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Clean Energy Fuels Corp.. (CLNE)

Q3 2009 Earnings Call Transcript

November 9, 2009 at 4:30 pm PT

Executives

Andrew J. Littlefair - President, Chief Executive Officer

Richard Wheeler - Chief Financial Officer

Ina McGuinnes - Investor Relations

Analysts

Robert Brown - Craig-Hallum Capital

David Woodburn - ThinkEquity Partners

Brian Gamble - Simmons & Company International

Steven Milunovich - Merrill Lynch

Eric Stine - Northland Securities

Operator

Welcome to Clean Energy Fuels third quarter 2009 earnings conference call. At this time all participants are in listen-only mode. A 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, Ms. Ina McGuinness of ICR.

Ina McGuinnes

Earlier this afternoon, Clean Energy released financial results for the third quarter, nine months ended 30 September 2009. If you did not receive the press release, it is available on the Investor Relations section of the company's website at www.cleanenergyfuels.com. This call is being webcast and a replay will be available on the Company's web site for 30 days.

Before we begin we would 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 project. Words and expressions reflecting optimism, satisfaction with current prospects as well as words such as believe, intend, expect, plan, anticipate and similar variation 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 the Clean Energy Form 10-K filed with the SEC today on 16 November 2009 and in the Form 10-Q for the quarter and its [supplementary] filed earlier today.

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 circumstances after the date of this release.

The Company's non-GAAP EPS and adjusted EBITDA which will be reviewed on this call excludes 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 which should not be considered as substitute for or superior to GAAP results.

The most directly comparable GAAP information, reasons why management uses non-GAAP information, a definition of non-GAAP EPS and adjusted EBITDA and a reconciliation between non-GAAP and GAAP figures is provided in the Company’s second quarter 2009 press release which has been furnished to the SEC on Form 8-K today.

Participating on today's call from the Company are President and CEO Andrew Littlefair, and Chief Financial Officer Rick Wheeler. And with that, I will turn the call over to Andrew.

Andrew Littlefair

Good afternoon everyone. This has been a very good quarter for CleanEnergy, operationally, strategically and financially. We are beginning to see the benefits of the leverage in our business model. Our gross margins are up and our volumes are up. Volumes rose 58% from a year ago, with all of our sectors, refuse, support, tracking, transits and airports contributing to our growth.

On the strategic development front on 1 October, we closed on a transaction to acquire BAF Technologies. BAF is a leading provider of natural gas, vehicle conversion technology in the US and we believe a nice strategic fit for us as they provide conversion solutions to our taxis and airport shuttles. Remember we worked with BAF for years, as they provided vehicles in our key markets. So we are familiar with them and their capabilities. This acquisition bolsters our strategy of providing trend key solutions that leads to the adoption on the use of natural gas as a vehicle fuel. We believe we can provide the resources and marketing help for BAF to capitalize on the opportunities we see in front of them.

The biggest neutral opportunity for BAF is the AT&T-CNG van conversion project that I have mentioned on previous calls. BAF is on more than halfway through the first purchase order for 600 vehicles that AT&T submitted awhile back. And BAF also just received the second purchase order from AT&T for 483 vans for the delivery in the first quarter of 2010. We also believe that AT&T and other companies will feel a little more comfortable converting their fleets to natural gas knowing that Clean Energy is behind the conversions with its industry expertise and financial resources.

Turning to the Queen Cities Program we are very pleased to have benefited from the Department of Energy’s stimulus funding that was awarded in late August. Clean Energy and its direct partners were originally awarded $34 million to build 11 natural gas fuelling stations and offset the cost of deploying 800 natural gas vehicles. As I have mentioned earlier, there are also several other awards that were announced in the natural gas arena without a specified station builder or fuel provider. As of today we have added another 4 stations and so our total was now $40.8 million and 966 vehicles. So we are actively pursuing more of these opportunities and I am sure we will be successful in winning more projects. We will keep you abreast on our progress as it unfolds.

On the legislature fronts the NAT GAS Act continues to have strong bipartisan support. Now there are 120 members of the House signed on as co-sponsors. And if you know the Senate bill sponsored by Senator Menendez and Senator Orrin Hatch and has the support of the majority leader Harry Reid. Right not health care is dominating the agenda in Washington so we are working hard and we are looking for the time when energy initiatives resurface to the forefront.

The NAT GAS Act has strong congressional leadership support so there has been talk about the Act succeeding as a stand-alone bill. But other options include as part of the transportation bill, as part of the modified energy bill or other legislation. Our team is joined by the American Gas Association, the American Natural Gas Alliance which is a coalition of leading natural gas EMP companies as well as the Picken’s Army, and they are actively engaged on several fronts. Boone has been working this very hard but we are confident that these efforts will keep the bills at the top of mind. To me, the NAT GAS Act is not an “if”, but it is a “when” situation.

Another important development was the formation of the Congressional Natural Gas Caucus. This caucus was formed by House members who support natural gas issues and recognize the importance of natural gas for this country including helping to pass the NAT GAS Act. Boone spoke at their first meeting a few weeks ago.

With the announcement by AT&T to deploy 8,000 natural gas vehicles over the next four years, several national fleets are considering similar policies to protect themselves from rising gasoline and diesel prices and to reduce their carbon footprint. For example last week Verizon, issued a request for proposal to purchase up to 800 natural gas-powered vans that will be converted and deployed in 2010. This is a new announcement.

Our subsidiary BAF has submitted a bid to do the conversions. Although we did not yet advertised the contractual agreement with Verizon to fuel their CNG fleet, we expect many of these vans will use our existing public network in metropolitan areas where our service areas overlap. For instance, we are already fueling now 151 AT&T vans on our existing network. We also expect Verizon will have private CNG stations built for their large vehicle bases which will present an opportunity for us.

To capitalize on the national fleet opportunity, I have asked Jim Harger our Chief Marketing Officer to devote his time and develop a team to pursue this sector of our business. The successful deployment of heavy duty trucks in the Port of Los Angeles in Long Beach has also been noticed by several national heavy duty regional truck operators. With almost 500 LNG trucks making daily deliveries from the port, some of America’s largest private regional operators are now convinced LNG trucks work and that they are commercially ready alternative to diesel.

Many of these fleets including Feedaway, J.B. Hunt, Knight, Mohawk, Pepsi, Shaw, Southern Mail, Cisco, Swift, UPS and WalMart have tested the freightliner and ordered Kenworth heavy duty LNG trucks in their local serving California operations. The demonstration was also been good and some have already placed orders and others were awarded large deal re-stimulus grants to develop LNG trucks and fund infrastructure.

The third quarter marked the first full quarter of operation for our port of Long Beach LNG truck stop. We are really pleased with how the station is performing, already it is one of our highest volume stations and is running at about 9,000 gallons a day and sometimes it hits it as high as 12,000 gallons on certain days. This squarely has been a contributor to our accelerated volume growth. For the quarter port volume was up 35% from a year ago and as more trucks roll out of the ports we expect our LNG stations to continue to deliver strong volume growth.

As of today there are about 500 LNG truck operating at the ports and we are continuing to see good signs in the deployment of additional trucks. Funding programs have already been approved that will add another 546 LNG trucks or so. This number was increased just last Friday by 63. So if all goes according to plan, there should more than a thousand LNG trucks fuelling at the port in the coming months.

The refuse piece of our business has continued to see some promising developments and over the course of the past several weeks, we have opened two stations, one in San Luis, Obispo, California and one in Pompano Beach, Florida. The southern Florida station marks our entry into the Florida market. These were previously announced projects and we are pleased to see these stations now fully operational and contributing to the expanded geographical reach of natural gas’ appeal in the refuse sector.

We also have another refuse station opening tomorrow in New Jersey. It is worth revealing that the refuse sector of our business is contributing in a significant way to our growing backlog. When you look at the refuse sector we are seeing multiple installations being contracted with major companies. I think there is a pattern here that is worth pointing out.

We started slowing the refuse industry but we have now been in that business in earnest for three years or so. And today we are seeing the major players in the industry expanding their natural gas fleets in a meaningful way. This is not just because they are worried about meeting the 2010 emission standards; it is also because they have had time to experienced economic and operational benefits available from natural gas. In comparison the regional trucking market is a new market for our industry. We are roughly in the same phase of our sales cycle today in regional trucking that we were in the refuse sector a couple of years ago.

I think the deployment will occur more quickly with regional trucking because the engine technology is more advanced and if the fleet turns over more quickly. High diesel prices coupled with incentives and the potential of Natural Gas Act could really jumpstart this sector. The next phase will be with more customer pilot programs and then larger and larger deployments of LNG trucks within these customer suites. The important takeaway at the Port of Long Beach and Los Angeles has really been that it has proved out the heavy duty trucking market, delivering a proof of concept and confidence that will put regional trucking toward natural gas.

Remember of all of our markets, this is the biggest, consuming about 30 billion gallons of diesel per year. Turning briefly to our international business when we first talked about Peru, I mentioned that we wanted to build more stations down there and I am pleased to report that we now have two more under construction. In addition, our main station sold 572,000 gallons in the month of October and this compares to 90,000 in March.

Finally, let me cover some new businesses that does not always want a press release but speaks to the progress we are making on a number of fronts. For instance, in the last 90 days or so, we have added 12 new contracts and here is a just a sample. At the University of California San Diego, we had 100,000 gallons on an annual basis related to their expanding natural gas shuttle service, Oklahoma State University we are building a station to serve 25 new shuttles.

Orange County Transportation Authority in Irvine California added 40 new busses for 500,000 gallons annually. At Love Field, Wayne Transportation added several new shuttle busses which add 25,000 gallons. The City of Dallas is adding 13 new trash trucks for an additional 80,000 gallons a year and at LAX airport, rental car service is adding a total of 50 new busses for Hertz, Avis and Budget that would consume about 750,000 incremental gallons on an annual basis.

Together these developments add another 325,000 per month. In addition, we renewed three waste management contracts for another 10 years after the first 10-year contracts expired. These new contracts comprise 2.5 million gallons annually. All told we have many new contracts during the quarter that show very good progress across our Company segments.

With that, I would like to turn the call over to Rick to review our financial results.

Richard Wheeler

Thanks Andrew. Before I review our financial results, I would like to point out that all of my references to our results will be comparing the third quarter of 2009 to the third quarter of 2008 or comparing a nine-month period ended September 30, 2009 to the nine-month period ended September 30, 2008 unless otherwise specified.

Volumes during the quarter rose approximately 58% from a year ago to 29.5 million gallons. The increase in volume between periods was a large part due to our increased port volumes, increased volumes from the transit properties we acquired from Exterran, an increase sales at our landfill gas project in Dallas.

We are also seeing increased volume in the third quarter of 2009 from the additional piece of the Phoenix LNG supply contract and we recently won and it commenced on July 1. For the first nine months of 2009, we delivered 71.5 million gallons of fuel to our customers, up from 54.8 million gallons. We earned $0.01 a share on the non-GAAP basis in the third quarter of 2009. This compares with the non-GAAP loss of $0.08 for the third quarter last year.

On a non-GAAP basis, our loss per share for the first nine months of 2009 was $0.06 per share compared with the non-GAAP loss of $0.28 last year. Our net loss on a GAAP basis for the third quarter was $18.5 million or $0.31 per share. This compares to a net loss of $12.1 million or $0.27 per share. Our net loss for the first nine months was $31.3 million or $0.59 per share versus a loss of $20.7 million or $0.47 per share in the prior period.

During the third quarter of 2009 we recorded a non-cash charge of $15.4 million or $0.26 per share related to valuing our Series One warrant which is required this year under new accounting guidance. The primary driver of the increased amount recorded this quarter was the impact of a higher stock price had on the valuation model we used to value the warrants.

Before I move on, I would like to emphasize that this is not a cash liability of the Company, but rather a required exercise we must do under the accounting rules to mark-to market the warrants each period due to the exercise price reset feature of the warrants. As an aside the first reset date for these warrants just passed on November 3 and there was no reset of the warrants’ strike price. There is only one more reset provision on the warrants which is on November 3, 2010. So this issue will be gone in the fourth quarter of next year and we will no longer have to mark-to-market the warrants from that date on.

Adjusted EBITDA in the third quarter of 2009 was $5.4 million which compares to a loss of $1 million in the third quarter of 2008. Adjusted EBITDA for the first nine months of 2009 was $9.9 million compared to a loss of $7 million in the first nine months of 2008. Adjusted EBITDA is a financial measure we developed to highlight our operating results excluding the large, non-cash charges that we are incurring that are not core to our business. Including the amounts we are incurring for our Series One warrant valuation, our third quarter 2008 losses on the features contracts included in our derivative gain-loss line item and our stock based comp charges for our options.

Adjusted EBITDA is described in more detail in the press release we issued earlier today. From a margin perspective, our gross margins increased about $759,000 from the prior quarter primarily due to our volume increase between periods. Our margin per gallon was $0.42 for the quarter which compares with $0.48 in the first six months of 2009. The decrease was primarily due to the proportional increase of transit volumes in our volume mix during the third quarter.

One thing to remember on our transit volumes is we typically do not have any capital on this deal so making lower margins in these segments still makes economic sense. We are however focused on improving our margin per gallon number in the future as we look to add new volume in the higher margin segments of our business including our commercial retail operation.

For the quarter, our revenues were $31.2 million versus $33.8 million last year. For the first nine months, our revenue totaled $89.3 million which compares to $97.6 million. As we have previously discussed, a significant portion of our revenues are based on the price of natural gas which was down about 67% between the third quarter of 2008 and 2009. As you know, when the price of natural gas goes down and our revenues goes down, our cost of sales for the natural gas that we are selling to our customers also goes down generally by a similar amount.

In these instances the price of natural gas is in essence a pass-through to our customers. So as we have also discussed before, this is the main reason we believe you need to look at us from a net revenue perspective taking out revenues and subtracting our cost of sales when assessing our financial performance. On the acquisition of BAF, Andrew mentioned at the outset of the call, we paid $8.3 million for all of the equity of BAF where part of the proceeds were used to payback our $3.8 million note we had outstanding with BAF.

So our net out-of-pocket cash for the acquisition was only $4.5 million. We also agreed to pay the seller various portions of the gross margins of the business during 2010 and 2011 subject to certain minimum performance levels and certain maximums. We believe BAF will be a nice acquisition for us especially with the AT&T vehicle order they are currently working on and the other project they are pursuing.

On October 7, we paid off our Facility A term loan with Plains Capital Bank, which had about $17 million outstanding at that time and simultaneously amended the loan into a $20 million line of credit that we can draw on over the next two years. As we did not have an immediate need for these proceeds, we thought this was prudent as they will save us about $900,000 in interest expense per year while the money is not outstanding as debt and we still have access to the funds in the future for when we need the money.

As of today, after the BAF acquisition and the note payoff, we still have about $60 million in the bank to cover our future capital needs before drawing on the line of credit. So borrowing any large, unanticipated expenditure, we should be good through next year from a cash perspective.

With that operator, please open the call to question.

Question-and-Answer Session

Operator

Ladies and Gentlemen at this time we will be conducting a question and answer session

(Operator Instructions)

Our first question comes from the line of Rob Brown with Craig Hallum. Please proceed with your question.

Robert Brown – Craig-Hallum Capital

I wanted to give a little color on your backlog and pipeline given your stations in the pipeline in the past. Can you give an update?

Andrew Littlefair

Last time we were on this call I said we are going to complete about 25 or 6 stations up for the year. That is kind of the contract or the amount of our pipeline or our backlog, I guess, we use both terms sometimes but that number has grown. So currently on the engineering carpet those stations under contract has grown since last time we talked about 34, that are either in permitting or under construction right now. Then the number is still in the low 80s that is kind of in the pipeline. Those are stations that we are working with them, we are negotiating deals that are not under contract but we have seen that number grow. I would say, Rob that is fairly conservative. We have been working with our guys. Those stations have to go through some betting before we add them in there, so I still like what that looks like.

Robert Brown - Craig-Hallum Capital

On BAF was there any revenue in the quarter and then maybe give a sense of how much revenue that 483 truck incremental PO could be?

Richard Wheeler

Yes Rob we did not do the acquisition till 01 October so BAF results will not show up in our numbers until the fourth quarter. As we talked, basically, conversion of these types of ends are somewhere in the $15,000 range a pop. You can do the math there to see, 400 or 600 or if AT&T pulls off the 1,500 or so they are talking about doing next year. You can see where that business starts to ramp up pretty nicely from the revenue perspective. We certainly look forward to drop on some financial help to our results as well.

Operator.

Our next question comes from the line of Graham Mattison with Lazard Capital Markets. Please proceed with your question.

Graham Mattison - Lazard Capital Markets

On the DOE Clean Cities Awards, you mentioned you gave updates in terms of the numbers there, how much is still out there under the hunting license if you will that you guys are still chasing?

Andrew Littlefair

I hate to give a number but I know just being on this business long will not tell you how others work. What happens is, people submitted proposals and I am surprised out of the political nature of the way these things go. Those words were kind of spread out around the country. What we find often is that, while there are a lot of good intentions, some of these projects are noteworthy and I think that ultimately will be successful projects, might have whacked some of the funding so I do not know if out of the $300 million if $50 million or $100 million falls in that category but I would say it is significant. I do not want to say too much here but I know for instance in one state, just this last week it looks like four new projects are getting ready to come our way.

Then another state it looks like two and potentially four. There were a bunch of different projects and I do not have a number off the top of my head, ones that were funded and were significant more than the number of stations I was talking about. I think over time as these awards have to move to the contract phase I feel pretty confident we will continue to peak up or more. The deal Wheeler has told us that they had hoped to have a lot of these in contract and of course they moved rather slowly in December.

Graham Mattison - Lazard Capital Markets

Looking at the new gallons that you had in the quarter, rather the sequential growth there, can you give us a sense of how much of that came from the Hanover acquisition and how much came from Phoenix and how much serve as an expansion of the port versus just an expansion of existing customers that you have, adding more fleets or more vehicles and ramping up.

Richard Wheeler

You bet. The Exterran add is about 6.4 million gallons of the increase. The port is about 750,000 gallons of the increase. Phoenix was about 1.2 million gallons of the increase. Then the other big one was the DCE as you recall, we picked that up in August 2008, last year and then with the capital improvements and enhancements and all that good stuff. It has really picked up as production and it kicked in about 1.3 million gallons of the growth between periods as well.

Graham Mattison - Lazard Capital Markets

Got it, and then in the ports we really serve and seen the contribution from the truck awards itself.

Richard Wheeler

Agree, you all have seen their end process and we have talked about it before, it takes a little while for the grants and everything to matriculate and through the process and all in motion but unfortunately as you know it takes a little while to get all that done but they are rolling along and coming along so hopefully they will just continue to roll out and start to hit our numbers over the fourth quarter and in the next year.

Operator

Our next question comes from the line of Eric Stine with Northland Securities. Please proceed with your question.

Ian for Eric Stine - Northland Securities

This is Ian actually sitting in for Eric today. Just want to get back to Rob’s question; I think you mentioned that there were about 80 stations in the pipeline. Any sense of percentage between O&M deals and supply deals of those 80?

Richard Wheeler

My perception is a lot more of a Miranda supply variety than the O&M variety. I think the Exterran acquisition is the biggest add-on and impacting our numbers you are going to see from the transit side. A lot of the new stuff we are working on is trash projects and regional trucking and other projects along those lines that we are a little more building the stations for selling the fuel. Kind of doing what we do, more on the regular basis. I would think that as those continue to roll out and come online you are going to see a lot of those on our main line of business of selling fuel.

Ian for Eric Stine - Northland Securities

Alright and then internationally, obviously, you got Peru going but many thoughts about other international business.

Andrew Littlefair

You know what, I have said this before, we have the opportunity to look at a lot of things and some countries where there is a lot of exciting opportunity, this does not seem to fit us, either the gas utilities are owned by the government. We just have a hard time seeing how we fit in. We are working a little bit with some opportunities in the United Kingdom there. There we think the model might fit our business and so we will keep you posted on that and I do not have anything yet to announce on that.

Ian for Eric Stine - Northland Securities

Okay great and then just lastly real quick, the VTAC any feeling for the renewal on that on 31 December and coming up?

Andrew Littlefair

You are talking about on VTAC? Yes, VTAC as you well know, is currently embedded in the NAT GAS Act and you are right, the fuel portion VTAC expires end of this year. We have been talking with the Committees of Congress about depending on the pieces of the NAT GAS Act ensuring that the VTAC would get extended in what they call extender bills.

Kind of one of those things where you do not want to let up on the gas on the NAT GAS Act and switch the focus over to extenders, but this is the way that game is played and we are beginning to talk to them to make sure, if the NAT GAS Act becomes bogged down because of the other agenda in congress of other items. Make sure that the VTAC, portion of them get extended and I feel relatively comfortable that that will happen because as you know, many of the other fuels need to get that extended as well. So this is kind of a regular bit of housekeeping that the congress does. It is not a huge ‘ask’ and I think that if we get to the point where we have to get it in their extender bill that will happen.

Operator

Our next question comes from the line of David Woodburn with ThinkEquity. Please proceed with your question.

David Woodburn - ThinkEquity Partners

Question on the margin per gallon, Rick in the end do you think that with jump in volumes, in trends of volume from Phoenix, do you think that margin per gallon has hit bottom or at least close to bottom and as you get more trucking and fleet business that it will, at least, stay flat if not go up?

Richard Wheeler

Yes, I think you are right on there as we talked last quarter, this is the quarter when the Exterran acquisitions and as well as the Phoenix LNG supply contract coming back on was just a very significant portion of our total volumes this period, and I think as we go forward as we are talking about the backlog unfolds and some of the other projects we are working on unfold and stimulus projects we are talking about unfold which are all in our higher margin businesses. Our commercial retail world, our trash world et cetera. That should hopefully bring that number back up which obviously is something we are focused on, because obviously it really drives our business as well from a financial result perspective.

David Woodburn - ThinkEquity Partners

Okay. Andrew in looking at what the Enga group is doing. Things like obviously very well funded but a brand new group, do you think they fit full stride yet in terms of their activities?

Andrew Littlefair

No I do not. But let me say I am really proud of what they have been doing as an industry. I was in the EMP sector. In the old days with Mesa and with [Bern] in years ago and we are one of the few that got actively involved and I think they correctly analyzed the situation. Well here they are, it is very large, significant companies that create a lot of jobs for the country and they just did not have the right set-up as an industry to protect themselves or promote themselves like they should. So they pulled together a war chest of about $80 million which may be less than what Coal has at their disposal I am not sure. But it put them in good stead.

So I am pleased that they are doing that. We have met with a lot of them, they have met with Boone, they have been helping the Picken’s plan, and they have added lobbyists on Capitol Hill. You have seen some of their ads, now I would say they are just beginning to get active and their messages will begin to roll out. You have seen those commercial talking about Eureka, that natural gas was plentiful, they have been working in Capitol Hill for a year and getting the word out that there has really been a change. And the change being increased natural gas supplies. So I think look for a lot more from them on the lobbying side and the government relation side as well as promoting the message of natural gas for transportation. I think it is getting done.

Operator

Our next question comes from the line of Brian Gamble with Simmons & Company. Please proceed with your question.

Brian Gamble - Simmons & Company International

I just wanted to touch on the 12 regional contracts you are talked about releasing some decent details there, 325,000 gallons a month, if I heard you right. You are talking about 4 million per year run rate. Just wondered, with what you are seeing in the current pipeline, is that the sort of growth that you guys think as achievable on a quarterly basis? Do you think it is higher than that? Or it will work as the strategy there and then along with that, are there additional large chunks of gallons that you were looking at or does the growth in the future for the 7, 8, 12, 18 months all look like this kind of smaller projects that were all lumped together to create the growth?

Richard Wheeler

No, I am Rick here, maybe give some more color. Here is how I break it down, it is those sampling that I gave you are really just incremental load. Some of our new stations, but most of those are not. And that is just same store sales growth so that we see is just ongoing businesses like for instance, the Dallas were fueling 13 of those trucks that now have arrived but they have got 17 more getting ready to come. You will see that all over and we are opening up other new airport stations and we are getting other fleets come on. I think you can look for that as just an example of ongoing same store sales growth.

Now those are big chunks, their big chunks were in the refuse market and in the regional trucking market. Figure that a regional truck can use anywhere from 15,000 to 20,000 gallons a year and so you add significantly, you have heard me talked before about, you get into several thousand truck numbers, those were the bigger pieces that I think add in, and that will add in as our commercial retail business.

So just look at that as kind of a nice to have business to come in and it is very nice incrementally, it helps drive nice margins to the bottom line of those current stations, but there are bigger pieces to come.

Brian Gamble - Simmons & Company International

And then secondly on the gross margin for gallon of $0.42 in the quarter, obviously the down take quarter-on-quarter makes sense, Rick any color on growth getting back to that $0.49 or about to be greater? I know that growth of 4-year run rate and we had expected it not to take down quite that much during the quarter, what does that mean for the rest of the year and then as you look forward into next year, what can we be thinking about?

Richard Wheeler

Yes, I mean we are certainly focused on getting back to the levels where it was at in previous quarters in previous periods. When and how fast that happens? The nice thing is the math works out that if we can get the next 20% of our volume growth into our higher margin businesses, that number should start ticking back up to kind of where we have seen it before. So and when and how fast that happened, that is just kind of predicated on how fast these port trucks roll out that which we know were coming. How fast some of these other projects we are talking about, come online. We are also trying to do some fairly significant things with our landfill opportunities now that things were looking at out there which are nice piece of the business for us. So, a lot of it is predicated on how fast a lot of the stuff comes on, but we are certainly focused on getting back to more historical type of level as soon as we can.

Andrew J. Littlefair

The thing that Rick and I talked about a week or so ago is that knowing that you noticed this margin going down is, they really does have a lot most to do with the transit volumes that are added on at the period but it is not a sign that we have seen the best of the margin growth. It is because the markets that were really focusing on and that would be adding, the regional tracking and some of these others substantially higher margins. So, I think you will see that reverse itself.

Brian Gamble - Simmons & Company International

And then finally this is a non-contract with Verizon, AT&T for their new vehicles coming online and I know that is not an issue for you guys. It is perfectly well and you see them fuelling from your public stations. Have there been continued discussions on that front to building stations directly for those customers or are they probably happy with the current arrangements and going to stations on a more public basis?

Andrew J. Littlefair

No, they have and we will and but they are smart guys and so they figured out that in certain places they do not need stations and certain places that they do, so we will working through that with them. We will back and forth with them on how we will develop some of those for them, so it will be a blend. For instance, on a couple of these places we are literally down on the street with a nice public access stations so it just makes sense for them to do it this way.

We have a lot on the stations in the northeast and other places that will develop themselves as well so, but it will be a blend and we will continue to talk with them and negotiating some stuff on building some more stations for them.

Operator

Our next question comes from the line of Rupert Merer with National Bank Financial; please proceed with your question.

Rupert Merer - National Bank Financial

It looks like it is a nice drop in SG&A in this last quarter. How you should we look at that going forward? Is that a run rate we should expect or you expect that to take up the equity on the BAF acquisition?

Andrew J. Littlefair

It will certainly tick up a little bit with the BAF acquisition in the fourth quarter, their G&A and their operations will start showing up in our numbers. They certainly have their conversion facility in Dallas and all the requisite G&A on their business. The other thing is, just going forward and head into next year we have got some cost cutting measures which are helping us this year which we will continue into next year. But next year we anticipate ramping up pretty considerably on sales and marketing side, some other areas of policies and some of those types of things that really capture the momentum which we think is building our business.

Now while the economy is down a little bit once that thing turns, we want to make sure we are in the position to really capture the up-swing on this deals and so. We may layer in some more costs next year so just, FYI, that maybe coming as we build in anticipating the growth we see coming in the business.

Rupert Merer - National Bank Financial

Okay, can you give us an idea of the scale of that ramp-up?

Andrew J. Littlefair

It is hard to say, it depends on how fast and how we see it coming and we do not give guidance or so but, you can probably make some assumption, 30% of the increase that we were tracking at. Obviously, we will have less SG&A for more of the cash perspective than what the actual number looks like in our P&L we pull-out. All the stock-based comp and all the other funnier stuff that is in there and once you strip all that out and look at that number, I would ramp that up a little bit assuming a growth type environment and you will come up with some reasonable numbers.

Rupert Merer - National Bank Financial

Okay, great just one more quick question. What do you anticipate would be the timing on the ramp up of volumes associated with the Clean Cities Program?

Andrew J. Littlefair

Well, as I said it is always a little murky when you are dealing with the DOE, but they are now pushing those contracts out about a month and then they said in December. So we have to take them at their words, so that means that December launch are pretty short month, I have to tell you, but so I am guessing that you will see those in December and January but that is enough for us once we get those sign and we will start. We will start on the vehicles that could be ordered and we will start on the stations. So, you know, it takes anywhere from four months to six months to get through the construction of these stations. So, we will see and that we begin to come on in the mid-part or the early four to five months, five months into 2010.

Operator

Our next question comes from the line of John Roy with Janney Montgomery Scott; please proceed with your question

John Roy - Janney Montgomery Scott LLC

Quick question with all these growth companies coming,. are you guys seeing any competition as yet that is out there or are you seeing anybody that is talking about it?

Andrew J. Littlefair

Yes we are, we are starting to see it. It typically, John, sort of takes the look, I guess it is the right word. It shows up as small companies that are willing to build somebody a station, and they do not have much track record and they have not done much but everybody has figured out that you can go and build something for $500,000 to $1 million or maybe get some profit on that. There are not many or any really in the business like us that will really provide turn-key set of services that help analyze the fleet and help hedge fuel or sell fuel and operate stations long-term and do all those other things that we think were important to really make people come along. Certainly, we do not have much competition on the LNG side just because of the production. But, for instance I heard the other day there was a job-walk at an airport where there were 50 people there.

Now, some of those will not end up being able to produce takers, they just do not have the right, they would not meet the right requirements but we are starting to see some of that. This business goes the way we think it will; you will realize you are going to draw some competition. You are just going to see it first with some of these small Mom & Pop construction companies and they keep us on, let us face it, but I do not know that we are going to lose a lot of stuff to them right now.

John Roy - Janney Montgomery Scott LLC

Right, on the LNG side, could you have an idea of how much is available out there in the US versus maybe if you really want to ramp up, I think you need to build another plant?

Andrew J. Littlefair

Right, if it goes the way I think and I have to be careful here but I really do think that just from watching in the media and what is happening with the climate change and everything else. I really do think that the natural gas is going to move into regional trucking and in goods movement. The NAT GAS Act is asking to be a nice catalyst if it happens but it is going to happen anyway because of the economics. So when you start looking at, I have used this before and I use it again just for fun, it is just one out of my head and we recall that we just got through talking about that at the end of this year, you will be on your way to about a thousand trucks on the port.

But, there are 3 million 18-wheelers in the United States, right? They turn over in the good year, we are not having good year in trucks, and trucks run about 95,000 18-wheelers across trucks purchased this year but on a good year you do more like 225,000 to 250,000 trucks.

So, if you sell over a few, four or five-year period, you can get yourself around, figuring you are not going to get all of those but you could get yourself to 350,000 truck number, that is the number that we have shared with the administration and others but added by some pretty smart people. Well, that is 5 billion to 6 billion gallons of diesel. And it requires a lot more in LNG, totally outstrips anything that we have in the United States right now. That is why we have been actually working and talking with some of the large natural gas producers that we think-- there will come a time relatively soon and that is why we have been meeting with them, that they ought to develop some LNG plants.

We see working with them to do that. Sure, we will end up on the trigger at some point here as we see this inflection point on our Boron plant but we will need more and we think we will be down on the road and making some deals with some of these providers, fuel providers and we will get the LNG.

But, it will get pretty big and it will be a big business.

Operator

Our next question comes from the line of Peter Christiansen with Bank of America Merrill Lynch; please proceed with your question.

Peter Christensen - Bank of America Merrill Lynch

Also, for the increase transparency of this quarter that was great, you guys laid out some of the incremental growth plans lying ahead. Couple of questions here, on the national fleets’ opportunity that you see, you think there is a chance that some of these opportunities who were building these private plants, private stations will use multiple suppliers?

Andrew J. Littlefair

So if I understand what you are saying, you mean like will WalMart go out to bid?

Peter Christensen - Bank of America Merrill Lynch

Yes

Andrew J. Littlefair

Yes sure. Some of these big firms are really well-versed in shopping for things so yes there will be competition for that kind of thing. That is where we have to distinguish ourselves by service, price and by experience.

Some of these very large fleets are used to doing things for themselves. We have seen that before. We have sometimes seen big sophisticated companies decide they will do it themselves and then after a while they figure out it is a little bit further outside their core competency and then it comes back to us. You will run through all those different scenarios.

Peter Christensen - Bank of America Merrill Lynch

Thanks and also with the economy starting to come back a little bit. Have you seen increased utilization from your customers, just from your existing customers, using more gallons?

Andrew Littlefair

It is a good question, we saw a dip toward the end of last year and in the first month or so, but I do not know Rick. It has been a little bit. It has firmed up but I do not know if I have that up at the top of my head.

Richard Wheeler

Yes, I think ‘firming’ is a good word. It has certainly taken back and the nice thing is the natural gas is cheaper than gas and diesel, so they are certainly incentivized to use their natural gas vehicles barring the other benefits so, I think, that is accurate.

Andrew Littlefair

We saw, we heard and tell, I do not know that it is hard to get your arms around some of these. We know that some of the transit properties curtailed some routes, curtailed some service, I think a lot of that has come back. So I do not know, that is the best we can do for you right now.

Peter Christensen - Bank of America Merrill Lynch

That is great, that is great. This one, one last quick question, on the warrants, I know you said we discussed the reset date so the strike price does not change much but did the strike price changed when you went through with the follow on?

Richard Wheeler

It did. It went from the $13.50, what I believe that is originally set at, it went down to $12.86.

Peter Christensen - Bank of America Merrill Lynch

Okay.

Richard Wheeler

My legal guide is nodding his head so that is a good sign. Also in our Q as well and the nice thing was we did feel good that we did get pass this first reset. There was no reset and now just have to deal with this for another year. We tried to put out that 8-K. So hopefully everybody saw the numbers so they know what it is, it is non-cash. Everybody can kind of realize a) the magnitude of it and b) what it is, so you can deal with it appropriately.

Peter Christensen - Bank of America Merrill Lynch

Are you going to continue to release an 8-K?

Richard Wheeler

Yes.

Peter Christensen - Bank of America Merrill Lynch

On a regular basis?

Richard Wheeler

Yes.

Peter Christensen - Bank of America Merrill Lynch

Okay.

Richard Wheeler

Obviously quarterly.

Operator

(Operator instructions) Our next question comes from the line of Mark Segal with Cannacord Adams. Please proceed with your question.

Mark Segal - Cannacord Adams

Beyond the Verizon and AT&T, can you quantify the CNG vehicle fully pipelined that you see out there?

Andrew Littlefair

Well I thought you are going to ask me, what are the other national kind of fleet so Hertz and Avis and Park & Fly, and Parking Spot and Cox Cable, those are all CNG fleets. Republic, Allied, waste management, mostly CNG, you know the way this business is developing, think about fleets with smaller vehicles or vans or pick-up trucks and those will be CNG. Trash trucks you will have some LNG but most of refuge fleet, in my humble opinion, will go to CNG as with most transit busses and really trucking is where you will see more LNG, of course it is a big market.

But those big national fleets that I talked about JH Hunt, Knights, Swifts all of those are all LNG.

Mark Segal - Cannacord Adams

Okay, thank you.

Andrew Littlefair

I do not if that answered your question.

Mark Segal - Cannacord Adams

Yes.

Andrew Littlefair

But that is the way it will break out.

Mark Segal - Cannacord Adams

Thanks.

Operator

Our next question is a follow up question from the line of David Woodburn, please proceed with your question.

David Woodburn - ThinkEquity Partners

Forgive me guys if I missed this, but did you give the breakout of LNG versus CNG versus landfill bio-methane?

Richard Wheeler

I cannot believe it? We almost got through the call without somebody asking? No, we did not and we would be happy to. Here you go. Third quarter of 2008, CNG was 12.3 million, LNG was 5.8 million, obviously these are millions, and bio-methane was 0.6 million to get you to your $18.7 million gallons.

The third quarter of 2009 for CNG was 19.9 million, LNG was 7.7 million and bio- methane was 1.9 million and that gets you to your total of 29.5 million. That is also in our Q which we filed earlier as well if you want to look for it there.

David Woodburn - ThinkEquity Partners

Okay, so a little increase in the bio-methane does that stop, is that going to be level from now on? Or is there still some ramp up with the existing infrastructure there?

Richard Wheeler

Well the 1.3 million increase so; we got to like it but actually yes. We are producing, with the new capital upgrade, to the level where we can run for a while and we are looking at increasing production further. So obviously there is a lot more gaps down there with the [Shell deal] and all that stuff coming together and making that thing really economic. We are looking at a way to expand that, do some things to get that production up. So, but for now, and in the short-term here, it will probably be at that current level for a little while.

Operator

There are no other questions in the cue. This does conclude our conference for today. You may disconnect your lines at this time and have a wonderful day. Thank you for your participation.

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Source: Clean Energy Fuels Corp. Q3 2009 Earnings Call Transcript
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