Aemetis, Inc Q2 FY2022 Earnings Call

Welcome to the Aemetis Second Quarter 2022 Earnings Review Conference Call. At this time, all participants are in a listen-only. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce you to your host, Mr. Todd Waltz, Executive Vice President and Chief Financial Officer of Aemetis, Inc. Mr. Waltz, you may begin.

Thank you, Kelly. Welcome to the Aemetis second quarter 2022 earnings review conference call. Joining us for the call today is Eric McAfee, Founder, Chairman and CEO of Aemetis; and Andy Foster, President of Aemetis Advanced Fuels and Aemetis Biogas. We suggest visiting our website at aemetis.com to review today's earnings press release, the Aemetis corporate and investor presentations, filings with the Securities and Exchange Commission, recent press releases and previous earnings conference calls. The presentation for today's call is available for review or download on the Investors section of the aemetis.com website. Before we begin our discussion today, I'd like to read the following disclaimer statement. During today's call, we'll be making forward-looking statements, including without limitation statements with respect to our future stock performance, plans, opportunities and expectations with respect to financing activities and the execution of our business plan. These statements must be considered in conjunction with the disclosures and cautionary warnings that appear in our SEC filings. Investors are cautioned that all forward-looking statements made on this call involve risks and uncertainties and that future events may differ materially from the statements made. For additional information, please refer to the Company's Securities and Exchange Commission filings, which are posted on our website and are available from the Company without charge. Our discussion on this call will include a review of non-GAAP measures as a supplement to financial results based on GAAP. A reconciliation of the non-GAAP measures to the most directly comparable GAAP measures is included in our earnings release for the three and six months ended June 30, 2022, which is available on our website. Adjusted EBITDA is defined as net income or loss plus to the extent deducted in calculating net income, interest expense, gain on debt extinguishment, income tax expense, intangible and other amortization expense, accretion and other expense of Series A preferred units, loss on lease termination, gain on litigation, depreciation expense and share-based compensation expense. Now I'd like to review the financial results for the second quarter of 2022. Revenue during the second quarter of 2022 increased 20% to $65.9 million compared to $54.9 million for the second quarter of 2021. Our California Ethanol operation experienced steady sales volume with an increase in the selling price of ethanol from $2.78 per gallon in the second quarter of 2021 to $3.13 per gallon in the second quarter of 2022. Delivery corn price significantly increased from an average price of $8.04 per bushel during the second quarter of 2021 to $10.21 per bushel during the second quarter of 2022, as continued poor railroad performance impacted both the delivery cost and supply of corn into California. Gross loss for the second quarter of 2022 was $214,000 compared to a $3.6 million gross profit during the second quarter of 2021. Our California Ethanol segment accounted for substantially all of the reported consolidated gross loss of profit respectively in both periods. Selling, general and administrative expenses were $7.1 million during the second quarter of 2022 compared to $5.8 million during the second quarter of 2021 as a result of investments in our ultra-low carbon initiatives and noncash charges for stock compensation. Operating loss was $7.6 million for the second quarter of 2022 compared to an operating loss of $2.1 million in the second quarter of 2021. Interest expense during the second quarter of 2022 was $6.7 million, excluding accretion and other expenses in connection with Series A preferred units in our Aemetis Biogas LLC subsidiary compared to $5.2 million during the second quarter of 2021. Additionally, our Aemetis Biogas LLC subsidiary recognized $1.5 million of accretion and other expenses in connection with preference payments on its preferred stock during the second quarter of 2022 compared to $3.8 million during the second quarter of 2021. The EdenIQ litigation was settled during the second quarter of 2022 for $4.8 million, including litigation costs, allowing for the release of $1.4 million of litigation reserves. Additionally, a grant of $14.2 million was received from the United States Department of Agriculture Biofuel Producer Program. Net loss was $209,000 for the second quarter of 2022 compared to a net loss of $10.6 million for the second quarter of 2021. Cash at the end of the second quarter of 2021 was $3.6 million compared to $7.8 million at the close of the fourth quarter of 2021. Investments in capital projects of $12.1 million were made during the second quarter of 2022, further highlighting our commitment to build ultra low-carbon projects. This completes our review of the second quarter of 2022. Now I'd like to introduce the Founder, Chairman and Chief Executive Officer of Aemetis, Eric McAfee, for a business update. Eric?

Thanks, Todd. Aemetis is focusing on producing below zero carbon intensity products, including negative carbon intensity renewable natural gas and renewable aviation fuel with carbon sequestration. Our projects maximize the value of favorable federal and state carbon reduction programs, while reducing feedstocks and operating costs by using waste materials as feedstock, hydrogen supply and energy sources for the production of renewable fuels. In early 2022, we announced an updated five-year plan, which projected revenues to grow to about $1.5 billion and annual EBITDA to increase to more than $460 million by year 2026. We are monitoring federal legislation that strongly supports almost every aspect of our business and, if passed, would be expected to significantly improve our five-year plan. If the legislation becomes law, we will provide further updates. Our plan is to fund growth by using the approximately $100 million of lower interest rate senior secured lines of credit that were signed in March of this year, in addition to low interest rate U.S. government guaranteed long-term loans. In the past 1.5 years, we have repaid more than $80 million to reduce higher interest rate bridge loans from Third Eye Capital, which has expanded our access to lower interest rate funding. We recently closed two credit facilities at 8% and 10% interest rates with the same lender, who will have an aggregate availability of up to $100 million subject to certain criteria. The carbon reduction line of credit is designed to fund the completion of the carbon reduction projects at the Keyes ethanol plant and to provide the development funding prior to project financing for the jet/diesel plant and the two CO2 sequestration wells. The working capital line of credit is intended to provide liquidity for ongoing operations. We're also on track with financing growth using long-term 20-year low interest rate project financing from the U.S. Department of Agriculture. Our first $25 million of an expected $100 million or more of USDA Renewable Energy for America funding for our biogas subsidiary was approved last week by the National USDA Investment Committee and is in the closing process now for funding this month. The positive regulatory trends for renewable fuels have continued to improve, including the recent approval of year-round 15% ethanol known as E15 by the EPA and the release of the California Air Resources Board 2022 LCFS scoping plan that significantly increases the number of credits required under the Low Carbon Fuel Standard Program. We expect that LCFS credit prices will increase significantly as traders learn more about the number of LCFS credits that will be required starting in January 2024 in order to meet the expanded decarbonization goals set forth by CARB. Last week, investors were pleasantly surprised to hear the news that the energy provisions of the Build Back Better legislation received the support of key congressional leaders and the White House, and the bill is now on a fast track for approval. Though the legislation is not final, a brief summary of the provisions and the potential impact on Aemetis includes the following direct benefits to Aemetis projects, a $1.25 to $1.75 tax credit for sustainable aviation fuel. The proposed sustainable aviation fuel tax credit could result in up to $80 million per year to support the construction and operation of the 90 million-gallon per year Aemetis Carbon Zero one sustainable aviation fuel and renewable diesel plant in Riverbank, California, assuming a 50% SAF production allocation and a 50% renewable diesel production allocation. Renewable diesel is expected to continue to receive the dollar per gallon blenders tax credit. Next, a 30% investment tax credit for renewable natural gas capital investments. The ITC for renewable natural gas projects is expected to result in more than $90 million of cash received by Aemetis in the next five years from investment tax credits. This cash will be additional equity investment into the Aemetis Biogas project, which makes project financing much easier by reducing the amount of long-term project debt by $90 million and reducing interest costs by more than $60 million over the life of the 66 dairy digester project. Also, an increase in the carbon sequestration tax credit from $50 to $85 per metric ton of CO2, but paying the credit in cash as an IRS tax refund to companies in a process called Direct Pay. We are developing two CO2 injection wells located at the Aemetis biofuels plant sites in California to sequester 2 million metric tons per year of CO2 into a saline formation about 7,000 feet underground. 2 million tons x $85 per ton equals $170 million per year of cash that could potentially be paid to Aemetis by the IRS each year for the first five years of the project, providing $850 million of IRS funding to repay the capital costs and operating costs of the two projects. With another seven years thereafter as a tax credit valued at $1.2 billion, the total value of the $85 per metric ton tax credit would be $2 billion in just the first 12 years of operations of the two Aemetis carbon sequestration wells. Several provisions in the legislation are valuable to the ethanol business, including $500 million for biofuels fueling infrastructure to support 15% and 85% ethanol blends, a tax credit for low carbon intensity ethanol and adopting the GREET model, so the carbon intensity of ethanol is calculated correctly. These regulations are driven by initiatives to decarbonize transportation, the need to reduce the cost of fuels as petroleum prices increase and a renewed interest in energy security. In the second quarter of 2022, Aemetis achieved important milestones toward revenue growth and sustained profitability in each of our businesses. Now Andy Foster, the President of the Aemetis Biogas and Aemetis Advanced Fuels businesses, will review some highlights. Andy?

Thanks, Eric. The Aemetis Biogas renewable natural gas project in California has progressed with the completion of construction of more than 20 miles of the 40-mile biogas pipeline and is on track for completion later this year. Additionally, we've completed construction and testing of the $12 million centralized dairy biogas-to-RNG upgrading facility and construction of four additional dairy digesters that are scheduled for completion this quarter is well underway. Importantly, we have successfully completed and been approved by PG&E for product and mechanical testing of the interconnection unit, which will inject RNG into their utility pipeline. By the end of this quarter, we plan to have seven operating dairy biogas digesters connected to the utility pipeline, generating approximately 200,000 MMBtus per year of RNG valued at more than $20 million per year of ongoing revenues. We plan to begin injecting RNG into the pipeline later this month, storing RNG underground initially until we receive CARB pathway approval for LCFS credit generation, which takes about six to nine months. Since we believe that the LCFS credits are presently undervalued as the market waits for the revised LCFS targets to be adopted, beginning sales of RNG early next year will potentially provide increased revenues compared to RNG sales that would have occurred this month. With the completion of the central RNG production facility and the utility gas pipeline connection as well as more than 20 miles of biogas pipeline, our focus will be on the construction of dairy digesters to fill the pipeline. We have signed 24 leases or participation agreements with dairies and have many more dairies in progress. While continued supply chain challenges for items such as compressors could impact project schedules, our existing backlog of new dairy digesters takes us into year 2024. So we expect to be on track with the five-year plan. To date, Aemetis has been awarded $23 million of grants related to the biogas project from the California Department of Food and Agriculture, the California Energy Commission, Pacific Gas and Electric and other government agencies for the dairy biogas project and the production of renewable gas. As Eric mentioned earlier, we expect to close $25 million of a 20-year debt at a low interest rate under the USDA Renewable Energy for America Program. This month was our first USDA funding for the biogas project, and we expect to receive approximately $6 million of grants during the next few months for the RNG projects. Let's briefly discuss our California Ethanol plant. As Todd mentioned earlier, we generated a 20% year-over-year increase in revenues from ethanol sales in Q1 2022 compared to Q1 of 2021. That said, higher energy and corn prices, combined with increased railroad price increases, coupled with poor performance issues, increased the delivered cost of corn to more than $10 per bushel. Ongoing labor issues with the major rail carriers continue to cast a negative shadow on our industry and the economy as a whole. We are hopeful that the President's Emergency Board will resolve this issue as soon as possible. On a positive note, strong demand and favorable pricing for ethanol, wet distillers grains and distillers corn oil helped to offset the increased cost of corn and energy in the quarter. Our California Ethanol plant is being upgraded to operate using high-efficiency electric motors and pumps powered by low or zero carbon intensity renewable power sources, including our solar microgrid and local renewable electricity. As a strong endorsement of this strategy, Aemetis has been awarded approximately $16 million of energy efficiency and other grants by PG&E, the California CPUC and other entities to supplement our own funding to complete these projects. Let me take a moment to provide a few updates on the Keyes ethanol plant projects that are expected to materially increase cash flow when the projects are completed. The Mitsubishi ZEBREX ethanol dehydration unit has been installed and a test run has been completed. We are currently installing a specialized pretreatment unit and additional process upgrades. We expect to have this ZEBREX unit fully operational this month. The ZEBREX unit is designed to significantly reduce steam consumption in the plant by approximately 20,000 pounds of steam per hour. This is a 75% reduction in natural gas generated steam use for the ethanol dehydration and is expected to reduce our operating costs by decreasing petroleum natural gas use and increasing our revenues through lower carbon intensity ethanol. The solar microgrid with battery backup is progressing nicely, and we have a signed EPC contract with Total for the installation of the $12 million solar microgrid system. This project is supported by an $8 million grant from the California Energy Commission. The solar unit is designed to generate approximately 1.9 megawatts of zero carbon intensity electric power at low cost for operation of the ethanol plant. Mechanical vapor recompression system, which will further reduce petroleum natural gas and steam use, is now in the detailed engineering phase and contractors have submitted initial bids. When completed with the ZEBREX system, we expect to reduce about 85% of our natural gas use at the Keyes plant when the MVR system becomes operational next year. Currently, natural gas costs the Keyes plant more than $10 million per year. So we expect to save on natural gas costs while also reducing our ethanol carbon intensity. In summary, operational performance and project milestones for the Aemetis Biogas and Ethanol plant businesses are well on track with our five-year plan. Eric?

Thank you, Andy. Let's discuss our Carbon Zero one sustainable aviation fuel and renewable diesel project in Riverbank, California. We are pleased that the Aemetis Carbon Zero biorefinery under development at Riverbank near Modesto continues to achieve major milestones. In December 2021, after three years in negotiations with the City of Riverbank and the U.S. Army, Aemetis signed the acquisition of the 125-acre Riverbank Industrial Complex. This site is a former U.S. Army ammunition production facility with 710,000 square feet of existing manufacturing space, a rail loop with storage space for 120 railcars on site, a 20-megawatt electricity substation and 100% zero carbon intensity renewable power with a direct power line connection to the hydroelectric dam. In Q2 of this year, Aemetis took operational control of the 125-acre Riverbank Industrial Complex for construction of our sustainable aviation fuel and renewable diesel plant as well as the Riverbank portion of our CO2 sequestration well project. We have signed and announced more than $3.4 billion of sales contracts with Delta Airlines, American Airlines, Japan Airlines, Qantas and other airlines. Along with signed letters of intent, we have contracts for about 45 million gallons per year of blended sustainable aviation fuel to be produced at the Riverbank plant. Under the sales agreements, the neat SAF will be trucked from the Riverbank production plant to the San Francisco Bay Area for blending with jet fuel. The blended SAF will then be delivered via pipeline to the San Francisco Airport for use by airlines. In addition to the $3.4 billion of blended sustainable aviation fuel sales contracts, we signed a $3.2 billion renewable diesel sales agreement to deliver 45 million gallons per year under a 10-year sales contract with a major travel fueling chain for its Northern California locations. Incentives included in the pending federal legislation expand the market for sustainable aviation fuel by allowing a price to airlines that is competitive with petroleum jet fuel. We look forward to completing engineering and permitting in order to begin construction of the plant early next year. Let's review our new subsidiary, Aemetis Carbon Capture. In October 2020, the Aemetis plant in California was identified in the study issued by the Stanford University Center for Carbon Capture as one of three ethanol plant CO2 sources in California that have the highest potential return on investment from building a carbon capture and sequestration facility compared to the oil refinery, cement plants and natural gas power plants that comprise 61 largest CO2 emission sources in California. Our ethanol plant currently captures about 150,000 metric tons of CO2 per year, which is compressed in the Messer liquefaction plant into transportable liquid carbon dioxide, from which we already generate IRS $30 per metric ton tax credits from CO2 reuse. Current operations generated about $4 million per year of tax credits under the 45Q program. That could increase to about $8 million per year under the pending legislation. The carbon sequestration study that Aemetis commissioned from Baker Hughes indicated that the Aemetis Keyes plant and the Riverbank plant site are located above a 7,000-foot deep strata known as a caprock and an 8,000 foot deep strata known as a basement rock. Between the two layers is a saline formation that was cited by Stanford University as ideal for safe carbon dioxide sequestration. Over a long period of time, the CO2 reacts with saline to form a mineral that is permanently sequestered underground and does not return to the atmosphere. In Phase 1 of the Aemetis carbon capture project, we plan to inject up to 400,000 metric tons per year of CO2 emissions from our biogas, ethanol and jet/diesel plants into two sequestration wells, which we plan to drill near our two biofuels plant sites in California. We expect to construct two CO2 injection wells that each have a minimum of 1 million metric tons per year of injection capacity with additional CO2 supplied by other emission sources to sequester a total of 2 million metric tons per year of CO2. The initial phase of construction includes drilling two characterization wells to provide empirical data for the EPA Class 6 permit. The injection wells will then be drilled at the same site after receiving EPA and other permits. We are currently in the engineering and permitting process for the two characterization wells with an expectation we will drill the first characterization well at the Riverbank site. A direct feature of the pending legislation would provide $85 per metric ton of CO2 as a cash refund to Aemetis each year. As we mentioned earlier, the 2 million metric ton per year Aemetis carbon capture project would generate $170 million per year from the Federal Direct Pay tax credit as well as an estimated $400 million per year at a projected $200 per ton of sequestered CO2 from the Low Carbon Fuel Standard in California. The fixed amount of $850 million provided by the Direct Pay funding over the first five years of the project could support funding of the estimated $250 million capital cost of the two injection wells and related equipment. Let's review our biodiesel business in India. The National Biofuels Policy in India was updated in 2022 and is now being implemented to achieve a 5% blend of biodiesel that is equal to about 1.25 billion gallons of biodiesel per year. This month, our India Biodiesel subsidiary bid on a tender offer from the three government oil marketing companies, where about 180 million gallons per month of biodiesel was tendered for purchase by the OMCs. For the past 15 years, the pricing formulas have largely been driven by petroleum diesel prices. For the first time, a feedstock plus pricing formula was used for the OMC tender, reflecting the actual cost for feedstock to produce biodiesel in India. The pricing formula and the timing of the two months tender by the oil marketing companies is expected to be the ongoing format for sales to the OMCs. We expect the formula to be a successful mechanism for the rapid growth of biodiesel production in India due to the predictability of the pricing formula. We began operations of our India Biodiesel plant in early August and expect to produce at full capacity to fulfill the tender offer. We believe this revised OMC purchasing process will allow us to maintain strong production levels on an ongoing basis. Since our India subsidiary has no debt and the 50 million-gallon per year biodiesel plant is fully constructed and commissioned, we are well positioned for a rapid revenue increase as we restart biodiesel production after a long delay. In summary, Aemetis is expanding a diversified portfolio of negative carbon intensity projects, Dairy Renewable Natural Gas, sustainable aviation and diesel fuel, low-carbon ethanol using zero carbon intensity electricity and CO2 sequestration. All these projects are synergistic and create a circular bioeconomy within Aemetis, in which we use byproducts and waste products from our facilities in local areas as feedstocks to produce low and negative carbon intensity renewable fuels. Our company's values include a long-term commitment to building value for shareholders, the empowerment of and respect for our employees and business partners and making significant and positive contributions to the communities we serve. Now let's take a few questions from our call participants. Kelly?

Your first question is from Manav Gupta with Credit Suisse.

So the first question, Eric and team, I wanted to ask is this letter that Gavin Newsom seems to have sent on July 22 to Liane Randolph, the CARB Chair. And looking at the letter, he clearly wants a faster pace of decarbonization in California. I think he's calling for 20% sustainable aviation fuel, and again, pretty much higher carbon reduction targets everywhere. And I mean, looking at the comments you have provided where you just went through the calculations, where you're calling on like a $200 LCFS price, again. So when we put these things together, are you optimistic that this letter and everything else that you're seeing out there will have an impact, the carbon targets will be raised and the LCFS price will rebound in your opinion?

I think that if you talk to CARB staff, they will tell you they have worked as hard as they can to communicate to the market that the goals that they have set forth in scoping plan are realistic, achievable and that they are now being asked to stretch even beyond those goals. And so there's a very significant gap between traders and investors and their current view of the current requirements of LCFS credits and what the January 2024 and onward credit requirements the CARB stated very clearly in the scoping plan and other disclosures. And so the governor's letter, I think, just seals that CARB is committed to this. You may know that the Board of Directors of CARB is largely appointed by the governor. So this is not a casual commentary by the governor. This is a direct instruction. And so I think it's very hazardous to be obligated to deliver LCFS credits and not own them. So I think as traders over the next 18 months, increasingly get more and more information about the specific numbers on an annual basis, we have two analyst reports that say we will be at the cap. There is a $200-plus cost of living index, current cap is roughly $250. The system is just structurally set up so that we'll be at the price cap. And the only question really is, does that happen in the next six months as traders start to see the information come out in the first quarter of next year? Or does it take us 18 months as traders wait for the actual legislation and regulatory activities to be completed in the first quarter of 2024?

Perfect, Eric. The second thing which I wanted to touch base was clearly this Inflation Reduction Act. There was a lot of revisions, which help you guys, whether it's renewable diesel, whether it's $85 a ton. The one which I just quickly wanted to focus was because this really disproportionately benefits you is the 30% ITC. Help us understand why this works for you, how this means that the money that you're spending you can get credit for it, how you can monetize it. And does it also mean that given this benefit, if it comes through, is there a possibility that Aemetis increases the pace of dairy farm development because you're basically getting cash for the money you're putting in? Help us understand how this all works.

Thank you, Manav. Firstly, we're looking at a $100 million equity contribution, which allows us to avoid taking on $100 million in debt financing that we have access to and are currently working on. This effectively reduces the project's interest payments by around $60 million, thus boosting its profitability by the same amount. By introducing $100 million in new equity for the project, securing the debt financing becomes simpler. This contribution represents about one-third of our overall capital expenditure. While we already have equity in place, this significantly enhances our equity commitment, making our debt even less costly. Regarding the project timeline, we plan to update our five-year plan in the first quarter of next year. In the meantime, if this passes, we may provide some updates around September. We discussed various indications today, but the comprehensive five-year plan will still be revised in the first quarter of next year. However, these indications could be integrated into the 2022 plan to reflect our annual impact. Overall, this development will certainly help us execute more swiftly by reducing lead times tied to debt financing. Consequently, we can expect faster methane capture, quicker enhancements in air quality in California, and a more rapid realization of the biogas benefits with the passage of this legislation.

And the last question, sir, by, let's say, year-end 2022, how many dairy farm RNGs would you be able to connect and start producing from? Even if you're not directly making a sale at this point, which you explained why you won't be for the credits, but how many of those would be complete and ready to produce by year-end 2022? And I'll leave it there.

Yes. We will have seven that will be fully operational. As you know from our process, we inject into storage. Additionally, we will begin constructing five more in the fourth quarter of this year. We will have seven fully producing and going into storage, and we plan to quickly scale that up to twelve early next year.

Your next question is from Jordan Levy with Truist Securities.

First, maybe you'll have a lot of high-impact projects going on in different stages. Maybe so we kind of know the trajectory over the near to medium term here. Can you just touch on pretty briefly what the big milestones for the Company we should be looking towards or and, call it, the remainder of this year and into early next year, if there's anything on each of the big projects going on?

We have seven fully operational digesters that are upgrading to renewable natural gas and injecting it into the pipeline. This is a significant milestone for us because it brings in positive cash flow, marking a major advancement. Additionally, we have five more digesters under construction, which will bring the total to twelve by next year. Regarding CO2 sequestration, the recent characterization work leads us toward a significant opportunity, potentially generating around $570 million a year in new revenue for the company. We are well-positioned as one of the few carbon capture and sequestration companies in California, making the characterization well process a key focus. We've also finished several upgrades at our Keyes ethanol plant, including a heat exchanger upgrade and a ZEBREX upgrade that is concluding this month, which represents a five-year investment of time, effort, and capital. Our solar project is progressing well and is expected to be completed next year, along with mechanical dairy compression. We'll issue press releases as we proceed with permitting and construction for these projects. In addition, we have a set of customers in the airline sector, with letters of intent that will soon be converted into off-take orders, potentially adding around $500 million in contracts. These agreements are currently in the letter of intent stage, and we aim to have everything finalized by the end of this year. We also anticipate progress in permitting and expect the final signed EPC agreement to be completed by the first quarter of next year, which will be accompanied by press releases. Lastly, our plant in India has commenced operations and is fully producing. Over the coming months, we expect to see ongoing progress as we fulfill purchase orders and look forward to an additional order later this month, with the new purchasing process being much quicker than previous fixed-price structures. The flexible feedstock and contracting mechanism now allows for updates every two months, so we anticipate more news from India as we run that operation.

Maybe just briefly as a follow-up. Can you just talk to the regulatory environment for the CCS side of things and how that maybe evolved since you first announced that business and what you're kind of looking towards there in terms of Class 6 well permitting and that sort of thing?

In recent federal legislation, the EPA has provided additional resources to support the Class 6 well process. We have received direct backing from the White House and senior EPA well drilling officials at both federal and state levels. This has led to more support and interest in our project than we anticipated. When we initially announced our subsidiary, we expected a lengthy and challenging process with the EPA, but the reality has been quite the opposite. The EPA is enthusiastically backing our efforts and is doing everything possible to ensure a smooth process. We anticipate continued support, particularly in terms of staffing to complete our Class 6 characterization well process. We are very pleased with this level of support, which starts with the White House.

Your next question is coming from Derrick Whitfield with Stifel.

For my first question, I wanted to ask if you could offer color on the dairy RNG competitive landscape. More specifically, are you guys sensing less competition as a result of the weaker LCFS pricing environment? Or do you sense competitors are looking through this period of weakness?

Good question, Derrick. We've noticed some retreat by outside investors. In California, there are mainly three developers that have been driving the business, including Aemetis and two others. This situation seems to continue, alongside numerous discussions. While some other groups explored opportunities last year, there is still some private investment occurring. However, it appears that other parties have pulled back.

Great. And then for clarification on Manav's earlier question, if the IRA is approved next week, what's your understanding or assumption on how soon you could begin to receive funds from the $90 million you noted in your prepared comments?

The current structure is that we file our tax returns and then get a refund. So we have planned at our projections, that would be Q2 of the following year. So for capex happening this year, we wouldn't receive a refund until probably the almost June timeframe, so Q2 of next year. And you plan that out over a five-year span and it ends up being about $100 million.

Terrific. And lastly, regarding REIT financing, are there any remaining steps that are required for approval between now and later this month when you guys receive funding?

No, this is Andy again. Right now, it's just paperwork. There is no more approval process. We are simply ramping up the paperwork with our lender.

Your next question is coming from Amit Dayal with HC Wainwright.

With respect to the India operations, what is the timeline within which the plant could be restarted, et cetera, over there?

The plant was restarted in early August, and we are currently operating at full production. During the COVID period, we utilized this time to allow employees to replace equipment, upgrade seals, and conduct tests, which has prepared us well for full operations. The operational restart went smoothly, with the only delay coming from the local power authority taking an additional week to provide power for the restart. Beyond that, we have procured billions of dollars' worth of feedstock in preparation and are positioned to run at full capacity under our two-month contract. Customers have assured us that demand will continue robustly. While there might be minor technical challenges related to testing and temperature changes as we enter winter, we have a solid plan in place for execution over the next two months. Our total production capacity is about 4 million gallons per month, while demand stands at 180 million gallons. This indicates a substantial growth opportunity for our business in that area, given the ongoing interest from OMCs to meet their needs.

Are there any additional start-up costs we should consider as you begin the process of restarting the plant over there?

Yes, the plant is fully restarted already, and we didn't have any one-time capex or operating costs that were notable. We planned for this and we're, if anything, waiting for this for a while. So there was no unexpected startup.

And then revenues, et cetera, from this will show in maybe the 4Q results?

It would be in the Q3 results and also just continue on into Q4. So our goal is full operation for the foreseeable future. What we have in hand is the two-month tender offer that has been accepted. And so we're expecting, though, that the oil marketing companies will be an ongoing customer base that we could supply with all of our capacity.

Your next question is coming from Matthew Blair with Tudor, Pickering, Holt.

I was hoping we could revisit the CapEx guidance for 2022. I think at one point, you were expecting around $85 million. Think you spent about $22 million in the first half of the year. Is that $85 million, is that still a good number? Or should we expect something lower? And at this stage, do you have any early thoughts on 2023 CapEx?

I believe we are on track for 2022. There are various projects contributing to that number. Our five-year plan for 2022 includes some flow of biogas between the fourth quarter of this year and the first quarter of next year, depending on the pace of construction, which introduces some variability. However, there hasn't been any significant change in our other activities, and the budgets remain the same. I also don't anticipate any major shifts in timing. Consequently, we are likely to be within $10 million of the capital expenditures estimate.

Sounds good. And then I wanted to clarify on the timing of the RNG monetization. It sounds like you're waiting for the LCFS pathway to come through. Would you be able to monetize any D3 RINs in Q3 or Q4? Or should we really expect everything to happen in sometime in the first half of 2023?

Andy, you want to...

Yes, I would say that's the right expectation. We'll take it to storage, and then following the approval by CARB for the pathways, well, that's when we'll actually exchange the gas out of storage and start to monetize it.

Got it. And then last question, could you provide any sort of a rough range on profitability per gallon for this India Biodiesel restart?

Not with any specificity at this point in time. It's a price of INR 106 in per liter. That is a publicly announced price. And so you can do some math on what the market looks like and probably can get pretty close. But right now, the numbers are definitely positive, and we expect to be able to put these numbers in the third quarter and as well as the fourth quarter. And it's a restart of the entire industry. So the formula of feedstock plus is structured so that we would be provided not only just profitability, but frankly, growth capital to be able to expand our capacity from 50 million gallons to 100 million gallons and even more. So the design of the program is to be able to fund the growth.

Your next question is coming from Marco Rodriguez with Stonegate Capital.

I was wondering if maybe, Eric, you could spend a little time just coming back to the CapEx plan for the five-year plan. Just kind of give us a little bit better of a sense or an update on the funding sources. I know you've got the new line here. But if you can maybe frame the sources, the mix of the sources, whether that's from capital markets, grants, cash flow would be helpful.

Certainly. Each of our businesses has different funding sources. Generally, we utilize a mix of grants and investment tax credits, either through direct pay or transferability, as all biofuel tax credits seem to include one of those features. This allows us to convert them into cash rather than waiting several years for tax benefits. So far, we've received about $57 million in grants across our portfolio. The investment tax credits significantly contribute additional equity and adjust our five-year plan. Besides grants and investment tax credits, we also have government-backed loans, with the USDA being our most significant partner, especially in biogas. This supports our business growth. Furthermore, we can tap into the California municipal bond market for private activity bonds, usually around $50 million, while USDA loans are typically capped at $25 million per project. I anticipate incorporating California municipal bond funding alongside USDA support for our biogas business. The same strategy applies to our jet and diesel operations, where we have a $125 million commitment from the U.S. Department of Agriculture under the 9003 Biorefinery Assistance Program. We're also looking to expand this relationship and secure additional funding through the Renewable Energy for America Program, which could include tax-exempt financing. When considering the tax credits worth $1.25 to $1.75, it contributes additional equity to our projects, making debt financing easier to arrange. In carbon sequestration, we have invested about $18 million in characterization wells for two wells plus consulting for permitting, which is our main investment. We expect to receive a Class 6 license in 2024, which will enable us to utilize $850 million in direct payments for financing and strengthen our existing USDA collaborations to scale up that business. Overall, we seek confidence in U.S. government policies being implemented through loan guarantee programs, which have proven to be an effective business strategy. If there is strong interest in these projects from the California municipal bond market, we can include that funding when necessary. However, if interest wanes, we can still rely on U.S. government-guaranteed bond structures, which have been successful for us and should continue to be.

Great. And last quick question. Just on the gross margins that you guys saw in this quarter from ethanol. Just kind of can you talk about how you're thinking about the mechanics behind that, just kind of given the rising price in corn and the rail issues, how you're thinking about that in the second half?

I would say that we are all facing challenges due to the railroads' inadequate response to the recovery after COVID. They should have hired and trained new staff much faster, which has contributed to some increased rail costs. However, that situation is temporary, and they are working on a solution. The Management Board is actively monitoring their progress, so I expect to see gradual improvements over the next six months. Additionally, everyone is aware that cutting off Ukrainian corn will provoke a market reaction, which may be somewhat speculative. As we move through the corn harvest and the yields appear to be better than expected, and as some corn begins to flow into Ukraine, we will observe how the market responds. Our situation largely depends on Ukrainian production to see a significant decrease. If a resolution in Ukraine were to occur next week and there was a surge of corn in the market during the harvest season, it would certainly have an effect. Personally, I believe we are currently in a temporarily elevated situation due to both rail issues and the reduced Ukrainian supply in the market. Andy, do you have anything to add?

I would say that August is typically one of the more challenging months for the ethanol industry in terms of corn pricing. There are a lot of uncertainties regarding what the harvest and carryout will look like. Historically, I consider January, February, and August to be my three least favorable months for purchasing ethanol. While the actual price of corn has decreased somewhat, the corn basis remains quite high. This means we aren't seeing much relief, as farmers are not selling, which is common for this time of year. As the harvest approaches, farmers will need to make space in elevators for the new crop corn. I anticipate that this will be an average corn year rather than an exceptional one. The Western corn belt is experiencing dry conditions, but the rest of the corn belt is performing as expected. Unless there are significant disruptions, such as further escalation in Ukraine, which tends to impact perception more than real supply, I believe things will begin to normalize as we enter the harvest. We will look for opportunities to capitalize on pricing as they arise.

In the medium term, though, I think that investors should reflect on the fact we don't actually sell corn as one of our products. We sell ethanol. So it's a demand for ethanol that generates our margins. Our most profitable year, we generated $40 million of EBITDA from our ethanol plant in California, and we had corn prices were roughly the same as where they are right now. So E15 and E85 funding of $500 million will significantly expand the market for ethanol.

Yes, the EIA numbers released yesterday indicated a significant drop in demand, which we anticipated would happen eventually due to high gas prices. Gasoline and ethanol demand both decreased by almost double digits in just a week of data. Typically, I prefer to analyze data over a longer period, such as several weeks or a month. However, with the back-to-school season approaching, we may start to see changes. It seems people are reaching their limits regarding gas prices. This is something we're closely monitoring. Corn is following its usual cycle, but we'll need to see how ethanol demand evolves.

Your last question is coming from Edward Woo with Ascendiant Capital.

You answered a lot of my questions about the outlook for ethanol. But we've seen some pullback in gasoline prices from record levels, and there's been a lot of concern by the federal government to get oil prices down. Do you think we'll see sustainable decreases in the outlook for oil? And may that possibly increase demand for gasoline and obviously back for ethanol to rebound?

This is Andy. I think a lot of the current situation relates to geopolitical factors affecting oil prices. I won't speculate, as I'm not an oil expert and I follow the market just like you. Events in Ukraine, China, and elsewhere have unpredictable impacts on traders in New York, so I can't make predictions there. However, it seems we're starting to return to our normal demand cycles, particularly for ethanol. Typically, this time of year sees a decrease in demand as summer vacation ends and school begins. I feel that barring any unforeseen external events, which could happen at any time in today's world, we are moving toward a more normalized state. Gas prices have decreased; for example, I was on the East Coast last week, and prices were significantly lower than in California. California gas prices have also dropped somewhat. As I look at the ethanol business, it’s back-to-school time, and I believe people are finishing up their summer vacations this week, which is leading us back into a standard cycle. I want to emphasize that this could change if we face another international crisis that pushes oil prices up again.

There are no further questions at this time. I would now like to turn the floor back over to management for any closing comments.

Thanks, Kelly. Thanks to Aemetis shareholders, analysts and others for joining us today. Please review the Company presentation and the investor presentation that is posted on the home page of the Aemetis website. We look forward to talking with you about participating in the growth opportunities at Aemetis.

Thank you for attending today's Aemetis earnings conference call. Please visit the Investors section of the Aemetis website, where we'll post a written version and an audio version of this Aemetis earnings review and business update. Kelly?

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.