in probably late fall. I've heard the estimates go from September to December. And I haven't heard anyone say it's going to get punt into next year, at least not very many people say that. Most people think it will be sometime in the late third, early fourth quarter, something like that. What I can expect is you're not going to remember the 45Z for the blenders tax credit or the producer's credit that comes into effect in 2025. What you're going to see is like the precedent set as to how to do some of the other rules that are related to 45, Section 45 and how to count carbon and stuff like that, you'll see that start to get described here in this rule making, but it won't be a final rule set, but it will be a good indication of what to expect. It also might draw some battle lines where we're going to go fight for stuff too because we're trying to count all the carbon and make improvements. And enviros (ph), I sometimes like thinking enviros don't want anything. They don't want any fuels made. They don't want from any source. So it's this very weird dynamic that's going to occur. I think that because the people are anticipating a split Congress next year, that's actually helpful. So by taking an approach, we actually measure carbon accurately and reward it, and you do it a transparent, measurable way that plays, that plays to everybody. It's common sense it's going to approach. Let's get the dam data and measure it and reward people for making improvements and do it. That plays and it's hard to argue with. But we see some of these far out enviros like they're terrified of that even.

That’s helpful. Thanks.

[Operator Instructions] The next question comes from Manav Gupta with UBS. Your line is open.

Good afternoon, guys. I'm going to, if you don't mind, just stick to more macro questions. I wanted to pick your brain. You have indicated that you expect your eventually RNG to have a negative carbon intensity of minus 350, we keep hearing chatter and I strongly oppose this, to be honest with you, where people say that, a, RNG should not even be part of the CARB, and b, try and cap it at minus 100 or minus 150. So I'm just trying to understand, when you hear those things, what is your response? And is this something you would be lobbying for where you say minus 350 is what we really deserve because that's what the value we are adding.

Well, I think when you follow the rules to measure the stuff like California has outlined, it's minus 350 is what pencils in. I don't think of it like that at all. Mine is a completely different paradigm. I think it's this. I think methane, fossil-based methane natural gas is one of the greatest polluters, greatest generators of fossil-based CO2 and greenhouse gas emissions there is. I know that we in evaluating our NetZ plant designs, the biggest enemy was the use of natural gas, which is why we've made such improvements. We view that there's an RNG business here where you can transfer it at attractive prices to a plant like our NZ plant or any other plant for that matter, where you can make good money on an RNG project and you don't need a CARB California at all. In our long-term plans, we don't need California or that CI score. So it's a very different point of view that we have. It's about the transfer price and whatever the rule making is under more like a Greek model, a standard Greek model. So we are not counting, I guess, real bluntly, you're not going to see me bet big investment accounting on California at minus 350. You're not going to see that from us. You're going to see us do it at market prices per MMBtu that work to make good money at a dairy RNG project like we have, they're efficient ones, and then transferring it to some production facility of some type where that carbon value can be transferred. That's how I think it's going to unfold in the long run. So we wouldn't bet on counting on minus 350 in California, our California LCFS saves the day. We just don't think like that. We're looking at a different business actually. We think of it as creating the option to get rid of fossil-based natural gas out of our business systems. That's how we view it in the long run.

Perfect. I agree with you. My quick follow-up here is one of your peers [indiscernible] yesterday said, look, SAF is a very strange market. The demand is infinite and the supply is pretty much zero. And then they made some comments around pricing. And I'm just trying to understand from you from a long-term perspective, when you talk to airlines and stuff, how do you see them actually pricing SAF like how much higher versus the jet fuel or any benchmark, how should we think about the pricing on the SAF side?

Yeah. That's a really good question. It's the thing that we're paying pretty close attention to because the real practical matter that you're alluding to is that airlines themselves can't afford to pay premiums for SAF, at least not very much. And unless they find a way to pass it on to their customers and get them to embrace it. The customers have to embrace it or everybody in the industry has to do it all at once and say there's going to be a surcharge for these new fuels, but then there's a chicken and egg problem. So this is part of the problematic issue we have in and around SAF. The way to break it down and think about it is like this. A product like ours made in a net zero system, it's pretty darn low cash cost. It's reasonable. It's our capital that has to be paid for. That's what builds up the cost, right? So you think about what's that going to take and then you look at how much carbon value is going to be in the marketplace. So the way you think of revenue is this. Our jet fuel for sure has at least as much, if not more value technically just as jet fuel than a PetroJet molecule, right, without counting carbon. The carbon value itself then comes from the RFS, the 45Z, if they ever pin it down, right, the state programs, and there are several of them. There's LCFS. There's buck 50 available in Illinois, another buck 50 in Minnesota, Oregon beats everybody because they have a higher premium for all those things. And so you got to take all those things and stack them up and then ask what's left on the table? And is this something that the airlines can accept? Well, our contracts say, yes, they can accept that. It's reasonable. It's in the small category. It's incremental. And so you have to have investors at the same time who have a long-term view that carbon is going to be valued. Now in our point of view and as we started thinking about this years ago, we believe that there is [indiscernible] in government policy. And you know what, ultimately, we want to be consumer trade, something that we can show to consumers and think I say, yes, I think this is worthwhile and I pay for it and I can see it. This was the genesis of our Verity tracking. That is the purpose, is to get it bullet-proofed, audited, measured, transparent. So you want to fight about data, bring it. We've got the data, we'll lay it out in the open for you, and let's have the discussion about facts because what we see in this space is all kinds of BS handwaving of stuff. And you see that being attack right now, even out of Europe with some of the issues around these carbon offsets and stuff. We're doing insets, the actual real carbon attached to real products and measuring it. And that's what ultimately has to happen, that's a system were created and the airlines love that. And because that's all part of creating the value across and making the carbon bulletproof. So yes, it requires some extra premium from airlines. Yes, it requires carbon value from state and federal policies. And yes, it's going to require carbon value, I think, in the long run, and it will be something that grows over time as consumers find out that, no, really, it's real, that's how I think it's going to unfold. But we're already in the hunt of when you take all the carbon add it up and you just say you use that credit against the total cost, what the economics work and it is in the range of affordable for airlines already, at least with our stuff, other people stuff is different, they're at a higher price.

The last question for me and a little bit of a follow-up on Derrick's question. Like as you grow your RNG offering, this environment is pretty supportive, which are the key end markets? Would you like only to supply to the transportation market or is it going to be more to the utility market? Like how would you describe your end market for the RNG that you're producing? Thank you.

Well, today, the paradigm is that we're selling the transportation fuels in California because that's where you make the most money. There will be a question in the future, barring any changes that occur or any new influences from government policies that we should take that gas up to our Net Zero-1 plant, drive the CI score down further, that could be something we would do and there's potential there. And it will depend upon which is more valuable sending it to transportation or sending it over there to as gas to do the thermal load for a manufacturing plant. There are things that are wildcards here though. I was talking to some folks yesterday talking about the hydrogen and the potential to generate hydrogen. And how do you get more green hydrogen? And how do you blend a carbon-negative RNG type with brown hydrogen to make more hydrogen. So will there be an opportunity there show me the money. Let's see what it is, and we'll look at it and see. So I can see there definitely could be influences from government policy as they weigh into this stuff. I've seen hypothetical things. I don't know that I believe them yet about the 45Z being kind of a windfall towards RNG projects. I don't know if I believe it, but if it's true, well, that's going to cause me a little pay attention for a while. But it's not going to be sustainable in the long run. It's an unreasonable amount of money from what is being talked about. Could that influence? Yes, sure. Fine. You want electricity made out of I get paid an extra 20 bucks a million BTUs. Fine. You want electricity, I can make that happen for you. No big deal. So we have a point of view of where out to make money is what we're doing here. And we have not a luxury, but we have an unusual capability as a small company, and then I got really strong technical people, engineers, operators, practical people. And so we can adjust the stuff as it unfolds. And that's kind of how we view it. We'll go where the money is, man. That's what we'll do. I just don't want to speculate on it.

Thank you so much.

I show no further questions in the queue. I would now like to turn the call back to Dr. Patrick Gruber for closing remarks.

Well, thank you all. This was a longer one today. We felt it was important to try to really get on the record how we're thinking to make it more clear. I don't want to have people think that we're not planning on being an investor in our projects. We are planning to be an investor, but someone has to play the role developer. We are playing the role of developer, we're the best suited to do it, but we're more than that, too, with our technology developments. And so that makes us in the role of people who really do pay attention to technology and how to improve things. So we're trying to clear up a whole bunch of these questions. Thanks for sticking with us through this. Thanks for your support, and I wish you all a good evening.

This concludes today's conference call. Thank you for participating. You may now disconnect.