Clean Energy Fuels Corp. Q2 FY2023 Earnings Call

Greetings and welcome to Clean Energy Fuels Second Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Robert Vreeland, Chief Financial Officer. Please go ahead.

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

Good afternoon, everyone, and thank you for joining us. If you haven't seen it yet, I'll note that we changed the format of our earnings press release a bit that will hopefully make it easier to quickly see important data and highlights for the quarter. We know that many of you on this call are juggling multiple companies' earnings, so we want to make it as easy as possible. And in that vein, I'm going to also make my opening remarks a little more concise, allowing us to get to your questions quicker. So, let's jump in. Fortunately, the issue of historically high natural gas prices being charged by California utilities began to normalize in the second quarter, allowing our adjusted EBITDA to improve to $12.1 million. Not only was this a $16 million rebound from the first quarter, it was over 20% higher than Q2 of last year. Thanks in part to the opening of new stations anchored by our customer Amazon, our RNG fuel volumes climbed over 17% in the quarter compared to a year ago to over 58 million gallons. We expect nice growth to continue through this year with planned openings in the third quarter of additional key stations in Southern California, Texas, Washington State, Michigan, and Maryland. And as I've said before, it's great to have a large anchor customer in Amazon, but these stations are strategically located in areas around distribution centers and can easily handle additional fleets. Revenue for the second quarter was $90 million. Remember, this was impacted by $14 million of non-cash Amazon warrant charges. It’s also slightly down from a year ago due to lower environmental credit prices, but those began to increase in the quarter and have held up nicely since. The alternative fuel tax credit reinstated for three years and the Inflation Reduction Act increased revenue by $5 million in the quarter. The rebound in our adjusted EBITDA, growth in the RNG business including upward trends in environmental credit prices and $192 million in cash and investments has kept our balance sheet strong and supports our positive outlook for the remainder of the year and into 2024. The strong demand for RNG continues, not only through our newly built stations, but we're adding customers at our existing fueling infrastructure. For instance, Liberty Coca-Cola, which is one of the country's largest Coke bottlers, signed a deal to fuel trucks in several of our stations in the Northeast. Electrolux, a large appliance company and Channel Islands Dairy Farms have begun operating RNG heavy-duty trucks for the first time and are fueling at our California stations. Campbell's Trucking Company is deploying heavy-duty trucks that will fuel at a Clean Energy station in Washington State, which has its new low-carbon fuel program in place. I told you on the last call about our recently signed partnership with Tourmaline, one of Canada's leading energy companies. Over the last three months, we have hit the ground running on the plan to build a network of stations throughout Western Canada. By partnering with such a recognized and respected Canadian company, we believe this to be the foundation for a significant surge in natural gas fueling by the heavy-duty trucking market and other Canadian fleets. We couldn't be more enthusiastic about this relationship. Our core Refuse and Transit business saw additional growth with new and the extension of larger contracts. A waste company expanded their relationship with us at multiple California stations. Several big transit agencies continue to grow their RNG fueling with new deals in the second quarter including Big Blue Bus in Santa Monica and Gold Coast Transit in Oxnard, California. Also during the second quarter, US EPA provided a vote of confidence for RNG fueling when it announced the final renewable volume obligation or RVO manned targets with an average 30% increase for the next three years. Both RNG customers, as well as investors and additional RNG supply should be heartened with the significant increase in targets. Our own RNG production projects continue to move forward with the Del Rio Dairy in Texas now operational and we're in the final commissioning on three projects that we expect to have online in Q3 with two more by year end. As I said, I'm trying to tighten up my prepared remarks. So I'll just end by saying we believe there are many signs pointing in a positive direction. You've heard me several times about our excitement for the new Cummins 15-liter natural gas engine that is currently being tested by important fleets. So I will only add that when it hits the broader market sometime next year, the timing couldn't be better. Not only will we and the entire industry have significantly greater volume of low CI RNG available, but fleets will have a new choice and a tested larger engine produced by one of the most reliable manufacturers in the world. This comes at a time of continued uncertainty and cost with other new technologies and their lack of reliable fueling infrastructures. We are pleased with our progress. And with that, I'll turn the call over to Bob.

Thank you, Andrew, and good afternoon to everyone. As Andrew mentioned, our second quarter financial results bounced back significantly from the first quarter. Our second quarter results for 2023 were largely in line with our expectations with the only notable negative variance on the quarter being a GAAP operating loss of $1.4 million or negative $1 million in EBITDA attributed to our Texas LNG plant, that was and remains under repair. Normally, we could see $300,000 or more per quarter of positive EBITDA from this plant and of course, we're working diligently to bring it back online, but due to long lead item parts needed for repairs, we may not get that back into operations in 2023, but it did have an impact on the quarter for sure. Our improved financial results for the second quarter of 2023 were principally driven by the three factors we mentioned on our previous earnings call, starting first with the ramping up of RNG fuel volumes largely coming from our trucking sector. Second, we saw favorable retail fuel margins at the pump driven by low underlying natural gas commodity costs in relation to oil and really the price of retail diesel. And then the third item we saw increase is in environmental credit prices, albeit we did not see the full effect of the run-up in the RIN prices, which occurred in late June. And to put that into perspective, our weighted average RIN price realized for the second quarter was $2.16 versus the more recent pricing that's been around $3.05. We're anticipating that these three factors continue to positively impact our results in 2023. So we're maintaining our 2023 annual financial guidance. Now looking at our year-over-year results, our GAAP operating loss of $13.1 million for the second quarter of 2023 compares to an operating loss of $11.9 million a year ago in the second quarter. On the downside, compared to a year ago, the second quarter of 2023 includes $9.1 million of incremental non-cash Amazon warrant charges and $6.1 million in lower RIN and LCFS revenues due to the lower credit prices. On the upside, compared to a year ago, the second quarter of 2023 benefited by $4.7 million from the non-cash change in fair value of our fuel hedge and by $5.1 million in additional revenue due to the reinstatement of the alternative fuel tax credit. Our adjusted EBITDA of $12.1 million in the second quarter of 2023 compares to adjusted EBITDA of $10 million for the second quarter of 2022 or 21% improvement. And while the lower 2023 RIN and LCFS prices negatively impacted the second quarter of '23 when compared to '22, and that was by the $6.1 million I just mentioned, our underlying base fuel margins, service margins, and the alternative fuel tax credit in 2023 more than offset the effect of the lower credit prices as well as some higher operating and joint venture costs that are associated with our growth plans around the RNG efforts. So effectively, we improved our adjusted EBITDA by 21% over last year. I think that's a testament to our diverse financial model where we have multiple drivers of margin, where one component can compensate for another. As we did last quarter and will continue going forward, we have disclosed the EBITDA components of our RNG supply business, particularly as dairy projects are being placed into service. So having said that, our adjusted EBITDA of $12.1 million for the second quarter of 2023 breaks down as $13.5 million coming from the distribution business, and a negative $1.4 million coming from our RNG supply business. I've included a consolidating table of adjusted EBITDA in our company presentation that's posted on our website. And then lastly, I'll say, we remain on plan with our capital spending, which calls for about $90 million in the distribution business and $40 million in the RNG supply business for 2023. Although, I'll note that we have a little over $100 million that's related to the JVs that's off our balance sheet that's also available to us in that RNG supply business. And with that, operator, please open the call to questions.

Thank you. We will now be conducting a question-and-answer session. And our first question comes from Eric Stine with Craig Hallum. Please go ahead.

Hi, Andrew. Hi, Bob.

Hey, Eric.

Hey. So hoping you could just give an update. You did a little bit in the prepared remarks on the upstream RNG. So it sounds like you expect to have six operating by year-end. Just curious beyond that, I think in the past you've given a number of under construction engineering phase and then also what your pipeline is looking like.

Right, right. That's right, Eric. So you'll have six that are kind of in the final throes of construction now. And then in the kind of the next what's called level 2 engineering and term sheets signed and kind of Phase 1 engineering, there's another seven, that number that I've used before. And so, those will go into construction in early '24. And then we have about four more behind that, that are in level 1 due diligence and development engineering. And then of course our pipeline continues to be robust. I mean, everybody has a large pipeline. There's just upwards of another 15 projects that are in the pipeline that are earlier, that we're continuing to work on and the team is trying to bring those forward. We continue to feel good about it. Some of these projects have taken a little bit longer than we thought six, eight, nine months ago, but we're making very good progress on all these projects.

And just curious, is the thought still that you're considering 105 million gallons as an interim target? With the RVO and improved credit prices, is there any possibility of expanding that number?

No, I think that's still the working number that we're using. As Bob and I have said often, we also believe there will be opportunities to acquire projects and bring them in from others. We continue to work on that in terms of M&A, perhaps bringing forward some projects that are under development by other developers. We like that number and feel confident that we can achieve it.

Got it. Maybe my last question. Regarding the Amazon stations, it's good to hear about the buildout and that those locations are being utilized by other fleets. I'm interested, though, in how Amazon is communicating this with their suppliers. Are you seeing them strongly encouraging or requiring their suppliers to use natural gas as part of their Scope 2 or Scope 3 emissions strategy?

Right. Well, I'm going to let Amazon really speak for any more advanced discussions that we're having with their third-party AFP haulers, but we have said in the past that, that they have had very constructive conferences where they've introduced the RNG to their different haulers. And so, we, and we've worked with them on that. So we feel optimistic that they'll continue to bring the RNG heavy-duty trucks into their fleet with those that haul for them. So we're kind of, time will tell on how that exactly all plays out, but I know it's something that they continue to work with their haulers.

Our next question comes from Rob Brown with Lake Street Capital. Please go ahead.

Good morning, Andrew and Rob, or good afternoon. Excuse me.

Good afternoon, Rob.

I would like to get more details on the Amazon rollouts. Where does that stand in your plan? How many stations are fully operational, and how many are still pending for this year and into next year?

Hey, Rob. Let me think this through for a moment. What we announced with Amazon nearly a year ago involved 19 stations, and I've mentioned this year that by the end of the year, we expect to have all but possibly one operational. We're on track for that. This is a critical period, as many stations are opening now and will continue to do so throughout the year. Currently, we fuel a lot of trucks in the network, and as I indicated earlier, we have 85 stations accommodating Amazon's heavy-duty trucks right now. We're excited about these stations coming online because they will quickly be loaded with trucks that may be redeployed from other areas of the network, which we might not be fueling at the moment, but will be based at these stations. The program is functioning as we anticipated with Amazon. They've mentioned that they've deployed at least 2,000 trucks, and the increased volumes we're observing in our trucking operations reflect that those trucks are coming online. It's promising news. We're also aware that the Amazon deployment could serve as a model for other significant fleets that are considering how to integrate these Cummins 15-liter engines. That's something I'm very enthusiastic about, and our sales team is diligently working with these fleets, which are currently in customer trials this summer with the 15-liter. Our aim is to create similar programs for other major national fleets as they incorporate the 15-liter into their operations.

Thank you for the overview. Regarding the specifics of the RVO, what impact do you anticipate on your business from improved RIN pricing or increased demand for RNG volume?

I'll let Bob assist with this. The initial program aimed to promote some regulations that could encourage the use of renewable natural gas in electric vehicles. However, those regulations didn't make it into the final rules. It's possible that we'll revisit this topic in the future. Nevertheless, there is a strong endorsement for using renewable natural gas in heavy-duty transportation, highlighting its potential impact. We observed an immediate overnight increase in the RIN price from around $2 to nearly $3.10, later settling back to approximately $3.5, which is a significant strengthening. Additionally, regarding the Renewable Volume Obligation, the requirement for renewable natural gas will increase over the next three years. Historically, this obligation grew by about 12%, but due to a surge in ongoing projects, it has now been increased to a 30% growth rate. Overall, this reinforces the strong outlook for renewable natural gas in both transportation and generation.

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

Our next question comes from Dushyant Ailani with Jefferies. Please go ahead.

Hi, everyone. Thank you for taking my question. I have just one question regarding the RVO. Considering the increase in pricing, how do you view your full-year guidance in comparison to what you initially provided? Do you see any potential upside if RIN pricing remains stable?

I'm being a little cautious about that because we've faced some challenges related to California, and I believe that contributed to our decision to maintain our guidance. There were concerns about how we would manage during that situation in the first quarter. However, we did account for the RIN, and it's possible that the increase was greater than we initially anticipated, but it's still within our range.

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

Our next question comes from Manav Gupta with UBS. Please go ahead.

Hey, Bob and Andrew. So first question on the CARB side. There is growing chatter that within the next few weeks, there would be meetings and then even if the final regulation doesn't come up, there is a very strong possibility that CARB is looking at the reset of the program and a higher reset, which helps everybody out. So on that front, you obviously talked to CARB. Do we have any kind of insights from you on that front?

Manav, I believe you’re correct. There’s talk about a new program and outlook, as well as new regulations being developed. The timeline for this is not entirely clear, but it has been indicated that something might be released in the next couple of weeks or by the end of the month. It’s certainly on the way. As you're aware, there will likely be a comment period, followed by a push for approval from the CARB Board later this year, which may extend into early 2024. The new rules are expected to take effect around late 2024. Many believe this presents a significant opportunity. There’s a growing consensus that California's low carbon fuel standard has been effective, and there has been some discussion about potentially increasing the carbon reduction obligation from 20% up to 25%, 30%, or even 35%. Research suggests that sufficient renewable natural gas and lower carbon fuels are available, potentially allowing the state to surpass the 35% target. While I’m not speculating on whether that will happen, it seems CARB is starting to recognize the opportunity to raise the targets and obligations to lower carbon usage in the state. I’m optimistic that we may see a push towards the more ambitious 35% goal, which would be beneficial for everyone involved, especially those in the RNG sector. California will need all the RNG available, which should positively influence LCFS pricing moving forward. If targets lean towards the aggressive side, I anticipate an early market response. The LCFS framework should strengthen into next year as the implications for obligated parties become clearer. We’re hopeful and are actively working with ARB staff and regulators to emphasize that we have a ready fuel solution that can assist the state in achieving its goal of a 45% reduction by 2040. It’s crucial for them to be proactive if they wish to meet these objectives.

I agree with you. One question that keeps coming up is the claim that CARB may not support RNG or might eliminate it. I know you have addressed this previously, but have you received any updates on that because we strongly believe that RNG should be included in the CARB program and should not be excluded under any circumstances.

I agree with you, Manav. Some people believe that captured dairy methane shouldn't be included in the low carbon fuel standard program and have called for its removal. This could mean having a renewable diesel program in California, but I'm not sure that's what ARB wants. It's also unclear if they can meet their targets without our low carbon fuel. While some may advocate for that, I think the industry feels more positive now that ARB has recognized the importance of renewable natural gas in the low carbon fuel standard program. So, I don't believe that will happen.

I agree with you. My last question here is, when we, sometimes people don't give you enough credit for something which is your third-party volume growth, so could you just remind everybody, how your third party RNG volumes are growing in '23, '24 and '25. How is the pipeline looking on that front?

It's going according to our plans. All of our volume this year comes from third parties. We have outlined the growth rate for third-party volumes, and it looks promising. A lot of effort goes into securing this, and we have over 60 suppliers. We are consistently exploring renewable natural gas sources as they become available. We also have strong partners in this area, particularly BP, due to their recent acquisitions. Overall, we are feeling optimistic about this.

Manav, you raised a valid point. We still account for about 50% to 60% of all the RNG in transportation, as we source from nearly every RNG provider available. Our team is dedicated to cultivating those relationships and securing contracts, and we are seeing strong growth in that area, which we will need. By the end of 2026, our plan indicates we aim to produce around 105 million gallons of our own equity supply. However, with the growth we anticipate in the trucking sector, we will require nearly 400 million gallons of third-party RNG, making it a crucial component of our business moving forward.

Our next question comes from Derrick Whitfield with Stifel. Please go ahead.

Good afternoon, Andrew and team, and thanks for taking my question.

Sure. You bet, Derrick.

With regard to your pipeline, it's been in kind of at that 15 to 20 level for a few quarters. What do you see is the greatest impediment to advancing those opportunities into the contractual engineering phases?

Well, I don't know if it's an impediment, Derrick. I think they are just reality that these take some engineering, right, and there's a lot of considerations in terms of the interconnects and each dairy is little bit different on what needs to be solved in terms of the cleanup and the composition of the newer and how it's handled. And so there's just a lot of things that go into it. I wish these projects and I happen to believe that over time, we'll be able to make these a little bit less custom, if you will, but there's just a lot that has to go into it. And we're still learning as we go. Now we're gaining a lot of experience with our construction folks and our engineering teams, and we've built out a bigger team here now to be able to handle it. I don't know that it's any particular impediment. It's not necessarily equipment. We saw that a year ago where we had some long lead time situations with certain cleanup technologies and some steel. But I think that's generally resolved itself now. But going forward, we'll get better at it and bring these things on, but they do take, they take some time to get through the engineering phase and it's probably time well spent to make sure that you have a project that can meet, bring on the fuel at the carbon intensity as designed and meet the returns that we've figured on.

Great. That makes sense. And maybe shifting over to policy for my follow-up. Now that we have full rulemaking in place around the ITC, how should we think about the CapEx implications for your upstream business over the next few years?

We are focused on accelerating our capital expenditures within the ITC period and are managing our projects accordingly to maximize our benefits. Fortunately, we had several projects ready before the Inflation Reduction Act, which has provided additional returns. As we approach the end of the period, we are engaged in discussions about starting construction by the end of 2024 and are making every effort to take full advantage of this opportunity.

Maybe just a follow-up to that. Do you see it more in the 30% to 40% range as the potential benefit for you?

Yes. There are some nuances with domestic content and various factors as we move from $30 million to $40 million, but overall I believe the projects appear to be promising within that range.

That's great. Thanks for your time.

Our next question comes from Michael Blair with TPH. Please go ahead.

Hey, good afternoon, Andrew and Bob. It looks like your RNG share of total volumes rose to a record 81%. So congrats on that. However, your capture of RINs revenue these past two quarters has been lower on a percentage-based system, what we saw in 2022. Is it just timing related, or have there been any structural changes in how much RIN revenue you're receiving for these RNG volumes?

No, nothing structural Matthew, I think just normal market dynamics. However, we need to consider LCFS as well. We evaluate both together. So, from our perspective, everything seems to be normal activity. There are no structural changes happening, and we continue to find it profitable and we're comfortable with the situation.

Sounds good. And then, Bob, I think you mentioned the Texas LNG plant may stay down for the remainder of 2023. If that happens, what's the total EBITDA headwind approximately in 2023 from this outage?

This quarter, I can't guarantee that the results will be maintained. We will make efforts to optimize our equipment, although we still have some testing to complete. I mentioned that the plant has the potential to generate around $300,000 or more in EBITDA per quarter. If we consider a negative impact, it translates to about a $1.3 million effect, similar to what we experienced in the second quarter, where we faced a $1 million loss when we should have generated about $300,000. Looking ahead, the rest of the year could yield a couple million dollars or more. We've taken this into account in our guidance. Overall, this was a significant headwind, and it’s quite binary—either the plant is operational or it isn't. It doesn't simply factor into our regular operations, which is why we highlighted it. We will conduct repairs to get things back on track, but this will still have an impact.

Great. Thank you.

Our next question comes from Pavel Molchanov with Raymond James. Please go ahead.

Thanks for taking the question. We had a lot of questions on CARB policy, also literally today, there was a statement by Governor Newsom about a new hydrogen strategy for California. Might be a little early for you guys to comment on specifically that statement but can you just talk more broadly about your approach to kind of the green hydrogen economy?

I appreciate your question, Pavel. I don't have any comments regarding what the Governor announced today. We did have a former Board member who was very involved in hydrogen policy in California, and during our Board meetings, we often discussed how we could get involved. As we've mentioned before, we have been operating hydrogen fueling stations for nearly a decade and initially ventured into hydrogen, which we referred to as hythane, years ago in Canada, and we have built two stations at our LAX location. Recently, we added a new state-of-the-art hydrogen fueling station for one of our clients. Currently, we're in the process of issuing RFPs for three or four of our transit properties to establish fueling stations and supply hydrogen. We believe that renewable natural gas (RNG) could be a key component for low-carbon hydrogen production in the future. While we have experience with high-pressure fuel, we think that utilizing RNG through pipelines reformed at stations could be a feasible way to supply hydrogen for fuel cell vehicles; however, further work is needed in this area. We advise not to expect widespread hydrogen fueling locations from us just yet, as we need to see industry advancements in vehicle availability. We are engaging with some of the leading industrial hydrogen companies in the country and have active discussions with them. We believe RNG will play a significant role. We hold a 49% stake in a compressor company operating in Canada and Italy, and we have acquired a hydrogen compressor company that is performing well. We are gaining valuable insights into how our network can be prepared to supply hydrogen in the future, but we still have work to do. Additionally, we are exploring how RNG could be integrated into low-carbon fuel standard programs, as there is potential for profit in providing ultra-low carbon hydrogen. We're still in the early stages of determining how clean energy can participate in the hydrogen economy, but we believe we're well positioned for this future because of our existing infrastructure.

Understood. And then maybe shifting north a bit to your recent deal with Tourmaline, still obviously early days in that, but do have a sense of how big that fuel station network in Western Canada can ultimately become?

I want to mention a few points. Bob, who is the chairman of our joint development committee, will provide some insight. I have been involved in Canada for nearly 25 years, and there are a couple of key aspects to note. Firstly, Canada has a significant natural gas resource base, and diesel is relatively expensive here. This creates favorable economic conditions. Our partner is the largest gas producer in Canada, and we have established stations along some major routes in Eastern Canada. Our primary focus, however, will be in Western Canada, where there is substantial trucking activity from Calgary to the West. The current joint venture plans to initially build 15 stations, but we will start with four or five. Depending on demand, we may expand to 15, and eventually, our partners at Tourmaline estimate that there could be a need for as many as 30 stations in Western Canada.

So it's exciting, but it's going to take a little bit of time. We'll get those first four stations up, we're working with the largest fleets now. We're already fueling one of the largest trucking companies at our Edmonton and we've just purchased land for our station in Calgary. So we're excited about the potential. We'll get those first four up and then we'll begin to gauge how quickly we need to bring more stations online.

The roadmap is in place. It's great to collaborate with Tourmaline and witness their drive to replace diesel with natural gas. Initially, we agreed on $70 million Canadian, splitting $35 million each to kick off this first phase. The timing aligns well with the introduction of the 15-liter engine, which is crucial for Canada. We are moving as quickly as possible to establish these stations before the first one is operational, followed by the remaining three. This will coincide with the arrival of the 15-liter truck in mid to late '24. While we may not see significant volumes initially, we anticipate things will ramp up in '25. The advancements we make from now until then will be very important to discuss.

Last question. This is a little bit below the radar, I think more recently for you. Two years ago, you started participating in this Adopt-a-Port project, I guess on Long Beach, maybe somewhere else on kind of the marine space. How is that going?

Thank you, Pavel. For those who may not be familiar, we've been involved in an effort to improve air quality in Southern California, particularly at the port, which has the worst air quality due to ships and haulers in the area. We've launched a couple of clean air trucking programs at the port, and one of them is the Adopt-a-Port program with Chevron. Chevron has invested funds that we've mainly utilized, and we plan to add more funding. We are working with Chevron to provide grants to our trucking customers at the port to assist them in purchasing new natural gas trucks. In return, these customers are required to buy a certain amount of renewable natural gas from us at our stations, where Chevron is our supplier. This creates a beneficial situation for everyone, introducing low-carbon renewable natural gas trucks into the port. Currently, we have nearly 400 trucks participating in the program, with a few hundred more waiting for funding. I've discussed with Chevron the potential for increasing their financial support, and they have shown strong backing for the program, which we may expand. Although the process takes time due to the need for purchasing new trucks and navigating grant requirements, its progress has been commendable. It's worth noting that despite claims about the transition to electric trucks, there are only about 15 to 30 electric trucks operating at the port, while we have around 480 to 500 renewable natural gas trucks in daily operation. Overall, I consider the program a significant success.

Thanks very much.

Thanks, Pavel.

Our next question comes from Ryan Todd with Piper Sandler. Please go ahead.

Thank you. I would like to follow up on some previous comments. There was a question regarding the ITCs, and I know that the IRS has provided some guidance on transfer pricing for them. What are your thoughts on the timing for beginning to monetize some of those? Do you anticipate that it will clearly be a 2024 event, or could you start monetizing some of them earlier? What do you see as the obstacles to monetizing these ITCs at this point?

There's not really bottlenecks, Ryan, I would say. We're going through the process of qualifying all the expenditures at the locations. So we're kind of following the process, I've got teams, the folks that are coming up with what are the qualified CapEx expenditures, and then works, and then we're frankly, we're kind of putting our feelers out on the market in terms of what the transfer market looks like. I believe that it will be more of a '24. I'm not in a rush to need capital, but that doesn't mean we're taking our time. I'm going through the process. And making, making sure that we understand it all, and what kind of clawbacks there are and when you go through a transfer like that. So we kind of want to have it all buttoned down. And we're counting on the money principally for this first wave of projects in '24.

Okay, thank you.

With our partners, we get 50% of the value that we, the capital that goes into the total project, but we intend to likely transfer ours and monetize it.

Okay, that's helpful. You mentioned earlier some ongoing early tests on the 15-liter engine. Have you received any initial feedback on that? Also, do you have any thoughts on the timing or milestones for testing and feedback over the next year, and when you might see the first indications of potential uptake for that engine?

I think it's important to remind everyone that while this is a new engine, it has a proven track record. The natural gas heavy-duty engine has had great success in China, with sales of 35,000 units last year. This engine is an improvement on the previous model, but essentially remains similar. It's not a testing of an entirely new product; rather, it's a fleet introduction. Cummins is cautious in their approach and takes their time to ensure everything is correct, as their reputation is at stake. They have partnered with some of the largest fleets in the Americas, including Amazon, UPS, FedEx, and Walmart, and are involving major trucking companies like Knight-Swift and Werner. This introduction phase is currently happening, with over 40 fleets participating. We've heard positive anecdotal feedback from drivers, especially regarding performance in challenging terrains like the Grapevine in California and the Rocky Mountains. It appears there is improved fuel economy, which aligns with Cummins' claims. The timeline for opening orders was initially set for Q3 or Q4, but these things often take longer than expected. Key milestones to watch for include feedback from the big fleets, which should come later this year, leading to a serious order book opening around late 2023 or early 2024. We may not see those orders built until Q2 of 2024. It's encouraging that we are past the days of fleets only ordering a couple of units; now we are looking at larger orders, potentially in the hundreds, which is promising. The fact that the 15-liter engine makes up around 75% of diesel engine sales and that we finally have it available is significant for the industry.

Great, thanks, that's great color.

Our next question comes from Patty Zhang with Scotiabank. Please go ahead.

Great. Thank you. Hey, Andrew. Hey, Bob. Good afternoon and thanks for taking my questions. So my first question is just on kind of trucking demand. So, we've heard of softer e-commerce, weaker industrial production and so on having some impact on shipping demand and other logistics. So I was just curious if that's had any impact on your volumes at all?

We really haven't. We haven't really seen that. I mean oftentimes the natural gas engines are the ones that get used the most. So if there is going to be a little back down on some of that, it's, they're not going to pull natural gas engines out of the mix.

Sorry, I mean our trucking volume is up. I'm not doubting that that's been the case. We just haven't seen it in our numbers as limited exposure to it.

Not something we are managing around or through right now.

Perfect. Got it. Great. Great. And then second question on kind of your full-year guidance you've kept that the same, and we're going to need about $47 million in the back half of the year to reach the midpoint there. So at least $20 million a quarter. Can you maybe give us a bit more color on what gives you the confidence to reach that? And then I know you mentioned ramping RNG volumes, favorable margins and favorable credit pricing, maybe can you talk about what you're assuming for credit pricing specifically for the remainder of the year? Thank you.

I'm assuming that the RIN stays around its current level, though it could potentially rise further. The increase in RIN is positive for us, and we also believe that the LCFS could exceed its current amount, which is significantly higher than our initial forecast of around 62 or 63. We're already seeing some improvement compared to that. The primary factor in this will be volume, which is very important. While all these elements are significant, the expansion of our stations is what really boosts our margins the most. RIN and credit are meaningful as well, contributing millions of dollars toward our goals. We are working to recover from a setback in the first quarter, but the external environment appears favorable overall. Volume is on a gradual increase, and we will not simply split the yearly balance in half; we expect a ramp-up along the way.

Great. Thank you.

Our next question comes from Jason Gabelman with Cowen. Please go ahead.

Yeah, hey. It's Jason Gabelman. Good afternoon.

Hi, Jason.

I wanted to revisit the RNG upstream volumes as they are starting to increase, but it seems the earnings contribution this year will be limited. Could you remind us about the timing for the certification process regarding the LCFS and the RINs, and when you anticipate those gallons will start to positively impact earnings? Additionally, could you provide some insight on the dollar per gallon potential given the current credit prices? Lastly, I would appreciate your thoughts on the potential benefits from the clean fuel producer tax credit and your expectations for when we might receive updates on that. Thank you.

You got those, Bob?

You're correct, Jason, that the contribution won't be significant. In fact, there may be a slight negative impact in '23 due to the RNG supply and the certification process. We expect to start monetizing that in late '24, assuming we achieve the planned commissions and factoring in the 12-month timeline for LCFS. The contribution in '24 will be minor, but there will be some from the projects we commission this year. I'm not ready to provide specific guidance for '24 yet, but based on our construction status and the certification process, we won't see monetization from RIN or LCFS until '24. We're continually assessing the best time to monetize, as various markets could accept our gas. We aim to be consistent in '24 regarding our gas production. We might choose not to store all of it to avoid lengthy certification delays if we can secure a suitable price.

Got it. And then just thoughts on the greenfield producer tax credit, if you've heard anything about whether it will come in at the high-end or low-end regarding negative carbon intensity without a lower bound and any timing on when we could expect an update.

Okay. We haven't received any updates on that. We're listening to those who know that the production tax credit becomes significant beyond negative 250, reaching $5 or $6 per gallon. We'll see how this develops, but I don't have any substantial details on that 45.

We haven't heard anything on the timing of that or when that might be promulgated or when the Secretary would deal with that.

No, we haven't heard that yet, Jason. We're listening and we have our tentacles out, but we haven't picked up anything on that yet.

There are no further questions at this time. I would like to turn the floor back over to Andrew Littlefair for closing comments. Please go ahead.

Thank you, operator. And thank you, everyone, for joining us today and we look forward to filling you in on our progress next time. Thank you. Good evening.

This concludes today's conference call. You may disconnect your lines at this time. Thank you for your participation and have a good day.