Clean Energy Fuels' CEO Discusses Q2 2013 Results - Earnings Call Transcript

Aug. 8.13 | About: Clean Energy (CLNE)

Clean Energy Fuels Corp. (NASDAQ:CLNE)

Q2 2013 Earnings Conference Call

August 08, 2013 4:30 .m. ET

Executives

Andrew J. Littlefair - President and Chief Executive Officer

Richard R. Wheeler – Chief Financial Officer

Tony Kritzer – Director, Investor Relations

Analysts

Laurence Alexander - Jefferies

Robert Brown – Lake Street Capital Markets

Greg Palm – Craig Hallum

Carter Driscoll - Ascendiant Capital

Andrea James – Dougherty & Company

Caleb Dorfman – Simmons & Company

Matthew Blair - Macquarie

Operator

Greetings and welcome to the Clean Energy Fuels Second Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (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. Good afternoon everyone. Earlier this afternoon, Clean Energy released financial results for the second quarter ended June 30, 2013. If you did not receive the release, it’s 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 August 8, 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 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’m pleased to review our second quarter 2013 operating results. During the quarter we generated $88.1 million of revenue, up 26% from $69.8 million a year ago. We reported gallons of 52.6 million, up from 48.6 million. Gallons delivered were up 13% for the second quarter of 2013 when excluding the 2.1 million gallons delivered in the second quarter of 2012 by our Peruvian joint venture which we sold in March of 2013.

I’d like to start today by discussing the heavy duty truck deployment. Last week Westport reported they delivered over 2,700 CWI natural gas engine units in the second quarter. Of course this number also includes the 9-litre engines going into refuse trucks and transit buses. But Westport pointed to the launch of the new 12-liter engine as a major reason for the growth of their trucking segment. Our national trucking team has been working closely with Cummins Westport, the OEMs, shippers, dealers and carriers and we have received positive feedback from customer fleets that are deploying the new 12-liter engine. Many of these early 12-liter commitments are for CNG trucks because the first engines with 350 horsepower and well suited for local trucking applications. But we are pleased that the 400 horsepower version of the 12-liter began production on August first. We are seeing a healthy portion of these engines being ordered as LNG.

Clean Energy is already capturing market share in both CNG which we have years of experience in and in the new LNG market. In fact, as we break down customer information, we believe there are over 900 12-liter orders, firm orders and another 700 pending orders already for 2013. Of course this is very fluid, but the trend is stronger than we expected at this point in the year. The numbers I just mentioned do not include the 985 LNG trucks that UPS has announced they will be ordering in between this year and next. And furthermore, UPS has said they will not be buying any diesel tractors in 2014 and I think that is strong.

In addition to the strong commitments from companies like UPS, Proctor and Gamble, Ryder and Penske, we are very pleased with recent announcements from additional companies, including Safeway, Trader Joe's and DHL Worldwide Express that either they or their contracted carriers such as such as Warner, Swift, J. B. Hunt, Knight or C.R. England, just to name a few, will soon be deploying natural gas trucks as part of their daily operations.

The construction of America’s Natural Gas Highway station is progressing well. We currently have 76 stations built, 24 truck stop stations in various stages of construction, with 30 others in the contracting and proposal stage. We have six LNG truck stops ready to open in the coming weeks. Our core fleet segments continue to be very healthy. This was recently demonstrated with Tuesday’s L.A Metro announcement, already a long time clean energy customer. We signed a new 10 year contract for the country’s largest CNG bus fleet. This is very important on a number of levels. L.A Metro is showing a high level of confidence in us by extending and expanding their relationship with Clean Energy. The deal represents very large volume, about 150 million gallons over the life of the contract. And most importantly, we were able to significantly increase our margins in recognition of the premium service we provide.

Other transit deals signed over the last quarter include an extension of Orange County Transportation Authority’s contract, representing approximately 1.7 million gallons annually; A five year contract extension for LNG with Phoenix Public Transit for about 6.5 million gallons annually; 15 additional CNG buses were ordered by our customer, Las Vegas Regional Transportation that will consume about 240,000 gallons each year and I’m pleased to say we added our first transit customer in Canada. We were awarded a contract by British Columbia Transit to build a CNG station for 50 buses or approximately 800,000 gallons per year.

Our refuse market continues to expand with new customers, additional geographies and deeper relationships with existing customers. I’d like to remind you that five years ago, we had less than 10 refuse customers and today we work with 126 different refuse companies, including the largest four public waste companies in the country. We have a 75% market share in the space and refuse gallons delivered are up 37% year over year. This year, we have completed 14 refuse stations. We have eight stations currently in construction and additional 53 stations where the customer has paid us a fee to get into our construction queue.

More and more airports are requiring service vehicles to switch to natural gas and clean energy continues to dominate this space, with our presence at 39 airports across the country. San Francisco International recently extended our relationship with a 10-year contract for its growing fleet of CNG vehicles and taxis. For those of you on the east coast, we are finishing constructions at new stations at JFK Airport in New York and Dallas Airport outside of Washington D.C. Both stations are scheduled to open in about 30 days. In Las Vegas an additional 90 new CNG taxis representing approximately 450,000 annual gallons were added that will fuel at our airport station. Our long time customer SuperShuttle is adding 40 new CNG vans here in Southern California as well as 75 more in other markets like Austin and San Francisco, approximately 1.1 million gallons a year.

It's very important to remember that while we are extremely excited about the tremendous opportunity that the new heavy duty trucking market is providing Clean Energy, we have the nation's largest network of CNG fueling stations and have completed 37 projects so far this year and have 41 more in construction. And remember we have 54 projects in the construction queue. Now let me turn to our biomethane business. In a demonstration of our ongoing commitment to producing the most environmentally friendly fuel for fleets in North America, we broke ground this month on our third biomethane production facility located outside of Memphis, Tennessee.

This new project is slated to start up operations in the first half of 2014 and it will produce fuel that will be derived entirely from landfill gas. I think it's worth repeating that this biomethane when used in transportation can reduce greenhouse gases by 90% as compared to petroleum fuels. I am confident that there is no other commercially available alternative fuel in the market that can meet 100% of the fueling requirements of an 18-wheeler and provide this level of environmental benefit.

To that end, we will be announcing our plans in the coming months that we will be rolling out a renewable natural fuel that will enable our customers to dramatically reduce the greenhouse gas emissions from their fleet operations and affordably achieve their sustainability goals. Finally, I would like to discuss some of the noteworthy items of business that took place in the second quarter. At the end of June we announced the sale of our vehicle conversion subsidiary, BAF, to Westport Innovations.

The natural gas vehicle conversion business has matured since we purchased BAF in 2009. At the time of the purchase BAF was one of the only vehicle conversion companies and the owner was struggling through the financial crisis. We wanted to ensure that our customers have light and medium-duty vehicles available to fuel at our stations, so we acquired BAF. And we are proud of what BAF achieved under our ownership, both of their expanded product line up as well as the record level of sales. However, as the industry has grown and more options are available to our customers, Clean Energy no longer needs to be in the conversion business.

For other companies like Westport, this is their core business. We have the largest network of public access CNG stations in the country and we will continue to fuel BAF light and medium-duty vehicles as well as all the new natural gas vehicle offerings that are becoming available, such as the recently announced Ford F-150. We will work shoulder to shoulder with Westport and BAF as we have a two-year marketing arrangement to assist them with their sales.

Also during June, Boone Pickens, our Founder, Board Member and largest shareholder, increased his stake in the company by partnering with Leonard Green & Partners, an LA based private equity firm, to purchase $100 million of convertible notes that we had issued to Chesapeake. Boone and Leonard Green also made the final $50 million investment that Chesapeake was obligated to fund. A little background may be necessary. Aubrey McClendon and Chesapeake shared our vision to grow the market for natural gas as a transportation fuel and in 2011 agreed to provide us capital to help build out America's natural gas highway.

With the progress that we made on our highway network, Chesapeake felt they had accomplished their objective. Consequently, with our consent, Chesapeake sold their position to Boone and Leonard Green Partners. We are thrilled by this vote of confidence from Boone and are excited by Leonard Green's involvement. Not only is Leonard Green a well-respected firm but it brings a wealth of relationships among retailers and other shippers as well as contract carriers. I would like to reiterate our gratitude to Chesapeake as well as our other capital partners, Temasek and RRJ Capital for their support in helping develop the America's natural gas highway, and we look forward to working with them in collaborative ways to help grow the natural gas transportation market in America.

And with that I will turn the call over to Rick.

Richard Wheeler

Thanks, Andrew. Before I review our financial results, I would like to point out that all my references to our results will be comparing the second quarter of 2013 with the second quarter of 2012 and the first six months of 2013 with the first six months of 2012, unless otherwise noted.

For the quarter, revenue increased to $88.1 million, up from $69.8 million. For the first six months of 2013, revenue increased to $181.2 million, up from $143.5 million a year ago. When comparing our numbers between periods, please note that the quarter ended June 30, 2013, includes $6 million of volumetric excise tax credit or VETC revenue, and the first six months of 2013 includes $32.2 million of VETC revenue, of which $20.8 million related to the full year of 2012. We did not record any VETC revenue in 2012 as the law was not in effect at that time and was reinstated in January 2013 and made retroactive to 2012 at that time.

Volumes rose to 52.6 million gallons during the quarter, up 48.6 million gallons a year ago. Please note the prior year amount included 2.1 million gallons associated with our Peruvian joint venture, which we sold in March of 2013. For the quarter, our CNG volumes were 35.6 million. Our RNG volumes were 2.2 million gallons. And our LNG volumes were 14.8 million gallons. For the six months of 2013, volumes increased to 02.5 million gallons, up from 92.3 million gallons.

On a non-GAAP basis for the second quarter, we reported a loss of $0.07 per share. This compares with the non-GAAP loss of $0.16 per share in the second quarter of 2012. For the first six months of 2013, our non-GAAP loss per share was $0.03, and was $0.33 per in the prior period.

Adjusted EBITDA in the second quarter of 2013 was $11.1 million, which compares to adjusted EBITDA of minus $1.6 million in 2012. For the first six months of 2013, adjusted EBTIDA was $31.2 million, compared to minus $3.6 million last year. Again, please remember the second quarter and first six months of 2013 included $6 million and $32.2 million respectively of VETC revenue. And the second quarter of 2013 also included a $15.5 million gain on the sale of our vehicle conversion subsidiary BAF.

Adjusted EBITDA, non-GAAP EPS are financial measures we develop to highlight our operating results, excluding certain large, non-cash or non-recurring charges or gains which are not core to our business. These items include the amounts we are incurring for the Series I warrant valuation, our stock-based compensation charges, and foreign currency gains and losses related to our IMW purchase notes. 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 second quarter was $11.9 million or $0.13 per share, which included a non-cash loss of $40,000 related to valuing our Series I warrants, non-cash stock-based compensation charges of $5.5 million, and a $0.2 million foreign currency losses related to our IMW purchase notes. This compares with the net loss of $11.3 million or $0.13 per share in 2012, which included a non-cash gain of $8.9 million related to valuing our Series I warrants, non-cash stock-based compensation charges of $5.8 million, and foreign currency losses of $0.5 million on our IMW purchase notes.

For the first six months of 2013, our net loss on a GAAP basis was $15.8 million, or $0.17 per share and included a non-cash charge related to valuing the Series I warrants, non-cash stock-based compensation charges of $11.7 million, and a $0.4 million foreign currency loss on our IMW purchase notes.

For the first six months of 2012, our net loss on a GAAP basis was $43.2 million, or $0.50 per share and included a non-cash charge of $4.6 million related to valuing the Series I warrants, non-cash stock-based compensation charges of $10.4 million, and a foreign currency loss of $0.1 million on our IMW purchase notes.

Our SG&A charges are higher between periods, primarily as a result of continued business growth and costs incurred to support our construction and sales efforts to develop and launch America’s Natural Gas highway. Also in the second quarter of 2013, we incurred a $1.1 million charge related to vacating our former office lease and approximately $750,000 of moving and IT related costs in connection with moving our headquarters from Seal Beach, California to Newport Beach, California. We anticipate these costs will be offset in the future with reduced rental rates at our new location.

Our interest expense was also up between periods, principally due to the interest charges we are incurring on our convertible notes we issued in June 2012 and 2013, coupled with the fact we capitalized less interest in the second quarter of 2013 related to our construction activities.

Our gross margin this quarter was $26.2 million, which compares to $21.3 million in 2012. For the first six months of 2013 our gross margin was $68.5 million, compared to $39.1 million. The gross margin for the second quarter and first six months of 2013, includes $6 million and $32.2 million of VETC revenues respectively. Our margin per gallon on our fuel sales this quarter was up $0.02 from last quarter to $0.30 per gallon. Our cash balance plus our restricted cash, plus our short-term investments, totaled $190.2 million at June 30, 2013, which we have available to fund our future cash needs.

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

Question-and-Answer Session

Operator

(Operator Instructions) And our first question comes from the line of Laurence Alexander with Jefferies. Please proceed with your question.

Laurence Alexander - Jefferies

Just a quick couple of questions. First, on the joint marketing agreement. Can you flesh out a little billion the cadence of the commitments on your part? Any capital outlays you will need to do? And secondly, can you give an update on how you are thinking, with the funding that you have received, any changes in the number of stations you want to build over the next 24 months or so.

Andrew Littlefair

Sure, good. Thank you. You are speaking of the Westport marketing alliance?

Laurence Alexander - Jefferies

Yes.

Andrew Littlefair

Because we have a couple in the works right now. But the Westport one is -- we take that very seriously, because as you know, we always viewed all of the conversions coming out of Westport to be gallons. And since we are the largest of CNG network, public access network, that’s very important to us. I mean that’s one reason we got in the business in the first place. Our sales teams are for airports and such, but this would really come into -- would really apply, led by Peter Grace here, it's going to be fully integrated to be able to continue to help sell the BAF product.

Over the last year and a half, two years, we have really cross trained our salesmen to understand the vehicle offerings that we have developed. And we will continue with that as Westport brings other product. We will have quarterly meetings and it will not be uncommon to see our Westport sales folks go on joint customer calls with Clean Energy. So we are working in the glove with them over the next two years and my guess is, that will be fruitful relationship for both us. We will probably even continue beyond that, wouldn’t surprise me.

The second part of the question was stations. So you will notice that, we have talked about this before, I think we talked about it on the last call. We have been mindful of the fact that as we want to engage the development of the stations, the network stations with the delivery of the trucks. So we are very pleased that the trucks are beginning to be deployed. We are beginning to see those 12-wheelers show up at our stations. But as we have said before, it doesn’t do us a whole lot of good to have 150 stations out there in close. So the nice thing about this business is, we can gauge it and slow down and speed it up as necessary.

We pulled back in a little bit this year and slowed down the development of the stations to better coincide with how we saw the trucking point going. Now we are pleased with outgoing but we have enough stations there currently and as you know, many of them are not open. So we trended back some. We are in a very nice position to be able to fund our remaining CapEx requirement for this year and, frankly, well into next year. I mean it's not the entire year. We still see the business requiring from our end, 200 to 300 more stations here in the next few years and we will be on track to handle that.

Laurence Alexander - Jefferies

And then just one clarification. I think as part of your answer you hinted that there might be other joint marketing agreements either in the near-term or as other OEMs launch vehicles. So could flush that out a little bit?

Andrew Littlefair

Well, I am not going to give you all the secrets there, but...

Laurence Alexander - Jefferies

Just a little bit.

Andrew Littlefair

Yeah. For instance, we have one with Navistar currently. Now, Navistar has pulled back on their product, but we had a joint marketing agreement with Navistar and their dealer franchise. And we’re talking with the other leaders in the business for other joint marketing arranges. We like that because every time we get more product we sell more fuel. And so we like to think that our sales force is very well trained. We have about 55 salesmen who do nothing but call on heavy duty trucking shippers. Those people that hire truckers and truckers themselves and we have a light number, if not more in transit airport and refuse. And they’re very well trained. And so when we get a chance to work with other people producing product, product that buys fuel, we’d like to have that relationship to calling the customer jointly. Thank you.

Operator

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

Robert Brown – Lake Street Capital Markets

Could you give us a sense of the 54 projects in queue? Could you give us a sense of what pockets those projects are for? And is trucking going to be part of those or is that – that’s still waiting for the 12 wheeler?

Andrew Littlefair

It’s funny. It’s a good question because we can slice and dice the stuff differently. Really a preponderance of those 53 or 54 stations in the construction queue, a bit majority of that is refuse. Now, we have another 30 or probably 70 stations that I don’t have in that queue that really need to be – that are in a separate bucket that we know will be in the queue for the heavy duty trucking for the latter part of this year and early next year. So I think right now 47 or 43 of that 53 are in refuse in that one group. But there’s a whole another group that I don’t count as -- because somebody hasn’t necessarily given us money to do it and maybe there are stations. So we know of 125 to 140 stations that are in the planning process to be built.

Robert Brown – Lake Street Capital Markets

And then on the 12 wheeler rollout, you gave some numbers about this year. What’s your view into next year in terms of the engine demand? Can you give us a sense of how this rollout starts to load your stations?

Andrew Littlefair

Yes. Sure. This is -- you can probably call almost everybody in the business and get a different number. So a lot of this is based on the same people, Rob that you’re talking to. It's the people I mentioned in my remarks. It’s dealers. It’s people that have bought trucks. It’s the producers. You can slice and dice these numbers a lot. We think we've seen and this would take into account 9-liter, 12 liter, which of course I'm highly focused on and even some 15 later. If you look at what we believe from our customers, our sources of confirmed orders and pending orders as we sit here right here today, it’s 2,700 plus. It jives very nicely with what Westport said. Now of course remember, we’re sitting here, the 400-horsepower just got released. And so I feel very good about having that many engines already spoken for here as we sit here in August. We have great hopes for the latter part of the year. When we look out to 2014, we see another 1,700 and 60 60 pending orders that we believe are out there. That’s not super soft, Rob because about 900 and some odd of those are UPS LNG orders.

And so I think if you roll that together, some of those will fall into ‘13 and some of them into ‘14. You have a few thousand engines so we’re a couple thousand ahead of where I thought we’d be right now. We’re just getting started. So I feel good. I’ve told people all along, let's look at the order bank by month in the fourth quarter and see what we look like and if that number gets to be 500 and 600, 700 a month, you’re on track to do 10,000 dealers next year, which for our company is significant. It’s significant for Westport and others as well. It begins to track. It’s what we’ve said before, it begins to track what we’ve seen in the refuse sector. Because remember, you look at the refuse sector, we started out when we had the new engine. 3% of the new purchases were natural gas in the year that that new engine came out. But we’re in that same place now with this 12-liter engine. And if you just begin to do something, half of what we've done in the refuse sector, you will see 10,000 or more engines next year. And then after that it ramps up significantly.

Operator

And our next question comes from the line of Steve Dyer with Craig Hallum. Please proceed with your question.

Greg Palm – Craig Hallum

This is actually Greg Palm on for Steve. Sorry if I missed this, but Rick, can you provide the revenue and margin by segment please.

Richard Wheeler

Which segments would you like?

Greg Palm – Craig Hallum

The BAF, IMW, station, all of those if you can.

Richard Wheeler

BAF was $2.8 million of revenue. IMW $19.2 million of revenue. Station $12.1 million. Margin, BAF was actually $400,000 loss. IMW was $1.7 million. And Station was $2.3 million of margin.

Greg Palm – Craig Hallum

Thanks a lot. Just kind of piggybacking off a couple of earlier questions with the launch of 12-liter early this year. Can you just more of an update on kind of the process with some of those anchor fleets to open some of those stations that are already out there.

Andrew Littlefair

Sure. And you know that’s where we are working very closely with these folks that are ordering trucks. All these fleets are a little different. And so you know they are all in kind of a testing mode. I mean some of them are more sold than others, some of them are further along in the testing cycle. But you are having these fleets order 20 trucks, or 12 trucks, or 15 trucks. And some obviously, UPS has shown tremendous leadership by ordering 100s and 100s of trucks. They have had arguably more experience than some of these others because they have operated natural gas vehicles now for 15 years.

So our national trucking team led by Jim Harger, are working very closely with the shippers and the contracting carriers. And kind of what you are seeing is, you are focusing, we are taking the line data that we have from certain of these shippers. We are working with them in their interest to bring their carriers along to go to natural gas and we are overlaying that on top of our network. And they maybe just a one root for trucks that operate everyday between point A and point B. And you will see that in our network for, let's say, Dallas to San Antonio. We work very hard to gather up 20 trucks to basically call one station home. And when you get that, then you can open a station.

So it's very important to us. When we see the, UPS, for instance, announcement, UPS announcement alone over the next 8 months opens up 19 stations. So the nice thing is, I don’t need 40,000 trucks here to open up 70 stations. You need 20. That gets that station open up, makes that station perform nicely. We are not done at that point of course. We can open with 20. Our team needs to move it to 100. Remember an average truck uses about 20,000 gallons of fuel a year. So you have 100 trucks operating at your stations, you are almost at capacity for that $1.8 million investment.

And if you are lucky enough, Greg, to get 100 trucks on day one which is not going to be the normal case, you have about a year payback on that station. So the [pointer] is, work with the fleets to open these stations as they begin to take the 20 trucks. That’s how they kind of group these anyway and we will begin to open these stations. And you will see over the course of the next six months, certainly with the UPS help, we have about nine that are in process right now and then you have these other 19 behind it. And by this time next year you will have a lot of those stations will be open, if not all.

Greg Palm – Craig Hallum

Okay. Great. Thanks for the color. Last one for us and I will hop back in the queue. Kind of given what's been going on over Pilot-Flying J, we are just curious if there has been any change to the agreement that you guys have with them. Any potential effects as a result?

Andrew Littlefair

No. You know we continue to be big fans of the management at Pilot-Flying J. The relationship is strong. We have stations under construction right now. As you know we have  whole bunch of them built. I’m sure they’d like to see more volume come through there as we would. But they continue to be a very strong partner. We have about 18 more Pilot-Flying J's in the queue I believe right now. So no ramifications related to us. We have very good relations with their top management.

Operator

Our next question comes from the line of Carter Driscoll with Ascendiant. Please proceed with your question.

Carter Driscoll - Ascendiant Capital

Just getting back to the discussion about agreements. Can you talk about anything that transpired with your recent signing of Mansfield and how you’ve been able to maybe approach their customer base to try to convert them over to GMG? Then I have a follow up.

Andrew Littlefair

Carter, good question. We like what we’ve done with Mansfield. Just to remind everybody, we’re proud of our relationship with Pilot Flying J. We have a couple of other pilot like Flying J relationships with Quarles and (inaudible) Petroleum for almost another 1000 stations. So yeah, you’re working with the largest public truck stop owner and private -- with Flying J, Pilot Flying J. Mansfield is the largest behind-the-gate field provider of doing now the recently met acquisition in Chicago, 3.5 billion gallons behind the gate. So we feel very strongly that we’ve got these two really important relationships. If you think with me that there’s 25 billion gallons of fuel in this market, our two exclusive partners have 11.5 billion gallons of it every day, annually.

We’ve assimilated the 20 some odd stations -- all of the Mansfield stations and we’re building up 20 others that were in process when we acquired it. Our sales teams are now going on joint sales calls. So we like that. We’ll soon announce a few of the first Mansfield deals, if you will, where one of their customers wanted to move forward with natural gas. They’ve sleeved us as the product experts bring us into the play. Our sales people are making these joint calls and we have the first of those beginning to come to fruition. We like it. We see -- I’m in contact with Michael Mansfield and we like the relationship. We hope going forward it will be very important for both of us.

Carter Driscoll - Ascendiant Capital

And then just shifting gears a little bit. You talked about – you just said you broke ground for the new renewable plant outside of Memphis. Can you talk about maybe the learning curve, what you’ve learned building the first two and maybe how to apply that either maybe potentially speeding up the construction time or maybe improving the throughput. I know you could have picked up with the Michigan plant last year. Maybe if you could just talk to the evolution of what you’ve learned in there.

Andrew Littlefair

Carter, it’s a good question. We’ve learned a lot and the beauty of the biomethane business is you have a really phenomenal product and you’re rewarded for it because of its clean nature, 90% cleaner. And of course as you know, getting into transportation it brings with it some substantial margin enhancements. Having said that, it’s not that easy and these are expensive projects to place on landfills. There’s wells that need to be drilled, land filled, manage methane there. These are anywhere between $25 million and $40 million cleanup facilities with very large, big time compression. We’ve learned a lot and we’ve improved our first – actually our first to look almost -- as you know we’re in the process of doubling it. We’ve had quite a bit of problem bringing on the full completion of the second -- if you will the second compressor train of it.

We’ve already increased that thing from about 3 million to now we’re kicking up around 5.2 million a day. But we’re not comfortable until we get it up to where the design capacity is around 6 million a day, 6.2 million. So we’re on our way. There’s more to be done there. Our second project in Michigan, we’ve had problems with that as well and things weren’t sized correctly. We’ve learned a lot on building these. I think we see the light at the end of the tunnel on that as well. So I guess all I could tell you is that we’ve learned a lot on the construction side of this, on the equipment side. We’re getting better. We’re getting faster. We still like it. Our customers like the product. But it's not for the faint of heart, let's put it that way. And we have though, probably three more like this one that I just mentioned, in the pipeline. So you will see more of these. And I think we will get better in each one of them.

Operator

And our next question comes from the line of Andrea James with Dougherty & Company. Please proceed with your question.

Andrea James – Dougherty & Company

Just really quickly, Andrew, you were going over, that you have 100 trucks at a station. It's a one year payback on your investment. And I was just wondering, what margin are assuming on those trucks per gallon.

Andrew Littlefair

Now you wouldn’t think much of me if I just spilled the beans and told you all that, right. You are going to have to back into that. But, remember, this may be a good push. Remember, Andrea, that the way to think about this is, today you have natural gas at just what, $3.40-$3.30 some odd per mcf. And you 7 gallons, you get 7 gallons, 7.2 gallons of diesel. So your commodity per gallon is about $0.47 as we sit here today. Now you have got to liquefy the gas and haul it, transport it, do O&M and insurance. And so I have always told everybody, add about $1-$1.10. So you can see with that as your cost to $0.47 plus the $1.10, you are up at nozzle tip for the $1.50 or $1.60 and you are competing with diesel at $4-$4.20.

So there is a lot of room in there. There is a lot of room for me to share with our customer and there is some in there for us. So you just have to do the math. But....

Andrea James – Dougherty & Company

I did the math. It comes out to $0.90. But then if you look -- there is just a wide range of (inaudible) out there on margin per gallon. I mean everywhere from $0.25, $0.50, $0.90 and $1. And I guess, I was wondering if you could bracket it a little bit. Just seems to be a wide range.

Andrew Littlefair

Is it bigger than a breadbox or. Well, it's kind of -- I just sort of took you through it, all right. Now there are profit splits in there and naturally there are other things. But it's not $0.25. Now you may be thinking of liquefaction costs or something, but it's.....

Richard Wheeler

An O&M type....

Andrew Littlefair

An O&M deal...

Richard Wheeler

Something like that. So there’s different types of sales models.

Andrew Littlefair

But if you are building a station and risking your capital and retailing fuel, then you have some control over at a station, the margins is a healthy margin.

Andrea James – Dougherty & Company

Okay. Thank you. And then...

Andrew Littlefair

And one thing I think Andrea that I think is important on that. Because I get this a lot, and I understand people who (inaudible) this margin compression and all. Remember, we are competing with this other fuel that’s $2.50 more than we are. So there will be other people come to the party and compete with us. But we are competing with a fuel that’s substantially more expensive. So there is going to be some good margins here in people in our business for, I think, for the foreseeable future.

Andrea James – Dougherty & Company

Fair enough. Thanks. And when Ford said they are going to do a CNG pickup in 2014, I just wondered, does that move the needle for you guys at all.

Andrew Littlefair

Well, of course we love it, right. We love the fact that today every major OEM in the heavy duty sector, every single one of them in the world, either making trucks or building trucks or engines, has announced product. That’s good for us because we sell fuel. So we like it when Chrysler made their announcement during the Dodge pickup which we saw yesterday. Range Resources bought about 150 Dodge pickups. So that’s great. We will get a crack to fuel in some of those. Yet 150 had never been in our sweet spot at the time we were for fleets. A lot of fleets don’t use the F-150 but some do. Gas utilities do, water districts do, some school districts do. Heaver, bigger fleets often didn’t use the 150. Of course the motoring public does.

I have already had a call from a very aggressive gasoline retailer in Texas that believes the F-150 will, and sort of the F-150 is kind of like a suburban down there, is a Texas mainstay, and believes it's time to begin to put natural gas into his gasoline retail travel centers because he can make his customers drive the F-150. So, yeah, all of it helps. You will discover that the F-150 doesn’t drive as much in many cases as some of our other fleets. And maybe it doesn't burn as much fuel because the duty cycle is a little different. But yeah, we love it. We love having that product come to market. We've been trying to get forward to make gas prep engines available for many of the line. So I think this is a good step that they’ve come with the F-150. And we’ll be a beneficiary. Look, Southern California, people buy a lot of F-150s. We have 60 public stations in Los Angeles. To the extent that those were sold to Ford dealers, we’ll be fueling them.

Operator

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

Caleb Dorfman – Simmons & Company

I guess first, interesting to see the agreement announced with NG Advantage. Can you walk us through that deal, how the economics let to the actual off taker versus the clean versus the NG Advantage? Isn’t that a one-off deal or do you view that as a segment which can generate a lot of growth for you going forward?

Andrew Littlefair

Well, natural gas is cheap. And so you’ll find markets and we’ve done this before, years ago we used to sell LNG to drive lumber in Canada and the Northwest. So you’ll find these uses where stationary sources of natural gas make a lot of sense. We saw it in the northern border towns and the (inaudible) doors of Texas years ago. So here you’re able to compete very favorably with fuel oil in the northeast and propane. We can sell at a nice margin. It’s not quite that margin we talked about a minute ago, but it’s a very nice one that we’re very comfortable with. Deliver the fuel in fairly large quantities which we like. And the customer -- the deal with NG Advantage you’re going to have to ask them on what they would charge those stationary customers. But there’s plenty for it to make sense for them to deliver the fuel and in effect retail it to their customer who otherwise would be buying number two fuel oil or propane in these remote areas where it’s expensive. So we like it because we've got capacity and the relationships. We have the tanker fleet. And this is the first of several you're going to see. We're talking with asphalt guys and others where this makes a lot of sense.

Caleb Dorfman – Simmons & Company

How big do you think this market segment could be over the next let’s say two to five years?

Andrew Littlefair

I’d love to give you a real big number, Caleb, but I just don’t have that off the top of my head. But we’ve got a dedicated group now working on it now. And this is a big customer and the nice thing is they’re typically high volume applications which is nice. How many are out there I just don’t know if we have a really good feel right now. It’s just starting.

Caleb Dorfman – Simmons & Company

That is interesting to see. I guess the President's really making climate change a central part of his strategy for his second term. And obviously he’s talked about like the use of natural gas in heavy-duty vehicles before. Do you actually think something gets done on the legislative side this time around? Or is it still something where the timeline keeps on getting pushed to the right?

Andrew Littlefair

Well, there's a difference between legislative -- legislation on this and the President talking about climate change. Those are two different things. I think to the extent that the administration and the President talk about climate change and there's pressure on greenhouse gas and rules promulgated the EPA, we’re a winner in that. Natural gas is a very low carbon fuel compared to the others. And so every time somebody comes up with something like that, we tend to do very well. I wouldn't say you should translate that in that we’re going to have a piece of tax incentive legislation come through this Congress anytime soon. Now there are some specific, like what we used to talk about, Caleb, the Nat Gas Act. Now I will say this, we have a lot of support in Congress. We don't have to sell like we once did. People get it. People get this is good for the country. It’s also happening without them, which is probably not a bad thing.

The market is taking the bull by the horns here and not waiting around for the federal government, which I think is a good thing. Are there some things they should do? Yeah. They should fix the LNG tax. We pay more in LNG per gallon than diesel does. So if you are in the Middle East and you sell us oil and we make diesel out of it, imported diesel, it has a lower tax rate than LNG produced in America. Which is crazy, it's $0.18 a gallon. That ought to get fixed. And I think that that might. There are some targeted things like that that could happen. But I think that the business is happening kind of without federal -- it is going to happen without federal legislation. I am not sure it's required. If the country wanted to move along faster, then they should do it. And it would help. If you just today, even if we took the old Nat Gas Act which was different, and you just provided someone buying a truck a $10,000 credit. That would make this a six-seven month payback and I think it would expedite the business. But I wouldn’t count on it.

Operator

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

Matthew Blair - Macquarie

I was curious if there is an update on the micro-liquefaction projects through GE. Have you said either the two locations and should we still expect the spending to ramp up starting in 1Q 2014.

Andrew Littlefair

Yeah, we are working hard on it. We have guys working on it. We haven’t announced locations but we have got to set the locations. We haven’t quite ready to announce them but we have made -- we have narrowed it down and we have made real estate activities underway to do that. So we feel pretty good about it. We have worked very closely with GE and other on the design. We have done a lot of work over the last six months. So before the end of the year, which is what we want to do, we will have those locations public. And I think you are right, the spending for us will begin -- I don’t if it will be in the first quarter or be later than that.

Richard Wheeler

I think that’s a little early.

Andrew Littlefair

Yeah.

Richard Wheeler

Just from the perspective, once we pull the trigger on the locations, there is lot of permitting and those types of things that have to go on that kind of typically will delay your big expenditures. Now we will certainly start, put deposits down or look at long lead type items. So that may start to creep in middle-ish part of next year or so. But for most part I would just think it's probably a little early.

Andrew Littlefair

You know standard -- couple of hundred thousand bucks on permitting and people to help you do that, but it's not significant until later, a little later.

Matthew Blair - Macquarie

Sound good, thanks. And the, Rick, on the uptick in the fueling margin. Could you break this out? How much was due to increases or decreases in commodity prices and how much was due to just your own efficiencies? Reducing costs, things like that.

Richard Wheeler

Most of it -- I don’t think a healthy chunk of it was related to the commodity changes. Because that typically goes up and down with our price and typically corresponds with the increases and decreases in oil and natural gas etcetera. And this thing, I think helped us, were just some of the things that hurt us last quarter. You know the transit industry picked back you so we had some more volume. There is different locations. Some of the other things that hit us in the first quarter this year got fixed again this quarter cost wise. One thing that helped us this quarter that hurt us in the previous quarter is our Pickens Plant was down in the last half of last year, which caused us to incur a lot of extra cost from transportation perspective. And there was some basis differences with some of the commodities when we had to go get product from different locations.

So we were enduring all those extra cost in the last half of last year. We kind of settled up on our business insurance policy and got the money in this quarter which helped. So I would say it was mostly, just kind of one off things that got fixed. I don’t think there was a lot of the commodity stuff. I mean $0.30 is kind of the normalized number that I think we just kind of got back to, just the way certain things timed up this quarter.

Operator

And since we have no further questions at this time, I would like to turn the floor back over for any closing comments.

Andrew Littlefair

Good, thank you, operator. Significant progress has taken place over the first half of the year in long haul trucking's transition in natural gas. The new 12-liter natural gas engines are being delivered to the truck manufacturers. Some shippers are starting to request that their contract carriers make the switch to natural gas. And some of the biggest companies in the business like UPS and Proctor and Gamble are announcing their commitment to natural gas trucks. With our highway in place, our fueling experience in the established refuse and transit fueling markets and our superior capabilities and station construction and operation, we believe we’re well positioned to take advantage of this historical shift.

We thank you for your continued support and I look forward to reporting to you on our progress next quarter. Thank you.

Operator

Ladies and gentlemen, this concludes today’s teleconference. You may disconnect your lines at this time and thank you for your participation.

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