Gevo Q1 results provide update on isobutanol equipment upgrades

By Katie Fletcher | May 13, 2016

On May 12, Gevo Inc. released its financial results for the three months ended March 31, focusing on progress made at Luverne since the restart of the isobutanol side of the plant in mid-March, and announcing the first commercial flight with Alaska Airlines using Gevo’s alcohol-to-jet (ATJ) fuel is scheduled in June.

In September of 2015, Gevo announced plans to invest approximately $5 million into its plant in Luverne. The upgrades were designed to decrease the cost of production for isobutanol by bringing certain parts of the production process onsite that had previously been done offsite by third parties. Three key pieces of equipment associated with the capital improvement projects at Luverne were discussed, and the first batch of isobutanol was produced in March, as Patrick Gruber, Gevo CEO stated in the company’s fourth quarter earnings call earlier this year.

The first piece of equipment Gevo installed was the replacement of one of the carbon steel production fermenters with a new stainless steel fermenter. Gevo added a second distillation system as well, designed to handle the output of the company’s isobutanol fermentation train. Previously, Gevo only had one distillation system at Luverne, configured for ethanol given the larger production and revenues coming from the ethanol side of the plant, Gruber said. “Without this distillation equipment for isobutanol, we were forced to send our crude isobutanol offsite to a third party to purify and that added about $1.50 to $2 per gallon cost to the finished isobutanol product.”

The company can now purify the crude isobutanol to meet commercial specifications for various end markets, namely for specialty gasoline blend spec markets like marina and off-road markets, as well as for feedstock for the company’s hydrocarbon plant at South Hampton Resources in Silsbee, Texas. Here the isobutanol is converted to end products like jet fuel and isooctane. Gruber said the distillation equipment should represent the biggest driver of cost savings for Gevo’s isobutanol process.

The third piece of equipment was an addition to Gevo’s seed train, which allows the company to produce yeast onsite at Luverne at a lower cost. Prior to this addition, Gevo was contracting with third parties to produce production quantities of Gevo’s yeast, which, according to Gruber, was relatively expensive because the company was forced to use larger amounts of purchased yeast in every batch. “By increasing our capability to grow yeast onsite, we expect to be capable to use much lower volumes of purchased yeast which should lower our costs,” Gruber added.

Gevo will still buy initial quantities of yeast from a third party supplier, but the new equipment enables the company to get more batches out of the same quantity of yeast purchased. Gruber said the seed train is just now being commissioned and once the seed train equipment is optimized Gevo anticipates this will decrease production costs by over $1 per gallon.

The goals for production guidance that Gevo established last September remain unchanged, with an expectation to produce 750,000 to 1 million gallons of isobutanol in 2016. The company will start at lower rates and ramp up to production to achieve an expected production rate of approximately 1.5 million gallons per year by the end of year. “As we optimize the production process and achieve our targeted run rates, we project the variable cost of production will fall to between $3 to $3.50 per gallon by the end of year,” Gruber stated. “Our goal with the new equipment on site is to have the full isobutanol production line operational at Luverne, from yeast production to isobutanol fermentation through to finished product that meets commercial specifications for both the isobutanol and the animal feed products, and completing that cycle within five days while producing at least 18,000 gallons of isobutanol per batch.”

Gruber added that the company will keep the ethanol side of the plant operating at targeted rates of at least 15 million gallons per year, and ethanol margins have been improving as of late with contribution margins climbing to 15 to 20 cents per gallon, whereas Gevo reported breakeven margins earlier in the year. In addition, Gevo’s iDGs, or the distiller grains produced as part of the isobutanol process, are being blended with the distiller grains coming from the ethanol side of the plant, and being sold on par with traditional ethanol distiller grains.

Since mid-March, Gevo’s completed 3.5 batches, or approximately 50,000 gallons of isobutanol, slightly behind expectations due to the fire in the feed dryer in late March, which forced the plant to shut down for a week. Gruber also mentioned that the company shipped its first rail car of product out last week, which holds approximately 27,000 to 28,000 gallons of isobutanol. The railcar is being sent to a terminal owned by CW Petroleum Corp. in Dayton, Texas, where it is expected to be delivered to retailers throughout Texas and sold primarily for marine and off-road specialty gasoline blendstock applications.

Gruber said Gevo expects to be at a run rate of three to five batches per month and producing between 50,000 to 75,000 gallons per month by next quarter’s results in a few months. By the end of the year, Gruber said the company expects to be producing six to seven batches per month, reaching the targeted run rate of 1.5 million gallons of isobutanol per year, and achieving the targeted variable cost of production under $3.50 per gallon.

Gruber stated on the earnings call the company believes that isobutanol can contribute two to three times ethanol margins and even more potential for more margin improvements. At full optimization Gevo believes it can achieve earnings before interest, taxes, depreciation and amortization (EBITDA) margins of 50 cents to $1 per gallon through its isobutanol. “That potential is what should make our isobutanol business system be so interesting to others and potential licensees,” Gruber said.

Gruber discussed the markets, and where the company plans to sell its isobutanol production that is now starting to come out of the Luverne plant. The specialty market is estimated at approximately 270,000 gallons per year in the U.S. The value proposition for Gevo’s isobutanol in gasoline is ethanol-free, high-octane, Gruber said. According to Gruber, the company continues to be focused on the Lake of the Ozarks region and the Lake Havasu area. Harbor Marina at Lake Pomme de Terre is selling isobutanol blends in gasoline. The Oil and Octane Shop has blended and distributed a 12.5 percent isobutanol-blended gasoline, primarily targeted to gas stations that sell to people with trailer boats. One of these called the New Station in Ash Grove, Missouri, currently has the isobutanol blend at the pump with a retail price of $2.89 per gallon. Golf Racing and CW Petroleum are also distributing the isobutanol product.

Gruber added that isooctane demand remains high. He also mentioned development with Gevo’s jet fuel. “With our fuel, we believe, we have the potential to seriously decrease the impact of fossil carbon greenhouse gas emissions,” Gruber stated on the call. “In the short run, we will be working with various airlines to get them comfortable with our ATJ.”

Alaska Airlines will fly its first flight sometime in the first half of June. “We are looking forward to that flight very much because we believe this represents the next step in building our jet fuel business,” Gruber said.

The specific flight route is still being determined, however, it is anticipated that the flight will depart from Alaska Airlines’ hub in Seattle–Tacoma International Airport. This follows the news announced in April that ASTM International had completed its process of approving a revision of ASTM D7566 (Standard Specification for Aviation Turbine Fuel Containing Synthesized Hydrocarbons) to include alcohol-to-jet synthetic paraffinic kerosene (ATJ-SPK) derived from renewable isobutanol.

Revenues for the first quarter of 2016 were $6.3 million compared with $5.9 million in the same period in 2015. During the first quarter of 2016, revenues derived at the Luverne plant were $5.8 million, an increase of approximately $700,000 from the same period in 2015. This was primarily a result of higher ethanol production, partially offset by lower ethanol prices, in the first quarter of 2016 versus the same period in 2015.

During the first quarter of 2016, hydrocarbon revenues were $300,000, a decrease of approximately $200,000 from the same period in 2015. This decrease was primarily a result of the timing of shipments of finished products from Gevo’s hydrocarbons demonstration plant located in Silsbee, Texas.

Gevo also generated grant revenue of $300,000 during the first quarter of 2016, flat as compared to the same period in 2015. Gevo’s grant revenue is primarily generated through the work it is doing with the Northwest Advanced Renewables Alliance to produce isobutanol from cellulosic feedstocks, such as wood waste, which can then be converted into Gevo’s ATJ.

Gross loss was $2.9 million for the three months ended March 31, 2016. Loss from operations in the first quarter of 2016 was $5.9 million, compared with $9.5 million in the same quarter in 2015. Non-GAAP cash EBITDA loss in the first quarter of 2016 was $3.9 million, compared with $7.5 million in the same quarter in 2015. The net loss for the first quarter of 2016 was $3.6 million, compared with $7.3 million during the same period in 2015. A net loss per share of 16 cents was reported for the first quarter of 2016 and Gevo ended the first quarter with cash and cash equivalents of $8.7 million.