Clean Energy Fuels Corp
NASDAQ:CLNE
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Clean Energy Fuels Corp
Earnings Call Analysis
Q3-2023 Analysis
Clean Energy Fuels Corp
The company's commitment to decarbonization appears to grow stronger as the demand for fleet decarbonization rises. They bank on renewable natural gas (RNG) being more practical and cost-effective compared to electric solutions, especially for heavy-duty fleets. With the addition of a new engine technology from Cummins, they anticipate even heavy-duty trucks will soon join the RNG movement. Despite the challenges faced by electric vehicles in the market, the company's leadership remains confident in RNG as a clean energy solution.
The company's financial performance for the third quarter did not meet their targets, with a reported GAAP net loss of $26 million against a forecast of $24 million, and adjusted EBITDA of $14.2 million compared to the anticipated $18.6 million. The shortfall primarily arose from two factors: a lower than expected Low Carbon Fuel Standard (LCFS) price and a scarcity of RNG supply, both from third parties and their own production. Nevertheless, the company experienced higher-than-expected RIN pricing, improved base fuel sales margins absent of Amazon warrant charges and environmental credits, and ramped up Amazon volumes. Even with these positive elements, the company has slightly revised its guidance downwards in light of these recent results.
Revenue for Q3 2023 stood at $95.6 million, decreasing by $30 million from the prior year. The decline can be attributed to the prior year including $11 million from the alternative fuel tax credit, a $10 million increase in Amazon warrant charges due to higher volumes, and a natural gas cost that was $13 million higher in 2022, inflating the sales price. Despite this, the company managed to enhance its base fuel sales margin per gallon in 2023, excluding the warrant charges. Costs are optimized, and the spread between the prices of oil and natural gas is favorable, which continues to benefit them.
The company faced operational issues such as a 3% sequential dip in RNG delivery, stemming from a shortage and their non-operational Texas LNG plant's effect on total fuel volumes. The company acknowledged these hiccups and noted the need for slightly adjusting their future guidance with a more conservative outlook on LCFS pricing and taking into account the third quarter's RNG shortfall.
A GAAP operating loss of $21.4 million for Q3 2023 was reported, which represents a $12.8 million increase compared to the year-ago period. This decline was significantly influenced by the lack of $11 million from the alternative fuel tax credit that bolstered the previous year's numbers and a $10 million rise in the Amazon warrant charge. Nonetheless, a bright spot in the company's financial reporting was lower depreciation and amortization expenses by about $7.2 million in 2023, as 2022 included additional charges associated with certain station assets.
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Good afternoon, ladies and gentlemen, and welcome to the Clean Energy Fuels' Third Quarter 2023 Earnings Conference Call. [Operator Instructions] 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 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 factor section of the Clean Energy's Form 10-Q filed today.These forward-looking statements speak only as of the date of this release. The company undertakes no obligation to publicly update any forward-looking statements or supply new information regarding the circumstances after the date of this release. The company's non-GAAP EPS and adjusted EBITDA will be reviewed on this call and exclude certain expenses that the company's management does not believe are indicative of the company's 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, well, 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 produce adjusted EBITDA of $14.2 million, which equates to $57 million on an annual run rate basis. So while I'd like -- so with that, I'd like to focus my comments on the progress we're making across many fronts of our business as we put hundreds of millions of dollars for 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, Amazon are all involved in the RNG space.We make 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 3 other dairies and there are another 2 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. You know, these projects are large and they can be a little disruptive at first at the dairies and the their normal dairy operations. And they need approvals by several regulatory agencies. So there will be unforeseen delays.But with every project we have gained important insight and knowledge that's being applied to new projects and we remain on track to meet our overall RNG supply timeline through our own constructed projects and potential acquisitions.The investments we are putting into RNG supply now will have tremendous value and position us very well for the future. The enthusiasm I have for our RNG supply business is only matched, if not surpassed by the demand side. Our base business of fueling tens of thousands of large fleet vehicles every day with RNG continues to grow, providing us with recurring revenue, keeping our balance sheet strong and allowing us to make the investments for what we believe to be sustainable growth.Much of my optimism is based on one of the most significant advancements that has ever taken place in the RNG technology space. Most of you probably know what I'm talking about, which is the introduction of Cummins' new X15 liter natural gas engine that is currently being tested by a handful of some of the country's largest heavy duty truck fleets.The phrase game changer is probably overused even by me, but there's not a better way to describe this larger engine that Cummins is introducing to the heavy duty market. In my 20 years of working very closely with this world class engine manufacturer, I've never heard Cummins speak about another product quite the way they are about this 15-liter engine. Cummins executives are actively promoting the attributes of the engine to investors, their dealers, industry partners, and potential customers with the message that this engine has all, superior power, torque fuel efficiency, and most importantly, the ability to decarbonize heavy duty trucks with RNG on a scale that no other technology is coming close to 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 includes some of the country's most demanding, such as Walmart, Warner, UPS and Knight-Swift. I would not be overstating this -- it 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% full from 2% today to over 8% by 2027. And they're realistic. High case is 12%. Approximately 250,000 heavy duty Class A trucks are sold every year in the U.S. And if one takes the medium between Cummins' low and high cases of 10%, that means 25,000 new heavy duty natural gas trucks can be sold in 2027. 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, many, if any, natural gas trucks. So much of the 25,000 will be coming from new customers. I could go on about the importance of this new engine, but let me close with saying it couldn't come at a more opportune time. The desire for fleets to decarbonize is only increasing. Yet the technology [indiscernible] 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, we'll 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 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. And 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 2 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 the expectations.Regarding our updated guidance, we felt given the circumstances where the LCFS is at, so 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 then also kind of a side note here, looking at our total fuel volumes for 2023 and particularly the conventional natural gas, this is where you'll see the impact from our Texas LNG plant that's not been operating, and we've talked about some of the drag that that's 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 -- so 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. First, the most notable item is that the third quarter of last year included 3/4 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. And 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.And then the kind of the third item there. Finally, for the third quarter. The third quarter revenue of 2022 was higher by about $13 million due to the natural gas cost being higher, which then also translates to higher sales pricing back in 2022. And we've -- that's a phenomenon that we deal with relative to the natural gas and how that impacts our pricing. But for some context here, though, even though the gas cost and sales pricing was higher in 2022, our base fuel sales margin per gallon exclusive of the warrant charges is higher in 2023. So we've optimized our retail pricing and gas cost in 2023. And large part of that's been the favorable spread that we've talked about between the price of oil and therefore the retail price of diesel and natural gas. So that is helping us. It continues to help us. But on the revenue front, it's lower when the gas costs are lower.Looking at our GAAP operating results of -- loss of $21.4 million for the third quarter of 2023. That compares to a GAAP operating loss of $8.6 million a year ago for a $12.8 million decrease. But of course we're going to -- that is being influenced by $21 million of the decrease that relates to the alternative fuel tax credit, retroactive credit of $11 million and then also the Amazon warrant charge that's up by $10 million. So that's basically more than takes care of all of that decrease.So really, the other notable item in our GAAP is that our depreciation and amortization was lower in 2023 by approximately $7.2 million, primarily because 2022 included some incremental depreciation on certain station assets.Our adjusted EBITDA of $14.2 million in the third quarter of 2023 compares to adjusted EBITDA of $23.9 million for the third quarter of 2022 or a decrease of $9.7 million. Again, the $11 million of the retroactive alternative fuel tax credit is included in that prior year number. If you were to exclude that, the 2022 third quarter adjusted EBITDA would be $12.9 million compared to the $14.2 million in 2023. And that improvement there is really our fuel volume growth. And the underlying base fuel sales margins continue to add incrementally to our results, which has helped to offset the effect of the lower LCFS credit pricing and a lower net take on the RIN and also some higher operating and equity investment costs in our dairy joint venture. So frankly, the fuel volume and that base fuel margin is working well for us and it always does.The adjusted EBITDA of $14.2 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. And noting though on that, that with the dairy RNG investments, there is $84 million in cash at our dairy JVs.And I think with that, operator, we'll turn the call over to questions.
[Operator Instructions] And your first question comes from Eric Stine from Craig-Hallum.
Can we just dig into the RNG for a second. So just wondering if you could expand a little bit on the RNG shortages. I mean I would assume it's all from third parties given that you've just started bringing on your own volumes. So maybe some of the things you saw in the quarter and have you seen that more normalized here in Q4?
Yes. Maybe I'll start. But Eric, yes, it was actually from what we were forecasting, there was both supply as well as our own production we thought we'd have a little bit more of. But on the 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 then some CARB certification delays. And so that took down a pretty good number of expected low CI gas. Now we also, though, had some landfill gas that produce more. And so there's a bit of an ebb and flow there. The net of it is that we were kind of -- we were net down, call it, maybe a couple of million gallons. So this is not huge, but we're talking about 4 here and 3 there and netted to 2. 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 real fundamental about things aren't 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 2 million or 3 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 LCF 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 of the 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, but.
Yes. Okay. And so then when you talk about in the release, you -- just a lower share of RIN values. So that also refers then to you just had values that did not reflect some -- a greater mix of low CI, and therefore you had a lower share of it. I mean just to confirm, I mean, nothing's changed in terms of your share as the downstream avenue to the fuel tank or anything. It simply is that mix issue.
It is. It is. Because each supply deal kind of has its own negotiated take, and as that starts to move around or it's short, it 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 6 to be producing gas here by the end of 2023. Just curious. I think in the past you've talked about, gosh, I don't know if it's 8 in '24 and a pipeline of 15-plus. Just curious if anything has changed there. Details would be great.
Yes. Eric, I'd say it's generally the same. And you're right. We still see that we'll be on track by the end of the year. Now I did, you'll notice, I did slip into early '24 with one of those. But it's going to go almost exactly as we've discussed that those 6 will be finished and 1 may slide in there a few weeks. But those will be on production and we'll have something out soon on 3 of them, all right? Now for 2024, you'll have -- it's essentially the same numbers that we discussed. It's actually a little larger. You can slice this, as we've discussed before, in a couple of different ways. But you will essentially have -- we have one that's in construction as we speak, that will continue to be in construction in '24. You'll have 4 more that will come on in construction. And then right now, we have 7/8 that are in the final throes of design, engineering, and a few of the -- a couple of those will be on production -- not on production, but in construction. So it's tracking, is exactly where we saw it, that you'll have a few come on towards the latter part of the year. And then our pipeline continues to be similar. It's in the double digits. Those ebb and flow, but don't be surprised that somewhere in the year, some of those will come on and kind of change our numbers. So I would say, Eric, it's about as many as we can handle right now, and it's going as expected. So we're feeling really good about that. We're beginning to do even more of the work ourselves and we're beginning to bring more of the operations of that as we contemplate these projects in-house. So we're really getting more and more comfortable as we cut our teeth on these early projects on how the future, how we develop these projects.
And your next question comes from Rob Brown from Lake Street Capital Markets.
Wanted to hear a sense of the run rate on the RNG production facilities when you get those 6 kind of up and running, what's the run rate in terms of gallons? And how does that -- I'm sure it does help the shortages, but just a sense of what that does in terms of volume.
Well, the -- you're looking, I don't know, $7 million to $10 million for maybe the ones that we're talking about that go into production or they going into -- come online by the end of the year. And then others that we talked about that will go into construction and as they produce, I don't know, they all vary, but I mean, our -- so we're looking, I guess, in kind of 10 million to 20 million gallon range as we've talked about. And these things will take a little time getting up. So I think they'll produce more as we move through. So you could be on a kind of an exit rate that's a higher number even as we go through '24.
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? And I think you quoted the Cummins percentage numbers, but how do you see the ramp rate more in the early years here.
The ramp on the 15-liter? Sorry, Rob, it was you were --
We're having a hard time hearing you, Rob.
Yes. Sorry about that, the ramp on the 15-liter.
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 2023 -- 2024, pardon me, 3,500 units, that '25 to be 7,000 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. It went to 50% in that market. Cummins has assured us that the number of engines is not a problem. And then once they get the more of the OEMs and 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 3 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.
Well, if -- I don't know what, I'm having a little hard time hearing some of the questions, but you're seeing the differences between Oregon [indiscernible]. No, I don't know. I do know this, Derrick, [indiscernible] there. We're getting more for it right now. And I don't know all of the -- what's all in it, why the CI score. I'm just not sure, Derrick. We'll have to get back to you on that. I don't know. Let's not get -- all I -- I do know this on the market because I do understand the market side of this thing. I mean, look, Oregon's not as big a California, right? So the LCFS Oregon was 180, we started injecting there and it came down some. So it just is a huge market. So it's not unlimited there. We can put more there. But it's not going to replace California, let's put it that way.
And just an extension on that question. Do you guys see Oregon as a likely pathway for your first few projects?
Will continue for a while. Look, I have great expectations. And I remind our friends in California as they've been kind of fooling around with the low-carbon fuel standard, I said, you know what, be careful. You're not the only state in the United States, right? So you've got Washington, you've got Oregon. We've got the legislature in Illinois looking at it, with New Jersey. New York has tried to pass it a couple of times, to Mexico. You're going to have other low-carbon fuel states. And it will be a discipline. It will give a little discipline to some who want to keep -- continue to muck around with these things because you have other markets that will -- it's going to be clear to everybody that RNG is one of the best ways to decarbonizes, certainly for transportation fleets. And so other states are going to adopt it. Now this doesn't happen overnight but it will. So you'll see these other states. We're working in those other states now, and we have good support in some of those places. So we'll -- and what I tried to get at, Derrick, in my comments is what makes -- sets us apart a little bit, one, we're in touch with the demand side of the equation in transportation, we're in 42 different states. We're moving RNG today in about 40 states. But it gives us the opportunity, certainly with our big supply portfolio, a lot of that being landfill gas, it allows us to optimize and move gas around to the best markets, and we can do that very quickly. So that's unique to us because we have the gas infrastructure.
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 tend to think it's [indiscernible]. But the way I'm thinking about it right now, landfill gas going to voluntary markets getting $25 an Mcf and in transportation the RINs are valued more like $36. So the transportation is just a much better market. One of the -- years ago, one of the Energy Secretary said, washing your car -- he said use of natural gas to make electricity is like washing your car with champagne. And that's the way I feel about. It is in a hard-to-decarbonize market, which is transportation, that's where RNG ought to go. And it will. And you're rewarded for it. It's a little more complicated. But that's where the infrastructure comes in.
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 be 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?
[Indiscernible].
Yes. And whether that stays in, is that going to be an incremental cost.
We'll probably have some questions. Let me go out on a limb and kind of talk about where I think that the Air Resources Board in California set it. We believe -- we haven't exactly tied on this, but I think we're pretty close to it. But we believe that the ARB will likely will hear some proposed rules before its board soon, the middle of -- it's been suggested it could be in the middle of November, it could be next week. And there were 3 -- Paul, there were 3 big issues kind of the stake, right, or at least that had our attention. One was that it avoided methane. Would the ARB, as it was suggested by some, get rid of the way we calculate or utilize the avoided methane in RNG, right? And it looks to us like that, that suggestion has not been heated. And that the ARB has understood that the low-carbon fuel standard is working. They want to make it more aggressive. And they know they need dairy gas. And they know they need RNG. And so the avoided methane calculation looks to me like it will be in place for a long time to come. And I don't know that it's clear if it's 2040 or 2045, but that's a significant issue, and that means that RNG will be in place for a long time to come. And certainly for these projects to get good returns and so that makes a lot of sense. And then they may decide that after 2040, that maybe you shouldn't go into transportation, it ought to go into other uses like trains and ships and other hard-to-decarbonize. So we'll see that. We'll see. There's a long ways to go before we get to that. The other is book and claim. The way that we currently account for it, we put it in, in Iowa and we take it out in California. And it looks to us like that is in place to 2035. Most of us believe that that's the way that's beginning to shake out. And then maybe there would be some refinements after some study. CARB I think has been very good about this. They've been listening to how the business really works. And that maybe after 2035 there would be, looking at -- you might have to justify that the pipes you're using to move it to California, they 50% of the time they have to have flow rate to California. It's not clear whether or not even after 2035 you might have to pay for transportation. But the way I look at it as compared to avoided methane, the book and claim is kind of cost of doing business. And if in the worst case after 2035 you needed to pay for the capacity charge, now you're talking about, let's call it a couple of bucks an Mcf. All right. Now we're dealing with potential value of fuel around $80 McF. So to me, that is a little bit of a cost of doing business, but it's way out. And I think we're having good negotiations and good understanding with CARB. Now finally, it is, well, what is the obligation curve going to be? And we all saw in the stuff that came out in [ Soria ] not so long ago, that one of the suggestions was, you remember there are 3 options. There was 25%, 30% and 35%. Well, it looks like they're moving toward the aggressive side of that. So as I look at it, as a shareholder and as a believer in the RNG business, looks to me like they're going toward the most aggressive end of the scale. So far it appears that it's in the range of something around 34%, right? So that's a big move, from 20% in 2030 to 34%. And so now I think the market -- I'm going to give it more here than your question, I think that the market is likely for LCMS to be a bit soft in 2024 because you don't really see the big pickup start on the obligation and on the compliance curve until '25. So you're going to -- it's going to take a little time to work off the oversupply of credits that are in the bank right now. On the other hand, it's likely that CARB is going to adopt this automatic ratchet mechanism that if there's a big oversupply, they can ratchet down and sop up some of the supply. That is going to look like it's going to be in this as well. So that's good news. So I don't -- I think we may have to grin and bear it a little bit until some of the oversupply is worked off in '24, I think that it will be much more constructive. The ARB has said that they believe that the range for the LCFS should be between 120 or 180 after 2025. So that we think is very constructive. So anyway, I gave you a lot more than you asked for, but I just thought we will get out free guidance.
Sure. Sure. And Andrew, I know typically you guys don't give guidance for next year data already, 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 -- yes, soft guidance. Well, that's a little tricky. That's, it could be too soft, it could be too hard. So look, I mean, Andrew alluded to the LCFS and I mean that could be potentially something if that price -- if it's going to be challenged by the kind of the supply and demand. But who knows? I think we have a fair amount of some time to kind of get some more information, and we're really evaluating all of that as we speak. Also it wouldn't be probably a good idea to try to do some soft guidance.
Paul, all that [indiscernible] and we know on the demand side, I mean, as I look out, I'm not going to give you any numbers, but on that I like -- we're constructive in that. We love the fact that in the biggest market in transportation, heavy duty, we've got now finally a product that's coming to market. And those are -- actually, those engines are going to be delivered in June. That's a good thing. So we haven't seen a cannibalization of the 12-liter right now. So we see this as incremental volume that will come into the system, which I think is a good thing. And of course, we know there's lots of RNG projects coming. So demand should be up and RNG supply should be up. And so we'll be more specific later. I'm sorry, we can't do it today, but we'll be more specific with guidance coming in the next quarter. Sorry.
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, they're not interested in RNG because of the low LCFS prices? And if that's the case, I mean, would a higher LCFS price just spark more sign-ups?
Higher -- no doubt, higher LCFS price helps the economics. Now the economics aren't negative, right? Payouts get stretched. And what it does, Matthew, it's why we're -- and I'll talk here in a second why we're embarking on an optimization program to try to bring -- get the cost of these projects down a little bit because it will mean that you can move into smaller dairies, right? Because of the way the industry has been developing these dairies, a less modular approach, more field-directed approach is just costly. So it's made it so that you have to target 5,000, 7,000. Look, we have a dairy that we're so excited about that we're building on and will throughout next year, is 35,000, PET, but there's only a couple of those. There are many thousands of dairies that are in the 2,000 head range. And right now those are tougher the way, one, because of the cost and a contributing factor would be because of a lower LCFS. So yes, as the LCFS price comes up, more comes into range. Now I'd say, in general, in the competition, the lowering of the low-carbon fuel standard has made some of -- we were in a little bit of a land rush gun-slinging environment about a year ago, 1.5 years ago. A lot of folks got into the business that maybe really didn't have any business because they saw the opportunity. And then things got a little tighter and supply chain happened and the cost went up a little bit. And then at that same time, the low-carbon fuel credit collapsed. So it shook some out. So I want to say that for those of us that need the RNG, we're a bit unusual, we're not building a project on spec and then looking to where we put it. We need it all. So we're a bit unique in the business. And for those of us that are in like that, this is a good move. And so, look, there are plenty of dairies, if you know what you're doing, I think. And we're going to be -- we are going to work hard in '24 to see if we can bring to market modular designs to bring the cost of this down so that we can then lower the cost of development of these dairies and therefore enter into lower smaller-sized dairies which then you open yourself up to a lot more targets.
Sounds good. And then it looks like the updated --
Hold on. Hold on a second, Matthew.
Yes. Sorry, just the question to come up on the CI score, what that looked like with the Del Rio going to Oregon. And so we went on a temporary pathway, and it's similar to California where that takes you to a negative 150. And that's where Oregon was. But of course the pricing was much better. And the process of basically securing even the temporary pathway is faster, so. But that's where it's at. The actual CI, Del Rio is anticipated to be much higher than that or much lower, I guess. Anyway. That's straight --
Okay. And then so 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?
It's mainly, Matt, added fuel volumes that when we've said our ramp is going to continue to go. We have a little bit on the -- we have a little bit on the RIN, although we're also mindful of what the take has been, but the RIN is there. And we're being -- frankly, I'm being, I won't say conservative, but the LCFS is really where I took that -- is where I kind of took that down to -- in the 60s. And so it is better, but it's generally volume-related, along with the RIN.
Your next question comes from the line of Pavel Molchanov from Raymond James.
Yes. I'll start with my usual Washington question. When are you guys expecting to get the Section 45Z transparency from the Treasury. Is that a '23 event? Or do we have to wait until the new year?
Yes. Well, 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, that -- 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 5 stations in [indiscernible] built and 4 others being built, and we're kind of full speed ahead on that effort. And they're just as excited up there about the 15-liter. It's frankly probably even more needed there. But we're just lockstep with our partner, Tourmaline, on that. And it's a good environment here with what we're doing. So we are finding that some of the permitting and just the ease of getting these things going has been favorable. Those will come on in here in the --
The good economics.
Yes, good economics.
Very expensive diesel in Canada. And so the economics are really, really good.
Yes. And so we'll 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'll come on. And like with a lot of this is just to see that in a sense that this is happening, and that's really what we look to is like the volume will come if the trucks are being ordered and bought, then it's just a matter of time that they're at the -- they're filling up at the stations.
Just one on market thing, Pavel. Last week, there was a meeting, you had 27 different fleets in a room with the largest dealer in the region and Cummins reviewing the 15-liter. So I like that. There's a lot of interest. And so we have great -- there's work to be done there, yes, but there's -- we're -- we've got a nice advantage. And of course, tourmaline is an excellent partner in that -- 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?
Have not. They've been here. They've been pretty public here recently where they've been kind of almost uncharacteristic kind of talking about when they could be ordered, when they will start to be delivered and ramp. They have been mentioning that. But I don't know, maybe that's factored in, Pavel. We have certain of our customers though, like for instance, our refuse customers are behind on getting natural gas engines. And it's kind of funny -- natural gas trash trucks. And it's interesting, it's -- often it's not the natural gas tanks or stainless steel tubing or the engines, it's door handles and seats and supply chain issues that's bottlenecked some of that. So there is still some of that working through. But we haven't heard -- I haven't heard that in these recent meetings and presentations by Cummins.
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, Bob.
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 -- I mean -- so that will be significant. That's 2025. That's why the clarity from the IRS coming couldn't come really any sooner.
I mean, Bob, you might just speak to it, the law says that it's on -- suitable for on-highway and that's a base level dollar. And then depending on the -- go ahead.
Yes. Right, exactly. So the lower -- it's for on-highway transportation. Depending on the CI score, you could be at $5, $6 a gallon credit off of the PTC. And that will relate to our production dairy investments that we have going on and the gallons that we project to produce there. And runs for 3 years, '25, '26, '27. It will be -- I think when we get that clarity, people can kind of start to do a little better math on this thing because it will be significant.
Second question here is we did get updated stock proposal from CARB, but we're still building a lot of credits. And when do you actually expect some improvement in LCFS prices because the way things are, it's not looking very good even for 2024, unless the LCFS price start to move up. So trying to understand when can we start seeing some improvement in LCFS prices?
Manav, you might have missed it. I kind of touched on this. I mean, look, we don't have a crystal ball, but it looks to us like that you could have some continued softness in 2024 as you work off the credit bank. Now what I mentioned is there is in -- now, look, there's a lot of ifs here, but the new rules will have a automatic -- not automatic, will have a ratchet mechanism to increase the compliance curve. Now those don't go into effect right away. So I think -- but they could go into effect fairly quickly. But I think that we might prepare ourselves for a little bit of tough sledding in '24. That should come much better in balance in '25. But it wouldn't surprise me if we bang around the lower end of the range in '24. Now on the other hand, you might start getting some folks to be buying these credits and take -- putting a little pressure on. I don't think that's happened yet either, and that can happen. It's not that liquid of a market.
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. Well, we were looking at around $3 on the RIN. And then at that time, the LCFS was really had come up. It was kind of in the low 80s with an expectation of possibly even some more bullishness on the [ hat ] with some of the news maybe coming out of CARB with maybe a better strengthened compliance curve and that sort of thing. And there was a little bit of that, but then the market kind of quickly tanked from that. So it came off of at the 80s and so I was in that range. And I just mentioned here, I kind of -- we've moved the RIN up a bit, probably closer to $3.25 or something. And the LCFS, I think I've -- I don't know how low to go on it, but it seems like you'd say, I put it out there, it comes up maybe a little lower. It's in the 68, 67, somewhere in there is what I factored into all that guidance.
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. And 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. And I know in your kind of 5-year plan, you have a ramp-up in your own distribution volumes. And I'm wondering how much market share of that 15-liter engine business would you need to have in order to hit that guidance? And is that kind of the way you look at the market opportunity of the market share of those Cummins engines?
Yes. I think, Jason, it's a good question. It's interesting. I mean I think what you're asking is on that when we laid out our RNG Day a couple of years, almost a couple of years ago, and we said, well, we need 545 million gallons. Boy, that didn't have this kind of robust -- that didn't have sort of that 10%, 375 million gallon bogey in it at all. I mean, I think we never got above 3,000 incremental heavy-duty engines, so 3,500 maybe. So we just -- at the time, we're trying to be conservative. And so you would need, so I don't have a percentage of where the market. But if it goes the way we think by the time you get out there, what we have, where we thought we need 545, you need another couple of hundred million gallons or more.
Yes. So I think on the -- easy, because by the time you get to '27, you're creating almost all the gallons that we're doing right now every year. And the industry can provide that. We'll have all have to get busier. But we, as a country, can get there. And I think that if you look at all -- if you look at the resource base for a landfill for wastewater, for food waste, I mean you can easily be in a 10 billion gallon dairy, a 10 billion gallon market. Now 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.
Got it. My follow-up is kind of maybe a bit more philosophical just about how you think about forecasting the business. 2022, your final EBITDA came in below forecast. Your initial '23 was below what you provided at the RNG Day and had to be revised lower. And a lot of the value, I guess, or the potential value for the stock is in the future growth potential. And so we're obviously very reliant on the earnings forecast that you provide. And so as you think about laying out those forecasts moving forward, how do you think about it relative to how -- how your results have come in relative to prior forecasts. Do you think you need to be a bit more conservative? Do you think there's a couple of things that drive -- that have driven the kind of forecast misses the past few years? Just any, I guess, thoughts about how you think about forecasting the business moving forward would be great.
No, it's a good question. And obviously we're trying to create a new market. So it's a little bit different, right? This isn't mature. There's a lot of moving pieces to it. But that notwithstanding, it's our job to try to do, as best a job we can to forecast. I mean this year, had you not had that first quarter, you would have been in on target. That's what I was trying to get at with this. You would have been right in on guidance, all right? And we did revise our guidance last quarter. So we just had enough information. We weren't sure about where that low-carbon fuel -- so your -- credit prices was. So you were -- and I think what we're trying to do here, Jason, is exactly that, is be conservative, be responsible and we reverse -- we revised it down. Now, albeit $3 million, $4 million, we're at. What we're trying to lay out though for you is to show the potential size, right, of the market. And so it's kind of a balancing act between is the future of this business to us discussing $47 million versus $50 million in EBITDA or 2 years hence when you have the [ PTC ] worth 250 million.
I think you're in that period here, right, where there's been -- hasn't been -- wasn't until recently a lot of great clarity on the -- we were all going to have an [ ERIN ]. Well, that's changed. We're not having an ERIN, right? We were going to have a June adoption of a rule at the low carbon -- in California. Woops, here we are in November, waiting around for. And so there's been some things that have interceded here and haven't given us much clarity as I wish that we would have had and we all would have had. When I look at our budget planning and we're within 97% of budget on volume, that's not so bad 98%. Now I don't control low-carbon fuel standard pricing. And we'll get better at it. But we're trying our best to try to get this right. And it doesn't help us to miss target. So today, we've revised down a little bit. I don't think you could fall off pancake at this point. I think we're about down to where we -- where we're about that is going to get, and I think it's upside from here. So I appreciate the question, and I don't think we're being overly rosy. But we're dealing with some kind of moving pieces. Will Cummins get those things all produced and start selling them in June, I don't know. They just said they would, but I hope they will. But when I look at the big picture 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. So I like the way we're positioned. And so I think the best thing for us to do is be prudent with our capital, is continue to develop on the RNG 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. Because when you compare a heavy-duty truck operating on RNG versus the other alternatives that are out there, we're leagues ahead and more efficient and more cost-effective. And so that's what 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.