Earnings Call Transcript
Green Plains Inc. (GPRE)
Earnings Call Transcript - GPRE Q4 2022
Operator, Operator
Good morning, and welcome to the Green Plains Inc., and Green Plains Partners Fourth Quarter and Full Year 2022 Earnings Conference Call. Following the company's prepared remarks, instructions will be provided for Q&A. At this time, all participants are in a listen-only mode. I will now turn the call over to your host, Phil Boggs, Executive Vice President, Investor Relations. Mr. Boggs, please go ahead.
Phil Boggs, EVP, Investor Relations
Thank you, and good morning. Welcome to Green Plains Inc., and Green Plains Partners fourth quarter and full year 2022 earnings call. Participants on today's call are Todd Becker, President and Chief Executive Officer, Jim Stark, Chief Financial Officer; and Leslie Van Der Meulen, EVP of Product Marketing and Innovation. There is a slide presentation available, and you can find it on the Investor page under the Events and Presentations link on both corporate websites. During this call, we will be making forward-looking statements, which are predictions, projections or other statements about future events. These statements are based on current expectations and assumptions that are subject to risks and uncertainties. Actual results could materially differ because of factors discussed in today's press releases and the comments made during this conference call and in the Risk Factors section of our Form 10-K, Form 10-Q and other reports and filings with the Securities and Exchange Commission. We do not undertake any duty to update any forward-looking statements. Now I'd like to turn the call over to Todd Becker.
Todd Becker, CEO
Thanks Phil, and good morning, everyone. We have a lot to discuss, so let's get started. The fourth quarter margins improved from the lows we encountered in the previous quarter, but we still face some tough challenges due to a quick decline in ethanol margins. This industry has significant potential, but we continue to experience a slight imbalance in production versus demand that is impacting margins. Furthermore, we believe the pricing structure is flawed, as very little volume in the market each day affects the pricing of a million barrels a day of production. This pricing mechanism needs to be addressed moving forward. In the Western Corn Belt, the basis remains unusually high for this time of year, approximately $0.45 per bushel above the last five-year average and $0.30 higher than last year. A severe cold snap in December caused outages across our platform, and combined with rail embargoes that hit Green Plains particularly hard, we had backed-up inventory at some locations which led to plant slowdowns and some plants temporarily going offline. We estimate the storm cost our platform around $0.02 per gallon for the quarter alone during that brief period. Additionally, we made the decision to temporarily idle 10% of our production capacity based on current market conditions and we are continuously evaluating when to bring that capacity back online. Despite these challenges, we operated at a 93% utilization rate across our platform, benefiting from pulling seasonal maintenance into the third quarter and continuing to see increased production rates at locations where we have invested in technology over the past few years. Overall, our results showed a consolidated cross margin of around $0.03 per gallon and EBITDA close to $6 million. What we are learning is that our transformation is more crucial than ever and has contributed to our positive margins, even with the headwinds from our traditional platform, which is why we continue to pursue the ambitious transformation of Green Plains we announced in recent years. Our focus is on our four pillars of protein, oil, sugar, and carbon, while also concentrating on reducing our traditional operations' costs. In 2022, we made great strides in our transformation, completing the construction of three additional MSC protein technology sites, making a total of five, and breaking ground on our first clean sugar facility in Shenandoah at a commercial scale. We are progressing toward the overall decarbonization of our platform, positioning ourselves for the future of sustainable aviation fuel, alongside our recent alcohol to jet announcements. Our MSC projects in Central City, Mount Vernon, and Obion continued to come online during the quarter, and the incremental yields from these new MSC systems contributed to another quarterly production record for our low carbon renewable corn oil. I am pleased to announce that all five of our MSC facilities are now completed and operational, producing ultra-high protein. In fact, just this week, we set daily production records. This is a significant achievement for our team, especially amidst the ongoing supply chain and labor market challenges. In the last call, I mentioned we expected to see significant progress in our commercial sales for 2023, and we have indeed achieved that, which I will cover later in the call. Our carbon initiatives are also advancing, starting with our partnerships with Osaka Gas and Tallgrass to utilize carbon from our Southeastern locations to produce synthetic fuels and methane products. Although it is still in the development phase, we're optimistic about its potential. We recently announced a sustainable aviation fuel partnership with Tallgrass, PNNL, and United Airlines to develop new alcohol to jet technology. United's agreement to purchase this product highlights the urgency to create decarbonized aviation fuel pathways, and we believe that using decarbonized ethanol as a low-carbon feedstock could be transformative for our company, our shareholders, and the entire industry. We are committed to further developing this innovative technology from PNNL as Blue Blade Energy scales it and works towards a pilot facility in the coming years. This gives us confidence in the long-term value of our biorefinery platform and the options available for our future endeavors. Currently, the fundamentals of our base ethanol business are under pressure, but we have seen rapid changes in our margin structures. We are open to forward margins, though opportunities to hedge are limited. At times, I feel like I'm repeating myself, which emphasizes the critical need for our technology transformation. The EPA recently proposed RFS volumes of 15.25 billion gallons per year. The current administration has consistently shown a commitment to increased ethanol blends, including allowing E15 sales during the summer for the fourth consecutive year. Our value proposition as the lowest-cost octane enhancer remains strong both domestically and internationally. We are capturing more corn oil from every kernel and are on track for 1.2 pounds mechanically, and regardless of the final RVO levels, we believe the rapid growth of renewable diesel production will continue and our distillers corn oil will remain in demand. As always, we will concentrate on the aspects within our control: executing our transformation plan, bringing additional MSC and corn oil facilities online, completing our clean sugar project in Shenandoah, and implementing our carbon plans. Jim will summarize our efforts shortly and highlight our success in strengthening our balance sheet, ending the year with over $500 million in cash. This positions us well to carry out our transformation strategy. Our partnership, Green Plains Partners, delivered another consistent quarter and declared a distribution of $0.455 per unit while maintaining stable coverage ratios. Now I will hand the call over to Jim to discuss the overall financial results.
Jim Stark, CFO
Thank you, Todd, and good morning everyone. Green Plains consolidated revenues for the fourth quarter reached $914 million, which is $112 million higher than the same period last year, primarily due to increased run rates. Our plant utilization improved year-over-year to a 93.4% run rate during the fourth quarter, compared to an 83% run rate reported in the same period last year. As Todd mentioned, we are closely monitoring the economic landscape regarding the potential to restart the 10% viable capacity we have, which is currently having a minor impact on our short-term utilization rate. For the quarter, we reported a net loss attributable to Green Plains of $38.6 million or $0.66 per diluted share, compared to a loss of $9.6 million or $0.18 per diluted share for the same period in 2021. Adjusted EBITDA for the quarter was $5.8 million compared to $32 million for the same period last year. Higher corn prices in the Western Corn Belt and weak ethanol demand contributed to a lower margin for Q4 2022 compared to the previous year. We recorded a $0.03 per gallon consolidated crush margin for Q4 2022, which is $0.17 a gallon lower than last year due to the aforementioned factors. Sequentially, the consolidated crush margin per gallon improved by $0.12 compared to the third quarter of 2022. Our Ag and Energy segment performed better than in 2021, with a $9.6 million increase in EBITDA to $11.8 million for the fourth quarter. This growth was driven by market volatility in our merchant trading and distribution businesses in fuel racks and natural gas storage. For the fourth quarter, our SG&A costs across all segments were $28.9 million, up from $18.2 million for Q4 2021. The increase was due to higher personnel costs associated with increased headcount, as previously discussed during last year's quarterly calls, and we have fully staffed our company for our transformation plan. Additionally, this increase was related to higher insurance, rents, and other operational expenses. Our interest expense for the quarter was $6.5 million, including the impact of debt amortization and capitalized interest, which is roughly in line with the $6.9 million reported in the same period last year. For the year, interest expense was significantly lower, down by approximately $34.5 million compared to last year due to the exchange of convertible notes in 2021 and 2022. We expect interest expense for 2023 to be around $40 million given current interest rates and lower debt balances moving into 2023. Our income tax expense for this quarter was $4.9 million, compared to a tax expense of $4.8 million for the same period in 2021. At the end of the quarter, the net loss carryforwards available to the company stood at $85.8 million, which may be carried forward indefinitely. We expect our normalized tax rate for 2023 for Green Plains Inc., excluding minority interest to be around 21%. As detailed on slide nine of the earnings deck, we ended the quarter with $464.4 million in cash and net working capital, down from $698 million at the end of 2021. Our liquidity position included $500.3 million in cash, cash equivalents, and restricted cash, along with approximately $235 million available through our working capital revolver. Our balance sheet remains strong as we advance our transformation to Green Plains 2.0. During the fourth quarter, we allocated roughly $29 million of capital towards sustaining growth projects, including $14 million for our MSC protein initiative, about $10 million for other growth initiatives, and approximately $5 million for maintenance, safety, and regulatory capital. Total capital expenditures for 2022 were $212 million, which falls about $38 million within the range we provided during our Q3 call. To date, we have invested around $330 million of our shareholders' capital across our platform and in deploying Fluid Quip Technologies MSC throughout the Green Plains biorefinery network, including our share in the Green Plains turnkey joint venture with Tharaldson Ethanol. For 2023, we expect capital expenditures to range from $150 million to $250 million, covering our share to finalize the turnkey project with Tharaldson this year and the capital needed to complete our clean sugar facility in Shenandoah by late Q4 2023. We should also commence construction on the MSC project in Madison, along with allocating capital for a couple of DCO tech installations across our platforms. Green Plains Partners continues to deliver consistent performance, showing earnings and cash flow, ending the quarter with a net income of $9.6 million and adjusted EBITDA of $12.7 million, slightly above the $12.2 million from the same period last year. Plant utilization rates at Green Plains increased, boosting storage and throughput volumes for the partnership by 12.3% for the fourth quarter compared to the previous year. For all of 2022, storage and throughput volumes rose by about 16% over 2021, totaling approximately 876 million gallons, with a similar volume expected for 2023 based on our current outlook. Consequently, the partnership remains on track to provide steady returns to our unitholders, announcing a quarterly distribution of $0.455 per unit, maintaining just under a one times coverage ratio for the quarter. For the partnership, distributable cash flow was $10.7 million for the quarter, in line with the $11 million from the same quarter in 2021. Over the past 12 months, the partnership produced adjusted EBITDA of $51.2 million, distributable cash flow of $44.6 million, and declared distributions of $42.8 million, yielding a 1.04 times coverage ratio, excluding adjustments for principal payments made during the past year. Additionally, the partnership reduced term debt by $1 million for the year and raised its cash for unitholders by $23.6 million in 2022 compared to 2021. Now, I would like to turn the call back over to Todd.
Todd Becker, CEO
Thank you, Jim. We've been looking forward to 2023 for some time, as we have substantial volumes from our enhanced MSC platform. Our team has collaborated with various customers, and the results are evident in our sales performance. So far this year, we have contracted and sold nearly half of our expected production, and when considering repeat customers, we have about 250,000 tons, or 75% of our capacity, effectively secured. Customer engagement across different species has been remarkable, and we value each partnership as introducing a new mass ingredient is unprecedented in my 35 years in the industry. A new plant-based high-protein product on a large scale, aside from traditional options like corn gluten meal and fish meal, has not been available until now. At the beginning of this journey, we concentrated on the crude protein differences between our established distillers’ grains and the new protein-focused products. This laid the groundwork for our transformation and our mission to be part of global food supply. We anticipated that once we established a solid customer base by delivering unmatched production volumes, our focus would naturally shift to nutritional value and its impact on our customers' profitability. As we complete sales cycles initiated in early to mid-2021, customers are starting to recognize the nutritional advantages of our fermented ingredients over other plant-based and solvent-extracted options. This aligns perfectly with our product development strategy, which is rooted in our fermentation platform and collaborations on yeast and enzyme solutions to develop amino acid and peptide products that strengthen our customer relationships in aquaculture, pet food, and young monogastric diets. We also understand what is important to our shareholders and have managed the capital entrusted to Green Plains responsibly. Since starting this strategy, we believed that our base product would command a premium of $200 over traditional low-protein distillers, and I'm pleased to report that we have consistently exceeded this expectation. This premium can vary based on customer needs for protein levels, quality control, and geographic location. Remember, this is before we fully explore our growth opportunities, which we are starting to prioritize this year. For 2023, we project that about one-third of our production will serve global aquaculture and pet food markets, including negotiations for higher protein levels of over 58%, which we are now confident we can produce on demand. The remaining production will be allocated to various species and feeding cycles from young to mature animals. Given the average premium trend and fluctuating corn oil prices, we anticipate achieving our projected return rates on the operating MSC systems. This journey hasn't been simple, as we faced challenges with bottlenecking, but once we demonstrated real product availability to our major clients, they recognized the legitimacy of our offerings. Our valued customers have shown their confidence in our products and our journey. We are pleased to provide solutions that meet their needs. Our MSC technology also aids in producing higher renewable corn oil yields, and the new pricing structures help reinforce long-term project returns. While we are observing strong acceptance of our 50% protein product, we will continuously work on developing and marketing higher protein options at 60% and beyond. Regarding our overall platform and timeline, we've discussed supply chain challenges, particularly related to our electrical equipment and permitting issues in previous calls. Our turnkey partnership with Tharaldson for a 175 million gallon plant, in which we hold half of the MSC production, is under construction. Our Madison, Illinois site is next in line for MSC technology development and, once we receive the necessary permits—which are currently in process—we plan to commence construction this summer for a 2024 launch. Our Fairmont facility in Minnesota is in the planning phase, but permitting there may take longer than in Madison. At our Otter Tail location, due to plant scale and our focus on capital efficiency, our priority is to enhance renewable corn yields before possibly implementing a full MSC system later. We are currently exploring the use of Fluid Quip DCO extraction technology to increase oil recovery in the interim. This strategy will enable us to achieve approximately 885 million gallons of capacity, including our share from Tharaldson, once the installation is complete. With DCO improvements, we will be close to our original plan, and importantly, we are on track with our long-term strategy to enhance pricing and protein levels over the next three to five years. Now, let’s turn to our sugar business. We are introducing a groundbreaking technology from Fluid Quip, which we own and control. This positions us to shake up an industry that has not seen new competition for a long time. Our expertise with protein sets us up for success in dextrose production, allowing us to leverage those insights for smoother execution of this strategy. Our ability to transform the starch from corn at a dry mill ethanol plant into a lower carbon dextrose product is creating new supply opportunities in a market largely dominated by a few major players. We've had potential clients reaching out as they seek alternatives to the major four dextrose suppliers, although our commercial facility is not yet operational. The CST system is under development in Shenandoah, Iowa, where we are constructing an innovative biocampus that will mark our first true biorefinery, capable of separating high-value protein feed and converting starch to dextrose. Importantly, once the CST facility is operational, we will continue to produce protein, oils, and other animal feeds from each bushel of corn, albeit with reduced ethanol output. This transformative technology exemplifies why we invested in Fluid Quip two years ago, and their efforts in designing and engineering this technology at scale underscore their intellectual property strength and commitment to disruptive agricultural technologies. The Shenandoah facility is set to produce 200 million pounds of dextrose per year and has potential to expand to 500 million pounds annually. We expect to further invest in this technology at Shenandoah or new locations next year. The talent we are attracting from the traditional corn wet milling sector is remarkable, and they are joining us because they recognize this as a transformative opportunity. The economic prospects remain strong, and we are eager to launch our first system. Our carbon initiatives continue to make progress as well. As mentioned earlier, our partnership on synfuels from biogenic carbon has made strides, and we've previously discussed the impacts of the Inflation Reduction Act. We are examining various options like combined heat and power systems for maximizing our opportunities. Summit Carbon Solutions is advancing on schedule, having completed over 60% of the required right-of-way for the 2000-mile project, with two-thirds acquired in key states like Iowa. It's important for Green Plains that Summit has started acquiring essential long-lead equipment, such as compression gear, for our facilities. Their progress keeps us on track to begin reaping the benefits of the IRA by 2025. Ensuring reliable carbon sequestration is vital, as we see opportunities in sustainable aviation fuel and Summit's access to permitted class six wells which could provide us a competitive edge in our low carbon strategies. Looking forward, we are hopeful that the Inflation Reduction Act will boost our margins starting in 2025 and beyond. If I revealed the potential future EBITDA estimates from this program alone, it would likely astound you. However, the numbers speak for themselves, and I encourage you to consider the possibilities. As you know, I firmly believe that the future of this industry is in alcohol-to-jet sustainable aviation fuel. Recently, Illinois enacted a new $1.50 per gallon SAF blender's credit in addition to benefits from the IRA. The aviation industry must decarbonize, and we are well-positioned to provide solutions with both our low carbon alcohol and the waste oils we produce for renewable diesel, which will transition to SAF in the future. For context, alcohol represents a much larger solution, but both vegetable oil-based and alcohol-based sustainable aviation fuel are crucial for aviation to reduce their emissions. With the opportunities presented by our MSC technology for protein and corn oil enhancements, along with our Clean Sugar Technology deployment and carbon capture strategies, we remain confident in our ability to meet our projections for 2024 and beyond. The IRA’s effects and the potential for higher protein pricing and enhanced nutritional outcomes in coming years could add significant value. We have structured this company to align with macro trends fueling demands for protein and vegetable oil, efforts to decarbonize, and the burgeoning bioeconomy, and this is just the beginning. Our employees are enthusiastic every day about creating value, and our customers are equally excited, all of which we believe will lead to significant shareholder value in the future. Thank you for your continued support during Green Plains' transformation. We can now begin the question-and-answer session.
Operator, Operator
Thank you. Our first question comes from Craig Irwin from Roth Capital Partners. Please go ahead. Your line is open.
Craig Irwin, Analyst
Good morning and thanks for taking my questions. So, Todd, talking to some of the other players out there, the private guys, it sounds like there's something really funky going on again with asset values that they're particularly strong. We haven't seen something like this in almost 10 years. Can you maybe share with us what you're seeing point to data points that we can see publicly? And I kind of have an intuition and this might be related to operators' confidence in SAF and the demand for those plants to serve the opportunity for the IRA and what President Biden laid out. Can you maybe just unpack that for us and talk about whether or not this could put us into a capacity deficit for fuel ethanol in the future?
Todd Becker, CEO
Thank you for the great question. What we're observing, especially at the larger scale plants that exceed 100 million gallons, is strong interest in the ongoing market processes. Some bidders are missing out on the second rounds of asset sales because they are offering amounts reflective of previous traditional values, which are no longer competitive. We’re seeing values approaching original replacement costs, even though rebuilding our platform would be significantly more expensive today. This is quite encouraging for us. When we assess our current asset values, it’s essential to consider whether we are operating at a subscale. From what we understand, many bidders are now focused on sustainable aviation fuel and decarbonization, influenced by the Inflation Reduction Act. The range of options available in this industry has never been greater, whether through our efforts in protein, oils, and sugars, or through others' advancements in technologies. We are also exploring combined heat and power systems to lower our carbon footprint and energy costs alongside the sustainable aviation fuel initiative. This range of options appears to attract new players to the U.S. ethanol industry, which they might not have considered before. While we are facing challenges in our traditional fuel economics, we’re still managing to generate a bit more than necessary each day. However, as we've experienced in the past, unpredictable shifts in margin structures can occur. Last year, we were uncertain about what Q2 would bring, and suddenly, we noticed a significant change in margins. It's impossible to predict whether similar changes will happen this year, but we are aware that ethanol margins can fluctuate rapidly.
Craig Irwin, Analyst
Excellent. Thank you. My second question is about protein pricing. So, it seems like every few months, there's some controversy that whips around people speculating about your pricing for the MSC product. You were pretty clear in your commentary, but I was hoping you might be able to kind of put some boundaries around pricing. In the past you pointed to soy meal versus soy concentrate, things to consider. Are we looking at potential pricing closer to that of soy concentrate, particularly as we look at the 58% product that you'll be selling into aquaculture? How should we really think about pricing today? And how this rolls out this year?
Todd Becker, CEO
We receive many rumors regarding our pricing, which is always intriguing. However, various factors influence pricing, including geography and freight spreads, as well as our production status. It's important for our shareholders to understand that we initially anticipated a $200 value over our traditional products, which we have not only achieved but are exceeding on average across our entire platform. There are occasions when Nebraska distillers' grains rise sharply against protein, while the same may not be true for Indiana. Depending on plant locations, margins can vary throughout the year. Overall, we are pleased to report that we have consistently surpassed the $200 per ton average since inception. Additionally, the contribution from corn oil, which we included in our margin calculations, has significantly improved since the project's beginning. We are still ramping up production, and recently experienced record production days across our platform, even though we are not yet at full capacity. This indicates that our production plans for these five facilities are on track, and so is our sales program. We're engaging in promising discussions about our next strategy, which involves replacing corn gluten meal in rations both domestically and globally. Currently, we can produce a product with a protein content of 58.5% to 60%, offering better nutritional benefits due to its amino acid profile and fermentation process. As we bring these facilities online, we are distributing our costs over increasing volumes, which will enhance our margins. Although contributions have been limited so far as we operate five plants, we anticipate 2023 to be pivotal for us. Many people may have insights into protein pricing based on rumors, but we can state that we are effectively sold out for nearly the first half of this year, covering a wide range of species. As previously mentioned, our customers expect us to maintain product availability in their rations. While they may not want to lock in pricing for the entire year right now, they do expect consistent volume supply, as we cannot simply tell them we don’t have any product available once they enter a ration. We know our commitments for the year and have nearly 50% priced and sold, which gives us strong confidence regarding our pricing outlook.
Craig Irwin, Analyst
Great. Well congratulations on the progress with MSC. And we look forward to more news from SAF. Thank you.
Todd Becker, CEO
Thank you.
Operator, Operator
Our next question comes from Jordan Levy from Truist Securities. Please go ahead. Your line is open.
Jordan Levy, Analyst
Morning Todd, Jim.
Todd Becker, CEO
Morning.
Jordan Levy, Analyst
Maybe we could just start off on CST. I wanted to get a sense for how you are all approaching the commercial process there as you get ready later this year to bring that first facility online. Is there learnings to be had from the work you've done building up the protein sales side of things, and how should we think about that, whether it's a co-location or sort of an off take arrangement?
Todd Becker, CEO
I believe our experiences with protein will definitely influence our CST business. We've learned how to enhance our sales and quality control processes, as well as the steps we took to bring our plants online. Traditionally, building an ethanol plant was straightforward; now, we are incorporating additional component technologies you’ve seen on your visits. These are separate functional assets, not part of the plant itself. We've gained valuable insights into how to successfully approach our CST initiative. Most of the initial production will be shipped to customers across the United States, and while we won’t have a co-location set up for several years, we are collaborating with partners on that front. We've been engaged in numerous discussions and have had our product in customers' hands. In York, we are currently focused on producing 95 DE, a terminology familiar in wet milling, and refining both unrefined and refined products. We are also increasing our capabilities to 43 DE, ensuring that our color aligns with traditional wet mill outputs, which is why we are attracting wet millers who previously had no connection to the ethanol industry. They find making ethanol straightforward compared to the complexities of wet milling. The talent and customer interest we’re seeing are encouraging, with calls from customers across the U.S. who are currently facing supply shortages and need more dextrose. One of the major companies recently announced their plans to expand dextrose capacity. Overall, we believe we’re poised to become a significant player; it’s just a matter of time. We need to kick-start our initial operations and resolve any bottlenecks. We anticipate that this technology could transform Green Plains' long-term margin structure, surpassing gains from protein, oil, and even long-term carbon initiatives. The potential margins for this product have been robust in the wet milling industry for many years. We're progressing well and are satisfied with our current position. If I could expedite this process magically, I would, but we must be patient for now. However, the lessons learned from protein are essential for launching our CST systems and improving our execution in the future.
Jordan Levy, Analyst
No, that's great color. Maybe just on a follow up. I don't know how much you can say here. But maybe from a more general level, I'm just curious how you're thinking about how the industry might go about pricing or structuring ethanol in an ethanol to jet situation, given it will be kind of a low carbon feed stock situation. I'm just curious if you have any thoughts there.
Todd Becker, CEO
We can transition from having access to a deficit as ATJ advances. While this isn't happening today, it's a possibility for the future, which I believe will give the industry some pricing power. First, we need decarbonized alcohol that meets the standards set by the IRA. We're still working on measuring that carbon. When initiating your carbon scoring under GRE, which typically ranges between 50 and 60 in the industry, you can reduce that by 30 as soon as you sequester the carbon, whether through direct capture or other methods. Then, you can take off another five to 10 points just from combined heat and power, before even considering the processes on the farm and the seeds used. Therefore, our low carbon alcohol should be more valuable than fuel. However, it'll be interesting to see how this unfolds. Currently, we're $0.50 below fuel prices due to some market excess, although there are times when our prices match fuel. I believe we will move from an excess to a deficit and gain some pricing power, with substantial margins throughout the supply chain. Some may wonder about demand, but United Airlines is firmly committed to our joint venture. It's important to note that this is not merely an off-take agreement, which are quite common. This partnership with Tallgrass, an infrastructure player that transports molecules daily, is significant. PNNL has introduced what we believe is an efficient technology, and United Airlines wants to go beyond simply purchasing fuel; they aim to have a stake in the entire process and invest in this technology. This highlights the importance of our partnership. Just consider that airlines are now discussing ethanol to jet, which was not the case three or four years ago. This approach offers a true volumetric path. RD to jet and vegetable oils to jet are also crucial and will materialize. Together, the combination of vegetable oils and alcohol will significantly impact sustainable aviation fuel in the future and enhance the margin structure of the industry.
Jordan Levy, Analyst
That's great. And definitely and really encouraging announcement. Appreciate the color.
Todd Becker, CEO
Thank you.
Operator, Operator
Our next question comes from Manav Gupta from UBS. Please go ahead. Your line is open.
Manav Gupta, Analyst
Hey, guys. Congratulations on the ultra pro update or routine update you were all looking forward to it. My question is, now that this is locked and we can all see the price of what corn oil is doing, can you or Jim talk a little bit about what kind of EBITDA could we be looking in 2023? If you could just walk us through the various components of the EBITDA guidance for the current year.
Todd Becker, CEO
The EBITDA range we provided for what we can control remains constant. The key factor is the performance of ethanol this year, which currently faces some challenges that we need to monitor closely. However, as we know, changes can happen rapidly. We've noticed a slight improvement in margin structure, but it's only moving from low to less low. We will need to continue advancing that margin structure. There will likely be some discipline and rationalization in the industry, as companies are becoming weary of underpricing their fuel and not achieving adequate returns on their assets. The fourth quarter was tough for ethanol, and the first quarter typically presents its own challenges. Nevertheless, we remain optimistic for the year, believing there will be opportunities to earn meaningful returns from ethanol. Additionally, the progress we're making in protein, coupled with the recent decrease in vegetable oil prices, means we will still generate significant EBITDA from our corn oil program. This year, we anticipate strong demand for corn oil, especially with a substantial increase in renewable diesel production expected. We're not expecting just minor increases; this year could see a doubling of production compared to prior levels, which will also double the demand for vegetable oils in that sector. Considering the ongoing developments in soy crushing, the real question is whether the market will adjust to support oil prices again, despite some current trends of selling oil and buying meal. I believe that by 2023, the oil market dynamics will shift positively, benefiting our corn oil pricing. We're excited about the potential and remain within the guidance we shared earlier, but we need to keep a close eye on ethanol.
Jim Stark, CFO
I would add onto, Manav, is as you are seeing more and more of these renewable diesel plants want to add sustainable aviation fuel technology, the low CI score of the renewable corn oil we make, we'll keep it in a preferred spot for demand as we move forward.
Manav Gupta, Analyst
No, thank you. I have a quick follow-up. As you mentioned, everyone is seeking corn oil, and since you have it, we’ve noticed others like ADM engaging in some transactions. Wouldn't now be an opportune moment to secure a favorable price on corn oil with the upcoming new facilities, providing a hedge against any potential volatility in corn oil pricing?
Todd Becker, CEO
I don't believe there will be many options for multi-year agreements at high prices today. The preference seems to be towards staying in the spot market or trying to secure volumes of low carbon products. We have been in discussions with multiple parties regarding a potential partnership. Securing volume is straightforward, but the challenge lies in structuring the pricing in a way that benefits our shareholders. Our patience in waiting for the industry's development has been beneficial. This year, I believe it will be crucial to establish a source for low carbon intensity waste oils, which will be highly valuable. We are also working to extract the last half pound of corn oil from the kernel. It remains available, and we believe that at rates of $0.60 to $0.70 per pound, or $1200 to $1400 per ton, it warrants significant research and development efforts, which others, including companies beyond Green Plains, are likely pursuing as well. This last half pound of oil is expected to have a lower carbon footprint compared to most alternatives, apart from one other type of waste residue. We are in a strong position, although I cannot predict global vegetable oil pricing. However, the U.S. appears to be somewhat insulated from global palm and other vegetable oils, a trend that is likely to continue given the strong demand for our products.
Manav Gupta, Analyst
Thanks guys and thank you again for the update on the protein side. I think the investors really appreciate it. Thank you.
Todd Becker, CEO
Yeah. Thank you.
Operator, Operator
Our next question comes from Kristen Owen from Oppenheimer. Please go ahead. Your line is open.
Kristen Owen, Analyst
Hi, good morning. Thank you for the question. Todd, you mentioned this in some of your other responses, but I was wondering if you could just say more about the Tallgrass and United Airlines agreement. And specifically I want to ask about the progression of that partnership, what happens as you develop that catalyst? And just help us understand why this pathway is so different from the other SAF announcements that we've seen.
Todd Becker, CEO
Yes, it's really exciting because this was a competitive process with PNNL. Green Plains and Tallgrass didn't just show up and obtain this technology; there were other well-known parties vying for it as well. What's unique about this technology is that it differs from the traditional SAF, alcohol/jet adjustment technologies, which typically involve a four-step to five-step process and focus on breaking the carbon chain's double bonds. In contrast, our technology is a three-step process that breaks the double bond between carbon and oxygen, making it easier to handle. Our initial task is to optimize the catalyst, which we recognized was essential when we partnered with Tallgrass to gain control of the technology from PNNL. We were approached by airlines, particularly United, seeking a partnership. We were confident in our ability to sell the alcohol-to-jet fuel, but United's commitment to helping us optimize the catalyst and to partner financially was crucial. They aim to ensure fuel efficiency in either Denver or Chicago, with Tallgrass transporting it and Green Plains supplying the low carbon alcohols via direct injects in the East and carbon pipelines in the West. This collaboration is highly valuable. Our immediate goal is to optimize the catalyst rapidly, working with global experts. As that progresses, we will also start planning our pilot plant, ideally located near a Green Plains facility or one of our own in the area between Denver and Chicago. Upon successful optimization of the catalyst, we will fund a pilot facility, sharing responsibilities among the three partners. Following the pilot, we intend to commercialize this technology, which uses a ketone process rather than turning ethanol into ethylene. While we believe this technology is promising, we recognize it won't be the only technology available, and we hope for the success of others as well. Ultimately, airlines and industries will have various options for production. It’s crucial to understand that to decarbonize jet fuel, we will need substantial volumes of alcohol, which presents a compelling narrative. Currently, 16 billion gallons of production can only translate to about 10 or 11 billion gallons of jet fuel, which is limited globally. It's not simply about jet fuel net credits; we anticipate this process could be more expensive than conventional jet fuel, highlighting that this is a pull-through strategy, not a push-through.
Kristen Owen, Analyst
No, that's super helpful. And I think we'd all take you up on that key trend. If I could follow up on...
Todd Becker, CEO
I'll tell Phil that.
Kristen Owen, Analyst
If I could follow up with a slightly less interesting question, more on the ethanol based business. Just how you're thinking about the export outlook for 2023. How much demand do you see moving to places like Canada and just your ability to serve that market? Thank you.
Todd Becker, CEO
Canada continues to perform strongly. They are effectively advancing our low carbon fuel initiatives, with ethanol being a vital element. We’re enthusiastic about the daily volumes being delivered, but there’s a need for other regions of the world to participate. Our position as a competitive option remains solid; we are currently priced favorably compared to gasoline, often making ethanol the least expensive octane source globally. Our octane values are robust. Engagement is crucial, and while it's repetitive to mention, we really need China to reopen post-COVID to restore demand. This could significantly influence gasoline prices and also benefit other fuel-related molecules. An interesting trend is the increase in blending rates, especially in states like Minnesota and Iowa, where rates have risen to over 12%. This rise is attributed to the ability to blend E15 year-round in many areas. We anticipate this trend to persist as our value proposition holds strong. Just a minor increase in E15 blending across the U.S. gasoline supply could significantly optimize our excess production and reshape the future of the ethanol industry. Looking ahead, Canada is performing well and we continue to conduct business with the global market, exporting both ethanol and B grade products. An uptick in blending percentages in the U.S. and rising export demands for sustainable aviation fuel could quickly enhance our margin structure, and that's what we are eagerly anticipating.
Kristen Owen, Analyst
Lots to sink our teeth into. Thank you so much.
Todd Becker, CEO
Thank you.
Operator, Operator
Our next question comes from Laurence Alexander Jefferies. Please go ahead. Your line is open.
Unidentified Analyst, Analyst
Hi, good morning. This is actually Kevin on behalf of Lawrence. Thank you for taking my question. Most of my questions have already been addressed, but I would like to revisit the SAF joint venture you announced recently. I'm curious about the expected contribution to your earnings once it's fully operational on a run rate basis. If you could share any insights on that, I would appreciate it. Additionally, how do you approach IRS for the projects and joint ventures you engage with? Any details would be helpful. Thank you.
Todd Becker, CEO
Sure. When we evaluate our various initiatives, especially in protein, our long-term and short-term projections remain strong. As we continue to launch more of these facilities each day, we're achieving our expected rates of return based on our initial product sales. Additionally, with corn oil, we're starting to see significant volumes, but we must account for the high startup costs, which naturally require time to scale. Overall, we are confident in our long-term trajectory. Our corn oil operations are yielding solid returns, and while our sugar system’s construction costs are substantial, the margin potential suggests that if we were operational today, we could see a payback period close to a year. However, we're not fully operational yet, so that timeline remains uncertain. Our preliminary estimates indicate that we could achieve margins around $0.60 per gallon based on traditional production and pricing models, likely resulting in paybacks of less than two years under standard pricing and potentially even quicker with current dextrose pricing. As for our alcohol-to-jet initiatives, the returns depend on several factors. Initially, we can enhance our margins through decarbonizing our alcohol, leveraging incentives from the Inflation Reduction Act, and monetizing the resultant carbon. We're currently assessing what the economic model should look like for full-scale jet production, including whether we need to own a facility ourselves or if a supply agreement to license our technology to others will suffice. We have a variety of options to consider. Overall, we believe the internal rate of returns will remain consistent with our ongoing projects.
Operator, Operator
Our next question comes from Eric Stine from Craig-Hallum. Please go ahead. Your line is open.
Eric Stine, Analyst
Hi, everyone. Thanks for taking the questions.
Todd Becker, CEO
Thank you.
Eric Stine, Analyst
Hey, so just on high pro, I know you talked about 50% spoken for you expect repeat buys here as the year progresses. Maybe, first could you just talk about the nature of the contracts, the typical length of the contracts? And then, maybe from a high level, what do you think the right number is in terms of locking that in, just when you think about moving up the J curve and also given pricing dynamics in the margin?
Todd Becker, CEO
We face questions about our sales daily. It's important to clarify that our products are sold, priced, and nearly sold out for the first half of the year. We've kept some volume back to accommodate new customers who are constantly emerging. We've begun to decline some customer requests, which has its pros and cons since it affects pricing dynamics. We had a sales plan in place before 2023, anticipating that we would sell all our production, and adjustments will depend on customer demand. We're also planning for 2024 initiatives to replace corn gluten meal in rations globally. We're focused on achieving higher protein levels and holding back some supplies for the second half of the year, as that's when we expect stronger sales, particularly in global aquaculture. Our large customers are integrating our products into their rations and expect us to maintain supply throughout the year. We understand our pricing strategy and remain committed to being a reliable supplier. We've seen significant increases in order sizes from customers, indicating a growing recognition of our product's unique benefits compared to traditional proteins. The amino acid profile and the inclusion of yeast set us apart from corn gluten meal and soybean meal. We're confident that demand will continue to rise for all protein sources, and we're poised to meet that demand. Our product can be customized to match taste and nutritional profiles, and we anticipate making further advancements in the coming year. We aim to avoid selling out too early because we want to cater to more valuable customers as they enter the market. We're balancing pricing across various customer segments while also aiming for premium pricing as we move towards higher protein levels. The Fluid Quip team is dedicated to developing products exceeding 60 protein. Our goal is to establish a solid base volume while demonstrating our ability to sell the product effectively, achieve good returns, and maintain inclusion rates. Although the journey has had its challenges, the commitment from customers has shown that the demand is there.
Eric Stine, Analyst
Okay, thanks Todd.
Todd Becker, CEO
Thanks. Appreciate it.
Operator, Operator
Our next question comes from Salvator Tiano from Bank of America. Please go ahead. Your line is open.
Salvator Tiano, Analyst
Thank you, Todd and Jim. My first question is about the carbon capture initiatives. The first project is expected to be completed in less than two years, and you mentioned that by 2025, you anticipate generating some income from it. Can you provide a bit more detail on what we should expect in terms of quantifying this, especially considering the carbon sequestration math with the IRA payments and your expenses? This project involves capital investment, but the benefits seem to be limited. How would you size the benefits we can expect in 2025? Additionally, considering the significant IRA benefits for low CCS projects in ethanol, why not pursue a project independently, which could potentially generate $40 million to $50 million in annual profits?
Todd Becker, CEO
We have a wide range of options on our platform related to carbon. It's important to remember the IRA, particularly the clean fuel production credit, which is effective from 2025 to 2027, and we need that extension. While there is potential for significant early gains, developing direct injection classic wells takes time. We must consider the timeline of 2025 to 2027 for greenfield production against an early partnership with Summit to realize returns. Summit recognizes the financial opportunities available, and our potential is undoubtedly larger. The key focus for us now is speed. For example, the pipeline we are involved with is two-thirds complete in Iowa, and they have established pore space in North Dakota. Their storage capabilities are ahead of the competition. Other companies may not have announced much regarding rights of way or pore space, especially since some projects in Illinois have been pulled. We are confident in our direction; in Indiana, we are working on a direct injection project, while in Illinois and Tennessee, we are collaborating with Tallgrass and Osaka to convert to syngas or methane. In Iowa and Nebraska, we are concentrating on carbon sequestration. There are different economic factors to consider, but the IRA is crucial for generating significant revenue while also helping to decarbonize our products over the long run. Our low protein dextrose or low carbon dextrose is already 40% to 50% less carbon-intensive compared to traditional wet milling, even before carbon sequestration. Low carbon dextrose will hold considerable value, and there will be substantial future opportunities in chemicals derived from it. We have to evaluate capital efficiencies as we implement our pipeline strategy without incurring capital costs. Although our returns might be lower, we can improve operations at our plants with combined heat and power systems, which can add five to ten carbon points at a cost-effective rate. Thus, we need to focus on the best returns for our shareholders, carefully allocating our capital and exploring partnerships in co-generation, which have significant tax equity interest and can provide long-term benefits. There are numerous opportunities within the IRA and the clean fuel production credits, and we want to prioritize areas that are less vulnerable to government policy changes, such as protein, sugar, and dextrose, where we see substantial margins. We aim to maximize all potential opportunities, and the IRA presents unexpected, significant value for our shareholders across various sectors.
Salvator Tiano, Analyst
Okay. Perfect. Thank you very much.
Todd Becker, CEO
Thank you very much.
Operator, Operator
We have no further questions. I would like to turn the call back over to Mr. Becker for closing remarks.
Todd Becker, CEO
Thank you all for joining the call. It lasted just over an hour, and I appreciate your patience as we had a lot to discuss at the end of the year. We are making excellent progress on our key initiatives. In terms of protein, we provided more insights than ever before, and our confidence is increasing daily regarding our ability to enhance our value and protein levels. The opportunities in oil, specifically renewable and low carbon oils, remain strong, although a bit lower than peak levels. However, we expect significant demand this year, particularly with the transition from renewable diesel to sustainable aviation fuels. Our sugar business is also on track, and we are committed to enhancing our margins. Decarbonization remains a crucial opportunity, and the role of decarbonized alcohol in our processes is exciting. We acknowledge there are challenges, but we believe we can overcome them. Financially, we are well-positioned and optimistic about achieving our guidance for 2024, 2025, and 2026, with potential for even greater upside. Thank you for your support, and we look forward to updating you next quarter.
Operator, Operator
This concludes today's conference call. Thank you for your participation. You may now disconnect.