Q3 2023 Clean Energy Fuels Corp Earnings Call
If at any time during the call you require immediate assistance. Please press star zero for the operator.
This call is being recorded on Thursday November nine 2023.
I would now like to turn the conference call over to Mr. Robert Whelan CFO. Please go ahead.
Thank you operator.
This afternoon clean energy released financial results for the third quarter ending September 32023.
You did not receive the release it is available on the Investor Relations section of the company's website at Www Dot clean energy fuels dot com, where the call.
<unk> 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 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 clean.
Clean Energy's Form 10-Q filed today.
These forward looking statements speak only as 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 core 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.
The directly comparable GAAP information reasons, why management uses non-GAAP information definition of non-GAAP, EPS and adjusted EBITDA and a reconciliation between these non-GAAP and GAAP figures is provided in the company's press release, which has been furnished to the SEC on form 8-K today.
With that I will turn the call over to our President and Chief Executive Officer, Andrew <unk>.
Thank you Bob Good afternoon, everyone and thank you for joining us I'll, let Bob go into the financial details on the quarter as this quarter has its your factors impacting the comparison to a year ago.
Well, it's factors impacting our results for the third quarter of 2023.
At a high level, while our results for the quarter didn't quite reach our expectations. There was also nothing occurring within our business of any significant consequence impacting our prospects.
Key strategic milestones are being executed and we do not see any obstacles in the near term.
Frankly, it is slightly up quarter, we still produced adjusted EBITDA of $14 2 million, which equates to $57 million 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 hundreds of millions of dollars.
Work with clients to deploy well above that.
I wanted to emphasize here that we remain as bullish about the future as we were when we rolled out our comprehensive R&D strategy in early 2022.
R&D is moving in the right direction is becoming recognized as the most realistic fueled to decarbonize heavy duty truck.
In our opinion the way the entire alternative fuel market has been moving has only confirmed.
That we set out on the right plan.
We are making investments in the production of our own steady supply of low carbon R&D, while at the same time growing the demand with new customers like Amazon and others that will leverage our nation national fueling infrastructure.
On the way, we've been able to secure the best in class financial and operational partners through the joint ventures, with BP and total energies 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 <unk> space is notable as we move forward.
Think about it.
It is really impressive to me that companies like BP Chevron total shell Enbridge Blackrock.
UBS WAM Republic, Amazon are all involved in the R&D space.
We made good progress on the low carbon LNG production project areas over the last 18 months.
And I Hope you saw the press release, a few weeks ago announcing that we began injecting R&D into the pipeline in June at our first project del Rio dairy in Texas.
We actually began producing LNG in February started until all the regulatory approvals were obtained.
But most importantly, we recently began generating both federal and state environmental credits, we made the decision to flow in this first R&D from del Rio to Oregon.
We have stations in demand and the price of Oregon's Lcs's 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 R&D dirt deliveries for a production projects.
We've also begun producing LNG at three other dairies and there are another two projects that are nearing completion, and we will be producing LNG 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 it is.
An important note that these are large scale projects, which in this case represent about $184 million of.
Gross deploy 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 have.
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 is being applied to new projects and we remain on track to meet our overall R&D supply timeline.
One constructed projects and potential acquisitions.
The investments, we're putting into R&D supply now a tremendous value and position us very well for the future.
The enthusiasm I have for RMG supply business is only matched if not surpassed by the demand side.
Our base business of fueling tens of thousands of large fleet vehicles everyday with LNG continues to grow providing us with recurring revenue and keeping our balance sheet strong and allowing us to make the investments we believe to be sustainable growth.
Most of my optimism is based on one of the most significant advancements that has ever taken place in the R&D technology space. Most of you probably know what I'm talking about which is the introduction of comes Nu X 15.
Leader natural gas engine that is currently being tested by a handful of some of the country's largest heavy duty truck fleets.
A phrase game changers, probably overuse, even by me, but there's not a better way to describe this larger engine that Cummins is introducing to the heavy duty market.
20 years of working very closely with this world class engine manufacturer Ive never heard come and speak about another product quite the way. They are about this 15 liter engine coming.
Cummins executives are actively promoting the attributes of the engine to investors or dealers industry partners and potential customers with the message that this engine has it all superior power Corp fuel efficiency and most importantly, the ability to decarbonize heavy duty trucks with R&D on a scale that no other.
Acknowledging is coming close to achieve.
Here's the one thing it was only common striking about a new engine, but they are building out a very successful launch and adoption of it in China, where 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 S.
The fleets that are doing the testing of this 15 liter engine includes some of the country's most demanding such as Walmart Werner UBS and Knight Swift.
I would not be overstating it would not be overstating to see the reviews have been very impressed.
Exact executive put up a slide at a recent presentation with quotes from the fleets like this well the drivers love the truck the engine has a nice pools for quiet plenty of torque.
The more they drive it better is getting all the way around it.
It feels and drives like a diesel which is good.
I could go on but the feedback like this is what is producing the optimism by comes in many within the industry like the Oems that will place it in their trucks. So much so that for the first time comes is making public their assessment of potential market penetration for the new 15 liter natural gas engines.
On the low side comes believes or it could be an increase.
Penetration of the heavy duty natural gas market share by fourfold from 2% today to over 8% by 2027 and they are realistic.
Hi case is 12%.
Approximately 250000 heavy duty class eight trucks are sold every year in the U S and in one case the medium between comes low in cases of 10% that means 25000, new heavy duty natural gas trucks can be sold in 2027.
Using an average annual fuel usage of 15000 gallons a year per truck would mean 375 million additional gallons of R&D used incrementally each year.
There is no other alternatives that could come close to those numbers in the heavy duty space.
Any of the fleets testing a 15 liter do not currently operate many if any natural gas trucks. So much of the 25000 will be coming from new customers.
I could go on about the importance of this new engine bulletin close with saying it couldn't come at a more opportune time.
Desire for fleets to Decarbonize is only increasing you have the technology to some place much hope to get them Theyre starting to come under increased scrutiny by the entire transportation industry and of course I'm talking about electric just in the last few weeks headline after headline has announced the issues that electric <unk>.
In the passenger vehicle market.
Many within the heavy duty space are quietly expressing some not so quietly their concerns about the practicality and costs of operating a fleet much larger batteries and the need for even more powerful charging infrastructure.
RMG continues to be recognized by hundreds of the country's largest transit agencies refuse companies has an ultra easy low carbon solution that is here today.
Soon with the addition of the 15 liter Cummins suite of natural gas offerings heavy duty truck fleets that operate in or the most extreme conditions, we will be able to participate in the R&D low carbon solution.
I will reiterate we strongly believe that the future could not be better for clean energy our strategy to increase the supply of low carbon R&D is being well executed.
The almost universal optimism and the new engine technology should be reason for everyone's confidence is 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.
To put that into perspective here.
We don't normally guide to quarters, but I want to tell you, where we kind of came in at.
For the third quarter, we had forecasted a GAAP net loss of $24 million and we're reporting a GAAP net loss of $26 million.
And then we were forecasting an adjusted EBITDA.
Around $18 6 million and were reporting $14 2 million of adjusted EBITDA.
While most of this miss.
As the result of two factors are much lower Lcs, that's priced than what we had forecasted and a shortage of R&D from third 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.
Environmental credits is contributing incrementally to our earnings as we expected.
Our Amazon volumes are ramping up as we open more stations.
And we also had positive operating cash flow for the third quarter as well so a lot of positive factors in the third quarter, even though the results didn't quite meet your expectations.
Regarding our updated guidance we felt.
Given the circumstances, where the L. CFS is at so principally looking at likely lower expectation on the <unk> pricing.
And considering the impact of the third quarter R&D deficit, we've taken our guidance range down slightly.
Looking at our results and starting with volumes I'll point out that the RMC volume of $56 7 million gallons delivered for the third quarter of 2023 was up 5% compared to the third quarter last year.
Sequentially. However, we were down 3% from the second quarter of 2023 due to the shortage of R&D that I mentioned.
And then Oh.
Also kind of a side note here looking at our total fuel volumes for 2023, and particularly the conventional natural gas business, where youll 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 caused.
Last year that plan had sold approximately 6 million gasoline gallon equivalents through September so about 2 million gasoline gallon equivalents at quarter.
And that so that is impacting kind of the overall story there.
Looking at <unk>.
As a comparison of revenue.
And this one always gets kind of interesting and it certainly is this quarter, we reported $95 $6 million of revenue for the third quarter of 2023.
Versus $125 7 million.
In the third quarter of 2022, so that's a $30 million decline.
First and most notable item is that the third quarter of last year and.
Included three quarters of the alternative fuel tax credit.
Which was which came which was reinstated as part of the inflation reduction Act. So there's $11 million of retroactive alternative fuel tax credit that's in the prior year number.
And then the Amazon noncash sales incentive warrant charge, which reduces revenue is approximately $10 million higher than the third quarter of 2023.
From increased volumes that we've had in 2023.
And then the third.
Third item there finally for the third quarter.
Third quarter revenue of 2022.
Was higher by about $13 million due to the natural gas costs being higher which then also translates to a higher sales pricing back in 2022 and that's.
That's a phenomenon that we deal with.
Relative to the natural gas and how that impacts on pricing.
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 as it continues to.
Help us but.
On a revenue front.
It's lower when the when the gas costs are lower.
Looking at our GAAP operating results of 'twenty.
Loss of $21 4 million for the third quarter of 2023.
That compares to a GAAP operating loss of $8 6 million a year ago.
For a $12 $8 million decrease but of course, we're going to debt that has been influenced by <unk>.
$21 million of the decrease that relates to the alternative fuel tax credit retroactive credit of $11 million and then also the Amazon warrant charge, that's up by $10 million. So that's basically more than takes care of all of that decrease so really the other notable item in our GAAP is that our depreciation and amortization.
<unk> was lower in 2023 <unk>.
By approximately $7 $2 million.
Primarily because 2022 included some incremental depreciation on certain station assets.
Our adjusted EBITDA of $14 2 million in the third quarter 2023 compares to adjusted EBITDA of $23 9 million for the third quarter of 2022.
Or a decrease of $9 7 million.
Again, the $11 million of the retroactive alternative fuel tax credit is included in that prior year number. If you were to exclude that the 2022 third quarter adjusted EBITDA would be $12 9 million compared to the $14 2 million.
In 2023.
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 LCR past credit pricing.
And a lower net take on the RIN.
And also some higher operating and equity investment costs in our dairy joint venture itself.
Frankly the.
The fuel volume and that Batesville margin.
Is working well for us.
And it always test.
The adjusted EBITDA of $14 2 million.
Is comprised of $15 5 million from the distribution business and a negative $1 3 million coming from our dairy R&D production business.
On the capital front, we remain on plan with our Capex spending.
And the distribution business and approximately $90 million.
As well as <unk>.
$40 million and our dairy R&D investment.
Business, and noting though on that with the dairy R&D investments there is $84 million in cash at our dairy jv's.
And I think with that operator, we'll turn the call over to questions.
Thank you.
And gentlemen, we will now begin the question and answer session should you have a question. Please press. The star then one any type of timeframe.
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CRC.
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If you are using a speakerphone please lift the handset before pressing any tier one moment. Please for your first question.
And your first question comes from Eric Stine from Craig comment. Please go ahead.
Hi, Bob.
Yeah.
Hey, Ken can we just dig into the.
The RMG for a second so.
Just wondering if you could expand a little bit on the RMG shortages.
I'd assume it's all from third 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.
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 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 <unk>.
Low ci projects that.
Well just add some startup delays and then some carb.
Some carb certification delays and so that took down a pretty good number.
Expected low Ci gas now.
Now.
We also though had some landfill gas.
<unk> more and so there's a bit of an ebb and flow there.
The net of it is is that we were kind of debt. We were net down call. It maybe a couple million gallons. So theres not huge but what we're talking about for year three there.
Netted to two but what it does do is it does it does have an impact on the on the mix right on kind of the economic mix. When 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 so.
And then just as there's more and more of it.
I'll kind of get past some of these win two or 3 million gallons makes a difference, but you know we're not dealing with huge.
Members here, but that did impact say, our net take on the rent.
The Lcs as well as the <unk>.
<unk> on the LCR and then on our production side.
We.
We are 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 costs and those are as Andrew said, they're kind of.
Producing gas now, but we didn't monetize itself.
We put it together.
There was asked.
But an impact that I call it kind of timing.
Okay nothing.
Nothing for us fundamentally don't worry about it a little bit in nature of the Beast, but.
Yes.
Okay, and so then when you talk about in the release.
Just a lower share of RIN values.
So that also refers then too.
You just had values that did not reflect.
Greater mix of low Ci and therefore, you had a.
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's simply as that mix issue.
It is it is it because each supply deal kind of has its own negotiated take and as that starts to move around or its short could be short where our take is higher or not you know in cell.
That's ultimately kind of how it shows up it looks like a lower take but.
It's really kind of.
How much we ultimately earned based on the mix of all the gas and the suppliers that were flowing through our network.
Yep Okay.
Maybe a good segue just in terms of the upstream progress. So it sounds like Youre basically I mean, maybe a little bit late but on track for the six two.
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 its.
In 'twenty four and a pipeline of 15, plus just curious if anything's changed there details would be great.
Yes, Eric.
Eric I'd say, it's generally in the same and Youre right. We still see that will be on track by the end of the year Youll notice I did slip into early 'twenty four with one of them. So.
But but but.
It's going to go almost exactly as we've discussed the dose six will be finished and one may slide and there are a few weeks.
But those will be on production and we will have something out soon on the three of them all right now.
So 2024.
You'll have.
It's essentially the same numbers as we discussed is actually the larger so it's.
You can slice these as we've discussed before a couple of different ways that you will essentially.
One that's in construction as we as we speak there will be continued to be in construction in 2004 Youll have four more that will come on in construction and then right now we have seven.
Seven slash eight that are in the final throes of design engineering.
And a few as 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.
Towards the latter part of the year and then our pipeline continues to be.
Similar.
In the double digits.
[noise] ebb and flow but.
Don't be surprised and somewhere in the year some of those will come on and kind of changed our numbers. So.
I would say Eric as about as many as we can handle right now.
And it's going as we 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. So we're really getting more and more comfortable as we cut our teeth on these early projects.
How the future of how we develop these projects.
Okay. Thank you.
Thank you.
And your next question comes from Rob Brown from Lake Street Capital markets. Please go ahead.
Hi, good afternoon.
Hi, Ross.
Sense of the run rate on the LNG production facilities, when you get those six kind of up and running.
Run rate in terms of gallons and how does that.
I'm sure it does help the shortages but.
Sense of what that does in terms of volume.
Okay well.
Year looking.
Seven to 10 million for maybe the ones that we're talking about that go into production.
Are they go into debt.
Come on line by the end of the year.
And then.
And then others.
That we've talked about that will go into construction.
Produce.
Yes.
They all vary but I mean.
Art.
So we're looking.
I guess in kind of a 10 to 20 million gallon range as we've talked about.
And.
These things will take a little time getting up so I'm.
I think they'll produce more as we move through so you could be on a kind of an exit rate.
You know higher number even as we go through 'twenty four.
Okay, great. Thank you.
And then on the 15 liter at very good to hear the bush kind of commentary there.
How do you see that ramp rate from from these tests rollouts to kind of production rollouts.
The Cummins hub percentage numbers, but how do you see that ramp rate more in the early years.
The ramp on the 15 liter.
Sorry, Robert wasn't where you were working on a hard time hearing you Rob Graham sorry about that are the ramp on the 15 liter. Thank you.
Oh well.
I always want to be careful here, but but.
I've taken is a very good side, there's been recent Cummins presentations, where they've been fairly candid about it is in fact.
So public statements that they thought they could sell as many.
In 2023, 2024 pardon me 3500 units the 25 to be 7000 units and then it would ramp up by 27, 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 nine liter as refuse market. It was.
300 units and then it went to 8% that is 15% went up pretty fast it went to 50% in that market.
Cummins has assured us that the number of events, it's not a problem and then once they get the more of the Oems and they can really hit those larger number so.
I'm feeling good about that ramp I think they are too and.
So I think youll see it move up.
Over those next three years to where you might be pleasantly surprised to be in that 10%.
Range, which would be 25000 units a year, which.
Would be a big move up from where we are today.
Okay. Thank you I'll turn it over.
Okay.
Thank you.
And your next question comes from Derrick Whitfield from Stifel. Please go ahead.
Good afternoon, all and congrats on your announcements today.
Great. Thanks, Scott in your.
Regarding your del Rio announcements, specifically congrats on getting <unk>, Oregon is that's a huge win given the backlog that exists in California could you comment on the CIA assigned by Oregon, or your expectations. There I know theres, some differences between California and Oregon.
Well.
I don't know what that little hard type area and some of the questions, but youre, saying the difference between or on.
C III.
Well I don't know I do know this Derek just reasons ended there.
You forget more for right now and I don't know all of the what's all in is why why the Ci score.
I'm just not sure Derik would have to get back to you on that.
I don't know look maybe it looks like all I do I do know this on the market because I do understand the market side of this thing I mean look Oregon's not states, California right. So so.
The LCM historically was all your data we started injected in there.
It just isn't 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.
And just an extension on that question do you guys see Oregon as a likely pathway for your first few projects.
We will continue for a while look I have great expectations, and I remind our friends in California.
<unk> been kind of fooling around with the low carbon fuel sooner.
Be careful youre not the only state in the United States right, So you've got Washington, Oregon.
Got the legislature in Illinois, looking at New Jersey, and New York's tried to ask a couple of times, the Mexico Youre going to have other low carbon fuel states.
And it'll be a disciplined it'll it'll give a little discipline to <unk>.
Some who want to keep continue to walk around with these things because you have other markets that we will now.
It's going to be clear to everybody that our LNG is one of the best ways to Decarbonize.
Certainly for transportation fleets and some other states are going to adopt it now does this doesn't happen overnight.
But it will so youll see these other states we're working in those other states now.
And we have good support in some of those places so.
Will.
I've tried to get at Derek My comments is what's makes sets us apart a little bit one we're in touch with demand side of the equation and transportation. We're in 42 different states are moving R&D today is 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 some of the best markets and we can do that very quickly. So that's unique to us because we have.
Infrastructure.
Great and if I could just ask one question to kind of build on our previous topic. When you look at R&D volumes more broadly and this is at the EPA level RIN generation peaked in June of this year and is generally decrease over the last few months in your view is this need of product owners increasingly pursuing.
The voluntary market or do you think generators are holding credits to monetize them at a higher price.
Well that's a good question I tend to think its lap but.
You know the way I'm thinking about it right now landfill gas growing a voluntary markets getting $25, an mcf and transportation. The rins are valued more like 36.
So the transportation just much better market.
One of the.
Years ago, one of the energy Secretary said, Washington or Colorado.
Using natural gas to make electricity is like Washington, Your car with Champagne and that's the way I feel about it is in a hard to decarbonize market.
Which is transportation that's where.
Our R&D at ago.
And it will.
And your award and your roll rewarded for it it's a little more complicated.
And that's where the infrastructure comes in.
Great. Thanks for your time.
Thank you and your next question comes from Paul Cheng from Scotiabank. Please go ahead.
Hey, guys.
And it.
Pablo and John and Bob.
I think that's a.
Natus trough.
Yes.
The vision is that I think will be quite the physical person.
Alan G in California.
So just a pathway in order to clean desk, yeah, that's quite a bit.
If this indeed, we will be making.
England that final.
Finally with efficient.
If any incremental cost for you guys.
Yeah.
Any rough estimate that on a per gallon basis that loss, it's the incremental cost.
Glen, Yes, whether that yes, it stays and 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 said, we believe we haven't exactly spot on this but I think we're pretty close to it but we believe that <unk> will likely you'll hear some proposed rules before its board soon.
Soon middle or suggests that it could be middle of November it could be next week.
And there were three Paul there were three big issues to kind of its stake right are or at least that has our attention one was the avoided methane.
Would would there be as it was just buy some get rid of the way we.
We calculate or utilized.
Avoided methane and in R&D right.
And it looks to us like that.
That suggests it's not in heated and that that the ERP as understood low carbon fuel standards working.
They wanted to make it more aggressive and they know they need dairy gas and they know they need our LNG and so.
Avoided methane calculation it looks to me like it will be in place for a long time to come and you know I don't know that it's clear if its 2040 or 2045, but that's a significant issue and that means that R&D will we.
We will be in place for a long time to come and certainly.
For these projects get good returns and so it makes a lot of sense and then they may decide that after 2040 that maybe it shouldn't go into transportation in order to go into other uses like.
Like trains and ships and other hard to Decarbonize.
But we will see that we will see there is a long ways to go before we get to that.
The other is book and claim.
The way that we currently account for it we put it in an island, we take it out in California.
And it looks to us like that is in place to 2035. Most of this believe the best way, that's beginning to shake out and then maybe there will be some refinements. After some steady cargo I think has been very good about this and the listening to how the business really works in that maybe after 2035 years.
Some.
So looking at I mean, you might have to justify that the pipes youre using the move into California that 50% of the time that that flow rate to California.
It's not clear whether or not even after 2035, you might have to pay for.
<unk>.
But you know the way I look at it as compared to the avoided methane the book and claim is kind of a.
Cost of doing business and.
If in the worst case after 2035, you needed to pay for the capacity charge now you're talking about let's call. It a couple of Bucks an mcf.
Right now, we're dealing with with potential value that fuel around $80. A mcf. So to me that is a little bit of a cost of doing business, but its way out.
And I think we're having good negotiations and good understanding with with <unk>.
Now finally as well what is the obligation curves are going to be and we all saw in the stuff that came out in <unk> not so long ago that one of the suggestions was you'd remember there are three options either.
25, 30, and 35% when it looks like they're moving towards the aggressive side of that so as I look at it.
Shareholder and as a as a believer in the R&D business, which to me like they are going toward.
Most aggressive end of the scale. So far it appears that it is in the range of something around 30.
4%.
So that's a big move from 20% in 2030% to 34% and.
And and so.
Now I think the market I'm going to give them more ear that your question I think that the market is likely for lcs to be a bit soft in 2024, because you don't really see the big pick up start on the obligation and on the compliance curve until <unk>.
25, so youre going to it's going to take a little time to work off.
The oversupply of credits that are in the bank right now on the other hand, it's.
It's likely that car that's going to adopt this automatic ratchet mechanism that if theres a big oversupply they can ratchet down.
Sop up some of the supply that is still it looks like it's going to be in this as well. So that's good news.
So.
I think we may have to to grin and bear it a little bit until some of the Oversupplies worked off in 24, I think it'll be a much more constructive.
<unk> said that they believe that the range for the LC that should be between 121 80.
After 2025, so that that we think for a construct so anyway I'll give you a lot more than you asked for but I just thought it would.
Thank you.
So sure. Thank you.
Andrew.
I know.
Typically you guys don't guide.
Guidance for next year.
Anyway. Thank you it's already earned in the wind and the soft guidance.
Adjusted EBITA.
And also the <unk>.
LNG LNG saleswoman.
For next year.
Good try.
Soft guide.
That's a little tricky.
It could be Tucson to it could be.
Too hard so.
Look I mean, Andrew alluded to the al CFS and yeah, I mean that could be potentially something.
Price.
You know if it's going to be challenged by that.
The supply and demand.
But.
Who knows I think.
We have a fair amount of it some time to kind of get some more information.
Really evaluating.
All of that as we speak.
All sites.
It wouldn't be.
Probably a good idea to try to do some soft guidance.
So all of that time.
No on the demand side, I mean, as I look out I'm not going to give you any numbers around that.
Like it's more constructive and that we love the fact that in the biggest market in transportation heavy duty got Dow finally, a product that's coming to market and those are actually those engines are going to be delivered in June that's a good thing.
So we haven't seen the cannibalization.
Of the 12 liter right now so we can see this is incremental volume that will come into the system, which I think is a good thing and of course, we know theres lots of R&D projects comment.
So demand should be up.
And RMG supply should be up and so.
We will be more specific later I'm, sorry, we can't do it today, but we'll be more specific with guidance coming.
In the next quarter.
Sorry.
Thank you.
And your next question comes from Matthew Blair from keeps H. Please go ahead.
Hey, Andrew could you talk about the competitive landscape for dairy LNG, if youre 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 there is just simply.
Not interested in R&D because of the low L PFS prices in.
And if that's the case I mean with a higher <unk> prices.
Spark more.
More sign ups.
A higher no doubt higher LCA less price helps the economics now economics are negative right payouts get stretched and what it does Matthew.
Why we're and I'll talk to your second why were embarking on an optimization program too.
Try to bring the cost of these projects.
Down a little bit because suitable.
It will mean that you can move into smaller dairies right.
Because of because of the way the industry has been developing these theories less.
Modular approach more field directed approach.
Costly so it's made it so that you'd have target 5000 7000.
Look we have a dairy that's we're so excited about that.
Building on and will throughout next year's 35000 head, but theres only a couple of those.
There are many thousands of dairies that earns of 2000.
Ahead range and right now those are tougher the way one because of the cost and a contributing factor would be because of lower Lcs. So yes, as the LC or best price comes up more comes into range now I'd say in general in the competition.
<unk>.
The lowering of the low carbon fuel standard has made some of them we were in a little bit of a land rush.
Gun slinging environment about a year ago year, and a half ago a lot of folks got into the end of the business that many of you really didn't have any business because they saw.
The opportunity and then things got a little tighter supply chain happened in cost went up a little bit and then at that same type of low carbon fuel credit collapsed.
So it took some out so I wanted to say that.
For those of us that need the R&D were a bit unusual we're not building a project on spec and then looking to where we put it we need at all.
So we are unique in the business and for those of us that are isn't like that.
This is a good moment.
And so.
Look there are plenty of dairies, if you know what youre doing I think and.
And we're going to be we're going to work hard in 2004 to see if we can.
Bringing to market modular designs to bring the cost down so that we can then lower the cost of development of these dairies that therefore enter into lower smaller sized dairies, which then you open yourself up to a lot more targets.
Sounds good and then.
It looks like the updated hold on for Scott.
Whole lot, saying that yes, I'm, sorry, I just.
The question that come up on the Ci score what that looked like with the del Rio Colorado, Oregon, and so we went on a temporary pathway and its similar to California, where that.
It takes you to a negative $1 50.
And that's that's where Oregon wise, but of course, the pricing was much better and the process of <unk>.
Securing EBIT temporary pathways fast herself, but that's where it's at.
The actual side.
Del Rio.
Is anticipated to be much higher than that.
Much lower I guess.
Anyway.
Some of that strength.
Okay. Okay.
So it looks like the updated 2023 EBITDA guidance implies that Q4.
Should improve to call it 20% to $25 million. So a nice step up from Q3 at $14 million could.
Could you talk about what is what is driving that improvement quarter over quarter.
It's it's.
It's mainly Matt.
Matt added added fuel volumes have been we've set our ramp is going to.
Continue to go.
We have a little bit on the.
We have a little bit on the RIN although were.
We're also mindful of.
What the take has been but the rent is there and we're being.
Frankly I'm.
<unk> been I won't say conservative, but the LCI fast is really where I took that.
Is really kind of took that down to in the sixties and so it is better but its generally <unk>.
Volume related.
Along with the Red.
Sounds good thank you very much.
Your next question comes from the line of <unk> merchant from maintenance Raymond James Your line is open.
Yeah. Thanks for taking my question.
Start with my usual Washington question.
When are you guys expecting to get the section 45 Z.
Transparency from.
The treasury has that.
23 event or do we have to wait until the new year.
Yeah, well if it is the new year valid I'd be shortly thereafter, I mean, we're hearing that by the end of the year.
We actually heard something finally fulfill that suggest it could be the end of the year, but then we heard a little something else that could be just after selling at all.
So.
Let's put it there.
Okay can we get an update on.
The Western Canadian J D.
Yeah that.
Where we stand with that and it's a joint development agreement, but we have.
We've secured most of the property that we've got kind of five stations in bright ones built in for others being built and we're kind of full speed ahead.
On that effort.
They are just as excited up there about the 15 liter, it's frankly, probably even more needed there, but we.
Yes.
Lockstep with our partner Tourmaline.
On that and.
It's a good environment have tariff with with what we're doing so where we are finding that.
Some of the permitting and just.
Ease of use.
These things go and has been.
Favorable.
So those will come on and year into good economics.
Nymex very expensive diesel in Canada, and so the economics are really.
Really good yeah, 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.
But they'll come on and the like.
With a lot of this is just to see that in a sense that this is happening and that's really what we'd look to us like the volume will come.
The trucks are being ordered and board then.
Just a matter of time that their asset.
They are filling up at the stations.
The other one on a market thing for belts.
Last week.
There was a meeting at 27 different fleets in a room.
With.
The largest dealer in the in the region.
In Cummins.
Reviewing the 15 liter so.
There's a lot of interest in.
So we have we have great work to be done there.
But there is.
Sure.
Got a nice nice advantage in quartz tourmaline.
Excellent partner.
Thank you.
Last question from my end.
About comments and thoughts.
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 comments, but have you heard anything deep lines regarding the <unk>.
<unk> are specifically.
Have not they've been here they've been pretty public here recently, where they've been kind of kind of omans uncharacteristic.
Talking about when they can be ordered when they will start to be delivered ramp.
They have been mentioning that but I don't know maybe thats factored into though we have certain of our customers that like for instance, our refuse customers are behind on getting natural gas.
Engines, and it's kind of funny natural gas trash trucks, and it's interesting. It's often it's not the natural gas tanks for our stainless steel tubing or the engines it's door handles.
And seats.
Supply chain issues.
Bottlenecks some of that so there is still some of that working through but we haven't heard any I haven't heard that.
These recent meetings and presentations by comes.
Alright, thanks, very much guys.
Thank you and your next question comes from Matt.
From UBS. Please go ahead.
Thanks for squeezing me in I, almost thought I won't get into.
As far as Fortifies. These concerned can you help us understand how you benefit from it.
<unk> Z as a different current fall there are negative R&D kind of gives you.
High dollar amount closely the landfill, adding he if you can talk to that.
Sure Bob go ahead Bob.
If the the scales that.
That we look at in considering the low Ci when you get into the negative 250, which.
Many of these farms are at that or lower.
And then.
Youre looking at potentially.
Five to $7, maybe even eight we've seen per gallon of.
45, Z PTC credit.
That would be on top of the economics that are already there prior to that with we just the actual sharing in the credits.
<unk>.
That I mean, so that will be significant that's 2025, that's why.
Clarity from the IRS coming.
Couldnt come really.
Any sooner.
I mean, Bob you might just speak to a dose.
The law says it's on high with suitable for on highway and then it's.
Base levels of dollar and bid depending on the go ahead, yeah exactly so the lower.
For on highway transportation.
The bidding on the Ci score or you could be at $5 $6 a gallon.
Credit offer the BTC and.
That will relate to.
Our production.
Dairy investments that we have going on in the gallons that we project to produce there and runs.
Three years 'twenty five 'twenty six 'twenty seven.
It will be I think when we get that clarity.
People can kind of start to do a little better math on this thing because.
It will be significant.
Second question here is.
Did get updated staff proposal from column B.
But.
We are still building a lot of critics.
And.
When do you actually expect some improvement in <unk> prices because the way things are.
Not looking very good even for 2020 full unless CFS price start to move up so playing to understand.
When can we start seeing some improvement in <unk> prices.
No.
Manav you might have missed that 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.
No look theres a lot of ifs here, but the new rules will have.
A.
Automatic right not all of it.
<unk> will have a ratchet ratchet mechanism to increase the compliance curve now.
Those are ability to effect right away so I think.
But they could go into effect fairly quickly.
But I think that we might prepare ourselves for a little bit.
Tough sledding in 24 of those that should yield much better balance in 'twenty five but wouldn't surprise me if we bang around the lower end of the range.
Yeah.
In 2004 and on the other hand.
Yeah, you might start getting some folks would be buying these credits and put more pressure on I don't think thats happened yet either and that can happen is it's not that liquid of mark.
Thank you.
Thank you Annie.
Our next question comes from.
Ivy.
Northland Capital. Please go ahead.
Yeah, Hi, Thanks for squeezing me in most of my question's been answered just wanted to get other modeling part so.
If the pricing and the RIN pricing what did you factor in and the earlier guidance and what's the what do you do realize versus what are you baking in now for the new guidance.
Yes.
We were well we were looking at around $3 on the on the.
Ren.
And then.
At that time. The Lcs was was really had come up was kind of in the low eighties with an expectation of.
Possibly even some more.
Bullishness on that.
With.
With some of the news maybe coming out of carb with maybe a better.
Strength in compliance curve and that sort of thing.
And there wasn't a little bit of that but then it.
Then the market kind of quickly.
From that so it came off in the eighties and so I was in that range.
And I just mentioned here I'm kind of.
We've we've moved.
Most of the rent up a bit.
Right.
Really.
Closer to three.
Three in a quarter or something that would be the.
<unk> I think I've.
So I don't know how low to go on it but it's.
Like each day I put it out there it comes up maybe a little lower it's in the.
60.
867 somewhere in there as well.
Factored into all of that guidance.
Sure. Thank you and then the last one I have is.
Particularly for our Capex part when you go into <unk>.
For 2023 were.
And on par to do.
About $90 million in the kind of the base distribution business and.
And we could spend up to 40 million of additional investment into the dairy.
Gary LNG production side.
Alright, perfect. Thank you very much.
Thank you.
And your last question comes from Jason.
Scanlon Maxim TD Cowen. Please go ahead.
Yeah, 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 five year plan you have a ramp up in your own distribution volumes.
And I'm wondering how much market share.
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 low market share of those Cummins engines.
Yes, I think Jay Jason It's a good question interesting I mean, I think what you're asking is that when we laid out our.
R&D day, a couple of years almost a couple of years ago, and we said well, we need 545 million gallons boy that didn't have.
That didn't have this kind of robust.
That didn't have sort of that 10% 375 million gallon bogey of it at all I mean, I think we never got above 3000 incremental heavy duty engine. So 3500, maybe so.
You know we just at the time were trying to be conservative.
And so you would need you would need and so I don't have I don't have.
Percentage.
The market, but.
If it goes the way we think by the time you get out there to what we had what we thought we need 545, you need another couple of hundred million gallons or more.
Yes, so I think on the.
Easy.
Because by the time, you get 27 U.
You're creating almost all the gallons that we're doing right now every year.
And then the industry can provide that.
We will all have to go all out to get easier, but we as a country.
Can you get there.
And I think that if you look at all if you look at the resource base.
For a landfill for wastewater for food waste I mean, you can easily be $10 billion a gallon.
Dairy.
10 billion gallon Mark.
Okay.
Now lots of money you will be still be a good thing for a lot of people a lot of money will be spent to get there.
But over a 10 year period, you can you can get there.
Got it.
Yeah.
My follow up is.
Maybe a bit more philosophical just about how you think.
About forecasting the business.
122 your final EBITDA came in below forecast. Your initial 23 was below what you provided at the R&D 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 forecast moving forward.
How do you think about it relative tough.
Hello.
Lots of comment relative to the prior forecast 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 kind of forecast misses the past few years.
Any I guess thoughts about how you think about forecasting the business moving forward would be great. Thanks.
No. It's a good question and obviously we are trying.
Trying to.
Create a new market. So it's a little bit different right. This is a mature or is a lot of moving pieces to it but that notwithstanding it's our job to try to do as best job, we can do to.
To forecast I mean, this year had you not had that first quarter you would've been an on target. That's what I was trying to get at with this.
You would have been right in right in non guidance alright and.
We did revise our guidance last quarters with just enough information reward sure about where that low carbon fuel.
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 reversed.
We've revised down now, albeit.
$334 million.
We're trying to lay out though for you is to show the potential size right of the market.
And so it's kind of a balancing act.
Between.
Is the future of this business us discussing 47 versus <unk> 50 in EBITDA or two years, hence when you have the PTC worth $250 million.
Alright, alright.
I think you're in that Youre in that peer.
You are right there has been.
It wasn't until recently a lot of great clarity on the we're all going to have an ear and.
Well that changed were not even or EBIT right.
Going to have a June adoption of a rule at low carbon in California, <unk> November waiting around for it.
And so there's been some things that have interceded, there and havent give as much clarity as I wish that we would have had and we had all of that.
When I look at our budget planning and.
Within 97% of budget on volume.
So that 98%.
No I don't control low carbon fuel standard price.
And it will get better at it.
We're trying our best to try to get this right and it doesn't help us to miss targets. So today.
We have revised down a little bit.
Thank you could fall pancake at this point I think were about down to where we were robust skip it yet and I think it's upside from here. So.
The question and I.
I don't think we're being overly rosy.
We're dealing with some kind of moving pieces will come in and get those things all produced start selling them in June.
No.
They said they would.
But I hope they will.
But when I look at the Big picture and I look at what's happening with electric vehicles I mean, Google has come in the electric vehicle trucks that are supposed to be the future a future of heavy duty transportation none of those 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 has continued to develop on the R&D side and control our own destiny.
And continue to work with our partners on the third party supply and work our customer base on the adoption because when you compare the heavy duty truck operating in R&D versus the other alternatives are out there we'll leagues ahead.
A more efficient and more cost effective and so that's what gives me optimism going forward.
Great I appreciate the detailed response.
Okay.
Thank you.
There are no further questions at this time.
And then you May proceed.
Oh. Thank you operator, thank you everyone for listening in today, and we look forward to updating you on our next quarter. Thank you.
Ladies and gentlemen concludes your conference call for today, we thank you.
Thank you very much for participating please disconnect your line have a great evening.