Clean Energy Fuels Corp. Q1 FY2023 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to the Clean Energy Fuels First Quarter 2023 Earnings Conference Call. This call is being recorded on Tuesday, May 9, 2023. I would now like to turn the conference over to Robert Vreeland, Chief Financial Officer of Clean Energy Fuels. Please go ahead.

Operator. Earlier this afternoon, Clean Energy released financial results for the first quarter ending March 31, 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. Words of expression reflecting optimism, satisfaction with current prospects as well as words such as believe, intend, expect, plan, should, anticipate and similar variations identify forward-looking statements, but their absence does not mean that the statement is not forward-looking. 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 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 excludes 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 that management uses non-GAAP information, a 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 Littlefair.

Thank you, Bob. Good afternoon, everyone, and thank you for joining us. Well, for the first quarter, the good news is that our underlying growth and fundamentals were strong. The bad news is our first quarter results were impacted by an anomaly and hopefully a one-time occurrence, which was a historic spike in natural gas prices in California, resulting in a $10 million compression in our profits. A confluence of events, including unusually cold weather in California, a lack of natural gas storage capacity by the gas utilities and the El Paso pipeline that supplies 20% of the natural gas to California being out of commission, all contributed to cause the price of natural gas to spike as high as $50 an MMBtu here in California in January. The move from $7 an MMBtu in November to January was a 600% increase, translating into an increase in our costs at the pump from approximately $1 a diesel equivalent to $7.50. We did everything we could to mitigate this unprecedented chain of events that impacted the cost of our commodity. But California continues to be our biggest market by far, with the largest agencies in the state, dozens of refuse, truck fleets, airport vehicles and a growing number of heavy-duty trucks, all fueling at our network of 150 stations across the state. We passed along some of the increase in fuel cost to these customers, but we felt we could only do so much. The good news is that they understood in large part, because every household and business in California was also seeing their gas bills at least tripled, if not quadrupled during January. The other important point of this historic increase is that the price began to moderate in February, although there were still some balancing effects that we were feeling. The El Paso pipeline is back online and gas utilities have filed plans for additional storage. As of March, the price of natural gas at the SoCal Citygate was back closer to $7 in MMBtu. Something else that has been impacting our bottom line and that we discussed in the last quarter's call is the price of the environmental credits. I know these are followed closely by many on this call. As you know, there has been a nice turnaround in the California low carbon fuel credit price recently, about a 35% increase. But for the majority of Q1, prices were on the low end and had an impact on our adjusted EBITDA when compared to a year ago. By March, credit prices were in line with our plan, if not exceeding. In the first quarter, we sold over 53 million gallons of renewable natural gas, which was 34% more than we sold in the same quarter of last year. We won several large transit contracts, converted existing customers from traditional CNG to more profitable RNG and opened additional RNG stations where Amazon heavy-duty trucks are the anchor customer. Our revenue for the quarter was $132 million, $48 million more than Q1 2022, but this was heavily impacted on the plus side by the commodity price in California that I just spoke about. By the time we got to March, we saw our overall business begin to right itself and track the plan that we had at the beginning of the year. Our balance sheet remains in very good shape with $220 million in cash and investments, addition to $132 million cash off balance sheet at our RNG supply joint ventures. As I spoke about last quarter, our first RNG supply project, Del Rio Dairy in Texas is now online. We now have three dairies in commissioning and two others in final construction. By summertime, we should have six projects producing RNG. Many of you have read about the tragic fire in South Fork Dairy in Texas, where we had plans to build an RNG digester. While we have funded some design, engineering and early equipment purchases for that project, we had not started on-site construction. We are now working with the dairy owner as he plans to rebuild the barn and repopulate the herd. We will keep you updated on his progress. We've added expertise in construction, project management and origination to our RNG team that are keeping our projects moving along at a good pace. Not only Clean Energy and our customers remain bullish on this ultra-clean renewable natural gas, but Washington also knows the benefits of RNG as well. I hope you saw the announcement that a bill was introduced last month in the U.S. House of Representatives providing a $1 per gallon tax credit for vehicles that use RNG. It's interesting to note that the bipartisan bill is being co-sponsored by a Republican member from a rural district, Brian Fitzpatrick, and a Democrat from our urban Southern California District, Linda Sanchez. Members understand both the environmental benefits of RNG, which reduces air pollution and carbon emissions, and that the investment of tens of millions of dollars per new RNG digester benefits their agricultural communities. We believe a companion bill will soon be introduced in the Senate by another bipartisan coalition. Seventy percent of all on-road fuel used in natural gas vehicles in 2022 in the U.S. was RNG, which is a great testament to its acceptance and the ease of transitioning it to existing fueling infrastructure and fleets. I think a tax credit will be a big boost to the adoption of RNG if it passes. We are also very excited about the rollout of the new Cummins 15-liter natural gas engine. It seems like a week doesn't go by that we don't hear from some of the country's largest fleets like Walmart, Werner and NICE taking delivery of these pre-production 15-liter engines. I've spoken multiple times on these calls about the importance of this 15-liter engine to the heavy-duty truck market because it delivers the power, torque, and economics the industry needs. It is incredibly gratifying to see the early response. A few weeks ago, I was with the CEO of the largest trucking company in Canada and a customer of ours, and he is anxiously waiting the delivery of two test 15-liter engines in a few months. I've gone on a little long, and my goal is to keep my remarks shorter, giving us more time to get to your questions. But I do want to end by highlighting why I was in Canada, which was for a significant announcement with the largest natural gas company in Canada and one of the most successful energy companies in North America, Tourmaline. Mike Rose, Tourmaline's Founder and CEO, and I announced that the two companies are partnering to build a network of natural gas stations across Western Canada primarily targeting the heavy-duty truck market. We've identified locations for the first four stations with one already operating in Edmonton and have plans to eventually add 15 or so stations that will be co-owned by the two companies. Clean Energy will build and operate the stations. We are very bullish about this new partnership with Tourmaline as well as our overall business. As I detailed at the top of my remarks, we experienced some headwinds at the beginning of the year, but the momentum has already shifted back. RNG continues to be a breakthrough fueling solution, allowing fleets to decarbonize quickly and affordably. No other company is better positioned for the RNG future with our expanding low-carbon supply and our growing fueling infrastructure. Thank you for your time today. And now I'll hand the call over to Bob.

Thank you, Andrew and good afternoon to everyone. Let me start with giving a little more color around the $10 million drag on earnings in the first quarter from the high California natural gas prices. The quick math on that is that we have about 2 million gallons per month with exposure to natural gas price movement in the California market. We saw an incremental price increase of around $6.50 a gallon, which is an increase in our cost. We were able to increase our retail prices by $2 a gallon, taking our price at the pump to $7.99 a gallon compared to diesel at the time which was $5.99. So that left us with about $4.50 a gallon that we absorbed, plus we experienced some elevated gas utilities at our California LNG plant for about another $1 million impact. It was disappointing when we really were having a nice quarter, but that is passed, and frankly, without that anomaly, the quarter was really more in line with what we were expecting. Recent trends in natural gas prices relative to oil remain healthy, meaning we have strong economics at our retail pricing. LCFS credit pricing has increased into the mid-80s from the low 60s, which is where it was at during our last call. Even more recently, there's been a nice rise in RIN pricing. So the current economic landscape is good for us, and we think that we can recover much of the $10 million anomaly by the end of this year. Moving on and looking at volumes. We saw increases in volume across all of our core sectors, with the largest gains coming from transit and trucking compared to a year ago. The transit sector has seen more recovery this year, and we've also had some nice customer gains. Our volumes with Amazon continued to increase, which is helping to drive the growth in the trucking sector. Both of these sectors, the transit and trucking, contributed to the growth in fuel gallons, which were up 18% year-over-year. Transit also contributed to service gallon growth, which was 7% compared to the first quarter of 2022. We reported a GAAP operating loss of $35.4 million for the first quarter of 2023 on revenues of $132 million, compared to a GAAP operating loss of $20 million on $83 million in revenue from the first quarter a year ago. On the downside for the first quarter results of 2023 compared to the same period in 2022, we have the $10 million drag from the California gas spike in 2023. Our increased volume with Amazon resulted in incremental Amazon warrant charges of $10 million in 2023. Our RIN and LCFS revenues combined were down $4.5 million from a year ago due to the lower credit prices. On the upside in 2023, we have $4.3 million of incremental alternative fuel tax credit revenue compared to a year ago, as the alternative fuel tax credit was not in effect in the first quarter of 2022. Our adjusted EBITDA was negative $4 million for the first quarter of 2023, which includes the $10 million negative impact from the California gas prices. We've also disclosed the EBITDA components of our RNG supply joint ventures, since we are operating one project, and we will be operating more this year. Our adjusted EBITDA of the negative $4 million breaks down as a negative $2.9 million coming from the distribution business and negative $1.1 million coming from our RNG supply business. You can calculate these figures utilized in the press release and our 10-Q, but we intend to update our company presentation on this adjusted EBITDA to show you the two different contributors to the adjusted EBITDA. With that, operator, please open the call to questions.

Your first question comes from Eric Stine with Craig Hallum.

So thanks for the details on the RNG pipeline. Maybe if you could go beyond that a little bit. I know in the past, you've talked about kind of the next level, which is the number of plants that you've got in engineering phase. And I'd also love to hear just kind of the size of the pipeline as it stands now maybe versus 6 months ago, 12 months ago?

We approach these matters in various ways. Ultimately, we currently have nine projects under construction, including South Fork, which I can provide more information about shortly. Additionally, we have four projects in the engineering phase. At this stage, these projects are quite advanced, with expenses incurred and approximately 30% of the drawings completed. They are well underway, and we have memorandums of understanding in place. Furthermore, there are two projects in the early stages of development, soon to enter the engineering phase. These are the projects that we consider active and progressing. The pipeline tends to fluctuate, with around 18 to 20 projects actively in consideration, where we are collaborating with farmers and exchanging documents. Just to clarify, that figure could be higher, as our team is engaging with more opportunities. However, that's the count I requested this morning, focusing on those we have a clear vision for. There are additional prospects, but we will know in the coming months which ones will transition into serious pursuits. The pipeline remains strong, and our team has done an excellent job not only with development but also on the RNG supply side, which is also very active for us.

Got it. And just curious, I guess, first of all, I mean I think in the past, you talked about an ultimate goal. I mean, obviously, you could expand beyond this with BP and Total at some point, but I think targeting like 105 million gallons. Is that still a number we should think about?

Yes, I'm glad you brought that up because we've been discussing it. We acknowledged in the last call that some of these projects are taking longer, resulting in a slight delay. However, the main goal remains the same as we outlined just over a year ago, which is to achieve 105 million gallons in our own equity account with our partners on the supply side. We are still on track for that. We have always been clear that some of this will involve developing greenfield projects and potentially M&A. We're still committed to that target, and I'd actually like to see that number increase. Our partners are still collaborating with us on this. Additionally, we need to incorporate more third-party, low CI gas and landfill gas into the equation as we work towards our 2026 development goal. We are quite active in that regard, and we haven't altered the size of our objectives or the investment we need to make alongside our partners.

Okay. And then, I have one last question. Last quarter, regarding the Amazon stations, it seemed like the delays were not due to your actions but rather permitting issues and similar factors. I wonder how that situation is progressing. Has there been any improvement? When do you expect to return to what you consider a more normal rollout?

We have been working diligently, with our large team focused on site acquisition, entitlement permitting, and construction. We have collaborated closely with our partners at Amazon and their construction team to streamline the process. I'm pleased to report that we currently have seven stations under construction, which are expected to be completed in the next five months, and I recently discussed this with Amazon. Most of the original stations we agreed to with Amazon will be finished by the end of the year. Although there is more work to be done, we have made some progress. Additionally, a recent break in the weather has allowed us to make significant advancements in a few stations in California over the past six weeks, which is also true for other regions. I feel optimistic about our progress. We have monitoring systems in place at all sites and hold a weekly meeting with a large team every Friday morning to advance these projects. I'm increasingly confident about the situation. Opening one of these stations is quite impactful; we often have trucks arriving just days after opening, even before final inspections and occupancy permits are issued. It's an impressive process, and we are very excited about the developments.

Your next question comes from Rob Brown with Lake Street Capital Markets.

Just following on with Amazon, how many stations are now open? And do you have a sense of how the truckload you're feeling at the moment?

I want to provide a brief warning, but I have some important information to share. About 18 months ago, when we started working with Amazon, we opened our nationwide network of stations to accommodate this partnership. Recently, during a meeting with executives, I learned that we are now fueling heavy-duty Amazon trucks and medium-duty trucks at 101 of our different stations on a daily basis. It appears that the number of trucks fueling daily is approaching 1,500. As we bring more stations online, I expect that this number will increase. According to information disclosed by Amazon, they have reported having around 2,000 to 2,500 trucks, and our numbers should continue to rise as we add more stations.

Okay. And then on the 15-liter rollout that they're testing right now, how does that ramp roll out? How do you sort of see that flowing into the fleet over the next 2 or 3 years?

It was really pleasing to see that Cummins has made significant strides recently. Over the past six weeks, there have been numerous announcements regarding various aspects of the business. Last week at the ACT Expo, Cummins had a substantial presence, with reports indicating that around 20 employees were in attendance. While there were other fuel types represented, nearly half of the exhibition focused on natural gas, generating considerable customer interest. Notably, the only vehicle that participated in the ride and drive event under its own power was the Cummins natural gas product, which was being operated by Walmart. From what I understand, there are approximately 40 of the nation's largest fleets awaiting delivery of these vehicles, which involve installing new engines into existing diesel trucks. Some of these fleets were mentioned in my earlier remarks, and while I haven't seen official feedback from Cummins, early reports suggest that the driver from Walmart had a very positive experience at the Expo. I'm hopeful that the customer experience will be favorable, given the performance in torque and horsepower. Additionally, I believe Cummins announced further details on their upfitting program with a new design for the back-of-cab. This is exciting as it showcases Cummins' ability to integrate their upfitting capabilities with the fuel system as a factory product. They've made improvements, offering options for a 170-gallon tank and a 130-gallon tank that look very appealing.

It's much lighter, 400 pounds lighter.

Yes, that tank package is 400 pounds lighter. So it seems like things are going well, and I'm hoping I can stay focused. The order book will open at some point later this year, and I'm optimistic that we will start seeing those orders placed for that engine.

Your next question comes from Manav Gupta with UBS.

I actually quickly wanted to touch a little bit on the third-party volumes. Some of your upstream projects are delayed. Some of your competitors' upstream projects are also slightly delayed. But in your guidance, you had indicated that you're still seeing very strong contractual volumes from third parties for both landfill and dairy RNG. Can you talk a little bit about your third-party volume contracts, as they relate to RNG and the volumes you actually distribute through your outlets?

Sure. The third party is a very important part of our story and will continue to be. We have 63 different RNG suppliers, working with almost everyone in the landfill and dairy sectors. Our dairy supply is significantly increasing this year. We're expecting to rise from about 20 million gallons of dairy RNG in California last year to closer to 60 million for 2023, which is a substantial increase. We're anticipating a 20% increase in third-party supply for 2023, currently on track with our budget. By the end of the year, we expect to reach about 234 million gallons, and everything is progressing well.

Yes, Andrew, I agree. I think it fluctuates as we have always observed, but the delays in projects are not affecting us. All of our third-party suppliers are operating well. Any issues we encounter might stem from operational factors, such as variations in yield, but since we work with multiple suppliers, we expect everything to go smoothly. We are on track to receive 234 million gallons from third parties this year.

Yes, I believe we are on track. It's a good question about whether we are experiencing a slowdown. I think we will be able to meet our demand, primarily due to our third-party supply.

Congratulations on that. I have a quick follow-up before I pass it along. You mentioned in your opening comments that you are seeing some improvement in LCFS prices. There were discussions about making changes to support higher carbon prices. You interact with them more frequently than we do, so could you help us understand better what’s happening with CARB and if they are genuinely considering changes that will support higher carbon prices in the future? I’ll pass it along after that.

We are in frequent contact with various groups regarding adjustments to the Low Carbon Fuel Standard program. There will be another community workshop at the end of this month or the beginning of June, and while details are still being finalized, we expect a proposed rule on adjustments to be released around mid-June. The Board is likely to review this around late July or August, and we anticipate a lot of feedback during this process. I don’t believe the ARB is aiming to raise prices, but rather to modify the program to increase the compliance requirements for obligated parties to incorporate more low-carbon fuels, which currently sit at about 20%. There are several constructive options in front of the ARB, including increasing biomethane usage to 30% or even 35%. Many industry stakeholders have voiced their support for moving towards a 35% compliance level, and there's a willingness among the private sector to invest in this transition. There are some challenges regarding supply and market entry for renewable natural gas, and we are making our opinions known on these issues. If the ARB decides on a 35% compliance level, it will require substantial amounts of RNG from across the United States. This decision could positively influence prices. It seems the market is starting to recognize an increase in obligation, which is reflected in the recent price movements from 62 to 85. Prices may continue to rise, even with the changes taking effect in a year.

Your next question comes from Dushyant Ailani with Jefferies.

My first one is on the Tourmaline contract. Could you kind of share some more color around the economics of the cadence of RNG stations coming online over the next couple of years? Yes, just maybe some more color on that.

We currently have visibility on four stations, with one already in operation. We expect to complete the construction of the remaining three this year, possibly extending into the first quarter of 2024. Additionally, we've identified around ten more locations in that market that we plan to develop. Our approach involves a construction period that is relatively short. We are particularly excited about our partnership with Tourmaline, who is eager to deploy natural gas heavy-duty trucks in Canada. From our observations, there is a strong demand for that type of vehicle, especially the 15-liter models. The timing is favorable; if we had all the stations ready right now, we might struggle to supply vehicles. Therefore, we need to expedite the construction of these stations. Tourmaline has extensive operations and can utilize their insights from various geographic areas where numerous trucks pass by each day. We anticipate completing about four stations this year and continuing to progress from there.

In Canada, there is a significant supply of natural gas and relatively high diesel costs, creating favorable economics. This resource stands alone in its viability. Over time, it is expected that renewable natural gas (RNG) will be incorporated, and there is a federal RNG low-carbon fuel initiative in Canada that will gradually be implemented. Although it's already in effect in Washington D.C., it will lead to RNG blending later, starting with compressed natural gas, which is more economical compared to diesel.

Understood. And then just a quick follow-up on that. In terms of permitting, how is that coming along? Are there any issues around that? Or is it relatively easier to get it versus what you've seen with Amazon?

Yes. I wouldn't say easy, but on the first four, we're pretty well into those. You always have it, but I believe that these areas are kind of heavy industrial. I don't know that the permitting is going to be as prevalent as it is when we want to put something into San Bernardino.

Understood. And my final question, and then I'll turn it over. Just on Del Rio in terms of pathway approvals. How is that coming along? Any kind of thoughts on the other facilities that are going to come on this summer? I think you talked about six flowing by summer. If you could share some color on the pathways approval for these.

Pathways take longer. You will begin to operate these systems, come to production, and then you will store some of the output. The pathways can take a significant amount of time. The industry is aware that, in my opinion, the pathways currently take too long. They can range from 12 months to longer. While you don't have to wait for the complete pathway, you cannot operate at full capacity, and you need to store some gas. That pathway is in progress, but it requires time.

Yes, because you have to run the dairy. You have to get a number of months of operation data that they collect and then establish the CI score. So all that is in the works, if you will. But that will take some time.

Your next question comes from Matthew Blair with TPH.

Andrew and Bob, could you talk about how the economics for dairy RNG will change in 2025 when the benefits of the IRA flow through? Should we expect that you would receive a PTC of approximately $80 per MMBtu in addition to the existing support from D2 RINs and LCFS programs?

Well, we'll get PTC at whatever, we hope it's $80, but it would be an addition, Matt. I mean, to your point, it's kind of on top of the economics that we've already built in to justify the investment, it's additive for sure. The big question is on how much. But we continue to hear that it could be substantial.

It's graded on the carbon intensity of the fuel and that rule has to be promulgated by the Treasury Secretary. That hasn't happened yet. So we don't want to count our chickens before they hatch, but we think it could be substantial.

Yes. It's relevant in the marketplace. It's in the narrative for sure.

Sounds good. Could you talk about what gives you confidence to keep the full year guide of $50 million to $60 million EBITDA? Are there any parts that are coming in better than expected that would offset the $10 million loss from high California natural gas prices in Q1?

Yes, some of this needs to remain. When we outlined our plan and discussed our guidance, we indicated we were projecting low LCFS in the low 60s. Currently, we are at $85 million, and if we receive more positive updates, this could increase further. The LCFS is showing favorable trends, as is the RIN. Overall, the commodity economics at our stations, before credits, reflect a spread of over 30 between WTI crude and NYMEX. We are seeing prices around the 70s and $2.26. This indicates our competitive position is strong. We offer a low-cost delivered product compared to relatively high-priced diesel competitors. We are optimistic about the future, especially with approximately nine months remaining in the year. Therefore, we believe we can adjust our forecast and maintain the $10 million target if necessary.

Sounds good. I think you have stations in Seattle and Tacoma in Washington State unveiled their LCFS program. Could you talk about how that's going and whether you're starting to receive any sort of LCFS contribution from Washington so far?

We do. We participate in the program in Oregon and Washington. I don't believe we collect anything yet in British Columbia, but I can't give you any more specifics than that.

It's not material yet.

It's not material yet, but we'll try to get back to you on that, but I just don't know. It's not a lot. We have a few stations up there.

It will grow. It will be meaningful. It doesn't really register on the radar at the moment. But we see volume up there. We'll get it. Oregon a little less, but they have great prices. It's more about the truck traffic and that sort of.

Trying to get that number, Matt. I'll try to get a number.

Your next question comes from Paul Cheng with Scotiabank.

Andrew and Bob, just two questions. One, in Amazon, can you talk about the path to profitability on that joint venture? I don't think they are profitable yet? What is the economy of scale that you need in order for you to really be profitable on there? And also that if we're looking at, there's a multiple avenue. I suppose that you can get to total corporation profitable over the next, say, by 2025, if the plan goes through, what is the most critical path for the most important driver in your opinion for you to get to profitability?

Okay. Paul, regarding your question about Amazon's profitability, we have not discussed the economics of Amazon yet. I'm interested to know what information you have that indicates whether or not Amazon will be profitable. One thing we do see in our numbers is the Amazon warrant charge, which does not impact the cash collected at the station in terms of the price per gallon and what is involved in that.

Yes. No, maybe let me rephrase it. If I exclude the warrant charges, if your joint venture with Amazon today. You don't have to tell me the exact number, but can you share whether they are profitable?

Well, I'll say this. We are investing in building stations. We have a model that would suggest that we need a fair return on investments. It's fair. Look, all that's kind of negotiated, but understood that the commitment that we have with Amazon is good for both parties. We should be able to make money, and they should be able to get one of the best fuels at the lowest cost around with the RNG and all of that. The more they spend is based on volume, so that benefits us. That whole program is good. And I'll say that it's beneficial.

I would add, I mean, Paul, it's not speculation, right? We're not spec'ing stations, hoping that an Amazon truck is going to show up. We are working hand in glove with Amazon, and we have a relationship to volume commitments for developing these stations, and that's beneficial for both companies.

In response to your question about overall corporate profitability and achieving positive net income, the key factors are the volume and adoption of heavy-duty natural gas vehicle fleets. This is what drives our efforts. All our RNG supply projects are linked to this, and we are optimistic about it because it represents a significant advancement in renewable energy for our transportation fleet. Additionally, we have already built out our capacity to handle much more volume, allowing us to take on increased demands without substantial capital expenditures. The Class 8 heavy-duty market, with over 40 billion gallons per year mainly using the 15-liter engine, remains a largely untapped opportunity.

So, Bob or Andrew, do you think that, that path to profitability, the critical mass is like 80 million or 100 million-gallon sales? Or that what is that number in your opinion when you're looking at your internal model?

That's a great question. There's a lot to consider. As we discussed regarding our Amazon warrant charge, it's not a significant boost. You can do the calculations; adding 100 million more gallons at a margin of $0.45 or $0.50 per gallon without increasing much in operational expenses would contribute around $50 million, which would put us in a positive position.

Your next question comes from Craig Shere with Tuohy Brothers.

Wanted to just dig a little bit into the EBITDA ramp. First, for this year in terms of making up for the $10 million drag in mostly January, it sounds like pricing power and low gas prices that all things are many equal from here forward with LCFS and RINs, who knows that, that's just kind of a static situation where you have an opportunity. So if everything remains the same, as it is today, should we assume that making up that $10 million would be kind of ratably equal over the next three quarters, if it happened, versus rising over time? How do you see that progression?

Yes, it will increase. Our progress is expected to be similar to last year, which also saw an increase. This rise is driven by volume, not because we anticipate changes in LCFS. We are not planning for that to occur.

The volume is increasing, specifically the Amazon station volume and other stations that are coming online. I understand that some of you may be frustrated and desire a bit more clarity on a quarter-over-quarter basis. However, for those of you who have been following us, there has typically been a gradual increase that starts low in the first quarter and then picks up as we deploy trash trucks and complete the stations. This pattern has always been the case and will be again this year.

I understand your concern. I apologize if my question wasn't clear. The increase in volumes was always intended. However, the situation in January and the significant difference between gas and diesel pricing right now were not anticipated. So, if the potential growth for the rest of the year offsets January's issues, my question is this: Assuming the future remains uncertain, is there any specific reason to believe that the growth in the fourth quarter will be stronger than in the second quarter? Would you agree with that?

I think we have already addressed this, but it seems you disagree with the answer. While the volume would make it stronger, you can still reach it on a relative basis. You will notice the ramp, and although we didn't experience much benefit, we only saw some in March and Q1, certainly not at the current prices. All I can say is that you have the same ramp, but with better economics than we initially planned.

Fair enough. Let me pivot to the upstream. You announced kind of a breakout, which was nice of the two business lines in terms of the adjusted EBITDA. Assume the RNG supply is merely an issue of fixed overhead on a burgeoning business that obviously is moving towards breakeven and positive EBITDA. But you've got these delays that you alluded to on the pathway issues, could we reasonably expect your upstream business to be breakeven to positive by the first half of '24?

There are ways to achieve breakeven, which involve producing the gas and understanding the economics of that gas.

Operator, if I can just, Matthew Blair may be gone, but the answer was in Washington in Q1, we did a couple of million gallons, and 50% of it was RNG.

Your next question comes from Chris Sung with Webber Research.

Andrew and Bob, I just wanted to dig in on the previous question. EBITDA perhaps asking in a slightly different way. How did Q1 and Q2 so far compare to your internal expectations for last quarter? Like with negative margins, right, with the historic ramp in natural gas prices, like higher volumes kind of hurt your full year EBITDA guidance. So I was just wondering, was most of the $10 million hit. Was it just on pricing or a mix of higher-than-expected volume for the quarter? How does that fit into the rest of your full year guidance considering that you as you're keeping it unchanged?

Yes. The $10 million was primarily due to gas costs. Removing that from the equation, our quarter aligned with our expectations. Overall, aside from the California gas situation, we hit our targets. However, we did face a $10 million deficit. Regarding the current environment, if nothing had changed, it would have been difficult to recover that $10 million loss. Fortunately, the outlook has improved compared to our assumptions from a couple of months ago, which is encouraging for us. It’s a better environment now, although we are disappointed that we had to deal with the significant gas cost issues. The gas bills were astonishingly high. Additionally, we reached out to our customers since many faced pass-through gas costs, resulting in bills that were seven times higher than usual. This raises concerns about their ability to pay, which has had a severe impact on many industries in California.

Restaurants went out of business.

We've observed that other groups in the alternative energy transition have been quite impressive. A significant aspect of their quarter was related to this issue. Once again, we have managed to navigate through a major challenge financially. This is not just a minor point; it cost us a substantial amount of money. After we raised prices to nearly $8 a gallon, compared to diesel at $5.99, the impact was considerable.

Yes.

Your next question comes from Jason Gabelman with Cowen.

It's Jason Gabelman from Cowen, but all my questions have actually been answered.

There are no further questions at this time. I turn the call over to Andrew Littlefair for closing remarks.

Operator, thank you. Thank you, everyone, for joining us today, and we look forward to updating you on our progress next quarter. Good afternoon.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.