Clean Energy Fuels Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 9, 2023

There are 11 speakers on the call.

Operator

Afternoon, ladies and gentlemen, and welcome to the Clean Energy Fuel Third Quarter 2023 Earnings Conference Call. At this time, all lines are in listen only mode and following the presentation, we will conduct a question and answer session. This call is being recorded on Thursday, November 9, 2023. I would now like to turn the conference call over to Mr. Robert Riehlin, CFO.

Operator

Please go ahead.

Speaker 1

Thank you, operator. Earlier this afternoon, Clean Energy released financial results for the Q3 ending September 30, 2023. If you did not receive the release, it is available on the Investor Relations section of the company's website at www.cleanenergyfuels.com, where the call is also being webcast. There will be a replay available on the website for 30 days. Before we begin, We'd like to remind you that some of the information contained in the news release and on this conference call contains forward looking statements that involve risks, uncertainties and assumptions that are difficult to predict.

Speaker 1

Such forward looking statements are not a guarantee of performance and the company's actual results could differ materially from those contained in such statements. Several factors that could cause or contribute to such differences are described in detail in the Risk Factors section of the Clean Energy's Form 10 Q filed today. These forward looking statements speak only as of the date of this release. The company undertakes no obligation to publicly update any forward looking statements or supply new information regarding the circumstances after the date of this release. The company's non GAAP EPS and adjusted EBITDA will be reviewed on this call and exclude certain expenses that the company's management does not believe are indicative of the company's For business operating results, non GAAP financial measures should be considered in addition to results prepared in accordance with GAAP and should not be considered as a substitute for or superior to GAAP results.

Speaker 1

The directly comparable GAAP information The reasons why management uses non GAAP information, a definition of non GAAP EPS and adjusted EBITDA and a reconciliation between these non GAAP GAAP figures is provided in the company's press release, which has been furnished to the SEC on Form 8 ks today. With that, I will turn the call over to our President and Chief Executive Officer, Andrew Littlefair. Thank you, Bob. Good afternoon, everyone, and thank you for joining I'll let Bob go into the financial details on the quarter as this quarter has its share of factors impacting the comparison to a year ago as well as factors impacting our results for the Q3 of 2023. But at a high level, while our results for the quarter didn't quite reach our There was also nothing occurring within our business of any significant consequence impacting our prospects.

Speaker 1

Key strategic milestones are being executed and we do not see any obstacles in the near term. Frankly, in a slightly off quarter, we still produced adjusted EBITDA of 14 point $2,000,000 which equates to $57,000,000 on an annual run rate basis. So while I'd like So with that, I'd like to focus my comments on the progress we're making across many fronts of our business as we put 100 of 1,000,000 of dollars We work with plans to deploy well above that. I want to emphasize here that we remain as bullish about the future as we were when we rolled out Our comprehensive RNG strategy in early 2022. RNG is moving in the right direction.

Speaker 1

It's becoming recognized as the most realistic fuel to decarbonize heavy duty trucking. In our opinion, the way the entire alternative fuel market has been Moving is only confirmed that we set out on the right plan. We are making investments in the production of our own steady Along the way, we've been able to secure the best in class financial and operational partners through the joint ventures with BP and TotalEnergies and sustainable capital providers like Riverstone Credit Partners. The confirmation of our strategy by such storied names along with significant investments by other energy majors, pipeline companies, utilities and large private equity firms in the RNG space is notable as we move forward. I mean, think about it.

Speaker 1

It is really impressive to me that companies like BP, Chevron, Total, Shell, Enbridge, BlackRock, UPS, WM, Republic, Amazon are all involved in the RNG space. We made good progress on the low carbon RNG production project at Dairies over the last 18 months. And I hope you saw the press release a few weeks ago announcing that we began injecting RNG into the pipeline in June at our first project, Del Rio Dairy in Texas. We actually began producing RNG in February and started until all the regulatory approvals were obtained. But most importantly, we recently began generating both federal and state environmental credits.

Speaker 1

We made the decision to flow this first RNG from Del Rio to Oregon, where we have stations and demand and the price of Oregon's LCFS credits is stronger. So this is a great example of why it's important to have a National Fueling Infrastructure, which allows us to optimize RNG deliveries for our production projects. We've also begun producing RNG at 3 other dairies and there are another 2 projects that are nearing completion and we'll be producing RNG by the end of the year or early 2024. We will be formally announcing the details of these in the coming weeks. Some of these dates might have slipped a little from our original plan, but nothing significant.

Speaker 1

It's important to note that these are large scale projects, Which in this case represent about $184,000,000 of gross deployed capital by us and our partners. These projects are large and they can be a little disruptive at first at the dairies, their normal dairy operations. And they need approvals by several regulatory agencies. So there will be unforeseen delays. But with every project, we have gained important insight and knowledge that's being applied to new projects and we remain on track to meet our overall RNG supply timeline through our own constructed projects and potential acquisitions.

Speaker 1

The investments we are putting into RNG supply now will have tremendous value and position us very well for the future. The enthusiasm I have for our RNG supply business is only matched, if not surpassed, by the demand side. Our base business of fueling tens of thousands of large fleet vehicles every day with RNG continues to grow, providing us with recurring revenue, keeping our balance sheet strong and allowing us to make the investments for what we believe to be sustainable growth. Much of my optimism is based on one of the most significant advancements that has ever taken place in the RNG technology space. Most of you probably know what I'm talking about, which is the introduction of Cummins' new X15 liter natural gas engine That is currently being tested by a handful of some of the country's largest heavy duty truck fleets.

Speaker 1

The phrase game changer is probably overused even by me, But there's not a better way to describe this larger engine that Cummins is introducing to the heavy duty market. In my 20 years of working very closely with this world class engine manufacturer, I've never heard Cummins speak about another product quite the way they are about this 15 liter engine. Cummins executives are actively promoting the attributes The engine to investors, their dealers, industry partners and potential customers with the message that this engine has all superior power, torque, Fuel efficiency and most importantly, the ability to decarbonize heavy duty trucks with RNG on a scale that no other technology is coming close to achieve. It would be one thing if it was only comments bragging about a new engine, but they are building on a very successful launch and adoption of it in China Tens of thousands have already been sold. And now we are hearing very positive early feedback from the fleets that are testing it here in the U.

Speaker 1

S. The fleets that are doing the testing of this 15 liter engine include some of the country's most demanding such as Walmart, Werner, UPS and Knight Swift. I would not be overstating to say the reviews have been very impressive. Cummins' executive put up a slide at a recent presentation with quotes from the fleet's likeness. The drivers love the truck.

Speaker 1

The engine has a nice pull. It's very quiet, plenty of torque. The more they drive it, the better it's getting all the way around. It feels and drives like a diesel, which is a good thing. I could go on, but the feedback like this is what is producing the optimism by Cummins and many within the industry like the OEMs that will place it in their trucks.

Speaker 1

So much so that for the first time Cummins is making public their assessment of potential market penetration for the new 15 liter natural gas engine. On the low side, Cummins believes there could be an increase of Penetration of the heavy duty natural gas market share by 4 fold from 2% today to over 8% by 2027 and the realistic High case is 12%. Approximately 250,000 heavy duty Class 8 trucks are sold every year in the U. S. And if one takes the medium between Cummins low and high cases of 10%, that means 25,000 new heavy duty natural gas trucks can be sold in 2027.

Speaker 1

Using an average annual fuel usage of 15,000 gallons a year per truck would mean 3 Many of the fleets testing the 15 liter do not currently operate many, if any natural gas trucks. So much of the 25,000 will be coming from new customers. I could go on about the importance of this new engine, but let me close with saying it couldn't come at a more opportune time. Desire for fleets to decarbonize is only increasing. Yet the technology that some had placed much hope to get them there It's starting to come under increased scrutiny by the entire transportation industry.

Speaker 1

And of course, I'm talking about electric. Just in the last few weeks, headline after headline has announced the issues that electric is having in the passenger vehicle market. Many within the heavy duty space are quietly expressing and some not so quietly their concerns about the practicality and cost of operating a 100 of the country's largest transit agencies and refuse companies as an ultra easy low carbon solution that is here today. Soon, with the addition of the 15 liter to come in suite of natural gas offerings, heavy duty truck fleets that operate under the most We strongly believe that the future could not be better for clean energy. Our strategy to increase the supply of low carbon RNG is being well executed And the almost universal optimism in the new engine technology should be reason for everyone's confidence.

Speaker 1

It certainly is for me. And with that, I'll turn the call over to Bob. Thank you, Andrew, and good afternoon to everyone. As Andrew mentioned, our financial results came in A little short of our expectations. I want to put that into perspective here.

Speaker 1

We don't normally guide to quarters, but I want to Tell you where we kind of came in at. For the Q3, we've forecasted a GAAP net loss of 24,000,000 And we're reporting a GAAP net loss of $26,000,000 And then we were forecasting an adjusted EBITDA of around $18,600,000 and we're reporting $14,200,000 of adjusted EBITDA. Now most of this miss was the result of 2 factors, a much lower LCFS price than what we forecasted and a shortage of RNG from 3rd parties as well as our own production. On the positive side, the RIN pricing has exceeded our expectations and remains high today in Q4. Our base fuel sales margin, exclusive of the Amazon warrant charges and environmental credits, It's contributing incrementally to our earnings as we expected.

Speaker 1

Our Amazon volumes are ramping up as we open more stations And we also had positive operating cash flow for the Q3 as well. So a lot of positive factors in the Q3, even though the results didn't quite meet Regarding our updated guidance, we felt given the circumstances where the LCFS So principally looking at likely a lower expectation on the LCFS pricing. And considering the impact Of the Q3 RNG deficit, we've taken our guidance range down slightly. Looking at our results and starting with volumes. I'll point out that the RNG volume of 56,700,000 gallons delivered The Q3 of 2023 was up 5% compared to the Q3 last year.

Speaker 1

Sequentially, however, we were down 3% from the Q2 of 2023 due to the shortage in RNG that I mentioned. And then, also kind of a side note here, looking at our total fuel volumes for 2023 and particularly the conventional natural gas, This is where you'll see the impact from our Texas LNG plant that's not been operating and we've talked about some of the drag that that's Last year that plant had sold approximately 6,000,000 gasoline gallon equivalents through September, so about 2,000,000 gasoline gallons equivalents a quarter. So that is impacting kind of the overall story there. Looking at a comparison of revenue, this one always gets It's kind of interesting and it certainly is this quarter. We reported $95,600,000 of revenue for the Q3 of 2023 versus $125,700,000 in the Q3 of 2022.

Speaker 1

So that's a $30,000,000 decline. First, the most notable item is that the Q3 of last year included 3 quarters of the alternative fuel tax credit, which was reinstated as part of the Inflation Reduction Act. So there's $11,000,000 of retroactive Alternative fuel tax credit that's in the prior year number. And then the Amazon non cash sales incentive warrant charge, which reduces revenue is approximately $10,000,000 higher in the Q3 of 2023 and that's From increased volumes that we've had in 2023. And then the kind of the third item there finally for the Q3, The Q3 revenue of 2022 was higher by about $13,000,000 due to the natural gas Costs being higher, which then also translates to higher sales pricing back in 2022.

Speaker 1

And we've That's a phenomenon that we deal with relative to the natural gas and how that impacts our pricing. But For some context here though, even though the gas cost and sales pricing was higher in 2022, Our base fuel sales margin per gallon, exclusive of the warrant charges, is higher in 2023. So we've Optimized our retail pricing and gas cost in 2023 and large part of that's been the favorable spread that we've talked about between the price of oil And therefore, the retail price of diesel and natural gas. So that is helping us. It continues to help us.

Speaker 1

But On a revenue front, it's lower when the gas costs are lower. Looking at our GAAP operating results The loss of $21,400,000 for the Q3 of 2023 that compares to a GAAP operating loss of $8,600,000 a year ago, for a $12,800,000 decrease, but of course, we're going to that is being Influenced by $21,000,000 of a decrease that relates to the alternative fuel tax credit, retroactive Credit of $11,000,000 and then also the Amazon warrant charge that's up by $10,000,000 So that's Basically more than takes care of all that decrease. So really the other notable item in our GAAP is that our depreciation and amortization was lower We will now begin the Q3 by approximately $7,200,000 primarily because 2022 included some incremental Depreciation on certain station assets. Our adjusted EBITDA of $14,200,000 in the Q3 of 2023 compares to adjusted EBITDA $23,900,000 for the Q3 of 2022 or a decrease of $9,700,000 Again, The $11,000,000 of the retroactive alternative fuel tax credit is included in that prior year number. If you were to exclude that, The 2022 Q3 adjusted EBITDA would be $12,900,000 compared to the $14,200,000 in 2023.

Speaker 1

And that improvement there is really our fuel volume growth And the underlying base fuel sales margins continue to add incrementally to our results, which has helped to offset The effect of a lower LCFS credit pricing and a lower net take on the RIN And also some higher operating and equity investment costs in our dairy joint venture. So frankly, The fuel volume and that base fuel margin is working well for us and it always does. The adjusted EBITDA of $14,200,000 is comprised of $15,500,000 from the distribution business and a negative $1,300,000 coming from our dairy R and G production business. On the capital front, we remain On plan with our CapEx spending in the distribution business of approximately $90,000,000 as well as $40,000,000 in our dairy RNG investment business. And noting though on that, that with the dairy RNG investments, There is $84,000,000 in cash at our dairy JVs.

Speaker 1

And I think with that, Operator, we'll turn the call over to questions.

Operator

Thank you. Ladies and gentlemen, we will now begin the question and answer You'll hear a 3 tone prompt acknowledging your request and your questions will be pulled in the order that they are received. And your first question comes from Eric Stine from Craig Hallum. Please go ahead.

Speaker 2

Hi, Andrew. Hi, Bob.

Speaker 1

Hi.

Speaker 3

Hi. Can we just dig into the RNG for a second? So just wondering if you could expand a little bit on the RNG Shortages, I mean, I would assume it's all from 3rd parties given that you've just started bringing on your own volumes. So maybe, some of the things you saw in the quarter and have you seen that more normalized here in Q4?

Speaker 1

Yes. Maybe I'll start. But Eric, yes, it was actually from what we were forecasting, there was both Supply as well as our own production, we thought we'd have a little bit more of. But on the supply Side, I'm going to say it's kind of a little bit of normal of the landscape, but there were some Low CI projects that were just had some startup delays and then Some CARB certification delays and so that took down a pretty good number of Expected low CI gas. Now, we also though had some landfill gas that produced more.

Speaker 1

And so there's a bit of an ebb and flow there. The net of it is that we were kind of net. We were net down, call it, maybe a couple of 1000000 gallons. So this is not Huge. We're talking about 4 here and 3 there and netted to 2.

Speaker 1

But what it does do is it does have an impact on the mix, Right, on kind of the economic mix and you talk about being short on low CI and making it up on landfill. But projects that It's just started a little later. So nothing real fundamental about things aren't working or shutting down. And I mean, just as there's more and more, but we'll kind of get past some of these when 2,000,000 or 3,000,000 gallons makes a difference. But we're not dealing with huge Numbers here, but that did impact, say, our net take on the RIN, The LCF as well as the values on the LCFS.

Speaker 1

And then on our production side, We were anticipating that we could have more than just the Del Rio That would be contributing and maybe monetizing some biogas in the quarter. Now maybe not a lot, but enough to defray some of the cost And those are, as Andrew said, they're kind of producing gas now, but we didn't monetize it. So we put it together and There was a bit of an impact that I call it kind of timing. Okay. Nothing for us fundamentally, Don't worry about it.

Speaker 1

It's a

Speaker 4

little bit of nature of the piece, but

Speaker 3

Yes. Okay. And so then when you talk about in the release, Just a lower share of RIN values, so that also refers then You just had values that did not reflect some a greater mix of low CI and therefore you had a lower share of it. I mean just To confirm, I mean nothing's changed in terms of your share as the downstream avenue to the fuel tank or anything. It simply is that mix

Speaker 2

It

Speaker 1

is, it is because each supply deal kind of has its own negotiated take and as that starts to move around or it's short, it To be short, where take is higher or not. And so, that's ultimately kind of how it shows up. I mean, it looks like a lower take, but It's really kind of how much we ultimately earn based on the mix of all the gas and the suppliers that were flowing through our network.

Speaker 3

Yes. Okay. Maybe a good segue just in terms of the upstream progress. So it sounds like You're basically, I mean, maybe a little delayed, but on track for the 6 to be producing gas here by the end of 2023. Just Curious, I think in the past you've talked about, gosh, I don't know if it's 8 in 24 And a pipeline of 15 plus, just curious if anything's changed there, details would be great.

Speaker 1

Yes. Eric, I'd say it's generally the same and you're right. We still see that we'll be on track by the end of the year. Now I did you'll notice, I did slip into early 24 was one of those, right? So, but it's going to go almost exactly as we've discussed that those 6 will be finished and one may slide in there a few weeks, but those will be on production And we'll have something out soon on 3 of them, all right.

Speaker 1

Now for 2024, you'll have Essentially, the same numbers that we discussed, it's actually a little larger. So it's you can slice pieces we've discussed before a couple of But you'll essentially have one that's in construction as we speak that will be continue to be in You'll have 4 more that will come on in construction. And then right now, we have Seveneight that are in the final throes of design, engineering And a few of those a couple of those will be on production not on production, but in construction. So it's tracking exactly where we saw that you'll have a few come on for the latter part of the year. And then Our pipeline continues to be similar.

Speaker 1

It's in the double digits. Those ebb and flow, but don't be surprised that somewhere in the year, some of those will come on and kind of change our numbers. I would say, Eric, it's about as many as we can handle right now, and it's going as expected. So we're feeling really good about that. We're beginning to do even more of the work ourselves And we're beginning to bring more of the operations of that as we contemplate these projects in house.

Speaker 1

So we're really getting We're more comfortable as we cut our teeth on these early projects on how the future, how we develop these projects.

Speaker 3

Okay. Thank you.

Operator

Thank you. And your next question comes from Rob Brown from Blake Street Capital Markets. Please go ahead.

Speaker 2

Hi, good afternoon.

Speaker 1

Hi, Ross.

Speaker 5

Wanted to get a

Speaker 2

sense of the hi, the run rate on the RNG production So these when you get those 6 kind of up and running, what's the run rate in terms of gallons and how does that

Speaker 6

I'm sure it does Help the shortages, but just a sense of what that does in terms of volume?

Speaker 1

Well, the You're looking $7,000,000 to $10,000,000 for maybe the ones that we're talking about that go into production Or they go into that, come online by the end of the year. And then others That we've talked about that will go into construction and as they produce Yes, they all vary, but I mean, our So we're looking, I guess, in kind of 10,000,000 to 20,000,000 Gallon range as we've talked about. And these things will take a little time getting up. I think they'll produce more as we move through. So you could be on a kind of an exit rate that's You know, a higher number even as we go through 'twenty four.

Speaker 2

Okay, great. Thank you. And then on the 15 liter, very good to hear the bullish kind of commentary there. How do you see that ramp rate from these test rollouts to kind of production rollouts and I think you quoted the Cummins Percentage numbers, but how do you see the ramp rate more in the early years?

Speaker 1

The ramp on the 15 liter? Sorry, Rob. It wasn't we you were We're having a hard time hearing you, Rob.

Speaker 2

Yes, sorry about that, the ramp on the 15 liter. Thank you.

Speaker 1

Well, I always want to be a little careful here, but I take it as a very good sign The recent Cummins presentations where they've been fairly candid about it. In fact, then some public Statements that they thought that they could sell as many in 2023 2024, pardon me, 3,500 units, The 25,000 to be 7,000 units and then it would ramp up by 27,000. This is where they get to the 8% to 12% number. That doesn't surprise me. Rod, you remember back with me when we first started out in the 9 liter in the refuse market, it was 300 units and then it went to 8%, then it was 15%, it went up pretty fast, it went to 50% in that market.

Speaker 1

Cummins has assured us that the number of engines is not a problem and that once they get more of the OEMs and they can really hit those larger numbers. I'm feeling good about that ramp. I think they are too. And so I think you'll see it move up Over those next 3 years, you might be pleasantly surprised to be in that 10% range, Which would be 25,000 units a year, which would be a big move up from where we are today.

Speaker 2

Okay. Thank you. I'll turn it over.

Operator

Thank you. Your next question comes from Derrick Whitfield from Stifel. Please go ahead.

Speaker 4

Good afternoon all and congrats on your announcements today. Thanks, Scott. Regarding your Del Rio announcement specifically, Congrats on getting LCFS through Oregon, because that's a huge win given the backlog that exists in California. Could you comment on the CI assigned by Oregon or your

Speaker 1

Well, if I I don't know what I'm having a little hard time hearing some of the questions, but you're saying the difference between Oregon and the CII. Well, I don't know. I do know this, Derek, as the reason we said it there, it's we're getting more forward right now. And I don't know all of the What's all in it? Why the CI score?

Speaker 1

I'm just not sure, Derek. We'd have to get back to you on that. I don't know. Look, let's not get all I do know this on the market because I do understand the market side of this thing. I mean, look, Oregon is not as big as So the LCFS order was 180.

Speaker 1

We started injecting in there and it came down some. So it's just is It's a huge market, so it's not unlimited there. We can put more there, but it's not going to replace California, let's put it that way.

Speaker 4

And just an extension on that question, do you guys see Oregon as a likely pathway for your first few projects?

Speaker 1

It will continue for a while. Look, I have great expectations and I remind our friends in California as they've been kind of Fooling around with the low carbon fuel center, I said, you know what, be careful. You're not the only state in the United States, right? So you've got Washington, you've got Oregon, We've got the legislature in Illinois looking at it with New Jersey. New York has tried to pass it a couple of times.

Speaker 1

New Mexico, you're going to have other low carbon fuel states. And it will be a discipline it will give a little discipline to some who want to keep continue to muck around with these things Because you have other markets that will now it's going to be clear to everybody that RNG is one of the best ways to decarbonize, Certainly for transportation fleets. And so other states are going to adopt it. Now this doesn't happen overnight, but it will. So you'll see these other states.

Speaker 1

We're working in those other And we have good support in some of those places. So, we'll and what I tried to get at, Derek, in my comments is What makes sets us apart a little bit, 1, we're in touch with the demand side of the equation in transportation. We're in 42 different states. We're moving RNG today in about 40 states. But it gives us the opportunity certainly with our big supply Portfolio, a lot of that being, landfill gas, it allows us to optimize and move gas around to the best markets, and we can do that very quickly.

Speaker 1

So that's unique to us because we have the downstream infrastructure.

Speaker 4

Agree. And if I could just ask one question to kind of build on a previous topic. When you look at RNG volumes more broadly, and this is at the EPA level, RIN generation peaked in June of this year and has generally decreased over the last few months. In your view, Is this due to product owners increasingly pursuing the voluntary market or do you think generators are holding credits to monetize them at a higher price?

Speaker 1

That's a good question. I tend to think it's a lap. But The way I'm thinking about it right now, landfill gas going to voluntary markets getting $25 in Mcf And in transportation, the RINs are valued more like 36. So, the transportation is just much better market. 1 of the years ago, one of the energy secretary said washing your car he said Using natural gas to make electricity is like washing your car with champagne.

Speaker 1

And that's the way I feel about it is in a hard to decarbonize market, Which is transportation, that's where RNG ought to go. And it will. And you're rewarded for it. It's a little more complicated. And that's where the infrastructure comes in.

Speaker 7

Great. Thanks for your time.

Operator

Thank you. And your next question comes from Paul Jang from Scotiabank. Please go ahead.

Speaker 7

Hi, guys. Good afternoon.

Speaker 1

Hi, Pavel.

Speaker 7

Andrew and Bob, I think that's the latest drop in the LCFS revision is that they will require the physical presence of The RNG in California, is just a pathway in order to claim the LCRs credit. Yes. This indeed will be remaining the final decision. Is there any incremental cost for you guys? And if it is, any rough estimate that on a per gallon basis that what is the incremental cost?

Speaker 1

Let's talk about booking, Clay.

Speaker 2

Yes.

Speaker 1

And whether that if it stays in, is that going to be an incremental? Well, let's We'll probably have some questions. Let me go out on a limb and kind of talk about where I think that the Air Resources Board in California is heading. We believe We haven't exactly tried on this, but I think we're pretty close to it. But we believe that ARB will likely hear some proposed rules before it's board, Middle of it's been suggested it could be middle of November, could be next week.

Speaker 1

And there were 3, Paul, there were 3 big issues The kind of at stake, right, or at least that had our attention. One was the avoided methane. Would ARB, as it was suggested By some, get rid of the way we calculate or utilize the avoided methane In RNG, right? And it looks to us like that suggestion has not been Heated and that the ARB has understood that the low carbon fuel standards are working. They want To make it more aggressive and they know they need dairy gas, they know they need RNG and so The avoided methane calculation looks to me like it will be in place for a long time to come.

Speaker 1

And I don't know that it's Clear if it's 2,040 or 2,045, but that's a significant issue and that means that RNG Will be in place for a long time to come. And certainly, for these projects, get good returns and so it makes a lot And then they may decide that after 2,040 that maybe it shouldn't go into transportation and ought to go into other uses like Trains and ships and other hard to carbonize. But we'll see that. We'll see there's a long ways to go before we get to that. The other is book and claim.

Speaker 1

The way that we currently account for it, we put it in, in Iowa and we take it out of California. And it looks to us like that is in place to 2,035 most of this believe that that's the way that's beginning to shake out. And then maybe there will be some refinements after some study. Carver, I think, has been very good about this. They've been listening to how the business really works.

Speaker 1

And that maybe after 2,035, there would be some looking at you might have to justify that Pipes you're using to move it to California, the 50% of the time they have to have flow rate to California. It's not clear whether or not even after 2,000 and 35, you might have to pay for transportation. But the way I look at it as compared to avoided methane, the book and claim is Kind of a cost of doing business. And if in the worst case after 2,035, you needed to pay for the capacity charge, Now you're talking about, let's call it a couple of bucks in Mcf, all right. Now we're dealing with potential value that fuel around $80 Mcf.

Speaker 1

So To me, that is a little bit of a cost of doing business, but it's way out. And I think we're having good negotiations and good understanding With KAR. Now finally, it is, well, what is the obligation curve going to be? And we all saw in the stuff that came out Not so long ago that one of the suggestions was, you remember there are 3 options, either it's 20 25%, 30% and 35%. Well, it looks like they're moving toward the aggressive side of that.

Speaker 1

So as I look at it as a shareholder and As a believer in the RNG business, looks to me like they're going toward the most aggressive end of the scale. So far, it appears that it's in the range of something around 34%, Right. So that's a big move from 20% in 2,030 to 34%. And so Now, I think the market, I'm going to give more here than your question, I think that the market is likely for LC MS to be a bit soft in 20 Because you don't really see the big pickup start on the obligation and on the compliance curve until in 'twenty five. So you're going to it's going Take a little time to work off the oversupply of credits that are in the bank right now.

Speaker 1

On the other hand, It's likely that Carve is going to adopt this automatic ratchet mechanism that if there's a big over Why they can ratchet down and sop up some of the supply. That is going to looks like it's going to be in this as well. So that's good news. So I think we may have to grin and bear it a little bit until some of the oversupply is worked Off to 24, I think it will be much more constructive. The ARB has said that they believe that the range For the LCFS, that should be between $120,000,000 $180,000,000 after 2025.

Speaker 1

So that we think is very constructive. So anyway, I gave you a lot more than you asked for, but I just thought we would get out

Speaker 7

of the 3 items. No, thank you. So sure. Thank you. And Andrew, I know typically you guys don't give guidance for next year that early, but anyway that is already early November.

Speaker 7

Any soft Guidance on adjusted EBITDA and also the RNG sales volume For next year?

Speaker 1

Good try. I don't think soft guys. Well, that's a little tricky. That's it could be too soft, it could be too hard. So Look, I mean, Andrew alluded to the LCFS and I mean that could be potentially something if that price If it's going to be challenged by the kind of the supply demand, but Who knows?

Speaker 1

I think we have a fair amount of some time to kind of get some more information and we're Really evaluating all of that as we speak. Also, It wouldn't be probably a good idea to try to do some soft guidance. Paul, all of

Speaker 2

that is fine. Paul, all of that is fine. Paul, all of that is fine. Paul, all of that is fine.

Speaker 1

Paul, is that We know on the demand side, I mean, as I look out, I'm not going to give you any numbers, but on the I like it's we're constructive in that we love the fact that In the biggest market in transportation, heavy duty, we've got now finally a product that's coming to market and those are actually those engines are going Delivered in June, that's a good thing. So we haven't seen the cannibalization on the 12 liter right now. So we see this as incremental volume That will come into the system, which I think is a good thing. And of course, we know there's lots of RNG projects coming. So demand should be up And RNG supply should be up.

Speaker 1

And so we'll be more specific later. I'm sorry we can't do it today, but we'll be more

Operator

Thank you. And your next question comes from Matthew Blair from TPH. Please go ahead.

Speaker 2

Hey, Andrew, could you talk about the competitive landscape for dairy RNG? If you're looking to sign up a new dairy today, Is that easier or tougher than it was a year ago? And are you seeing any cases where dairy is just simply They're not interested in RNG because of the low LCFS prices. And if that's the case, I mean, would a higher LCFS price just spark More sign ups?

Speaker 1

A higher no doubt, a higher LCFS price helps the economics. Now the economics aren't negative, Right. Payouts get stretched. And what it does, Matthew, it's why we're and I'll talk here in a second, Why we're embarking on an optimization program to try to bring get the cost of these projects Down a little bit because it will mean that you can move into smaller dairies, right? Because of the way the industry has been developing these derisk, a less Modular approach, more field directed approach, just costless.

Speaker 1

So it's made it so that you have target 5000, 7000 Look, we have a dairy that we're so excited about that we're building on and will throughout next year's 35,000 But there's only a couple of those. There are many thousands of dairies that are in the 2,000 Ahead range. And right now, those are tougher the way, 1, because of the cost and a contributing factor would be because of Lower LCFS. So yes, as the LCFS price comes up, more comes into range. Now I'd say in general in the competition, the lowering of the low carbon Fuel Standard has made some of we were in a little bit of a land rush, gunslinging environment about a year ago, 1.5 years ago, a lot of folks got into the business that maybe really didn't have any business because they saw The opportunity and then things got a little tighter and supply chain happened and the cost went up a little bit.

Speaker 1

And then at that same time, the low carbon fuel credit So it shook some out. So I want to say that, for those of us that need the RNG, we're a bit Unusual. We're not building a project on spec and then looking to where we put it. We need it all. So we're a bit unique in the business.

Speaker 1

And for those of us that are in it like that, this is a good moment. And so Look, there are plenty of dairies if you know what you're doing, I think. And we're going to be we're going to work hard in 'twenty four To see if we can bring to market modular designs to bring the cost of these down so that we can then lower The cost of development of these dairies and therefore enter into lower smaller sized dairies, which then you open yourself up to a lot more targets.

Speaker 2

Sounds good. And then, it looks like the updated

Speaker 1

Hold on, Tom, Scott. Hold on a second, Matt. Yes, sorry, I just the question had come up on the CI score, what that looked like with the Del Rio to Oregon and so we went on a temporary pathway and it's similar to California where that takes you to a negative 150 And that's where Oregon was, but of course the pricing was much better and the process of basically securing even the temporary pathways faster. So That's where it's at. The actual CI at Del Rio Is anticipated to be much higher than that or much lower, I guess.

Speaker 1

Anyway, that's just so that straight.

Speaker 2

Okay. And then, so it looks like the updated 2023 EBITDA guidance implies that Q4 Should improve to call it $20,000,000 to $25,000,000 So nice step up from Q3 at 14,000,000 Could you talk about what is driving that improvement quarter over quarter?

Speaker 1

It's mainly, Matt, added fuel volumes. I mean, we've said our ramp is going to Continue to go. We have a little bit on the we have a little bit on the RIN, although we're Also mindful of what the take has been, but the rent is there. And we're being frankly, I'm being I won't say conservative, but I'm the LCFS is really where I took that is really kind of took that down to in the 60s. And so it is better, but it's generally volume related along with the rent.

Speaker 2

Sounds good. Thank you very much.

Operator

Your next question comes from the line of Pavel Janab from Raymond James, your line is open.

Speaker 8

Yes, thanks for taking the question. I'll start with my usual Washington question. When are you guys expecting to get the Section 45z Transparency from the treasury, is that a 'twenty three event or do we have to wait until the New Year?

Speaker 1

Yes. Well, if it is a new year, Pavel, it'd be shortly thereafter. I mean, we're hearing by the end of the year. I think we actually heard something finally Pavel that suggested it could be the end of the year, but then we heard a little something else that could be just after, so I don't know. So let's put it there.

Speaker 8

Okay. Can we get an update on The Western Canadian JV?

Speaker 1

Yes. That Where we stand with that and it's a joint development agreement, but we have we've Most of the property that we've got kind of 5 stations in product. One is built and 4 others being built And we're kind of full speed ahead on that effort. And they're just as excited up there About the 15 liter, it's frankly probably even more needed there, but we're just Lockstep with our partner Tourmaline on that. And it's a good environment here with what we're doing.

Speaker 1

So we are Finding that some of the permitting and just the ease of getting these things going has been favorable. Those will come on in the year. Good economics. Good economics, very expensive diesel in Canada. And so the economics are really, Really good.

Speaker 1

Yes. So we'll see probably Most of those come on by in the second half of next year. So not huge Volume not a 12 month volume contribution, but they'll come on. And like with a lot of this is just to see that In a sense that this is happening and that's really what we look to is like the volume will come if The trucks are being ordered and bought, then it's just a matter of time that they're at the They're filling up at the stations. Just on the market thing, Pavel, last week, There was a meeting at 27 different fleets in a room with the largest dealer in the region and Cummins reviewing the 15 liter.

Speaker 1

So I like that. There's a lot of interest. And so we have great there's work to be done there, but there's We've got a nice advantage and of course, Tourmaline is an excellent partner in Canada.

Speaker 8

Last question from my end, about comments. In fact, We're still hearing from a lot of manufacturers, automotive and otherwise, about supply chain complications that are Impeding sort of scale up of production, maybe a better question for Cummins, but Have you heard anything these lines regarding the 15 liter specifically? Have

Speaker 1

not. They've been here they've been pretty public here recently where they've been kind of almost uncharacteristic kind of Talking about when they could be ordered, when they will start to be delivered and ramp, they have been mentioning that, But I don't know, maybe that's factored in, Pavel. We have certain of our customers, though, like for instance, our refuse customers are behind on getting natural gas Engines and it's kind of funny, natural gas crash trucks. And it's interesting, it's often it's not the natural gas Tanks or stainless steel tubing or the engines is door handles and seats And supply chain issues that's bottlenecked some of that. So there is still some of that working through, but we haven't heard I haven't heard that In these recent meetings and presentations by Cummins.

Speaker 8

All right. Thanks very much, guys.

Operator

Thank you. And your next question comes from Manav Gupta from UBS. Please go ahead.

Speaker 5

Thanks for squeezing me in. I almost thought I won't get in today. As far as 45z is concerned, Can you help us understand how you benefit from the 45z as it is in its current form where a negative RNG kind of gives you High dollar amount versus landfill RNG, if you can talk through that?

Speaker 1

Sure, Bob. Go ahead, Bob. Yes. I mean, If the scales that we look at and considering the low CI, when you get into the negative $250,000 which many of these farms are at that or lower, then you're looking at potentially $5 to $7 maybe even $8 we've seen per gallon of 45z PTC credit. That would be on top of the economics that are already there prior to that with just the actual sharing in the credits.

Speaker 1

So That I mean, so that will be significant. That's 2025. That's why the clarity from the IRS coming Couldn't come really any sooner. I mean, Bob, you might just speak to it. The law says that On highway, suitable for on highway and then it's a base levels, dollar and then depending on the Go ahead.

Speaker 1

Yes, right. Exactly. So the lower the it's for on highway transportation, The opinion on the CI score, you could be at $5, $6 a gallon credit off of the PTC. And That will relate to our production dairy investments that we have going on and the gallons that we project to produce there It runs for 3 years, 2025, 2026, 2027. It will be I think when we get to that Clarity, people can kind of start to do a little better math on this thing because it will be significant.

Speaker 5

Second question here is, we did get Updated staff proposal from CALB, but we're still bidding a lot of credits. And When do you actually expect some improvement in LCFS prices because the way things are, It's not looking very good even for 2024 unless the LCFS price start to move up. So trying to understand when can we start seeing some improvement in LCFS prices?

Speaker 1

Manav, you might have missed it. I kind of touched on this. I mean, look, we don't have a crystal ball, but it looks to us like That you could have some continued softness in 2024 as you work off the credit bank. Now, What I mentioned is there is and now look, there's a lot of ifs here, but the new rules will have a Automatic ratchet, not automatic, we'll have a ratchet mechanism to increase the compliance curve. Now Those don't go into effect right away.

Speaker 1

So I think, but they can go into effect fairly quickly. But I think that we might prepare ourselves for a little bit of tough sledding in 2024. Those that should come much better and bounce In 'twenty five, but wouldn't surprise me if we bang around the lower end of the range You know, in 'twenty four. Now on the other hand, you might start getting some folks to be buying these credits And take it putting a little pressure on. I don't think that's happened yet either and that can happen.

Speaker 1

It's not that liquid of a market.

Speaker 5

Thank you.

Operator

Thank you. And your next question comes from

Speaker 9

Most of my questions have been answered. Just wanted to get on the modeling part. So on the LCFS pricing and the RIN pricing, what did you factor in, in the earlier guidance And what did you realize versus what are you factoring in now for the new guidance?

Speaker 1

Yes. We were well, we were looking at around $3 on the RIN. And then, at that time, the LCFS was really had come up, was kind of in the low 80s With an expectation of possibly even some more bullishness on the hat With some of the news maybe coming out of carb with maybe a better strengthened compliance curve and that sort of thing. And there was a little bit of that, but then the market kind of quickly came from that. So it came off of the 80s and so I was in that range.

Speaker 1

And I just mentioned here, I've kind of we've moved the RIN up A bit, probably closer to 3.25 or something in the LCFS. I think I've Yes.

Speaker 4

I don't

Speaker 1

know how low to go on it, but it's, it seems like each day I put it out there, it comes up maybe a little lower. It's in the 68%, 67%, somewhere in there is what I factored into all that guidance.

Speaker 9

Sure. Thank you. And then the last one I have is, what's the expectation for CapEx for 2023?

Speaker 1

For 2023, we're kind of on par to do about $90,000,000 in the kind of the base Distribution business and we could spend up to $40,000,000 of additional investment into the dairy

Operator

Thank you. And your last question comes from Jason Gabelman from TD Coleman. Please go ahead.

Speaker 10

Yes. Hey, good afternoon. Thanks for taking my questions. You talked about the ramp up in the 15 liter Cummins Engine and I know in your kind of 5 year plan, you have a ramp up in your own distribution volumes. And I'm wondering how much market share of that 15 liter engine business would you need to have in order to hit That guidance and is that kind of the way you look at the market opportunity, the market share of those Cummins engines?

Speaker 1

Yes. I think, Jason, it's a good question. It's interesting. I mean, I think what you're asking is on that when we laid out our R and G Day, a couple of years almost a couple of years ago and we said, well, we need 545,000,000 gallons. Boy, That didn't have this kind of robust that didn't have sort of that 10%, dollars 375,000,000 gallon bogey At all.

Speaker 1

I mean, I think we never got above 3,000 incremental heavy duty engines, so 3,500 maybe. We just at the time, we're trying to be conservative. And so you would need so I don't have a percentage of where the market, but if it goes the way we think by the time you get out there to what we have, where We thought we need $545,000,000 you need another couple of 100,000,000 gallons or more. Yes. So I think on the easy Because by the time you get to 27, you're creating almost all the gallons that we're doing right now every year.

Speaker 1

The industry can provide that. We'll all have to get busier, but we as a country Can't get there. And I think that if you look at all if you look at the resource base For landfill, for wastewater, for food waste, I mean, you can easily be in a 10,000,000,000 gallon Dairy, a 10,000,000,000 gallon market. Now lots of money will be spent, it will be a good thing for a lot of people, a lot of money will

Speaker 10

Got it. My follow-up is kind of maybe a bit more philosophical just about how you think About forecasting the business, 2022, your final EBITDA came in below forecast. Your initial 23 was below what you provided at the RNG day and had to be revised lower. And a lot of the value, I guess or the potential value for the stock is in the future growth potential. And so we're obviously very reliant On the earnings forecast that you provide and so as you think about laying out those forecasts moving forward, How do you think about it relative to how those how your results have come in relative to prior forecasts?

Speaker 10

Do you think you need to be a bit more conservative? Do you think there's a couple of things that are drive that have driven the kind of forecast misses the past few years? Just Any, I guess, thoughts about how you think about forecasting the business moving forward will be great? Thanks.

Speaker 1

No, it's a good question. And obviously, we're trying to create a new market. So it's a little bit different, right? This This is a mature, there's a lot of moving pieces to it, but that notwithstanding, it's our job to try to do as best job we can to forecast. I mean, this year, Had you not had that Q1, you would have been in on target.

Speaker 1

That's what I was trying to get at with this. You would have been Right in on guidance, all right. And we didn't revise our guidance last quarter, so we just had enough Information, we weren't sure about where that low carbon field. So your credit prices was. So you were and I think what we're trying to do here, Jason, is exactly That is be conservative, be responsible and we reverse we revised it down now albeit $3,000,000 $4,000,000 What we're trying to lay out though for you is to show the potential size, right, of the market.

Speaker 1

And so it's kind of a balancing act between is the future of this business us Discussing 47 versus 50 in EBITDA or 2 years hence when you have the PTC worth 259.

Speaker 7

Right,

Speaker 1

right. And so I think you're in that Period, period, right, where there's been hasn't been wasn't until recently a lot of great clarity on the we were all going to have an e rent. Well, that changed. We're not having an e rent, right? We were going to have a June adoption of a rule at the low carbon in California.

Speaker 1

Whoops, here we are in November waiting around for it. And so there's been some things That have interceded here and haven't given us much clarity as I wish that we would have had and we had all of that. When I look at our budget planning and we're within 97% of budget on volume. That's not so bad, 98%. Now I don't control low carbon fuel standard price And we'll get better at it, but we're trying our best to try to get this right and it doesn't help us to miss targets.

Speaker 1

So today, We've revised down a little bit. I don't think you could fall off the pancake at this point. I think we're about down to where we We're about status of Skip a Jet and I think it's upside from here. So I appreciate the question and I don't think we're being overly rosy. Well, we're dealing with some kind of moving pieces.

Speaker 1

Will Cummins get those things all produced and start selling them in June? I don't know. They just said they would, but I hope they will. But when I look at the big picture I look at what's happening with electric vehicles. I mean, go ask how many electric vehicle trucks that are supposed to be the future of heavy duty transportation.

Speaker 1

None of those have sold. So I like the way we're positioned. And so I think the best thing for us to do is be prudent with our capital, is continue to develop on the RNG And we continue to work with our partners on third party supply and work our customer base On the adoption, because when you compare a heavy duty truck operating in RNG versus the other alternatives that are out there, world leagues ahead And more efficient and more cost effective. And so that's what gives me optimism going forward.

Speaker 10

Great. I appreciate the detailed response.

Operator

Thank you. There are no further questions at this time. Andrew, you may proceed.

Speaker 1

Thank you, operator. Thank you, everyone, for listening in today, and we look forward to updating you on our next quarter at year end. Thank you.

Operator

Ladies and gentlemen, this concludes your conference call for today. We Thank you very much for participating and ask that you please disconnect your line. Have a great evening.

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Earnings Conference Call
Clean Energy Fuels Q3 2023
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