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Clean Energy Fuels Corp (NASDAQ:CLNE)

Q4 2012 Earnings Conference Call

February 28, 2013 16:30 ET

Executives

Tony Kritzer - Investor Relations

Andrew Littlefair - President and Chief Executive Officer

Rick Wheeler - Chief Financial Officer

Analysts

Steve Dyer - Craig Hallum

Robert Brown - Lake Street Capital Markets

Lawrance Alexander - Jefferies and Company

Caleb Dorfman - Simmons & Company

Matthew Blair - Macquarie Group

Pavel Molchanov - Raymond James

Alex Potter - Piper Jaffray

Operator

Greetings and welcome to the Clean Energy Fuels Fourth Quarter Fiscal 2012 Earnings Conference Call. At this time, all parties are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Tony Kritzer. Thank you, Mr. Kritzer. You may begin.

Tony Kritzer

Thank you, operator. Earlier this afternoon, Clean Energy released financial results for the fourth quarter and full year ending December 31, 2012. If you did not receive the release, it is available on the Investor Relations section of the company’s website at www.cleanenergyfuels.com, where the call is also being webcast. There will be a replay available on the website for 30 days.

Before we begin, we’d like to remind you that some of the information contained in the news release and on this conference call contains forward-looking statements that involve risks, uncertainties, and assumptions that are difficult to predict. Words of expression reflecting optimism, satisfaction with current prospects, as well as words such as believe, intend, expect, plan, anticipate, and similar variations identify forward-looking statements, but their absence does not mean that the statement is not forward-looking. Such forward-looking statements are not a guarantee of performance, and the company’s actual results could differ materially from those contained in such statements.

Several factors that could cause or contribute to such differences are described in detail in the Risk Factors section of Clean Energy’s Form 10-Q filed February 28, 2013. These forward-looking statements speak only as of the date of this release, and 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.

Participating on today’s call from the company is President and Chief Executive Officer, Andrew Littlefair and Chief Financial Officer, Rick Wheeler. And with that, I’ll turn the call over to Andrew.

Andrew Littlefair

Thank you, Tony. Good afternoon everyone, and thank you for joining us. I am pleased to review our 2012 operating and financial results. Today, we have reported fourth quarter revenue of $99.1 million, which is up from $86.2 million in the fourth quarter of 2011. For the full year of 2012, revenue totaled $334 million, up $292.7 million a year ago. Gallons delivered for the fourth quarter were 51.7 million, up 29% or 40 million delivered in the same period a year ago.

For the full year 2012, we delivered a 194.9 million gallons, which was up 25% from a 155 600,000 gallons delivered in 2011. I want to mention the one year extension of CNG and LNG tax credits that was included as part of the American Taxpayer Relief Act passed by Congress in the beginning of the year. These tax credits are extended through 2013 and are retroactive for all the 2012 however because the bill was signed by the President on January 2nd we won't recognize the roughly $20.8 million in revenue in the fourth quarter of 2012, we will recognize that amount in the first quarter of 2013. 2012 is one (inaudible) year for clean energy and natural gas for transportation industry as a whole. The awareness of the environmental, economic benefits created by natural gas to fuel its vehicle has spread from our growing customer business to President Obama who mentioned natural gas for transportation and State of the Union address earlier this month.

Even today’s Wall Street Journal front page article on the gas boom tells the story. Clean energy has continued to form strategic partnerships with best in class companies to share our belief in the enormous economic opportunity of natural gas fueling for transportation. Since our last earnings call in November we announced a deal to partner with GE where in GE energy financial services will provide upto $200 million in financing for two GE micro-LNG plants which will be used to support our LNG highway stations around the country. GE Chairman and CEO Jeff Immelt said “GE privately partnering with Clean Energy Fuels to develop natural gas, infrastructure in the U.S.” Clean Energy is industry leader in pioneering a new way for America to fuel its vehicles and to further gain energy independence. With our GE partnership we have other key relationships, with Pilot-Flying. J, Chesapeake waste management, Republic Services, UPS, AT&T, FedEx, Verizon, (inaudible) and many others. We have a line of cells with the leaders and industry. Before the we saw in last year we laid out plans for major initiative to build America’s natural gas high way which is a nationwide network of LNG fueling stations to serve America’s heavy duty trucking market. We set varied demand station construction targets for the year but I’m pleased to report that we achieved our goal of 70 LNG highway stations by the end of 2012 as well as completing construction of 62 core market stations that served the refuse transit and airport markets. For the year we completed a total of 127 stations compared to 68 stations completed in 2011and 87% increase.

I feel confident that we changed the discussion in the chicken or egg debate about which needs to come first, the stations or the trucks. The infrastructure excuse isn’t that good anymore, sure there is more work to be done but regional trucking can now go coast to coast in a long regional corridors of natural gas. Before its commercial production of the 11.9 liter engines from Cummins Westport has begun and the engines are being shipped as we speak to the original equipment manufacturers Freightliner, Kenworth, Peterbilt and Volvo and Navistar later in the year. We expect CWI to wrap up production by August and expect this engine launch to be fully subscribed.

We’re working closely with more than two dozen contract carriers and working with over a 100 national shippers on fueling and we’ll specific doing locations up and ready when their trucks are deployed on the road. Here are fewer examples of the deployments in vehicle orders either already fueling or planning on fueling within our station network. Earlier this week we signed a new fueling contract with Lindy (ph) one of the country’s largest industrial gas companies. They have ordered 25 LNG trucks each of which were as roughly 18,000 diesel gallons per year and those trucks will need to board in Texas and South California. UPS has expanded their LNG fleet of 70 with 12 more tractors that will fuel Clean Energy’s Phoenix station and plans to deploy a 100 plus LNG tractors in Texas for 2013.

FedEx freight has been fueling LNG 11.9 liter Kenworth tractors out of our Dallas station since October running to close to a 1000 miles per day and they have been pleased with the performance and fueling operation. (Inaudible) the largest bulk fuel carrier in the U.S. just deployed 25 LNG tractors at Phoenix which fueled Clean Energy’s ANGA station. Saddle Creek supplemented their natural gas fleet in Lakeland, Florida by deploying 60 additional CNG tractors and now they have a fleet of over 100 trucks.

Premier Transportation ordered 60 new CNG trucks to supplement their fleet in Atlanta and the fleet fueled the Clean Energy’s College Park CNG station next to Atlanta’s Hartsfield Airport.

Heckmann Water Corp will be running trucks from Shreveport, Louisiana to our base down Texas, LNG station and returning to Shreveport to service oil and gas field operations. And I am pleased to highlight that just yesterday, YRC Freight, a subsidiary of YRC Worldwide announced they will purchase LNG trucks to operate in their Southern California network. Our Chief Marketing Officer, Jim Harger presented at the Food 0Shippers of America Conference earlier this week in Phoenix. And a thousand people were in the audience, 700 contract areas and about 300 food producers. And they were asked for a show of hands who was not considering natural gas for the fleets and not a single hand went up.

And finally, here is the concrete example of what we are beginning to see. Procter & Gamble recently went out with RFP supporting their orders for about 10%, which is roughly $100 million of their annual fuel spend just on natural gas, and those responses are now in. And to me that is huge. For 2013, our station build out will be gauged based on the anticipated truck deployment. We have the capability and the capital will construct an additional 80 or more LNG truck stop stations, but realistically depending on where and when those productions are deployed that number could be closer to between 50 and 60 stations and that still will be back end loaded as we know the adoption of the trucks will ramp up in the second half of the year. We are going to be crooned about our station construction CapEx to avoid building more stations this year.

And we should not believe in the overall need for about 250 stations by the end of 2014 and that hasn’t changed. And totally in addition to stations we are building along the interstates in 2013, the next phase of our station build out will also be focused on the distribution centers and intermodal facilities around metropolitan areas. These are hubs for major trucking activity and these geographic trucking centers see the interstate corridors. In order to serve the fuel demand of this trucking market over the next five years, we have been busy building up LNG supply across the country. In addition to the GE deal which I previously highlighted, we have contracts or supply agreements with the utility and midstream companies across the U.S. representing roughly 350 million LNG gallons per year and will add even more to that in 2013. This will give us more than enough running room and a strategic advantage over our competition.

Now, let me turn to our core markets. In our refuse market, 455 new CNG refuse trucks were delivered to Clean Energy customers across the country. In the fourth quarter, an additional 567 trucks were ordered. For the full year of 2012, over 2000 new CNG trucks were delivered to Clean Energy’s 101 refuse customers. In our airport, taxi and shuttle market, we now have 37 airport stations across the country and continue to see impressive fleet expansion throughout. Some noticeable highlights includes SuperShuttle’s announcement that they will be expanding their CNG fleet with 100 additional shuttles which will fuel our California stations and the opening of our new CNG station in the Hertz Rent-A-Car’s LAX property.

We also opened a new station at Cleveland-Hopkins International Airport with our partner Parking Company of America. And I am pleased to report that the City of Chicago has added 63 new CNG taxis and para-transit vehicles growing their total to over 400 natural gas vehicles in service, an increase of nearly 40% since the beginning of 2012. We have several good deals that have just been signed in the last few days. We were just asked to take over two stations for New York Sanitation. We were awarded a new station for LA Metro. We extended our fuel agreement with Dallas Area Rapid Transit for the next two years and signed a 5-year extension with Orange County Transit for a new station with an upgrade which services 170 buses.

Lastly, our third subsidiary achieved record production levels of 8.9 gasoline gallon equivalents during 2012 and commenced sales from our second biomethane project located in Michigan in December. We have moved a substantial portion of the gas we produced from the Michigan facility today to our Boron LNG plant, where it was liquefied and delivered as a vehicle fuel. We believe this is the first time that a biomethane project has successfully injected biomethane into the common carrier pipeline withdrawing the fuel from the pipeline at a fuel production facility and generated RINs under the federal renewable fuel standard and low carbon fuel standard credits on our California’s low carbon fuel standard. In total 2012, we recorded 2.9 million in LCF revenue; this is a bigger accomplishment for our subsidiary and lays the groundwork for a growing business of producing and selling of best to breed low carbon alternative fuel to our growing network of CNG and LNG stations and with that I will turn the call over to Rick.

Rick Wheeler

Thanks Andrew. Before I review our financial results I would like to point out that all of my references or our results will be comparing to fourth quarter and 2012 and the fourth quarter of 2011 and the year ended December 2012 to the year ended December 31, 2011 unless otherwise noted. Volume growth of 51.7 million gallons during the quarter up from 40 million gallons a year ago. For the year ended December 31, 2012 the volumes increased to 194.9 million gallons up from a 155.6 million gallons. Our CNG, LNG and RNG totals for the fourth quarter were 35.2 million, 14 million and 2.3 million respectively. For the quarter revenue increased to 99.1 million up from 86.2 million. For the year ended December 31, 2012 revenue increased to 334 million up from 292.7 million a year ago. When comparing our numbers between periods please note that the quarter and year ended December 31, 2012 do not include any volume metric excise tax credit or VETC revenue as the VETC expired on December 31, 2011. VETC revenue was 4.5 million and 17.9 million respectively in the fourth quarter and the year ended December 31, 2011.

In January 2013 VETC was extended through December 31, 2013 and made retroactive to January 1, 2012 because the extension occurred in 2013 we will have to record our 2012 VETC revenue in the first quarter of 2013 which we expect will be approximately 20.8 million. Also during 2012 we completed a large four station CNG project for Dallas area rapid transit that generated 40.3 million of revenue.

On a non-GAAP basis for the fourth quarter we reported a loss of $0.23 per share. This compares with a non-GAAP loss of $0.21 per share in the fourth quarter of 2011. For the year ended December 31, 2012 we reported a non-GAAP loss of $0.75 per share compared to a non-GAAP loss of $0.47 per share in 2011. Adjusted EBITDA in the fourth quarter of 2012 was minus 5.7 million compared to minus 3.5 million in 2011. For the year ended December 31, 2012 adjusted EBITDA was minus 12.3 million compared to 3.1 million in 2011 again please remember the fourth quarter and the year ended December 31, 2011 includes 4.5 million and 17.9 million respectively of VETC revenue. Adjusted EBITDA and non-GAAP EPS are financial measures we developed to highlight our operating results excluding certain large non-cash or non-recurring charges regained which are core to our business. These items include the amounts we’re incurring for the series one were on evaluation or stock based compensation charges and foreign currency gains and losses related to our IMW purchase notes.

In the fourth quarter of 2012 these items also included a settlement with the California Air Resources Board related to certain vehicle, our settlement with the IRS over certain VETC claims and the impairment of our investment VPG.

Adjusted EBITDA and non-GAAP EPS are described in more detail in the press release we issued earlier today. Our net loss on a GAAP basis for the fourth quarter was 41.7 million or $0.46 per share. This compares with a net loss for the fourth quarter of 2011 of 20.9 million or $0.29 per share. For the year ended December 31, 2012 our loss on a GAAP basis was a 101.3 million or $1.16 per share. For 2011 our loss on a GAAP basis was 47.6 million or $0.68 per share. Our SG&A are higher between periods primarily as a result of our continued business growth and ramping up to support our construction of Americas Natural Gas highway and the anticipated sales activity once it starts fueling significant numbers of heavy duty trucks.

Our interest expense is also up between periods due to the interest charges we’re incurring on our $250 million of convertible notes we have issued over the last year and half or so help fund our capital program including Americas Natural Gas highway. Our gross margin in the fourth quarter of 2012 was 21 million which compares to 19.7 million in 2011. For the year ended December 31, 2012, our gross margin was $80.3 million, which compares to $76 million in 2011. Our margin per gallon this quarter was $0.31 per gallon, which is up $0.03 from the prior quarter.

During 2013, we agreed to sell our ownership interest in our Peruvian joint venture to our JV partner for approximately $6.1 million. We expect the sale to close by March 31, 2013. During 2012, the Peruvian joint venture contributed approximately 9 million gallon to our gallon total. Once the sale is complete, we will no longer include any gallons associated with the Peruvian joint venture in our total.

And with that operator, please open the call to questions.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from the line of Steve Dyer with Craig Hallum. Please proceed with your question.

Steve Dyer - Craig Hallum

Thanks guys. Good afternoon.

Andrew Littlefair

Good afternoon.

Steve Dyer - Craig Hallum

Rick. Just to be clear on the VTEC, it’s the 20 and change in Q1 and that’s strictly retroactive and then every quarter from here on now it is going to be sort of as pumped right?

Rick Wheeler

That’s right. The $20.8 million is just a cumulative number for 2012 that will recognize all in the first quarter of 2013. And then going forward in 2013 it will kind to be back to normal that will record the amount as we sell the fuel.

Steve Dyer - Craig Hallum

Yeah, okay. Could you give kind of an update on VAF and if you are seeing some diversification there outside of AT&T and how you see that sort of playing out this year?

Andrew Littlefair

Sure. We do see an expanded customer base, Steve. We still love those big orders from those big companies like AT&T and Verizon. We have recently received a smaller order from AT&T of about 67 bands that came in just a little bit ago, but we have the working with our 54 dealers that we have trained around the country and others to expand our vehicle offerings as you know we have a full lineup of forward offerings running from the 150 all the way up to now to 550 and the 650. So, it’s a full – a full portfolio of their fleet offerings. We have some pretty good relationships now with these different shuttle bus companies, Creative Coach and others around the country. So, we are seeing the expanded customer base, but we are still up against trying to bring in some of those real big orders with some of the big national fleets. So, I give our guys a lot of credit for the expansion of customers, but we could use – we could always use more business in there. We are ready for it. We have good product and we are working hard at that, and so we could use more there.

Steve Dyer - Craig Hallum

Sure, okay. Anyway of sort of thinking how should we think about I guess the station construction ramp this year, I know it’s hard to model, because it’s sometimes lumpy and so forth, but how do you think about that?

Andrew Littlefair

Well, as I was trying to get at, I wouldn’t say this is any huge surprising departure, but we’ll continue – I think what you should think about is our core business. We kind of lump our obviously in our business never been scored, but our core business of direct use airport transit. That’s three markets that we haven’t taken our eye off the ball, let’s continuing to grow well and we are building another 50 or 60 of those stations. Some of those as you know are for own accounts, some of those are for our big customers, where we will sell them equipment due to design operations, selling IMW equipment’s. So, that business goes on and it’s strong, we’ll add more airports, we are adding more. In fact, it’s interesting we have already this year responded to 20 RFPs, about 12 of those are transit properties, we are going to work five already and the others were outstanding. And we like our chances. And so that business will continue.

Now, when you look at the heavy duty trucking market, you will look at that part of the business. We have the capability, as I said, in my remarks to build 80 stations or even more, but we want to be careful here that we don’t get too far ahead of our sales. Those engines were slightly delayed. We began the construction of these stations in the highway anticipating a summer delivery last summer and those engines were somewhat delayed and of course we knew that and we’re glad we have done what we have done but we want to be careful we don’t get another 80 or 100, so we’re watching it very closely as we go. I think you should figure that we will build somewhere between 50 and 60 or more that we can. It will be relatively back end loaded in this year because that’s when we need it. It won't really affect your models as you look at what you sent our playing capacity. We still believe that the market is going to require us and others to build by the end of 2014 something that we order of 200 to 250 stations and so we will be ready for that but we want to be a little careful this year and been prudent with our CapEx that we just don’t get out way too far ahead of the truck we planned.

I like where we’re now, I like that now we’re on schedule of these trucks, as we were told by our friends at Westport these trucks would be delivered right now to the OEMs the first batch and that is happening and it's happened. So we feel pretty good about it, we know that we’re going to ramp up in August and we know the back end of this year depending on how these trucks work and depending on the experience we can get into producing even more than what they have suggested so far. So, that’s a long answer to your question but I would think of us building somewhere around 50 or 60 core and about other 50 or 60 of highway stations.

Steve Dyer - Craig Hallum

And then just one more quick one and I will hop back in the queue. Any update on the GE, LNG loco station (ph) plans just maybe the timing of the CapEx and financing of those.

Andrew Littlefair

I’ll let Rick speak to the specifics on it, I will just tell you we’re making good headway with the, our teams have worked very closely, we’ve have had our technical folks with that several trips to Italy working with the design. We have begun to focus on two properties which I won't be any more specific with right now but they are the ones we thought about in sort of the Mid-West and the North East area, these things are long lead item. We’ll get a few I would say in our budget this year Rick correct me if I’m wrong we’ll get about $4 million it's really our part of the kind of the permitting tab and a little bit design tab before you see any other expenditure. So it's pretty light in 2013 and then it goes up.

Rick Wheeler

That’s right, we anticipate most of the more significant money will start in 2014, we have to and as they start drawing money at the end of ’14 so we probably put in our money as long as we can from our equity contribution perspective to defer the interest charges but it's probably going to be more of a 14 - 15 type building timeframe on the plants once we kind of determine where we want them and get them designed and all that good stuff once we identify the actual location.

Operator

Thank you. Our next question comes from the line of Robert Brown with Lake Street Capital Markets. Please proceed with your question.

Robert Brown - Lake Street Capital Markets

You gave some good color on the fleets that are looking at this but can you just give us a sense of how the fleet sort of maturation is happening, are they waiting to see the engine and try few vehicles or how much has the roll out of the stations really got them interested and down the road toward contract?

Andrew Littlefair

Now you’re talking to a station guy all right so here is the way I think, I think that really by building the highway we change the dynamic and we change the dynamic between the contractor carriers and the shipper. So it's not easy for a contracted carrier to wiggle out of the fact that there is no place to fuel and I’ll be the first to admit that the nationwide network is not finished and there will be certain daily truck lanes that won't fit what we have got but there is a lot of it does currently and so what’s happened Rob is literally 100s of shippers are having meetings with their contracted carriers and we’re involved in many of them where they are being asked to look very seriously at certain of the lanes that those shippers contract out of those carriers every day and that’s you know it's happening from the Procter & Gamble story that I just told you and so as we have discussed I think before you’re not likely to get these guys to just hold right out and buy a 100 or 200 trucks they are going to test these, we know that this year is a testing year but there are plenty of points that need to do that and they get them in groups of 10 to 25 and more. And we are seeing that now. Some of them will start with six, and some of them will start with 10. And so you are seeing that in dozens of fleets. I believe I am right in saying I was talking to Jim Harger earlier that 10 of the largest contract carrier are all testing vehicles right now.

And so yes to answer your first part of your question, they want to see these new 12-liter engines, they want to see not only 350 horsepower that’s out right now, but that 400 horsepower, which is sort of the one that comes out of August and they are going to test them first before they get into serious orders. I think we should just realize that’s what we expect. But I like the way its proceeding and its not unlike – its not unlike what we saw in the refuse industry, but the only good news is that in the refuse industry we went through four different engines, before we came up with a one, the 8.9-liter, the 9 what we call now becomes West Point 9 liter which is a champion engine before we got to that one. And so you had a little bit of reluctance. You don’t really have that with these. We haven’t done that to the trucking community. And so I think that the acceptance is going to be pretty good.

Robert Brown - Lake Street Capital Markets

Okay thank you.

Andrew Littlefair

Okay.

Operator

Thank you. Our next question comes from the line of Lawrance Alexander with Jefferies and Company. Please proceed with your question.

Lawrance Alexander - Jefferies and Company

Two quick questions. One is just on the utilization rates, if you can give a sense, if you split your location between the ones that are newly built and have low volume and the ones that have a little bit more history. Any sort of sense for how utilization rates have evolved over the course of the quarter into the New Year? And then also just in terms of partnerships as more people talk about building facility, are you seeing your operating – are you seeing any evidence in your operating history is providing a competitive advantage in terms of winning new partners or how should we look at the competitive environment right now?

Andrew Littlefair

Well, go ahead.

Rick Wheeler

I will just speak to the utilization question. The good news is our utilization in our core markets is going up, I don’t know the exact number. But we feel good it’s going up nicely, because a lot of our taxi/airport shuttle business guys have added several vehicles to our existing infrastructure, which has really helped make those more – those stations more economic over the last year. The other thing that I would say in the refuse sector is a lot of times we build the station and the refuse company will turn X percent of their vehicles a year. So, as each year goes by, we get another 10%, 15%, 20% other vehicles that convert to natural gas that obviously helps the utilization on those stations. So, it’s something we are cautious enough, where we are always trying to add additional vehicle to our existing infrastructure. We have been successful in several cases over the last year doing it. And then obviously utilization on the natural gas highway stations hopefully will go up quickly once we get these engines out and start deploying those.

Andrew Littlefair

It’s an excellent question. We actually last year hired about 12 more salesmen with just same-store sales growth mostly focused around our airports. The refuse as Rick indicates taken care of itself. We are adding trucks. And you are going from 20 to 30 to 40. And that’s just the way they do their business. They add 10%, 15% a year. The airports we are adding like for instance, so in that Chicago example that I have mentioned. We started out with 150 cabs and now we have 463 cabs, and so you like the way that that’s done. We have seen other things, for instance, the LAX where we have a really robust airport station. I got to the point, where we needed to build another one. So, are we fully utilized that our couple of 100, 300 CNG stations now kind of depends on what we built here and recall that we’ve occasionally acquired some older utility systems that have to be upgraded in and changed and new customers brought on. So, we continue to work on same-store sales growth. And obviously we are just starting on the trucking side. Now, your second part of your question, I just could not understand it was my competition, but I didn’t get the question about our offerings as related to competition. Can you just get me that again if I just missed?

Lawrance Alexander - Jefferies and Company

What I am trying to get out is to the extent that you have your staff and your firm is building up the history in an experienced base operating these units bringing them on stream etcetera, is that changing the way your negotiations evolved with potential new partners.

Andrew Littlefair

Well I like to think of this as a leader right? So, yes I mean I think it does we’re look there is a lot of competition there aren’t many people in the business though that adds the breadth in the vertical alignment that we do right, so for instance there are in a recent bids 67 people came out of the wood work to suggest that they can build station. Well fully 50 of those never built one before, now I don’t doubt that they can build one they might be able to but when you look at our offerings the fact that we have built more stations than anybody else in the United States and we have built more LNG stations that we have an LNG fabrication company, a compressor company and we haul LNG that we have three plans, you add all that together and it gives some it gives a lot of our customers comfort and that’s why I rattle through a bunch of those big players that we have at the beginning of my remarks, I mean that’s the reason we’re doing business with those big companies because they understand and we have history and capability and size to be able to meet their national roll-out needs that’s why we’re doing business with waste and we’re building an operating all of their stations today and a long term operations agreement, same with Republic we’re building all their stations.

I like to think you get credit for our capability and our history.

Operator

Thank you. Our next question comes from the line of Caleb Dorfman with Simmons & Company. Please proceed with your question.

Caleb Dorfman - Simmons & Company

I guess first of how is your deal pipeline looking right now and if we look at your deal pipeline over the past year what the general win rate if it's varied significantly between factual feeling deals and station instruction deals how do the win rate compare those different sector?

Andrew Littlefair

Well I didn’t go through that today and I don’t have those numbers right here but it's not because I didn’t want to, I was trying to keep it at a little higher level but actually if you look at those categories I talk about qualification, validation, negotiations, up 232% year-over-year and you know the win-rate, the good news we know most of the stuff eventually we did almost two times as many deals in all those categories fuel deals, station deals, 2.5 times as many deals last year’s or a year before. So we do internally monitor it. It's going very well because you have got more trained salesman on the ground and more things to offer. So Caleb I like the way that’s working, it's impressive I watch it on a weekly basis.

Caleb Dorfman - Simmons & Company

I know we have talked about potential capital raises in the past, what are your thoughts on that now sort of we’re looking at maybe building 50 to 60 stations this year instead of maybe at the high end, is the 80 to 90 range, is that going to help you maybe push out the date that you will need to raise capital and what types of capital options are you looking at?

Andrew Littlefair

It's a good question and you know one we have been sensitive to in terms of dilution. What we have said in the K and I know you have got that thing but we have said that our capital program is about a $186 million for 2013 that would probably be a number that would take into account sort of the higher end of the station build. We have the capital on hand, we really have the CapEx we need for 2013 either on hand or with the next trench of the Chesapeake money coming in, so really well we have got just 2013 taken care of and if you pair back a little bit on the station build you really kept quite ways out in the 2014 before you really needed to do anything else and we get a little money in from Peru. I mean we’re doing things all of the time to try to create room without having to necessarily go out and raise equity.

Rick Wheeler

I would just add Caleb that the 186 million include 80 American Natural Gas Highway stations, so the good news is if we do put that total together this year we will have the money aside what Andrew mentioned the nice thing is between cash and investments all that good stuff coupled with the Chesapeake’s money that is due to come in this June we will have enough money to cover that before even look at cash generated from operations or VETC revenues et cetera.

Caleb Dorfman - Simmons & Company

Great, that’s very helpful here. Good Rick.

Operator

Thank you. Our next question comes from the line of Andrea James, Dougherty & Company. Please proceed with your question.

Andrea James - Dougherty & Company

Hi, thanks for taking my questions. Can you just present us how many of the stations are in essence turned on, I remember last quarter was you build them but they weren’t all operating, so just number of stations built versus number of stations operating?

Andrew Littlefair

You are really now focused on those American natural gas highways.

Andrea James - Dougherty & Company

That’s exactly right, yeah.

Andrew Littlefair

So, we have got of those new bills, we have got 8 or 9, we got 6, 4 getting ready to open, so it gets you to 14, and then we have 6 others that are part of that network in California. So, you have about right in the next six to eight, you will have about 20 of those. And so our job and I just heard this morning we have just got 20 more, 25 more trucks. I didn’t mention it, but 25 more trucks from a hauler that works exclusively for Owens Corning. And so, we’ll open one in South Carolina. So, over the course of the next six months, we hope to – every couple of months, we hope to open more of those stations.

Andrea James - Dougherty & Company

And then the one that are open the capacity at this point just on a percentage basis, just kind of trying to get a sense of where it could go and just but at what level of capacity right now?

Andrew Littlefair

Well, remember I don’t know Andrea if we talk about this, but this is kind of the ways going to work, now there is a couple of days anomalies to this, but for instance the station down here at Long Beach we got opened a long time, that fills 100 of trucks a day. One of our stations that we brought on a little bit earlier in the process was the one on Los Vegas. That’s already up to about 82 trucks. If you think what would be on that? That station is already on a kind of annual run rate of a little over 1.6 million gallons. That’s the capacity to do about 2.5 million to 4 million gallons, but I like that because that’s done very well in a little over a year’s time. Most of these stations were opening up; let’s call it, 20 to 25 trucks calling that station home just in a simple way to look at it. It’s not that’s simple, but that’s kind of the way I think you should think of it. And if you think with me that those 20 trucks to 20,000 gets home new more 20,000 gallons a year. So, you would see that with about 0.5 million gallons on an annual basis, you will open the station and that station can do 2.5 million gallon.

Andrea James - Dougherty & Company

Got it.

Andrew Littlefair

Now, we are not done it at 20 trucks, 25 trucks. Our job then is to ramp that up and that’s what will happen over the course of this year or next year. But even sort of the nice thing is that I know this sounds simplistic, but the reason I kind of dwell on this is, because we talked about tens and thousands, hundreds and thousands, and millions of trucks, but when you really break it down to an individual station basis, you really need 100 trucks, let’s call that station home on an annual basis which gets you about 2 million gallons. It gets to the home as capacity. Then you will have the chance to spend another $0.5 million and add two more tons, it gets you up to 5 million gallons. So, you like to think, you start out with something that would give you probably a five-year payback, which is not acceptable. It’s not what we are in this business to do. And you could grow and over the course of the next year up to 100 trucks and on that rate, you are paying that station out of 18 months. So, that’s sort of what you are trying to do.

Andrea James - Dougherty & Company

Then a couple of things for that. And then finally just on – just on the field sales side, I know you already talked about competition, but just the competitive landscape on the field sales side, I mean, people talk about Shell has endorsed the concept now, I just wanted to get your updated thoughts on that?

Andrew Littlefair

Well I know, I guess, I love the fact that everybody is clamoring to get into the business, so, it makes me feel like we are not out here just spinning around by ourselves, but we haven’t seen much yet. We have heard some announcements. These are big players and less capability. Shell I think they have got their first – their first station up in Canada. We haven’t seen than yet in the lower 48. Others have talked about doing it; I know that there are some stations being built in Wisconsin. Hey, this is a big market. It’s a 25 billion gallon market. And there is plenty of room for lot of players. We haven’t seen much competition yet. There I am sure we will at some point. I guess, as you will see the competition is kind of spread out a little bit, there is a lot of room.

Andrea James - Dougherty & Company

Thank you so much.

Operator

Thank you. Our next question comes from the line of Matthew Blair with Macquarie Group. Please proceed with your question.

Matthew Blair - Macquarie Group

Hi, good afternoon. Rick regarding the fourth quarter SG&A are the CARB and IRS settlements included in this number and also for 2013 how should we think about SG&A coming up here?

Rick Wheeler

The CARB settlement yes, the VETC settlement no, it's actually a reduction of revenue. There is some kind of one timers in that fourth quarter SG&A number probably to the two nodes about 3.5 million. If you pull that number out that kind of like I think will give you more of a normalized number heading into 2013. When I think about SG&A that we have been talking about and we kind of watch around here is we go into ’13 I think if you even pulling out all the extra kind of VETC revenue to make it more apples to apples SG&A or a percent revenue should drop that back down in the kind of that low 30% number that we kind of have been trying to track to as opposed to kind of a mid-30% number. So I think that’s good, we’re seeing some leverage. I think we have been as you guys know ramping up over the last year, year and half so we could build these stations for the highway and kind of build the infrastructure and support system necessary to get handled increased sales activity et cetera, et cetera and if we have been successful in doing that and the nice thing is now that we’re kind of here at this level that we’re building 100 – 120 stations a year and starting to get the increased business activity. We should be able to kind of slow the growth of our SG&A year-to-year if you will.

So SG&A is kindly shaken out the way we had a division at hope so that’s kind of good.

Matthew Blair - Macquarie Group

I’m wondering if you guys can just share some thoughts of the long term price relationship between LNG and CNG if I check your website now it looks like your average LNG prices is about $0.55 a gallon higher than your average CNG price and you know what is that function of will the new liquefaction capacity from a GE plant help produce that gap or is that just a structural long term gap?

Rick Wheeler

Well I think there is couple of things at work there. So depending on where you’re selling LNG can be a little bit more expensive because of the transportation so you know apples to apples in the LA basin to our high volume customers not necessarily, you don’t necessarily see that spread even though our retail pump price may indicate that that’s probably not an indicative sales price okay so that will be one thing but transportation does play a component, taxes plays an important component in LNG so today domestic clean LNG as a motor fuel gets the privilege of 17 more cents than diesel fuel does so that’s a structural problem that we need to get fixed and then transportation plays another part and frankly the liquefaction and the hauling of LNG is a little bit more expensive than CNG it just is and it's not $0.55 a gallon more expensive but it's probably I think of it as a dime or $0.15 more. But kind of depending where you’re the tax situation that’s real, I think that LNG will always be a little bit more expensive but remember you’re competing against diesel that’s more expensive. So you know here today and in the LA basin gasoline is 4.12 I think and diesel is 4.44. So it's a little bit apples to apples but LNG is a tad more expensive I wouldn’t say that I would have you go away from the thinking it's $0.55 and that’s it forever.

Matthew Blair - Macquarie Group

And then Andrew are you willing to give out a LNG truck estimate in terms of new sales for 2013?

Andrew Littlefair

Well I don’t if I’m the right guy to do that but I have been gearing my vision off of what my friends are selling the trucks and that they have felt comfortable telling the market that they are going to sell and I’m now talking about the new engines you know the new 12 liters, they have used which I hope is a conservative number of a couple of thousand. Now they have said depending on how the introduction goes and depending on how the acceptance goes and you know these things always have a little bit of speed wobbles in the beginning that on the later part of the year that the they can sell more than that and that the order bank can go up and that they have spots to produce more engines than that run-rate in the fourth quarter at the Jamestown plant. So, we have done a lot of thinking around here that 1700 to 2000 engines coupled with the 9 liter and coupled with the 15 liter and what we see, we are not betting the role that there is going to be 10,000 trucks sold this year, we don’t think that’s the case. We do like and we are working hard to work on orders that in the fourth quarter that we are on a much higher run rate than we are say right now. And that’s where I’m going to be watching or is how do these engines rollout, what’s the acceptance rate and really in the August timeframe, are we beginning to see orders billed for the fourth quarter.

Matthew Blair - Macquarie Group

Great, thanks.

Andrew Littlefair

Okay.

Operator

Thank you. Our next question comes from the line of Pavel Molchanov with Raymond James. Please proceed with your question.

Pavel Molchanov - Raymond James

Hey, thanks for taking the question. Just a question about margins, we have seen a couple quarterly down-ticks in the product gross margin, down to 16%. You guys anticipating a bounce back maybe into the, let’s say, mid-20% range that it has been historically sometime this year.

Rick Wheeler

Well, we don’t give guidance slightly below careful here, but I would give you little flavor. One thing you keep in mind is BAF, it’s been challenged a little bit just with kind of their sales being relatively flat to dropping off at the same time they basically expanded their production facility and that have incurred more overhead if you will. So, we need to get more sales to there – to kind of get those margins back in line. IMW was had some issues over the last year or so that we’ve been working diligently on. The good news there is with the new engineering in production and supply team that’s come in and we’ve been working with those guys to kind of get that separated. So, that I think is kind of been diminishing the margins a little bit artificially this year and hopefully we’ll see a turnaround next year just from efficiency and cost savings productivity type perspective. We also expanded the IMW production facilities both in Canada and China recently in anticipation of increased sales so they also dealing with a little bit of overhead kind of drain on their margins.

So, I think those are the two that we’ve need to kind – just keep our eye on and hopefully get more sales through there to fix that. The fuel business, our fuel margins per gallon are heading in the right direction taken up. We want that, that’s a good story, CERF margins with the additional credits and stuff those guys, are selling that – selling that’s a good story. So, there are lot of good things going on there as well, I think just those two from the subsidiary level that we need to kind of get rated and once that happens hopefully we will cost back up.

Andrew Littlefair

We are seeing the good news is what we saw, I think what we saw a little pressure on the sales of IMW, we’ve seen sales kind of come around there, so that’s good around the world we have seen a tick up in Egypt and Mexico, and some of these other place, so China. So, I like the way that’s headed within the first quarter?

Pavel Molchanov - Raymond James

A follow-up on you actually just eluded to it, the international opportunities you mentioned Peru, I guess you guys are having some good traction there, are you interested in really kind of building on that, I mean, Latin America is a much better established CNG market than North America does, so is that something you guys will potentially get serious about?

Andrew Littlefair

Well, no, probably in our boards that fairly clearly, if we are in the biggest sandbox in the world right here, and we are the leader here and we have all of our stuff here and we are way out ahead. We have played around in these other parts. IMW could participate we sell compressors in 26 countries around the world. We have 50% market share of the compressors and the OEM business in Columbia and believe or not in Bangladesh, we have most of it. We are building whole bunch of stations right now in China, but that’s probably the way for us to participate internationally. For us to go in and invest capital and entering the long-term fuel agreements with fleets and negotiate fuel agreements with governments who can set the price, select them and then set the price. That’s a tough game and probably not one that’s well suited for us. So, I think we will participate with perhaps some LNG equipment sales in China, certainly, our IMW business will, but I think we are better off in our traditional fueling business to stay here in North America.

Pavel Molchanov - Raymond James

Great, I appreciate it guys.

Operator

Thank you. Our next question comes from the line of Alex Potter with Piper Jaffray. Please proceed with your question.

Alex Potter - Piper Jaffray

I was wondering if you can give a little commentary on the outlook for station construction related revenue here going forward, you don’t have to give explicit guidance just some of your expectations as we enter 2013.

Rick Wheeler

Sure one thing as I put in my comments to kind of highlight that is we had a $40 million project with DART during 2012 that was kind of a big one off type project not seeing any similar projects in 2013 so if you pull that out you kind of get back to more of a normalized number that’s kind of consistent with what we did in 2011. So I would assume we’re going to kind of be somewhat back in that type of range this year just looking at the activity in the refuse sector and some of the other sector. So I guess I would offer that.

Alex Potter - Piper Jaffray

And then I guess just the same question for IMW; it sounds like IMW could potentially trend the other direction in 2013.

Rick Wheeler

We’re hoping IMW starts ticking back up and I initially work with those guys up there to kind of work on some of the production and process issues, we would also have been kind of working with them on just getting sales function and effort turnaround or going again I’m not sure what the right word is but they see to get the traction in several new countries as well as the big stuff, it's always good looming and continues to loom in China. They should do pretty well here in America again or the U.S. with the refuse sector. So hopefully that sale effort does turnaround up there and we’re also working on some industrial applications which are big and kind of exciting outside just the SG&A fueling world. So we’re doing what we can to help and support them just, trying and get their sales headed back in the right direction.

Operator

There are no further questions at this time. I would now like to turn the conference over to management for closing comments.

Andrew Littlefair

Good. Thank you operator and thank you all for listening in today, as you know this year, year of the heavy duty roll out, what we have been waiting for has arrived, our stations are build and the engines are coming. We’re very focused and we will add infrastructure in consort with the demand. So thank you for your continued interest and we look forward to visiting with you next time.

Operator

Thank you. Ladies and gentlemen this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

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