Good afternoon, ladies and gentlemen, and welcome to the Clean Energy Fuels' Third Quarter 2023 Earnings Conference Call. This call is being recorded on Thursday, November 9, 2023. I would now like to turn the conference call over to Mr. Robert Vreeland, CFO. Please go ahead.

Thank you, operator. Earlier this afternoon, Clean Energy released financial results for the third quarter ending September 30, 2023. If you did not receive the release, it is available on the Investor Relations section of the company's website 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 factor 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 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, 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. I'll let Bob go into the financial details on the quarter as this quarter has its share of factors impacting the comparison to a year ago, as well as factors impacting our results for the third quarter of 2023. But at a high level, 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, in a slightly off quarter, we still produced adjusted EBITDA of $14.2 million, which equates to $57 million on an annual run rate basis. 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 to work with plans to deploy well above that. I want to emphasize here that we remain as bullish about the future as we were when we rolled out our comprehensive RNG strategy in early 2022. RNG is moving in the right direction. It's becoming recognized as the most realistic fuel to decarbonize heavy-duty trucking. In our opinion, the way the entire alternative fuel market has been moving 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 RNG, while at the same time growing the demand with new customers like Amazon and others that will leverage our 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 TotalEnergies and sustainable capital providers like Riverstone Credit Partners. The confirmation of our strategy by such story names along with significant investments by other energy majors, pipeline companies, utilities, and large private equity firms in the RNG space is notable as we move forward. I mean, think about it, it is really impressive to me that companies like BP, Chevron, Total, Shell, Enbridge, BlackRock, UPS, WM, Republic, and Amazon are all involved in the RNG space. We made good progress on the low-carbon RNG production project at dairies over the last 18 months. And I hope you saw the press release a few weeks ago announcing that we began injecting RNG into the pipeline in June at our first project, Del Rio Dairy in Texas. We actually began producing RNG in February and stored it 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 this first RNG from Del Rio to Oregon where we have stations and demand, and the price of Oregon's LCFS credits is stronger. So this is a great example of why it's important to have a national fueling infrastructure, which allows us to optimize RNG deliveries for our production projects. We've also begun producing RNG at three other dairies and there are another two projects that are nearing completion and will be producing RNG by the end of the year or early 2024. We will be formally announcing the details of these in the coming weeks. Some of these dates might have slipped a little from our original plan, but nothing significant. It's important to note that these are large-scale projects, which in this case represent about $184 million of gross deployed capital by us and our partners. These projects are large and they can be a little disruptive at first at the dairies and the normal dairy operations. And they need approvals by several regulatory agencies. So there will be unforeseen delays. But with every project we have gained important insight and knowledge that's being applied to new projects, and we remain on track to meet our overall RNG supply timeline through our own constructed projects and potential acquisitions. The investments we are putting into RNG supply now will have tremendous value and position us very well for the future. The enthusiasm I have for our RNG supply business is only matched, if not surpassed by the demand side. Our base business of fueling tens of thousands of large fleet vehicles every day with RNG continues to grow, providing us with recurring revenue, keeping our balance sheet strong and allowing us to make the investments for what we believe to be sustainable growth. Much of my optimism is based on one of the most significant advancements that have ever taken place in the RNG technology space. Most of you probably know what I'm talking about, which is the introduction of Cummins' new X15 liter natural gas engine that is currently being tested by a handful of some of the country's largest heavy-duty truck fleets. The phrase game changer is probably overused even by me, but there's not a better way to describe this larger engine that Cummins is introducing to the heavy-duty market. In my 20 years of working closely with this world-class engine manufacturer, I've never heard Cummins speak about another product quite the way they are about this 15-liter engine. Cummins executives are actively promoting the attributes of the engine to investors, their dealers, industry partners, and potential customers with the message that this engine has superior power, torque, fuel efficiency, and most importantly, the ability to decarbonize heavy-duty trucks with RNG on a scale that no other technology is coming close to achieving. It would be one thing if it was only Cummins bragging about a new engine, but they are building on 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 include some of the country's most demanding, such as Walmart, Warner, UPS, and Knight-Swift. I would not be overstating to say the reviews have been very impressive. A Cummins executive put up a slide at a recent presentation with quotes from the fleets like this: "The drivers love the truck. The engine has a nice pull. It's very quiet. Plenty of torque." "And the more they drive it, the better it's getting all the way around." "It feels and drives like a diesel, which is a good thing." I could go on, but the feedback like this is what is producing the optimism by Cummins and many within the industry like the OEMs that will place it in their trucks. So much so that for the first time Cummins is making public their assessment of potential market penetration for the new 15-liter natural gas engine. On the low side, Cummins believes there could be an increase of penetration of the heavy-duty natural gas market share by 4% from 2% today to over 8% by 2027. And the high case is 12%. Approximately 250,000 heavy-duty Class A trucks are sold every year in the U.S. If one takes the medium between Cummins' low and high cases of 10%, that means 25,000 new heavy-duty natural gas trucks can be sold in 2027. Using an average annual fuel usage of 15,000 gallons a year per truck would mean 375 million additional gallons of RNG used incrementally each year. There is no other alternative that could come close to those numbers in the heavy-duty space. Many of the fleets testing the 15-liter do not currently operate, if any, natural gas trucks. So much of the 25,000 will be coming from new customers. I could go on about the importance of this new engine, but let me close with saying it couldn't come at a more opportune time. The desire for fleets to decarbonize is only increasing. Yet the technology that plays much hope to get them there is 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 is having in the passenger vehicle market. Many within the heavy-duty space are quietly expressing and some not so quietly their concerns about the practicality and cost of operating a fleet with much larger batteries and the need for even more powerful charging infrastructure. RNG continues to be recognized by hundreds of the country's largest transit agencies and refuse companies as an ultra-easy low-carbon solution that is here today. Soon, with the addition of the 15-liter, the Cummins suite of natural gas offerings, heavy-duty truck fleets that operate under the most extreme conditions, will be able to participate in the RNG 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 RNG is being well-executed. And the almost universal optimism in the new engine technology should be a reason for everyone's confidence. It certainly is for me. And with that, I'll turn the call over to Bob.

Thank you, Andrew, and good afternoon to everyone. As Andrew mentioned, our financial results came in a little short of our expectations. I want to put that into perspective here. 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. Then we were forecasting an adjusted EBITDA of around $18.6 million, and we're reporting $14.2 million of adjusted EBITDA. Now most of this miss was the result of two factors: a much lower LCFS price than what we had forecasted and a shortage of RNG 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 and 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 expectations. Regarding our updated guidance, we felt given the circumstances where the LCFS is at, principally looking at likely a lower expectation on the LCFS pricing and considering the impact of the third-quarter RNG deficit, we've taken our guidance range down slightly. Looking at our results and starting with volumes, I'll point out that the RNG volume of 56.7 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 in RNG that I mentioned. And kind of a side note here, looking at our total fuel volumes for 2023 and particularly the conventional natural gas, this is where you'll see the impact from our Texas LNG plant that's not been operating, and we've talked about some of the drag that that's caused. Last year, that plant had sold approximately 6 million gasoline gallon equivalents through September, so about 2 million gasoline gallon equivalents a quarter. And that is impacting kind of the overall story there. Looking at our comparison of revenue, 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. The most notable item is that the third quarter of last year included three-quarters of the alternative fuel tax credit, 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. Then the Amazon noncash sales incentive warrant charge, which reduces revenue, is approximately $10 million higher in the third quarter of 2023, and that's from increased volumes that we've had in 2023. Finally, the third quarter revenue of 2022 was higher by about $13 million due to the natural gas costs being higher, which then also translates to higher sales pricing back in 2022. For some context here, even though the gas costs and sales pricing were 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. A large part of that's been the favorable spread we've talked about between the price of oil and therefore the retail price of diesel and natural gas. So that is helping us, and it continues to help us. But on the revenue front, it's lower when the gas costs are lower. Looking at our GAAP operating results, we posted a 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. Most of that decrease relates to $21 million associated with the alternative fuel tax credit and the Amazon warrant charge. Our adjusted EBITDA of $14.2 million in the third quarter of 2023 compares to adjusted EBITDA of $23.9 million for the third quarter of 2022, a decrease of $9.7 million. Again, $11 million of the retroactive alternative fuel tax credit is included in the prior year number. If you exclude that, the 2022 third-quarter adjusted EBITDA would be $12.9 million compared to $14.2 million in 2023. That improvement reflects our fuel volume growth, and the underlying base fuel sales margins continue to add incrementally to our results, which has helped offset the lower LCFS credit pricing and lower net take on the RIN and some higher operating and equity investment costs in our dairy joint venture. So frankly, the fuel volume and base fuel margin is working well for us, as it always does. 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 RNG production business. On the capital front, we remain on plan with our CapEx spending in the distribution business of approximately $90 million, as well as $40 million in our dairy RNG investment business. Noting, though, that with the dairy RNG investments, there is $84 million in cash at our dairy JVs. And I think with that, operator, we will turn the call over to questions.

Your first question comes from Eric Stine from Craig-Hallum.

Can we just dig into the RNG for a second? I mean, I would 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. On the supply side, I'm going to say it's kind of a little bit of normal of the landscape, but there were some low CI projects that we just had some start-up delays and some CARB certification delays. And so that took down a pretty good number of expected low CI gas. Now we also, though, had some landfill gas that produced more. So there's a bit of an ebb and flow there. The net of it is that we were kind of net down, call it, maybe a couple of million gallons. So this is not huge, but we're talking about four here and three there and netted to two. But what it does do is it does have an impact 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 just started a little later. So nothing fundamentally about things not working or shutting down. So I mean just as there's more and more of it, we'll kind of get past some of these when two million or three million gallons makes a difference. But we're not dealing with huge numbers here, but that did impact, say, our net take on the RIN, the LCFS as well as the values on the LCFS. And then on our production side, we were anticipating that we could have more than just the Del Rio that would be contributing and maybe monetizing some biogas in the quarter. Now maybe not a lot, but enough to defray some costs, and those are, as Andrew said, they're kind of producing gas now, but we didn't monetize it. So we put it together and there was a bit of an impact, but I call it kind of timing. Nothing for us fundamentally, don't worry about it; it's a little bit of nature of the beast.

Yes, so when you mention in the release that you had a lower share of RIN values, it refers to the fact that those values did not represent a higher mix of low carbon intensity. Therefore, your share was lower. Just to clarify, nothing has changed regarding your share as the downstream pathway to the fuel tank; it's simply an issue of that mix.

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

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

Yes, Eric, I'd say it's generally the same. You're correct that we are still on track to meet our goals by the end of the year. I did mention one that might extend into early '24, but we will have updates on three of them soon. For 2024, the figures we discussed earlier remain largely the same, possibly slightly larger. There's one project currently under construction that will continue into '24, and we anticipate four additional ones to start construction as well. Currently, we have seven or eight projects in the final stages of design and engineering, with a few of those moving into construction. Everything is proceeding as we expected, with some expected to launch later in the year. Our pipeline remains steady in the double digits. These projects can fluctuate, but it's likely that some will come online this year and possibly adjust our numbers. So, I'd say, Eric, we're at capacity right now, and everything is progressing as planned. We are also starting to take on more of the work ourselves and bring more operations in-house as we develop these projects. This experience on our early projects is making us quite comfortable with how we will manage future developments.

And your next question comes from Rob Brown from Lake Street Capital Markets.

I would like to know the projected output from the RNG production facilities once those six are operational. What is the projected output in terms of gallons? I believe it will contribute to alleviating the shortages, but I would like to understand its impact on volume.

You might be looking at $7 million to $10 million for the projects that are set to go into production by the end of the year. There are others that will start construction, and their outputs can vary, but generally, you're looking at a range of around 10 million to 20 million gallons as we've discussed. It will take some time for these projects to ramp up, and as we progress, I expect the production to increase. So, by the end of 2024, you could see a higher exit rate.

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

Well, I always want to be a little careful here, but I take it as a very good sign. There's been a recent Cummins presentation where they've been fairly candid about it. In fact, then some public statements that they thought that they could sell as many in 2024, 3,500 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, Rob. You remember back with me when we first started out in the 9 liter in the refuse market, it was 300 units, and then it went to 8% and then there is 15%, it went up pretty fast. Cummins has assured us that the number of engines is not a problem. And then once they get the more of the OEMs, they can really hit those larger numbers. So I'm feeling good about that ramp. I think they are too. And so I think you'll see it move up over those next three years to where you might be pleasantly surprised to be in that 10% range, which will be 25,000 units a year, which would be a big move up from where we are today.

And your next question comes from Derrick Whitfield from Stifel.

Congrats on your announcements today. Regarding your Del Rio announcement specifically, congrats on getting LCFS to Oregon and that's a huge win given the backlog that exists in California. Could you comment on the CI assigned by Oregon or your expectations there? I know there's some differences between California and Oregon.

I'm having a bit of difficulty hearing some of the questions, but you're noticing the differences between Oregon. I can't say for certain, but I do know that we're currently receiving more for it. I'm not clear on the specifics regarding the CI score, so I will need to follow up on that. It's important to understand the market dynamics here. Oregon isn't as large as California. The LCFS in Oregon was 180; we began injecting there, and it decreased somewhat. While it’s a significant market, it has its limits, and we can increase our presence there, but it's not going to take the place of California.

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

It will continue for some time. I have high hopes. I remind our colleagues in California that as they experiment with the low-carbon fuel standard, they should be cautious. They’re not the only state in the country. There’s Washington, Oregon, and the legislature in Illinois is also looking into it, along with New Jersey. New York has attempted to implement it multiple times, and Mexico is also involved. More states are likely to adopt low-carbon fuel policies, which will create some accountability for those who want to keep experimenting with these issues. It will become evident to everyone that renewable natural gas is one of the best methods for decarbonizing, especially for transportation fleets. Other states will eventually adopt these practices. While this process won’t be instantaneous, it will happen. We are already working in those states and have strong support in several of them.

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

That's a good question. I believe it's more about the latter option. Currently, landfill gas in voluntary markets is fetching around $25 per Mcf, while in transportation, the RINs are closer to $36. Therefore, the transportation market is significantly more lucrative. A few years ago, one of the Energy Secretaries mentioned that using natural gas to generate electricity is like washing your car with champagne. I resonate with that sentiment. The transportation sector is hard to decarbonize, and that is where RNG should be directed.

And your next question comes from Paul Cheng from Scotiabank.

Andrew and Bob, I think that the latest drop in the LCFS revision is that they will require the physical presence of the RNG in California instead of just a pathway in order to claim the LCFS credit. If this indeed will remain in the final decision, is there any incremental cost for you guys? And if it is, any rough estimate that on a per-gallon basis then what is the incremental cost?

The latest drop in the LCFS revision indicates that the physical presence of the RNG will be necessary in California to claim the LCFS credit, rather than just relying on a pathway. If this requirement persists in the final decision, will there be any additional cost for you? If so, what would be a rough estimate of the cost on a per-gallon basis?

Yes. And whether that stays in, is that going to be an incremental cost.

We will likely have some questions. I want to discuss where I believe the Air Resources Board in California stands. We think we are close to a conclusion, but we believe the ARB will soon review some proposed rules, possibly around mid-November or even next week. There are three major issues that have our attention. One is regarding avoided methane. There were suggestions about changing how we calculate or use avoided methane in renewable natural gas, but it seems that recommendation has not been adopted. The ARB recognizes that the Low Carbon Fuel Standard is effective and aims to make it more stringent. They understand the need for dairy gas and renewable natural gas, which suggests that the avoided methane calculation will likely remain unchanged for an extended period. While it’s uncertain whether that will extend to 2040 or 2045, it is a significant matter that indicates renewable natural gas will be relevant for a long time, supporting returns for these projects, which makes sense.

For these projects to yield good returns, we currently book and claim in Iowa and account for it in California. It appears this will remain in effect until 2035. Many believe this is how things are trending, although there may be some adjustments after further studies. CARB has been responsive to how businesses operate, and after 2035, we may need to justify the pipelines used to transport to California, as they require a flow rate at least half the time. It's uncertain if there will be transportation costs post-2035. I see the book and claim process as a cost of doing business, especially compared to avoided methane. Even if there are capacity charges after 2035, they would only add a couple of dollars per Mcf, and we're looking at potential fuel values around $80 per Mcf. So, I view this as a manageable cost. We're also having productive discussions with CARB. Regarding the obligation curve, recent suggestions indicated options of 25%, 30%, and 35%, and it seems the trend is toward a more aggressive target. I anticipate a softer LCMS market in 2024, as significant compliance increases won't begin until 2025. It will take a while to deplete the current oversupply of credits. However, CARB may implement a mechanism to reduce oversupply if necessary, leading to a more positive outlook in the coming year.

Sure. Sure. And Andrew, I know typically you guys don't give guidance for next year this early, but anyway that is already early November. Any soft guidance on adjusted EBITDA and also the RNG sales volume for next year?

Good try. I don't think the guidance is clear. It's a bit tricky because it could either be too lenient or too strict. As Andrew mentioned, the LCFS might be influenced by supply and demand dynamics. However, we have some time to gather more information, and we are assessing the situation as it develops. It might not be advisable to provide any soft guidance at this point.

Paul, regarding demand, I'm not going to provide any specific numbers at this time, but I feel optimistic about it. I'm pleased that we finally have a product ready to enter the heavy-duty transportation market. These engines will be delivered in June, which is a positive development. So far, we haven't observed any impact on the 12-liter engines, and we see this as additional volume that will benefit the system. Additionally, we are aware of multiple RNG projects in progress, which should increase both demand and supply for RNG. We will provide more specific guidance in the next quarter, but unfortunately, we can't share that information today.

And your next question comes from Matthew Blair from TPH.

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

The increased LCFS price certainly improves the economics. Currently, the economics are not negative, but payouts are extended. This situation highlights why we're initiating an optimization program aimed at reducing project costs. Lowering costs would allow us to target smaller dairies due to how the industry has been evolving, moving away from a modular approach to a more field-directed one, which is more expensive. Consequently, we typically aim for larger dairies, around 5,000 to 7,000 head. We're developing a dairy project that we’re very excited about, which will have 35,000 head, but such large-scale dairies are limited. Many dairies have around 2,000 heads, and these smaller dairies present challenges primarily due to costs and the lower LCFS prices. However, as LCFS prices increase, more opportunities become accessible. On a broader scale, the reduction in low-carbon fuel standards has resulted in a more competitive environment compared to about a year or a year and a half ago. Many entered the business during a gold rush phase, but as costs rose and low-carbon fuel credits decreased, some players exited. Our approach is different; we require RNG and are not building projects on speculation. For those of us in this position, the current market conditions are favorable. With the right strategy, there are numerous dairy opportunities available. In 2024, we aim to introduce modular designs to reduce development costs, enabling us to engage with smaller dairies and expand our target market significantly.

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

The improvement is primarily due to increased fuel volumes, as we have indicated that our growth will continue. While we are somewhat cautious about the RIN, we acknowledge that it remains a factor. I have taken a conservative approach regarding the LCFS, which I have adjusted down to the 60s. Overall, the enhancements are largely driven by volume, alongside the RIN.

And your next question comes from the line of Pavel Molchanov from Raymond James.

Yes. I will start with my usual Washington question. When are you guys expecting to get the Section 45Z transparency from the Treasury? Is that a 2023 event? Or do we have to wait until the new year?

Yes. If it is a new year, Pavel, it would be certainly thereafter. I mean we're hearing by the end of the year.

I think we actually heard something finally, Pavel, that suggested it could be the end of the year, but then we heard a little something else that it could be just after. So let's put it there.

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

Yes, where we stand with that, and it's a joint development agreement, but we have secured most of the property that we've got kind of five stations built and four 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. We're just lockstep with our partner, Tourmaline, on that. It's a good environment here with what we're doing. We are finding that some of the permitting and just the ease of getting these things going has been favorable. Those will come on in the next year.

The good economics.

Yes. Good economics. And so we will see probably most of those come on by in the second half of next year. So not a huge volume, not a 12-month volume contribution, but they will come on. A lot of this is just to see that in a sense that this is happening. That is really what we look to is like the volume will come if the trucks are being ordered and bought, then it’s just a matter of time that they're filling up at the stations.

Just one thing about the market, Pavel. Last week, there was a meeting with 27 different fleets and the largest dealer in the region, along with Cummins discussing the 15-liter engine. I'm pleased with the level of interest. There's definitely work to be done, but we have a strong advantage. Additionally, Tourmaline is a fantastic partner for us in Canada.

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

They have been present and have recently been unusually vocal about when they might be ordered and when deliveries are expected to start and scale up. I’m not sure if that has been taken into account, Pavel. However, some of our customers, such as those in the refuse industry, are experiencing delays in obtaining natural gas engines. Interestingly, the delays are not typically due to the natural gas tanks or the engines themselves, but rather due to issues with door handles, seats, and other supply chain problems that have caused bottlenecks. There are still some challenges being worked through. However, I have not heard anything regarding this in the recent meetings and presentations by Cummins.

And your next question comes from Manav Gupta from UBS.

As far as 45Z is concerned, can you help us understand how you benefit from the 45Z as it is in its current form where a negative RNG kind of gives you a high dollar amount versus the landfill range, if you can talk through that.

Sure. Bob, go ahead.

Yes. I mean, if the scales that we look at and considering the low CI, when you get into the negative 250, which many of these farms are at that or lower, then you're looking at potentially $5 to $7, maybe even $8; we've seen per gallon of 45Z PTC credit. That would be on top of the economics that are already there prior to that with just the actual sharing in the credit. So that will be significant. That's 2025. That's why the clarity from the IRS coming couldn't come really any sooner.

Bob, you might want to address this. The law states that it's appropriate for on-highway use, and that's the baseline dollar amount; depending on the specifics, please continue.

Yes, exactly. The lower rate is for on-highway transportation. Depending on the CI score, you could receive a credit of $5 or $6 per gallon off the PTC. This will relate to our ongoing production dairy investments and the gallons we expect to produce there. This program runs for three years, spanning 2025, 2026, and 2027. Once we gain more clarity, people will be able to perform better calculations on this matter, as it will have a significant impact.

Second question here is we did get updated stock proposal from CARB, but we're still building a lot of credits. When do you actually expect some improvement in LCFS prices? Because the way things are, it's not looking very good even for 2024, unless the LCFS prices start to move up. So trying to understand when can we start seeing some improvement in LCFS prices?

Manav, you may have missed my earlier point. We don’t have certainty, but it seems likely there will be some continued softness in 2024 as you deplete the credit bank. I did mention that there are several uncertainties, but the new regulations will include a mechanism to tighten the compliance curve. These changes won’t take effect immediately, but they could be implemented fairly soon. Therefore, it's wise to anticipate some challenges in 2024, although we expect things to improve in 2025. I wouldn't be surprised if we fluctuate at the lower end of the range in 2024. Conversely, there may be some buyers entering the market and applying pressure, which hasn’t happened yet, as this market is not very liquid.

And your next question comes from Abhi Sinha from Northland Capital.

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

Yes, we were estimating around $3 for the RIN. At that time, the LCFS was in the low 80s, with some expectations of increased positivity due to news from CARB, potentially suggesting a stronger compliance curve. However, the market quickly declined from that point. So, the LCFS came down from the 80s, and I noted that we've adjusted the RIN to about $3.25. As for the LCFS, I'm unsure how low it might go, but I've tentatively set it around the 68 or 67 range in my guidance.

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

For 2023, we're on par to about $90 million in the kind of the base distribution business. We could spend up to $40 million of additional investment into the dairy RNG production side.

And your last question comes from Jason Gabelman from TD Cowen.

Yes. You talked about the ramp-up in the 15-liter Cummins engine. I know in your kind of five-year plan, you have a ramp-up in your own distribution volumes. I'm wondering how much market share of that 15-liter engine business would you need to have in order to hit that guidance? Is that kind of the way you look at the market opportunity of the market share of those Cummins engines?

Yes, Jason, that's a great question. It's quite interesting. When we discussed our RNG Day almost two years ago, we mentioned needing 545 million gallons, but we didn't consider the robust expectations we have now, like the 10% increase and the 375 million gallon target. At that time, we were conservative, estimating only about 3,000 to 3,500 incremental heavy-duty engines. I don't have a specific percentage of the current market, but if our projections hold true, we will need an additional couple of hundred million gallons or more beyond the initial 545 million.

Yes. It's easy because by the time you get to '27, you're creating almost all the gallons that we're doing right now every year. The industry can provide that. We all have to get busier. As a country, we can get there. If you look at all the resource base for landfill, wastewater, and food waste, I mean you can easily be in a 10 billion gallon dairy, a 10 billion gallon market. Lots of money will be spent; will 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 get there.

I understand. My follow-up question is a bit more philosophical regarding your approach to forecasting the business. In 2022, your final EBITDA was below the forecast. Your initial guidance for 2023 was lower than what you provided at RNG Day and had to be revised downward. A significant portion of the stock's potential value lies in future growth prospects, and we heavily depend on the earnings forecast you provide. As you consider future forecasts, how do you reflect on them in light of past results compared to earlier forecasts? Should you adopt a more conservative stance? What factors do you think have contributed to the forecast misses in previous years? I would appreciate any insights you can share about your forecasting strategy going forward.

No, it's a good question. We're trying to create a new market, which is a bit different since it's not mature and involves many moving parts. Nevertheless, it's our responsibility to provide the best forecasts we can. If the first quarter had performed as expected this year, we would have been right on target. That's the point I was trying to make. You would have aligned with our guidance. We did revise our guidance last quarter based on the information we had, although we were uncertain about the prices of low-carbon fuel credits. We're working hard to get this right, as missing the target is not beneficial for us. Today, we've made a slight downward revision, but I don't think there's much more decline to anticipate at this point. I believe we're approaching our limit, and I expect growth from here.

I appreciate the question. I don't think we're being overly rosy. We're dealing with some moving pieces. Will Cummins get those things all produced and start selling them in June? I hope they will. But when I look at the big picture and I look at what's happening with electric vehicles, I mean, go ask how many electric vehicle trucks that are supposed to be the future of heavy-duty transportation, none of those are sold. I like the way we're positioned. The best thing for us to do is be prudent with our capital, to continue to develop on the RNG side, and control our own density, and continue to work with our partners on third-party supply and work our customer base on the adoption. When you compare a heavy-duty truck operating on RNG versus the other alternatives out there, we're leagues ahead and more efficient and more cost-effective. That gives me optimism going forward.

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

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

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