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.
Additionally, given the anticipated weak margin environment during Q3, we made the decision to accelerate our remaining scheduled maintenance shutdowns into September, which impacted our margins by $0.03 to $0.05 a gallon based on reduced production volumes and increased repair and maintenance expenses in the quarter.
The fourth quarter has returned to a positive margin environment and based on the current market, we expect to return to profitability, even as we hedge some of this early to protect our balance sheet, we are benefiting from the expansion in margins, along with our higher run rates.
The quarter was very exciting from a strategic standpoint, as we announced a new turnkey initiative to expand our protein footprint without increasing our exposure to ethanol, raise additional capital, providing greater assurance that our transformation can be carried out on schedule, broke ground on additional protein build-outs and finish the construction of the Wood River Fluid Quip MSC system.
I will come back on the call to talk more specifically about our thoughts around 2022, our ongoing initiatives and how each vertical fits into our transformation plan, all of which I think you will find very exciting.
Adjusted EBITDA for the period was negative $14.8 million compared to a positive $6.8 million we recorded in the prior year, largely related to historically higher corn basis across our platform and higher costs associated with the change in our maintenance schedule, partially offset by higher contributions from our corn oil business due to strong demand from renewable diesel.
I am pleased to report the partnership realized on adjusted EBITDA of $13.5 million for the quarter, comparing favorably to $13.9 million reported in the prior year when considering the reduction in the minimum volume commitments associated with the sale of both our Hereford and Ord plants.
For the partnership, distributable cash flow was $11.5 million for the quarter compared to $11.3 million for the same quarter of 2020.
All of this is possible as we have partnered with Fegan as our EPC contractor, and they are world-class when it comes to these type of projects, all in, company-owned production from protein, including Theraldson, will be running over 600 million equivalent production gallons with more underway.
I’m happy to announce that we are basically sold out of Shenandoah once again for 2022 into the pet food space, and more importantly, signed a multiyear MOU with increasing volumes through 2023 as our customers want to make sure they have the supply secured.
We believe we must focus on minimum 60% protein concentrations, which will be the best outcome for our customers and our shareholders and achieve our intended nutritional and protein targets providing a new ingredient we can utilize in customer development.
We believe these are some of the highest yields achieved in the industry as Fluid Quip’s technology is incredibly expanding corn oil yields, and we believe this is just the beginning, and I’ll discuss the impact of this in a bit when I talk about renewable corn oil.
With vegetable oil prices, $0.30 to $0.40 a pound or more above historical averages and rising, we could see total corn oil contribution exceed $160 million at $0.65 per pound as a baseload next year as well as 100 — which is well over $100 million more than historical contributions.
And lastly, we’re a founding shipper when we receive an additional uplift over and above our share of carbon credit based on the 45Q tax credit, which could be up to $6 million to $10 million a year as well.
We are encouraged by the proposed carbon credit capture proposals, including expansion — potential expansion and extension of the 45Q tax credit and the creation of new tax incentives for sustainable aviation fuels, both of which have the potential to be an incredible opportunity for our Green Plains 2.0 platform as we see significant potential in low-carbon ethanol and sustainable low carbon corn oil.
And on top of that, the contribution for renewable corn oil, and we can make a case of a baseload from these initiatives to deliver between 150 and $200 million in EBITDA in 2022 if the remarket remains at $0.65 or higher per pound, which it absolutely could before considering our base ethanol business without corn oil as we break total corn oil out separate plus other segments less corporate overhead.
And I guess, can you help us think about the key gating factors toward an investment decision around carbon sequestration, specifically on the pipeline, maybe help frame kind of what the potential equity investment could look like.
So the first thing that we did was we got involved in the initial investor group to fund average capital to get the project started, and we’ve already seen, based on the first round of potential valuations an uplift from there.
So it’s a little bit of a return from a standpoint of what will it return relative to the investment we put in place, but we also want to make sure that we help the project get off the ground and get built and the SCS guys are making incredible progress around securing storage, securing, getting starting to think about right ways, getting things done with the local landowners, and we’re watching it very closely, but we also just want to make sure from a diligence standpoint that it’s the best use of our capital.
And I think in the next couple of weeks, we’re going to finalize that decision and just make sure that is the best use of capital for our shareholders.
You talked about consistently getting to 58% in commercial quantities, signed some new MOUs.
I think where we really want to focus, though, is instead of spending a lot of time between kind of 50% and 60%, in that 56% to 58% range, which we believe we can — we now have the opportunity as we turn these on to potentially produce at scale.
But the first step, even before that is we actually believe the Fluid Quip guys, the Fluid Quip technology can achieve higher mechanical separations, and we’re working high on that because, obviously, Opex versus capex is something we would much rather focus on.
I think not all protein is the same, and I think we’re proving that with our product and the inclusions we’re getting and the innovation that’s happening around it and the quality of it and the flowability and the intended adjustability.
So look, I think the important thing is in a world of increasing demand for protein and by the way, the world is high protein again and while we’ve seen some weakness in, obviously, soy meal prices, it’s very tight around the world for proteins today, which we think is an opportunity.
We have others that are in negotiation now for use of this product because the key is — the key here is that they want to make sure that they have the supply because once Shenandoah was sold out, there’s no more supply.
That’s great detail.
Well, when we look at kind of protein oil and sugar, I mean, those are the three main high value opportunities, but protein is a baseline ingredient for many other opportunities around value-added agreements in the yeast, in the fiber.
When you layer on top of that, the opportunity that we can make 95 DE or dextrose equivalent of products that compete both financially and product-wise at we think better economics than what’s being made today in markets that need more and more products, we’re seeing great interest in potential partners that want to do over-the-fence opportunities, much like you see at other companies that produce dextrose because there’s just not enough availability left in the market today.
But if you just take a look at one really interesting market, if you just take a look at the global glycol market and you say, if you can convert that to a bio glycol coming off of dextrose as your main feed — as a feedstock and moving to bio glycol, that market is big enough that if you converted every single ethanol plant in the United States to dextrose, you still would only have 20% to 30% of the market covered for a bio glycol type of product.
When we start 2022 with all of our plants running close to 1.0 yields and our MSC plants pushing toward 1.2 to 1.4 pounds per bushel of oil and you think about the fact that we’re already getting a premium to soy eating into some of the low carbon advantage that this oil has.
And I’m curious, just when you think about the equation of making ethanol low CI ethanol a competitive feedstock for the SAF opportunity, which as you noted, is really, really big.
But number two, being on pipelines, obviously, is something that’s going to be important — or a question in your carbon direct inject, other areas that you can sequester carbon is a key component to sustainable aviation fuels because you do have to start out with a lower carbon intense liquid fuel before conversion.
And so it’s just — it’s not just announcing a technology, which I think are still — there’s still a lot of fluidity around which technology to choose, and there’s several out there, and there’s probably more coming, quite frankly.
And if you took six billion gallons of ethanol in a market that is using ethanol as an octane blend and a low-carbon blend, it could be really interesting to this industry and to this company and for our shareholders as all of this takes place.
And I think it’s clear you guys are on the runway to the long-term EBITDA kind of baseline potential of the organization.
And then as we bring on another 360 million gallons from our own system for about half the year, depending on when Obion, Mount Vernon and Central City start up and then obviously, Theraldson will be later in the year, maybe get a couple of months out of that, but it will be during start-up, just baseline, $40 million to $60 million is kind of how we’re thinking about 2022 first real contribution from protein.
So it’s a good starting point to think about that but I think what it does is it tells you, with ethanol 0 baseline, which right now we know it’s not, that’s just the baseline opportunity for the company based on everything we’ve done.
But there’s another kind of deal being offered by some of the newer guys who are basically saying the feedstock guy has to bring in the capital, and then we will kind of do a deal, which in a way would make you a partial owner of a renewable diesel facility.
Remember, if you take a look at the top four players in our space, you make a — altogether make the most amount of corn oil together one has committed — well, one already owns renewable diesel.
Number two, it’s a waste of all that food oil and the headlines right now on food oils, I would say, are moving a little bit negative in terms of looking at food prices and the articles around there while leaving waste oils out of it.
So I’m just trying to understand, in your view, when you look at these regulations as they are coming in, are we moving in a direction where, in a way, we can say we will have a national low carbon fuel standard mandate at some point where carbon intensity would definitely — or would be taken into consideration in a much more meaningful way because right now, if you look at RFS, pretty much, it doesn’t take into into consideration the carbon intensity at all.
And whether you can qualify for all of the credits available or if you have to pick and choose, we have to also watch that carefully.
And so — but that doesn’t mean that there aren’t great opportunities around lowering your carbon intensity but also having the opportunity around sustainable aviation or low carbon ethanol or a combination of both on top of low-carbon corn oil, on top of low-carbon ingredients.
You obviously, great that you have signed the — you mentioned multiyear MOU for sales in the pet foods for 2023, and I know you are certainly targeting more sales or contracts in 2022.
And I think that’s the key for what we’re trying to accomplish here is lock in volumes without, but also in each of our MOUs that we are — either have or negotiating within their — in each of these, we discussed the opportunity of increased protein concentrations or increasing nutritional outcomes and leaving those open for negotiation because like you said, I don’t — again, like we talked about in corn oil, like we talked about in carbon and like we talked about in sustainable aviation, you don’t want to lock it away too early because there’s a lot of other opportunities that might come into play, like low carbon ingredients into Europe or like ingredients into Asia aquaculture.
And again, there could be a point where there just won’t be enough of this product around because it’s a very distinctly different product than maybe others — the MSC Fluid Quip product is a very distinctly different product than alternatives that are available out there.
As you said, you don’t just call someone up and say, Hey, I’ve got a product for you.
So we are working with them on very specific tailored products using the MSC as the starting point, but we are discussing tailoring these products to their use, which is very different than just making some protein.
And so when we look at that relative to contributions, it’s starting to contribute potentially $0.01 to $0.02 a gallon overall to our total platform because it’s only 8% of our total — less than 8% of our total production, but we’re very happy with the results.
And then when I look at the renewable corn oil, I think your thought is that you’re going to have capacity about almost 400 million gallons, you’re at 330.
But then if we can achieve 60 protein and higher and nutritional outcomes that are beneficial for our — and using innovation and technology around this product hopefully, the sustainable high-protein gives us higher numbers than that.
But I think at this point, you can say we’re holding steady on our thoughts from the opportunity in 2024 as a starting point.
But I think on top of that, the success that we’re seeing around our product, product development, opportunities, innovation, technology and customer needs and wants and interest is really setting us up well to deliver what we think will be a transition, great transition opportunity in 2022 with the full transformation still ended up — ending in 2024.