Clean Energy Fuels Corp.

Good afternoon and welcome to the Clean Energy Third Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the Start key followed by 0. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press Start and 1 on your telephone keypad. To withdraw your question, please press Start and 2. Please note, this event is being recorded. I would now like to turn the conference over to Robert Reeland, CFO. Please, go ahead.

Thank you, operator. Earlier this afternoon, Clean Energy released financial results for the third quarter ending September 30, 2021. 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 risk, uncertainties, and assumptions that are difficult to predict. Words of expression reflecting optimism, satisfaction with current prospects, as well as words such as believe, intend, expect, plan, should, anticipate, and similar variations identify forward-looking statements but their absence does not mean that the statement is not forward-looking. Such forward-looking statements are not a guarantee of performance, and the company's actual results could differ materially from those contained in such statements. Several factors that could cause or contribute to such differences are described in detail in the risk 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 those non-GAAP and GAAP figures is provided in the company's press release, which has been furnished to the SEC on Form 8K 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. The country continued to climb out of the pandemic-induced economic slowdown this last quarter, which helped the ongoing recovery of the transportation sector and our fuel volumes. We also added new customers to our roster of those fueling, with our ultra-clean renewable natural gas, or RNG, and we made significant advancements in securing future supplies of RNG, all in all, a very good quarter. Our fuel volumes exceeded 100 million gallons for a second straight quarter, coming in at over 104 million gallons, an increase of about 7% from the third quarter of last year. Our revenue was up very healthy, 21% to $86 million for the third quarter, even after the non-cast charge for the Amazon warrant. Without that charge, revenue would have been $88 million, a 24% increase over the third quarter of last year. Our RNG volumes of 42 million gallons grew 5% from a year ago, demonstrating the increasing demand for the negative carbon intensity fuel and clean energy's ability to deliver large volumes of RNG. Adjusted EBITDA for the quarter was $13.4 million, a 22% increase over the same quarter a year ago. We entered the quarter with $260 million in cash and investments, leaving us in a strong financial position as we continue to invest in future R&G supply and further expand our fueling infrastructure for our large new customer, Amazon, and other fleets. We communicated to you earlier in the year that we pivoted our business to focus on the expansion of our R&G offering and to begin to control more of our own destiny by investing in the production of new R&G supplies. All fleets are looking to decarbonize, which is why a fuel that can be rated negative carbon intensity is so appealing. Fleets, including some of our longtime customers like the transit agencies in L.A., Dallas, and New York, easily and quickly switched to R&G because their buses were already equipped with natural gas engines, and the existing fueling infrastructure could immediately deliver our organic renewable fuel. Other customers like Amazon are deploying their first alternative fleets, and they are choosing R&G. The risk for them is negligible because the heavy-duty trucks are equipped with a proven Cummins engine and immediately have access to a national existing fueling infrastructure. Amazon began rolling out their fleet of heavy-duty R&G trucks less than a year ago, and Amazon trucks have already fueled at over 85 clean energy network stations in 21 states around the country. That number does not include the additional stations we announced we would be building to accommodate the deployment of the Amazon fleet as the new anchor customer. We expect those new stations to begin coming online starting in early 2022 as Amazon continues to expand its fleet. R&G is a drop-in fuel and can be directed to any of our stations for any customer that has contracted for the ultra-clean fuel. Speaking of Cummins engines, I hope you saw the very important announcement that was made last month about a new 15-liter natural gas engine for heavy-duty trucks. As the president of Cummins Engine Business said at the announcement, quote, this natural gas option is a game-changer as a cost-competitive power option to existing diesel powertrains and heavy-duty trucking, making it a great complement to reduce CO2 emissions, end quote. This new engine should make the switch by heavy-duty trucking companies to R&G all that more compelling because many of their trucks need the extra power. Cummins has communicated recently that they've never been more bullish on the adoption of R&G. Besides the announcement of the new 15-liter engine, Cummins also recently acquired a 50% stake in Momentum Fuel Technologies, which manufactures C&G fuel delivery systems. Cummins also announced that their entire RNG product line of engines has received 2022 certifications from the California Air Resources Board, rating them 90% cleaner than a new diesel engine. It's great to have one of the most respected and trusted manufacturers of engines and powertrains continuing to make investments and advancements in the future of RNG. The growth of RNG continues to come from a variety of customers. For example, Our longtime customer, Republic Services, recently awarded us a contract to build new stations in Boise, Idaho and Fremont, California that will flow R&G provided by us. The transit agency, Santa Monica Big Blue Bus, re-upped its contract and we added new customers, Sacramento Regional Transit and Gold Coast Transit in Ventura, California, all representing about 5 million gallons of fuel a year. Big Blue Bus was one of our first agencies to see the long-term greenhouse gas reduction benefits of operating their bus fleet on R&G and has been a loyal customer for many years. Another longtime customer, Foothill Transit, which serves a large portion of the LA Basin, expressed their loyalty in a different way by awarding Clean Energy a contract to build Foothill's first hydrogen fueling station. The station design, construction, and maintenance agreement, as well as the hydrogen fuel supply, is a tremendous confirmation of our strategy to give customers what they want as they explore ways to decarbonize their fleets. Not only did we have the best overall proposal in the competitive solicitation process, but Foothill also recognized Clean Energy's past performance over the last two decades of providing exceptional service, keeping their large fleet of buses operating on C&G initially and R&G more recently. The CEO of the agency that provides an average of 14 million rides a year cited our long, successful track record of building alternative fuel stations and said Foothill looks forward to continuing to work with Clean Energy as they expand into hydrogen fuel cell technology. This won't be the first hydrogen station that Clean Energy has built, but it is the first since OEMs. But it is the first since OEMs of large vehicles have recently agreed to test their new fuel cell technologies. Foothill Transit has placed an initial order of 30 fuel cell buses that will operate on hydrogen. And I'd like to note that a third of the feedstock to create the hydrogen will be low-carbon RNG. As I mentioned, following customers to where their alternative fuel plants take them is a long-term strategy for us. We acknowledge that there will be multiple alternatives going forward. Fortunately, by being the pioneer in building alternative fueling stations and our 25-plus years of maintaining those stations, combined with our access to the cleanest fuel in the world that can be used directly as a fuel or as a feedstock, we believe we are in the best position in this evolving market. But for any alternative to get a low carbon intensity rating, the fuel must either be low CI itself or its feedstock must be low CI. As everyone knows, it makes no sense to power a vehicle with electricity that was produced from a coal power plant. Most hydrogen produced today is not green. That is the beauty of R&G and why we are making significant investments in its production. Fortunately, we have two partners in Total Energies and BP that not only bring financial resources, but have centuries of experience in the energy business as well. I know there has been a lot of interest by many of you to hear more details about our progress in RNG production. And let me assure you, it's going very well. For instance, I'm traveling to the Texas Panhandle in a few weeks to participate in a groundbreaking of a new RNG facility at a large dairy. The project is one of the first that will be financed through our joint venture with Total Energies. That same week, we will be breaking ground at our fourth dairy in the Upper Midwest, all of which are funded through our BP joint venture. And just last week, we signed a contract with one of the country's largest dairies, which is in Idaho, to develop a new RNG production facility, which, when operational, will produce millions of gallons of negative carbon RNG per year. Details of these deals will be forthcoming. But please understand, the RNG produced at these dairies I just mentioned will be coming online in 2023, after the facilities are built. CARB certifies the carbon intensity of the RNG, and the pathways of the fuel are locked in. But in the meantime, we continue to secure additional RNG from dozens of third-party suppliers to meet growing demand in our downstream station network. Some of that demand is coming from our Adopt-A-Port finance program with Chevron that you've heard me speak about. Over 680 RNG heavy-duty trucks have either received grants, been purchased, or are in the process of being financed through the program. Trucks will operate in the very busy ports of L.A. and Long Beach, and most are owned by small companies or are owner-operated and benefited from grants administered by California state agencies that Clean Energy helps secure. In fact, I'm proud to say that our hard-working grants division recently surpassed the half-a-billion-dollar mark in securing grants to purchase new R&G trucks for our customers. I must brag about our entire clean energy team. They have continued to perform above and beyond expectations under difficult circumstances during these past 18 months, while at the same time taking the company to a new level. The sales team brought in our biggest customer in the company's history, Amazon, which was sold on the idea of fueling their new fleet of heavy-duty trucks with our R&G. The team also signed our first LNG bunkering contract with World Fuel Services for two cargo ships operated by PACIA out of the port of Long Beach. When the ships begin their regular routes back and forth from Hawaii, they're expected to operate on LNG that reduces nitrous oxide emissions by 90% and carbon dioxide by 25% compared to the incumbent shipping fuel. The contract is for five years, and we anticipate volumes to be at least 78 million LNG gallons. Our engineering and construction group continues to expand our fueling footprint around the continent with 66 different station projects in progress, and our superior maintenance team of men and women, which keep our customers happy and asking for more. Since the beginning of the year, we've made some significant pivots with our focus on offering a renewable fuel that can make a huge difference in the effort to combat climate change, and I'm pleased to say the Clean Energy team has risen to the occasion. And with that, I'll hand the call over to Bob.

Thank you, Andrew, and good afternoon, everyone. Our third quarter financial results were highlighted by continued volume growth, increased natural gas pricing helping drive revenues higher, and year-over-year improvements in our effective margin per gallon. We also improved our cash and investment position to $260 million at the end of the third quarter compared to $254 million at the end of the second quarter. We're maintaining our guidance for 2021 of a gap net loss of $86 million and adjusted EBITDA in the range of $60 to $62 million, as we described in more detail in our press release. Continuing with my third quarter comments, our volume increases compared to a year ago third quarter largely came from across all sectors with some variability around where our RNG flowed and if those volumes were incremental or already counted alongside maintenance gallons. Our RNG volume grew 5% to 42.2 million gallons in the quarter, up from 40.1 million RNG gallons in the third quarter last year. We're looking forward to continued RNG growth as supply continues to grow. Our effective price per gallon in the third quarter of 2021 was 77 cents per gallon compared to 59 cents a gallon a year ago, or an 18 cent per gallon increase. This increase reflects higher prices at the pump, principally from higher underlying natural gas costs, as well as higher rent and LCFS revenue. Our alternative fuel tax credit revenues of $5.3 million for the third quarter were in line with trends, while our station construction sales of $2.6 million were less than a year ago and lower than more recent trends. The construction revenues can be a bit lumpy due to the timing of the underlying construction processes, particularly in today's environment. We're anticipating fourth quarter construction revenues to be more in line with recent construction sale trends in the $5 to $6 million range. Our overall gross profit margin improved in the third quarter of 2021 compared to 2020, exclusive of a non-cash contra-revenue charge of $2.2 million related to the Amazon warrants and a non-cash fair value gain in our Zero Now fuel hedge of $300,000. Exclusive of these non-cash items, our gross margin was $32.2 million in the third quarter of 2021 compared to $25.7 million in the third quarter of 2020, or a 25% improvement. Increased volumes together with a rise in our margin per gallon from a year ago were the primary drivers of this year-over-year improvement in gross profit margin. Our effective margin per gallon for the third quarter of 2021 was 26 cents per gallon compared to 21 cents a year ago. This 5 cent per gallon improvement reflects the difference between a rise in our effective price per gallon of 18 cents and an increase in our effective cost per gallon of only 13 cents. With the cost of natural gas being at some of the highest levels we've seen, exceeding $5 in MMBTU, I thought I would take a moment to make the point that this significant rise in the cost of natural gas did not translate to a degradation in our margin. As you've seen in this third quarter, our effective costs per gallon were up 13 cents per gallon from a year ago, but we managed an increase in revenue per gallon of 18 cents, helping to drive higher overall revenues. This dynamic of the change in natural gas costs is key to understanding that a rise in the cost of natural gas is not automatically a bad scenario for us as we are generally able to increase our pump prices And we have contracts that call for commodity costs to be passed through to our customers. Our SG&A was $22.3 million in the third quarter of 2021 compared to $16.6 million a year ago, an increase of $5.7 million of which $2.7 million or 48% of the increase relates to an increase in stock compensation as expected. We have seen some cost increases in connection with our rebranding and R&G activities, which could take us to around $86 million in SG&A for 2021, including about $13 million of stock compensation. Our gap net loss for the third quarter of 2021 was $3.9 million, which includes the effects of the non-cash warrant contra revenue charges and the zero now hedge game. Our non-GAAP net income for the third quarter was $1.6 million, or one cent per share, which we believe is more indicative of our operating results. Our adjusted EBITDA of $13.4 million for the third quarter of 2021 compares to $11 million a year ago, which again highlighted the benefit of increased volumes and improved margins principally associated with our R&G deliveries. Our cash flow provided from operations amounted to $19.9 million for the third quarter of 2021 compared to $3.4 million in the third quarter of 2020. Exclusive of changes in operating assets and liabilities, cash flow from operations was $15.3 million in the third quarter of 2021 versus $10.2 million in the third quarter of 2020. CapEx spending for clean energy downstream business was $7.6 million for the third quarter of 2021, which is up from $4.6 million last quarter and likely will increase again in the fourth quarter as our station building continues to ramp up. Our debt was $42 million at the end of September 2021. On the R&G upstream supply business, we've begun spending in each of the joint ventures on equipment purchases and development expenses as we get projects moving. In the joint venture with BP, approximately $22.3 million has been spent on dairy project CapEx as of September. In the joint venture arrangement with Total Energies, Approximately $4.7 million has been spent on Dairy Project CapEx through September. The $4.7 million was reflected in our consolidated statement of cash flow as purchases of equipment in the third quarter as the Dairy Project JV with Total Energies was not formed until October, at which time those assets were moved into the 50-50 joint venture with Total Energies. And we will continue to report on the capital spend and other progress on our dairy projects as we move forward. And with that, operator, we can open the call to questions.

We'll now begin the question and answer session. To ask a question, you may press the start and 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To answer your question, please press the start and 2. At this time, we'll pause momentarily to assemble our roster. The first question comes from Mr. Robbie Brown with Lake Street Capital Markets.

Good afternoon. Hey, Rob. Hi, Rob. Just wanted to follow up on the JV and sort of the upstream activity that you're doing. How is that sort of supply situation right now, and how much sort of supply do you expect to come online over the next couple years? This is your own supply over the next couple years.

Right. Well, one way to look at it is a lot of ways to slice all that, but, you know, As our own supply, let me speak to you in a second, you know, this year we brought on about 50 million gallons of third-party, right, supply coming from other suppliers. So that's an important component to this. And as I look out over the next couple years to, you know, look, I think it's really important for everyone to understand these projects take 18 months to two years to come online and begin to really monetize the credits and contribute. We've got about 80 million gallons of projects in the pipeline at present. But, you know, these things are coming on all the time. So that number likely will go up over time. But, you know, since we've been at this in earnest this year, I think that's pretty good progress.

Okay, great.

And then maybe on the Cummins 15-liter engine that you talked about, how do you sort of see the market expanding with that engine coming in? What kind of customer growth do you think that can help drive, and how do you view that engine?

You know, Rob, you've looked at this a long time, and the current 11.9-liter engine is really very adequate for the day caps, right? And so much of our our customers at this point are regional day cabs. And, you know, the 12 liter is, is, is a good, is good for them. However, you know, I think it's important to recognize that 75%, probably, you know, someone could correct me on this, but it's in that neighborhood. So 75% of the diesels that are being purchased are more like our 15 liter diesels, right? So, so, In order to have the flexibility to run the routes and terrain and sleeper cabs and kind of be able to take care of the full breadth of what you would like to have that over-the-road truck do and to give the driver the torque and horsepower, you know, that 11.9 is in around $1,450. in terms of a torque. And this engine will be rated, it'll be variable, but it can go up to 1650. So you're going to have more horsepower and more torque. It's going to be able to handle the heaviest loads. It's going to be able to give that driver the power that they really like. And look, one of the things that these trucking companies are needing to do is make sure they have happy drivers, right? I uh, is, is really key. And so I think this 15 liter, it's going to be a ground up engine. Now it's coming with a, it's, it's been on the road now in China. It's going to be actually manufactured and assembled with American parts with American labor here, hoping that's going to get it to the market a little bit faster. It's going to have increased fuel efficiency as well. So, you know, we've always had a little bit of a, uh, of a, uh, efficiency penalty. Sometimes it's ranging between 8% and slightly more. I think this engine should be able to try to cut that in half. And so increased fuel efficiency, increased torque of horsepower, it'll really be able to do everything that you would want an over-the-road truck to do. So we're very excited about it. I think it really fits out the entire offering that Cummins now will have, the 6.7, the 9, the 12 liter, and now the 15. I imagine over time the 15 will end up being the workhorse and replace the 12.

Okay, great. Thank you for the overview. I'll turn it over.

The next question comes from Eric Stein with Craig Hallam.

Hey, just so obviously volume recovery underway. I'd love it if you could maybe just drill down in your various end markets and then curious whether you're willing to give kind of an early view of what you think volumes might be in light of this recovery in 2022.

Yeah, Bob's got some of the numbers there. You know, we've seen a participation in all of our segments. We're bringing on, let me just, and Bob will speak to that. You know, the airports are not back fully. We've all been at airports, so you know that they're not quite firing all cylinders, but we've seen tremendous recovery there. Our refuse is ahead of plan, as is our transit. So we're like where we stand on that. Now, trucking, because of in 20, you know, looking forward, the trucking because of Amazon is, you know, we're bringing on a lot of new trucks. And so we are very excited about the growth rates that we'll see in the trucking business. But, you know, we're making our job difficult, right, because we want to shift more and more of it to RNG. That's what our customers want, and we obviously want that. But at the same time, we're really pressing a pedal on the adoption, which is what we've always tried to do. So it just puts, you know, more strain on us to bring more RNG on faster. certainly as we bring on Amazon and some of the other big customers like them that want this R&G. Bob, you may be able to get into some more specifics there.

Yeah, I think, I mean, we continue to see kind of year-over-year growth in refuse. Transit was in double digit. The airports were actually, the kind of fleet area was certainly growing. uh, positive growth there, which, you know, that, that has taken a while to really start to come out of the recovery, but we're actually now seeing kind of year over year growth there. So, um, yeah. And then, um, as well as, uh, kind of the trucking considering, you know, the RNG optimization and, uh, that sort of thing. So it was kind of across the board. And, you know, as we look, as we look at, uh, Next year, I think we've at least preliminarily said we're looking at it, you know, kind of 10%-ish type number and, you know, on the volume. But, you know, more to come on that, I guess.

Got it. No, fair enough on that. Maybe just with the RNG, Andrew, I know you mentioned that. You've got the pedal down and you need to keep up with that. And I know these projects don't come on overnight. I mean, do you feel like what you see in the market, given the investment for the whole market, that you will be able to satisfy that demand? I mean, I know you will once you have all of your projects up and running. But in the interim, while those are in development, do you think you're able to kind of keep up with the volume growth you may see from Amazon and others?

Oh, I think realistically, Eric, you know, there's going to be challenging quarters in this next year or so until we get some of our on that. Look, the projects I've talked about, the 80 million projects, 80 million gallons of RNG projects I've talked to the pipeline, it needs to be significantly larger than that. I would like to think there's a time when one of the fleets that we've talked about today could take that much RNG, twice that much RNG, just one fleet. So we're just in the very early innings of the R&G supply game, right? And just to review, the supply resource, when you look at landfill, wastewater, and manure from livestock, is on the order of somewhere between 25 billion and 30 billion gallons annually. Now, that's many years from now, but that's a long bridge that could could take 15 years, 10 to 15, 20 years to develop. So there's a lot of room here. I think the lowest hanging fruit is in the dairy space. There's still plenty of large dairies to come and medium-sized dairies. You know, that's on the order of three to four billion gallons. Look, remember, the industry is growing. at 400 million gallons. So we're just getting started as an industry. And let me tell you, there's a lot of money pouring in. We're well positioned because, you know, it won't all be our own supply, but we are able to avail ourselves to this third-party supply because we have the network. So, yeah, I like the position where we are. But, you know, there will be quarters next year, especially if we do a good job on the demand side with some of these large fleets where, you know, it will be nip and tuck in terms of whether or not, you know, we have exactly all the RNG we'd like to have and the commitments that we've made. You know, all of our customers want the lowest RNG they can have. And, you know, I think over time that's going to be – we're going to be able to supply that. But I think, you know, in 2022, I could see periods where, you know, it could be, it'll be a, it'll be a challenge to get all that we'd like to have. That make sense, Eric?

Yep. Yeah, it does. No good. I guess a good problem to have, but yeah, it's something.

Well, that's right. It is sort of a good problem to have. It's not a long-term problem, but it's, it's one that I think we just have to recognize that it's a, um, You know, you bring on, you know, like this, you know, Amazon in their sustainability report talked about 2,700 trucks. So if you just kind of use that as a placeholder and multiply that to kind of an average number, you can see that, you know, annual number, that you can see that that alone would require 40 million gallons, right? So... As these other big fleets pay attention to that and want the RNG, and frankly, as we've discussed in this call before, when they look at their other alternatives and availability of those alternatives, I'm talking about electric and fuel cells, RNG is what's here today, and it's what's near term, and it's what's cost effective and efficient and available. And so these other fleets are looking at what Amazon is doing, and there is a little bit of an Amazon effect going on right now.

Okay. Thanks for the comment. You bet.

The next question comes from Manav Gupta with Credit Suisse.

Hey guys, I just want to ask some clarification questions and bear with me a little here. You said 80 million gallons of projects are kind of in the development. So could you confirm all of them are in the dairy farm RNG or there are some landfills? Because in the past, I think, Bob, you have indicated that for dairy farm RNG, it's about 15 to 20 million dollars per gallon. So To hit that 80 million gallon number, we are looking at a capital deployment of $1.6 to $1.2 billion between you and your partners. So is that math right, or if it's wrong, can you help me out?

Okay, no, it's not wrong, but that reference is really more toward offtake, other partners, not ours. Okay, so there's two pieces to our supply. It's what we get as an offtake partner, just taking gas, not producing it. And that's what Andrew was really referring to there that we've already signed up, you know, 50 million gallons of supply contracts from others. And we've got another 80 there because we need that gas, right? Because our gas is not going to fulfill our needs, you know, for a few years. Okay. So 50 is the part more than 30 is yours. What's that?

So 50 is the other than 30. I'm just trying to understand between you and your two JVs, what's the pipeline in million gallons? What's that number looking at right now?

Okay. The 50 that we've secured and the other 80 has nothing to do with our JVs. Okay. Okay. That's coming from other supply sources. That's offtake. We kind of refer to that as other offtake that we will secure. Okay. Our JVs, Andrew spoke to that some with Rob's question in terms of like, well, what is our volume going to be in 23, 24, and beyond? And I'll say that we're still tallying that number, if you will, when we start to really get into where our hope is that we'll even provide more color on that. in February when we do our year end, because while you've maybe heard us say this, and there's not a lot of quantification around it, there's a lot going on where we've got, we're just checking out a lot of deals. So we want to get those a little bit more tied up, if you will, and then we can start to say exactly what the, you know, what some of the numbers will be. But, you know, you're looking at, you know, double digit volumes from our from our JVs in 23, right? And I'm thinking, you know, certainly more than 10, right? And, you know, more on the way to 25, you know, above somewhere in that 20 and above, somewhere in there. And that's just even a little starting point right now from, you know, what I know and, you know, it's still moving.

Perfect. I won't press you on the number of days or anything. My just quick follow-up here is,

Well, you know, the dairies, obviously, one presses on that, you know, I thought maybe you would press this on the number of cows, but you have to. Well, really, you do have to define what you mean by a big dairy or a small dairy or medium dairy. So then you get down to the cows. But it's not. It's not like 150 dairies that we have to deal with in terms of as we're looking at our number. I can tell you that right now. It is the number of dairies is smaller than that because these dairies have some substantial cow heads.

Perfect. My quick follow-up here is as you come across all these customers who want your RNG, Are the customers pressing you specifically and saying, I want zero or below zero carbon RNG, or they are more or less agnostic and saying, fine, deliver even landfill RNG? Are the customers starting to make a distinction as to the carbon intensity of the RNG as you are interacting with them?

You know, it kind of depends. They are. They're becoming more educated and more. You know, it depends where they're located. It kind of depends what cycle they're in in terms of their sophistication. I imagine if you sat with a customer and walked them to that they could have the lowest CI fuel available, they'd want it, right? But not all customers need that right now. And I think that most customers understand that as you bring on the lower CI, that number comes down. For instance... You know, our number on our portfolio is coming down, right, from 30 or 40 positive or even higher than that. As you looked at, it used to be almost all landfill. And in this quarter and the next quarter, it's going to be very close to negative. And we'll begin to share that with you over time. I'm not really prepared to do that on this time. And it's because we're able to blend our portfolio. you know, and bring down the landfill with that super negative CI gas. So it'll continue to go lower over time, and we'll be able to serve our customers more and more negative fuel over time. It's not that a landfill gas isn't good, right? I mean, it's already 50% less than what the existing diesel fuel is in terms of So it's – you're headed in a good direction at the get-go, but it can be, as we all know, it can be lower than that, and it will be lower than that as we go.

Perfect. My last question is we saw a deal where you're looking to supply some LNG to ships, and I'm trying to understand as, again, you're out there talking to everybody here. Do you feel there is a possibility that going ahead, more ships globally could be looking to switch to something cleaner than running something like a bunker fuel, which is extremely unclean fuel to run?

Right. I mean, it's like burning asphalt, right, Banoff, as you know. Right. No, I think there's – I'm a little rusty. There is an international compact that was sanctioned out of the UN where this bunker fuel is being moved out, right, and – local jurisdictions, be it in Singapore, Hong Kong, or certainly here at the Port Valley, Long Beach. I mean, they've already put in rules where you have to switch over to reformulated diesel, which was a big change from bunker. And now they're requiring a lowering. So yes, it's happening all around the world. I think the U.S. is behind on that. But you see shipping, you know, there's a lot of LNG at the ports, at these worldwide ports. So in Rotterdam and in these other places, you're seeing more and more LNG shipping. It's kind of, it's sort of surprising. I also think that our friends at Carnival Cruises ordered LNG ships, and maybe as many as 11 of them was in my mind, 9 to 11. So Yes, this is a long-term trend. These are long-life assets, and you'll see it happening more and more all around the world. It takes a while, right, to build a new ship and repower a ship, and so this isn't like buying a new truck.

Thank you for taking my questions.

Yeah.

You're welcome.

The next question comes from Craig Sherr with Kelly Brothers.

Good afternoon. Hey, Craig. Good afternoon. Hey, Craig. So that Idaho dairy project that you mentioned that sounded really big, I was a little unclear if you were talking about something in the JVs or if you're looking at anything outside of that.

It's inside the, it's in, it's in one of the JVs. Okay. So that's, so that's our, that's our, you know, our, our production, our upstream for our account with our partner. I gotcha. And it's really, and it's a really big dairy.

And, but, but that still can come online in 2023.

Yeah, latter part. Probably not January.

Okay. And when something is that big, can it be ramping for a year or more after you start, you know, delivery when you have your line of when you've proven your, you know, theoretical transportation to California and CARB certified? Does it take a while to get to full capacity?

Well, you know, what happens originally, just to kind of take you through this, so when you start on production, it doesn't take a full, you know, I've always talked about 18 months to two years. You're on commercial production and you're producing R&G. And yet, you know, of course, there's a little ramp up, shake out period and all that. But it comes on fairly, you know, fairly in a robust way. It's not a long process. I'm going to speak to how you increase it, but it comes on at the expected volumes pretty quickly. But you're producing it while you're waiting for some of the certificates on the CI. You're storing it. So you're in production, but you're storing the RNG, and then you're turning it loose after you get the CI. that's sort of the good news of what otherwise seems like an interminable startup phase is that you're actually on production. Now, like at this dairy, and I'm just trying to be a little careful on it because we're going to do a little something more with it here later, but there is our designs to literally add tens of thousands of more cows to it over time. So that's how you're going to get more volume out of it as well. So it's already about the second largest dairy, and it's going to grow dramatically. So it's a big one, and we're really excited about it. And then what you're going to also see, Craig, just as these things go, there's been a lot of consolidation in dairies already. And, you know, I'm sure there are a lot of – you know, good parts and probably not so good parts as these things consolidate. But one of them from our point of view is it does make them, as they get larger, as they get folded together, it makes, it brings them into the scale that we need. So that's a good thing. And then what you'll see is there's kind of this infill clustering of nearby farms, not unlike what we see in the oil patch, right, gas patch, where you have gathering systems from several dairies and you wheel it into a central digester. And that's starting to, that's just getting underway, but there's going to be great potential for that as well. This is a new industry with lots of, you know, new parts to it. None of it's super, you know, doesn't have a lot of technology risk, but just a lot of things happening on it as people get more sophisticated.

And maybe I missed it. I apologize. It looked like, though there's a lot in the pipeline, I understand, third quarter RNG was lower than second quarter. Did I see that correctly?

Let's see. At 42...

I think it was, yeah, it may have been down a little from second quarter.

Is there anything specific around that? Over time, will there be hiccups to this, or will we get to a point where it is consistent, every quarter should be higher as all these investments start kicking in?

Oh, it's like anything else. Sometimes certain supply sources have a hiccup, you know, occasionally one doesn't get, we don't get re-upped on it. Over time, as the volume grows, you won't notice it, you know.

Right, yeah, I think it's the latter. As this thing, you know, right now you're a little bit susceptible to seeing that, you know, a real live operational matter. I will say, though, that we still are pretty diverse and spread out on all of our supply sources. Right, right. we're frankly in a much better position, you know, than maybe others where they kind of tie their supply into, you know, one or two projects.

We did have some of that change was because of weather event and a hurricane. So, you know, those kinds of things will happen. But as we grow these different projects I talked about earlier, you know, that'll should be going north all the time.

Great. And my last question, I just want to pick up on Manav's question about fleet customers, CI demand. If I understood it correctly, it all comes down to geography and function. And correct me if I'm wrong, but right now all the low CI nationwide, if it has a path, is going to California because of LCFS. I mean, there is a little in Oregon, I think, but it's pretty much going to California, which over time, as it starts to grow quicker than the California CNG market, that they'll start to push landfill gas out of California. to start filling tanks nationwide because Amazon and other fleet operators all across the country want to have some of that in their tanks outside of California. And then over time, the other CNG, just whatever you want to call it, Brown or whatever, that you're using, over time, that moves out of your filling stations and eventually is going to be more for the say that maritime bunkering market, you know, get into other areas where, you know, they're not going to be as focused as early, maybe not for a decade on the RNG. Am I saying that right?

I think you are. I think that's right. I mean, you know, we already have the fuel we sell. We're already at 70-some-odd percent of its RNG, right? But you're right. So fossil fuel will be replaced by RNG over time. However, I don't know, maybe the railroads will use it as LNG. It would be a significant little improvement over what they've got going on. And they use a lot of fuel. So, yes, I think you're exactly right. There will be other markets where you are competing as very dirty, unregulated sources. And fossil will go there. And then one other thing, Craig, that we didn't touch on, and it's important, I think, because this isn't just going to be a – it's not just a California story, right? So I like to think that in 2022, New York will adopt a low-carbon fuel standard. And – Typically, when New York does that, and it's got good support in both houses right now, in the statehouse, then normally the northeast compact, 13 states, looks at it as two. And then there are other study legislatures are studying RNG in several states, Illinois, Pennsylvania, Michigan. So it's not inconceivable that, and this doesn't usually happen, you know, all in one year. It takes sometimes a legislature, you know, a couple years. But it's not inconceivable that by 2024 you could have 10 or more, you know, low-carbon fuel states. So you've just increased the demand and the markets for the low-carbon fuel standard. That's next.

That would be a lot of money.

Which is a big deal.

Yeah. I appreciate it. Thank you. Thank you very much.

You bet.

The next question comes from Pavel Molchanov with Raymond Janey.

Thanks for taking the question.

All right. I'm going to ask about our friends in Washington again. So obviously we got the Build Back Better, at least the current version published last week. There is an interesting low carbon fuel credit, which has never existed before at the federal level. Do you know how that is going to work for your product in terms of Will you be collecting the low-carbon fuel credit or the natural gas fuel credit or both?

You know, Pavel, I think, you know, and I have that bill like you have it, and, you know, it's a barn burner, 2,200 pages. By the way, it's changing as you go here. I think the LNG credit that you're speaking of, I believe, and I was looking at it this morning, I think that's on the producer side.

It's a producer tax credit, I believe.

Now, you know, I've been working on a different one, and that's not in this bill. So I just have to say that's all I know about it, is I believe it's for the production of So it's a tax credit for the production, I think. I do know that the current Build Back Better, this is the thing you and I always talk about, has a five-year extension of the alternative fuel tax. You know, our fuel tax that we've had for all these years is in there extended for five years. Right. But there isn't a new RNG fuel tax credit collected at the pump. I wish there was in there, but I don't believe there is. I think it's something that's theoretically out at the farm, almost like a production tax credit.

And I don't know how it works.

Okay, understood. And, you know, same thing except, you know, I suppose as a potential competitor to you guys. You know, you've talked about green hydrogen being scarce and being expensive. Completely true at the moment. If that ends up being subsidized to the tune of, I think, up to $3 a kilo is what the reconciliation package contains. Do you envision that scaling up

from kind of the de minimis levels of of today in other words you know how much how much would that help for the hydrogen food chain it'll help i mean of course it would help it it's got some more ways it's got ways to go right because uh we we've just priced some of the most cost effective uh uh third of it being green hydrogen uh and it's more like 11 bucks a kilogram which is 11 bucks a gallon so So $3 would help. The infrastructure, you know, is really difficult, and that has to get factored into the fuel price, right? It's, you know, the infrastructure for hydrogen today is, you know, very, very expensive. So, of course, those kinds of things will help, and, of course, the vehicles are super expensive. So, you know, I think it would help. it doesn't make it a no-brainer by any stretch.

Right. Last question, kind of more big picture. You know, we have not seen $80 oil for seven years, but we have also not seen $5 natural gas for probably about that long, maybe even longer. How do you – kind of reconcile those two things, pushing and pulling in opposite directions.

Yeah, and you know, the refined product, right? We're seeing the price of diesel at the pump in the Port of LA at $4.76. And so that's about as high as it's been. I think we saw $5 when we had $100 oil, so it's not far off of there. You know, I always have to bring people back to the... So I used to talk about this and probably confuse everybody, but, you know, you remember years ago, Pavel, we always used to talk about the oil versus natural gas, BTU, you know, equivalents, right? And it was sort of 6 to 1 on the BTU equivalents, but it always traded more like it's 7 to 1. So at this $5.25, $5.50, wherever it is, versus the $84, it was at 16 to 1. So it's still, it's 15 to 1, 16 to 1. So it's still sort of on the upper part of the range. Now, if you roll back, you know, what, a year or two ago at $2 gas and whatever it was, you know, we were at 23 to 1. But then I have to remind you as well, you know, I didn't believe you would see $5 gas like this, and I still believe it'll come down at some point here. But Recall, you get seven gallons, 7.2 gallons of diesel per mcf of gas. So let's just say the price of natural gas, which it did, I mean, essentially went from three to five. That sounds like just a hell of an increase. Well, that's two bucks divided by seven. So, you know, it's about 30 cents a gallon, my feedstock went up. And as Bob covered, we were able to pass that through. either because that's the way our contracts are, or of the 20% or 30% that we control, that's that spot. We're able to pass that through because we're competing with diesel that went up on average over this last six months, $0.60. And so we are still able to give our customer, which is unique to us, $0.60 and $0.70 or more cash. discount per gallon relative to diesel, and we absorb that increased natural gas price. So, you know, I just do not have all that, but the truth is we've been able to move through it fine. We increased our margin. Our customers still have a nice discount, and we absorb it.

All right. Thank you very much, guys. Okay. Okay. Thanks.

The next question comes from Jason Gaberman with Cohen.

Hey, guys. Good afternoon. Hi, Jason. Thanks for providing the detail on the spend on these upstream joint ventures. That's helpful. Can you just clarify, is that your share of equity spend, or should I be thinking about that spend differently? And, yeah.

Yeah, okay. Real quick on that, that is the total spend at the JV.

Just equity, excluding debt.

Exactly. Okay. Well, it's either, you know, I wouldn't clarify whether it's debt or equity. It's the capital X, CapEx spend at the JV is the number I gave. As of the end of September. Okay. Okay. So, yeah, technically we're in for half of that. But, you know, just a reminder, you know, the VP, the JV that we have with VP, you know, we already have our money in there. That's off my balance sheet. So I'm just giving you what that JV has spent. And then as well on the total energy is a little different because that's on a project by project basis.

And has that spend been kind of rateable over the last six months or is it really just ramping up and do you expect it to continue to ramp up?

It's ramping. It's ramping. So, yeah, it's going quick.

And then my other question just on the downstream business, 4Q EBITDA guidance is implied to be pretty strong relative to where it's been the rest of the year. I was hoping you could just provide some context about that. And then as your RNG volumes ramp up and that carbon intensity score goes down, do you expect your margin, your gross margin per gallon to improve from that 22 to 26 cent per gallon range that you've been discussing? Thanks.

Okay. Yeah, on the, so on Q4, You kind of have to look historically a little bit. Q4, over the past four years, we've, in addition to our normal business, all that stuff, we've had some other income in there, which principally was related to our earn out. So there's a little bit of help in there. I'm not saying it's the bulk or anything, but that's a nuance that those that are new to the story understand. you know, would look back and say, okay, yeah, they've had a little bit of annual earn out from a deal we did in 2017 where we had sold some upstream, you know, assets and contracts to VP. And so we are still taking that in. So that helps that number some. So you're correct in kind of looking at the implied 21. And that's not all coming from margin. But it is absolutely EBITDA. I mean, because it is and we collect that cash in the earn out and we collect that cash in Q1. And then the second part of the question.

On margin. Oh, on the margin.

So we'll see that. Well, so without, you know, giving all my 22 guidance. Yeah, but that range should move up. Okay, I'm expecting that. that range to move up as I look forward. And part of that is part of that is the bringing in more dairy, as well as continuing to grow higher margin fuel gallons. Right. So there's there's a couple impacts that you can have there on that margin.

Great. Thanks.

I appreciate that. Yeah. Thank you.

The next question comes from Greg with Weber Research.

Hey, good afternoon, Andrew and Bob. How are you doing?

Good. Hi, Greg.

Good, Greg. It's nice to officially be on the call.

There you go. Well, welcome.

Thank you. I wanted to go back to one of your previous answers talking about additional LCFS programs in other states. And I'm just curious, could you speak to how that factors into the economics and your decision making when it comes time to sourcing dairy farms? Are you currently or will you soon be considering locations on the East Coast or in the Northeast region based on that assumption?

Well, you know, we do that already, right? So, I mean, we're taking them where they come. And we have in Wisconsin, upstate New York, North Carolina. So, you know, you, I guess, in a perfect world, you will move that fuel to the closer LCFS state rather than dragging it all the way to California, because you do end up having some pathway costs in terms of hit on the CI and and therefore less value. So you'll move it, you'll begin to move it to the closest, best you can, to work your portfolio. You'll move it to the closest LCFS state. But I wouldn't say that we're going to start, you know, cherry-picking locations. I mean, we're trying to bring it on anywhere we can get it.

Got it. Okay. Thank you. And you also mentioned the Amazon effect in an earlier answer. It's something you guys have talked about quite a bit on the past calls. But any update there on what you're seeing in terms of vendors or suppliers making the switch in response to Amazon or at Amazon's direction?

Oh, I can't really talk about the last part of it is, but let's just say that it looks to me like Amazon's fully engaged. The deployments are ongoing. We're providing them good fueling experience in 21 states. And, you know, there's many more trucks to come online. They have, and I know that they do do things to look at their scope three emissions. And as we've discussed before, you know, they have a very big vendor pool and supplier pool. And, you know, we hope that we'll design a program with them sometime to address that. But it's nothing specific I can get to on this call.

Okay. Fair enough. That's it for me. Thanks, guys.

All right. Thank you. Thank you, Jason.

This concludes our question and answer session. I would like to turn the conference back over to Andrew Littlefair for any closing remarks.

Thank you, operator, and thank you, everyone, for joining us today, and we look forward to updating you on our progress next quarter. Have a good day.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.