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Clean Energy Fuels Corp. (NASDAQ:CLNE)

Q4 2009 Earnings Call

March 10, 2010 4:30 pm ET

Executives

Ina McGuinness – IR, Integrated Corporate Relations

Andrew Littlefair – President & CEO

Rick Wheeler – CFO

Analysts

Steve Milunovich – Merrill Lynch

John Roy – Janney Montgomery Scott

Rob Brown – Craig-Hallum

Graham Mattison – Lazard Capital Markets

Pearce Hammond – Simmons & Company

Eric Stein – Northland Securities

Operator

Greetings and welcome to the Clean Energy Fuels fourth quarter fiscal 2009 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, Ms. Ina McGuinness of Integrated Corporate Relations. Thank you, Ms. McGuinness. You may begin.

Ina McGuinness

Thank you. Earlier this afternoon, Clean Energy released financial results for the fourth quarter and 12 months ended December31st 2009. If you did not receive the press release, it is available on the investor relations section of the Company’s Web site at www.cleanenergyfuels.com. This call is being web cast 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 contain forward-looking statements that involve risks, uncertainties and assumptions that are difficult to predict. Words and expressions reflecting optimism, satisfaction with current prospects as long as the words such as “believe,” “intend,” “expect,” “plan,” “anticipate,” and similar variations of identified 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 the differences are described in detail in the risk factor section of the Clean Energy Form 10K, which will be filed with the SEC later 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 the results prepared in accordance to GAAP and should not be considered as a 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 the non-GAAP and GAAP figures is provided in the Company’s fourth quarter 2009 press release, which is being furnished to the SEC on Form 8-K today.

Participating on today’s call in 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

Thank you, Ina, and good afternoon, everyone. We ended 2009 on a very positive note and we continue to see great progress for the industry and our company. In the fourth quarter, we grew our volume by 58% and we produced another strong cash flow quarter by generating $5.8 million of adjusted EBITDA.

Importantly, we ended the year with $67 million in cash leaving us well-positioned to continue our growth in 2010. Reflecting on the full year we are particularly pleased that in a very tough economic climate we experienced growth in all of our key markets, including refuse, regional trucking, transit and airports.

We added more projects than ever before and the volume of our backlog has more than doubled. The fact that we saw acceleration in station construction at a time when all of our customers were focused on cutting their costs is really a testament to the appealing economics of natural gas.

The spread between the price of oil and natural gas, which drives our economic advantage, continues to hover in the 13:1 to 15:1 range, and today, in fact it was 18.5:1. Even when I look out to the futures in 2015, it remains at about 14.5:1. So this is good for us.

We are also very encouraged by some of the recent activity we have seen for our industry. As many of you are aware, in December, Exxon agreed to acquire XTO Energy. Exxon’s decision to expand in the shale gas validates the huge potential of the natural gas market c. And this underscores our belief that there will be an increasing presence of natural gas in the energy picture as it is cleaner, economic and a domestic resource.

Also it seems shale natural gas reserve estimates just continue to grow. At the end of the year, the Colorado School of Mines released a study with U.S. gas reserves near 2,000 trillion cubic feet. A couple weeks ago I saw a report from JP Morgan that estimated the shale on conventional reserves in place in North America are closer to 8,000 trillion. Now, of course we won’t recover all of that. But it is the suggested 4,000 trillion could be a realistic number. So gas supply is not a problem.

Now, I would like to spend a moment discussing BAF. As we said last quarter, we closed on the acquisition of BAF on October 1st so the fourth quarter was our first quarter, during which BAF was included in our operating results. We are very pleased with the momentum we are seeing for BAF.

As you recall, AT&T submitted its first purchase order for 600 vehicles to be converted a while back. And we finished these converts in December. AT&T has since issued purchase orders for 1390 vans to be converted in the first three quarters of 2010 and appears on track to issue a purchase order for 463 vehicles for the fourth quarter of this year.

We’ve had nothing, but positive feedback from AT&T and their experience with BAF and their vehicles and we look forward to a longstanding relationship with AT&T as they continue to increase their use of clean vehicles.

BAF is working with other large national fleets, regional shuttle companies, taxi companies, the State of New York, the State of Texas and gas producers. So far it looks like these sources will add another 1,000 vehicles in 2010.

Overall, we view the increased activity surrounding BAF’s business as a testament to the promising developments in our industry. BAF’s business struggled for a while a few years back, but is evident that they have turned a corner in the last six months or so.

We are pleased that we’re now in a position to capitalize on the synergies of Clean Energy in BAF and based on working together, we see significant, profitable growth for BAF in the future, as they increase the number of natural gas vehicles on the road. And remember, we fuel a great percentage of these vehicles.

Now, turning to an update on what’s happening at the ports of L.A. and Long Beach. There are approximately 580 LNG trucks operating at the ports and there are another 470 or so LNG trucks had been awarded grant funds. Of the 470, a couple hundred are being produced right now by the OEMs and delivered to the dealers and the customers as we speak.

Of the remaining so 250 trucks, we are helping these customers obtain financing through outside sources which is going very well. We hope to have these trucks financed and operating at the ports by the end of April. So all in all, we should see about a 1,000 trucks operating at the ports in the second quarter of this year.

And as these programs develop, we’re starting to see some early adopters of LNG ordering additional trucks, which confirms what we suspected that once a customer begins using LNG trucks and sees their performance and fuel savings, they will continue to order additional trucks in the coming years.

One interesting trend that we are seeing at the ports is that LNG trucks are getting more work than their diesel counterparts. Often LNG trucks are running more routes, not only because the fuel is cheaper, but also because the container fees are waived for them, making it less expenses for Clean Trucks to move in and out of the ports.

This Friday, another solicitation of $16 million will be answered. We think it will be oversubscribed and should fund another 200 to 250 LNG trucks. One nice thing about this program is the trucks don’t have to operate exclusively at the ports, but can operate in certain parts of Southern California.

And we view this as a positive development as these funds will now be open to other fleet operators in the largest market, and will help support the network on public LNG stations that we are developing in Southern California.

We are continuing to see a host of economic incentives and grants to encourage vehicle operators to make the switch to cleaner fuels. We are proud of the good work of our grants department. In 2009, they lined up more than $95 million in grants for us and our customers.

And in the first quarter of 2010, we have already submitted another $23 million in grant requests. Even in these difficult economic times, we are seeing inner districts, cities, states among other entities continuing to issue grants and incentives.

Concerning the stimulus funds we were awarded, we are beginning to see the funds flow and the projects finally begin. We have started or completed construction on four projects of the 12 projects we were awarded. These four projects include our first project in Idaho and our first three projects in New Jersey. These funds are helping us expand our footprint across the United States.

On the legislative front, I have some late breaking news. Maybe an hour and a half ago, the Senate passed the extenders bill which contains the extension of VTAC. They passed it in the Senate 62-36. And depending on if the House accepts all the amendments and we believe they might this could be signed into law very shortly. So that’s good news.

Everyone on this call knows we believe that the NAT GAS Act will be an important catalyst for the move toward natural gas for heavy duty trucking. I continue to be optimistic and in fact we believe we are seeing the critical mass that can move this legislation.

It’s a bit complicated to describe the mechanizations of the legislative process here, but let me say there are several groups working, about three in the Senate and two in the House that all incorporate the NAT GAS Act.

Senator Reid continues to push hard as does Senators Menendez, Senators Carrie, Lieberman and Graham have all indicated strong support as well as the so-called group of seven, which includes senator Udall, Senator Pryor and others.

We believe a more comprehensive energy bill is likely to materialize in the Senate in the next couple weeks. It will be this vehicle that will contain the NAT GAS Act and likely move its way back to the House.

Another development on the legislative front that we stand to benefit from is the adoption of a low carbon fuel standard by 13 states. Also on the local front we continue to see current legislative activity.

For instance, Oklahoma recently passed a bill that sets a goal of having a public CNG fueling station every 100 miles along their interstate highway system by 2015. These developments highlight the growing nationwide awareness and push toward cleaner technologies which should benefit us.

Just today, in fact, the Dallas City Council adopted a front of the line privilege for CNG tax ease at Dallas Love Field.

Our McCommas landfill project is going well. With the capital upgrades we did in the first quarter of 2009, the project is now capable of generating approximately 950,000 gallons a month. We are also investigating the possibility of obtaining some project financing to expand the plant’s production capabilities further. Because as you recall with the premium we are receiving for renewable gas being produced, the economics of the project are very attractive.

Because of our success at McCommas, we are often approached by other landfill owners who are looking for someone to partner with to collect and sell their gas. We are also working with some of the refuse customers to see if there is a way we can work with them to capture the benefits of landfills that they own.

Now I would like to discuss our business in regard to some of our different sectors. We experienced growth in all of our sectors and we are confident that we will do so again in 2010. In particular, our refuse business continues to grow at a fast rate.

Three years ago, we had natural gas refuse trucks in just three states and now 11 states. We are doing business with the three largest refuse companies and they are buying more natural gas trucks than ever before. So far in this year we already have 34 projects in the backlog for this segment.

Another airport is another sector where we have seen accelerated growth. During 2009, we added stations of four airports and we are now at a total of 23 airports, and we have five more airports where we are negotiating with them. With this presence, we are now in business with seven national shuttle operators including the three largest, Fast-Park, Park & Fly and the Parking Spot.

Avis and Hertz just added 40 buses at LAX. And in January, we were awarded the DFW Rental Car Bus facility and are building another station at DFW for parking spot.

Also it’s worth noting that often times when we build an airport station, BAF benefits from these efforts by producing the various shuttles and vans that service the airports.

Before I turn the call over to Rick, I would like to highlight a few other developments we are working on or were involved. Let me for a second mention our engineering carpet. These are stations or major upgrades that are either under contract or committed to. Some are in design, permitting or construction.

Last year, we completed 29 station projects and at present we already have 52 underway and signed. Last week, we signed a deal to take over and upgrade 13 stations in and around New York. These stations along with our network of 12 stations in the area will give us a strong network to go after the taxi and black car markets in the area. This network will also be beneficial for us in anticipation of the MV1 vehicle launch scheduled for later this year.

As you recall, the MV1 vehicles a new ground up natural gas vehicle that can be used in paratransit, taxi, delivery van applications among others. In support of its anticipated launch, we are also developing networks in Chicago, Philadelphia and Houston to go along with our existing networks in L.A., San Francisco and Dallas. Okay.

So now let me turn the call over to Rick.

Rick Wheeler

Thanks, Andrew. Before I review our financial results, I would like to point out that all of my references to our results will be comparing the fourth quarter of 2009 to the fourth quarter of 2008, but comparing the year ended December 31st, 2009 to the year-ended December 31st 2008 unless otherwise specified.

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

We also saw an increased volume in the third and fourth quarters of 2009 from the additional piece of the Phoenix LNG supply contract that we won last year and they commenced on July 1st. For the 12 months of 2009 we delivered 101 million gallons of fuel to our customers, up from 73.5 million gallons.

We earned $0.02 per share on a non-GAAP basis in the fourth quarter of 2009. This compares with the non-GAAP loss of $0.12 for the fourth quarter last year. For 2009 on a non-GAAP basis, our loss per share was $0.03 compared with a non-GAAP loss of $0.33 last year.

Our net loss on a GAAP basis for the fourth quarter was 1.9 million or $0.03 per share. This compares to a net loss of 23.7 million or $0.49 cents per share. Our net loss for 2009 was 33.2 million or $0.60 per share versus a loss of 44.5 million or $0.98 per share in the prior period.

During 2008, we incurred 18. 6 million of nonrecurring costs related to supporting California bond initiative; 14.9 million of which was incurred in the fourth quarter of 2008.

During 2009, we recorded a non-cash charge of 17.4 million related to valuing our Series I Warrants, which is required this year under certain accounting requirements. The primary driver of the amount recorded this year was the impact our higher stock price had on the valuation model we used to value the warrants.

Before I move on I would like to emphasize that the Series I warrant adjustment is not a cash liability of the company, but rather a required exercise we must do under the accounting rules to mark-to-market that warrant each period due to the exercise price reset feature of the warrants.

After the exercise price reset feature goes away on November3rd, 2010 due to other exercise price protection features of the warrants, we will still be required to value them each period and take corresponding losses or gains until they are exercised or expired.

Adjusted EBITDA in the fourth quarter of the 2009 was $5.6 million which compares to a loss of $3.2 million in the fourth quarter of 2008. For 2009, the adjusted EBITDA was $15.5 million compared to a loss of $6.8 million in 2008.

Adjusted EBITDA is a financial measure we developed to highlight our operating results excluding certain large non-cash or non-recurring charges that are not core to our business, including the amounts we are incurring for the Series I Warrant valuation, our stock-based compensation charges for our options and in 2008, the cost we incurred to support the California bond initiative. Adjusted EBITDA is described in more detail in the press released we issued earlier today.

From a margin perspective, our gross margin increased about 3.2 million from the prior quarter. About 2/3rd of this increase was generated by BAF, which we acquired on October 1st A margin for gallon on fuel sales was $0.46 for the quarter which compares with $0.42 in the prior quarter.

This increase was primarily attributable to the Pickens Plan being up in the fourth quarter, which reduced our transportation costs to our Texas customers in the period and a settlement we recorded in the quarter with one of our LNG suppliers to reimburse us for the extra costs we were incurring while the plant was not operating.

For the quarter, our revenues were $42.2 million, up from $28.3 million last year. For the year, our revenues totaled $131.5 million, up from 125.9 million. During the fourth quarter of 2009, our subsidiary, BAF contributed $6.9 million of our revenue total for the period. At December 31st 2009 we had $67.1 million in the bank and 20 million available under our line of credit with Plains Capital Bank.

Our 2010 capital expenditure budget is 86.3 million and is based on the Nat Gas Act or similar legislation passing that would spur our growth. If this were to occur in order to capitalize on this opportunity and to preserve our market leading position we likely would need to raise money during 2010 to fund our anticipated growth in future years.

If some form of legislation does not pass or promote the use of natural gas vehicles and fuels, our capital expenditures may be significantly less than $86.3 million during 2010.

In this case, our capital raising needs during the year will be determined by the timing of the rollout of the current fuel supply and station construction project that we are working on as well as any unanticipated capital expenditures, investments or acquisitions we may pursue. As we’ve mentioned before, we will try and pursue debt facilities to fund our capital needs before pursuing equity options.

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

Question-and-Answer Session

Operator

Thank you. (Operator instructions) Our first question is from the line of Steve Milunovich with Merrill Lynch. Please proceed with your question.

Steve Milunovich – Merrill Lynch

Thank you very much. Would you guys care to hazard any guidance views on 2010 in terms of what kind of gallon increase you think is likely? And I assume the NAT GAS Act if passes would necessarily have that much impact on this year, more be future years.

Andrew Littlefair

Steve, we haven’t provided guidance on that. And I think you are right. The NAT GAS Act I think we’ll see a lot of activity and a lot of interest. Let’s say it passes here in the next couple months, you will see a lot of action, but you won’t see a lot of the volume drop in probably until next year.

Steve Milunovich – Merrill Lynch

Okay. And what is your station backlog? I think you said you were billed 50 plus this year, but I assume your backlog is larger?

Andrew Littlefair

That’s right. I use these terms and I know they are a bit funny. The backlog is a term that I have used over time. You and I have talked about that. It’s a larger number, but those aren’t necessarily under contract or ones where we already committed to build. That number has grown substantially. And I am very pleased with that. That’s what really makes me believe we have seen an inflection point. In fact, I was visiting with our board last week at our board meeting and that number is almost, almost tripled.

I remember, those are stations where we have been working with the customer they’ve been passed through some engineering and financial screens, but they are not necessarily under contract. Some of our under negotiations for contract. That number has gone from almost 80 stations, six months, eight months ago, to closer to 175 now. So there we have seen almost 200 now. So we’ve seen great growth there.

The number I just mentioned on the call is our engineering carpet. Those are stations that we are committed to building and/or under contract. Last year, we did 29 stations. Right now, either in permitting, in construction, its 52 stations. So we know we’re going to build 52 stations as we sit here today and I hazard guess it will be much bigger than that.

Steve Milunovich – Merrill Lynch

Okay. And then kind of on a same-store sale basis, can you make any comments in terms of kind of what volumes per station increase you saw in 2009 and what we might expect to see on the CNG side in 2010?

Andrew Littlefair

I don’t know that I can sit here and give you an exact same-store sales growth number. Steve, we will try to give a little color on that, maybe to you later, but we are seeing, for instance, let me just talk first on the LNG side. The LNG stations there in the port started out the year where they were doing 8,000 gallons a day to 10,000 gallons a day and I checked the reports last night and the station has almost seen a doubling of the volume there. And that will continue to grow with the other 500 trucks and 700 trucks come on line. So, we will in 2010 see some nice stations, same-store sales growth at some of our large LNG stations.

At certain of our network stations, for instance, we feel that I think it’s about 600 AT&T vehicles to 800 AT&T vehicles that have all gone to our network station so far. So those are network stations where we are seeing additional growth. Some of our airport stations have seen nice growth. LAX was up in 2010 about 35% to 40%.So I can’t give you a system wide – I’m hazarding a guess it’s more like 6% to 8%. Rick, I don’t know if you have a better way to answer it.

Rick Wheeler

I think that’s right. We don’t necessarily look at same-store sales growth like a retailer would. We look at kind of stuff by projects. As long as we are kind of managing our project and ensuring that the vehicles are coming on line, the same-store sales growth kind of takes care of itself. Like a lot of the trash deals we do, for instance, they only initially buy 10% or 20% of their fleet day one and convert it to natural gas. Any subsequent year they put another 10% or 20% on there. That’s kind of built in same-store sales growth. We certainly focus on it.

Anywhere we can add vehicles into our existing network, like our network in and around LA, we can put more tabs on that particular infrastructure on the shuttle vehicles, that’s just additional gallons and economics without any CapEx.

So, we certainly like that, we certainly try to do that. In fact, with some of the AT&T stuff we’ve been able to, wherever they wanted to deploy vehicles where we have network stations, we just put them in where we have fueling form, and that’s just a great example of how we can add gallons without increasing our CapEx, which obviously is good for us economically. We kind of watch it and monitor it more from an indirect perspective than looking at just traditional same-store sales number like perhaps a retailer would.

Steve Milunovich – Merrill Lynch

Okay, thank you.

Operator

Our next question is from the line of John Roy with Janney Montgomery Scott. Please proceed with your question.

John Roy – Janney Montgomery Scott

Hey, guys, hey, nice quarter. Real quick, in terms of the stations you announced in LA, the LNG stations, can you give us any kind of idea when those going to start and when those might finish? Because I know that’s going to connect into the network of what the others are doing as well.

Andrew Littlefair

That’s right. Those are the ones that we announced earlier late last month. Those are in Los Angeles, City of Commerce, industry, Fontana. For those of you that are familiar with Southern California, they really for the most part those stations kind of spread out east into what we call the Inland Empire. Also, the Otay Mesa stations down to the San Diego border and then one up toward closer to Bakersfield, which gets you up toward the San Joaquin valley, which is important distribution center as well.

Four of those are under construction right now. They all will be done by the end of the year. And that will be timely with these other 700 some odd trucks that will come on 400 trucks, 500 trucks of which will come on in April. Most of those will be at the port. But these next 200 trucks to 250 trucks that I mentioned will be scattered out in the greater South Coast Air Quality Management District. Does that get it for you?

John Roy – Janney Montgomery Scott

Yes, that definitely does. Because kind of freaking out. Because those are going to be probably reasonable volume, won’t they be?

Andrew Littlefair

Yes, they will be. The LNG, as we talked before, the LNG stations out can have pretty significant volume on them because each vehicle uses 100 gallons. While it takes a lot of light duty vehicles to get to a 1000 gallons a day, doesn’t take many trucks. So it will be a nice add. Remember, I casually mentioned those 700 or so additional trucks that number, those are averaging between 15,000 and more gallons a year. Those are nice volumes.

John Roy – Janney Montgomery Scott

One other quick question and I know, Rick, you normally give us the LNG versus CNG. Can you give us just real quick so we have it?

Rick Wheeler

Sure, John. For the quarter, CNG was 19.6 million. These are millions, obviously. Bio methane was 2.1 million, LNG was 7.8 million. That adds up to the 29.5 million.

John Roy – Janney Montgomery Scott

Great. Thanks, guys. Talk to you soon.

Rick Wheeler

Thanks, John.

Operator

Thank you. Our next question is from the line of Rob Brown with Craig-Hallum. Please proceed with your question.

Rob Brown – Craig-Hallum

Good afternoon. I think you mentioned on the BAF business that you have another 1000 trucks in your pipeline. Can you just give us a color there are those contracted trucks or those things that you might get?

Andrew Littlefair

For the most part that’s contract. They are not all trucks, Rob. Some of those are taxi cabs. I think 85 of which we’ve already produced. There is about 50 airport shuttles that are in that 1,000. There is another large national fleet that I’m counting in that number that I’m not going to give you any more color on, but that will be in that number.

And then easily I am feeling very comfortable about that 1000, there is easily another 500 or so, on that getting up to that 1,000. And this is where we see pick up trucks in the State of Texas and New York. I don’t know that we have all the contracts in, but we are negotiating in all those right now. So I feel comfortable that we will get those all done. Hopefully, it will be more. I am trying to be conservative.

Rob Brown – Craig-Hallum

And then in terms of revenue is it similar to the AT&T business, maybe a little lower revenue per unit?

Andrew Littlefair

Some of them are same. Some of them are a little lower. In some cases, we are using outside dealers and small volume manufacturers to do that business where margins are very nice, but the revenue per vehicle may be slightly lower. But a lot of that’s in house in Dallas.

Rob Brown – Craig-Hallum

Okay, great, thank you.

Operator

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

Graham Mattison – Lazard Capital Markets

Good evening, guys.

Andrew Littlefair

Hey, Graham.

Graham Mattison – Lazard Capital Markets

Just a quick question on the acquisition you made during the quarter. General thing, in terms of what you are looking at out of the potential for additional acquisitions and what type of price are you guys sort of looking to pay? Is it sort of the $0.25 cents per gallon similar to the extra deal last year?

Rick Wheeler

That was kind of unique because it was in the transit business why the math worked out the way it did. Obviously, if it is a retail operation it is going to be higher than that per gallon and on the capital, etc., and what we’re buying, we need to be a little careful on what we’re looking at or thinking about. We always kind of have our eyes open and looking to see what’s out there that may make sense, from adding on to the business we think it’d be a nice piece to add on. We’ll look at it and to make economic sense then we can get it at a reasonable price and something we would look at.

Andrew Littlefair

You really have to look, Graham, at those gallons, what the margin is on the gallons. As you know, the transit gallons are thinner margin. And there are not many left, but if you are able to acquire some “commercial retail public taxi type stations,” those carry much higher margin; in which case, you pay more than that number you’re using for the transit.

Graham Mattison – Lazard Capital Markets

So that be more like a $0.50 or $0.75 number or –?

Rick Wheeler

Depends on what it is doing and how much they want for it and all that good stuff.

Graham Mattison – Lazard Capital Markets

All right. But that just sort of like a loose range on that. And then actually, Rick, you mentioned there was a one-time gain in the quarter that was with the margin. How much was that gain and what would the margin per quarter have been without that?

Rick Wheeler

I would rather not say what it was out for confidentially reasons, but I would say, it would have been close to that. Keep in mind that was basically offsetting the increased costs that we were incurring. So, it’s kind of a wash.

Graham Mattison – Lazard Capital Markets

Got you. And then last question on the tax extenders bill that will go through probably by the end of the month. So that will be retroactive for you guys, but going forward, has that changed anyway that you’re negotiating your contracts in terms of whether you keep it or how much you split or how much you share and how should we think about long-term margins of that going forward?

Andrew Littlefair

I think most lawmakers understand that one year extensions on these kinds of things is not really the right way to do business. They will tell us that, but it’s kind of what’s been easy for them to do right now. As you know the NAT GAS Act had some much longer extensions that it considers. And so this extends the VTAC for a year

We’ve always in all of our existing negotiations and contracts with customers, we always had outs for if the VTAC goes away and it disappears. And our customers now, especially since the VTAC went away a few months ago, they all understand that now too. So, we are very mindful of it. I do happen to think that it is important.

I think it is an important piece of legislation that the House members and the Senators understand. I don’t think it’s going to sunset at the end of this year. I think it will get extended and it wouldn’t surprise me that VTAC some extension could find its way in a broader energy piece, more comprehensive Energy bill or in the NAT GAS Act if that thing moves alone.

Graham Mattison – Lazard Capital Markets

Okay, got. I will jump back in queue. Thank you.

Andrew Littlefair

Okay, thanks.

Operator

Thank you. Our next question is from the line of Pearce Hammond with Simmons & Company. Please proceed with your question.

Pearce Hammond – Simmons & Company

Good afternoon.

Rick Wheeler

Hey, pierce, how are you doing?

Pearce Hammond – Simmons & Company

Good, good, thank you. Very good gross margin per gallon this quarter. I know you don’t provide guidance for '10, but is that gross margin per gallon reasonable to think about for 2010?

Andrew Littlefair

Yes, I mean, gross margin is not an exact science, right? Depends on the mix where we’re pulling product from and who is coming in and who is going out and all that good stuff. It’s not an exact science, but it’s kind of hovering where historically and the Exterran acquisition is kind of in there now, and has had impact and the additional port trucks that are showing up, that certainly helping and that was part of the reason to bounce back a little bit in the fourth quarter. So knock on wood, but assumes our energy production facility stay up and running and our sales mix stays the same and all that. It’s certainly something that shouldn’t be unreasonable.

Pearce Hammond – Simmons & Company

Thank you. And then on VTAC I certainly believe it will get extended and obviously be retroactive. If for some reason it didn’t get done by the end of March, how would that look from an accounting standpoint for Clean Energy Fuels? Will we see a decline in margin for Q1, but then a pick up in say Q2? How do you see that looking?

Rick Wheeler

I guess in theory, we just wouldn’t recognize the revenue for whatever piece is not retroactive for in the first quarter. And then whenever it does become effective, which in theory is day one of the second quarter, and then we would just be back on track with our normal quarterly filings for the second quarter. Kind of a hole in there I guess in the first quarter if it’s not retroactive.

Andrew Littlefair

It is contemplated to be retroactive right now.

Pearce Hammond – Simmons & Company

Then, Andrew, just one final question. If the NAT GAS Act passes and basically let’s say the government said, let’s move forward with natural gas fuels in a big way and so you got a complete green light to move forward, where would you see the biggest? I don’t know if the right word is choke point, but where would be the limiting factor? Certainly, not the supply of gas. Would it be LNG facilities or would it be engine manufacturers or where have you identified the kind of key constraint?

Andrew Littlefair

It’s going to take a while. It’s going to take a while for the customers to understand and purchase the trucks and understand how it works and get with the –I think the OEMs and the manufacturers will come around relatively quickly. But they don’t just start making natural gas engines overnight. So we do know that there is a period for those platforms to engineer around the line and come to market.

The good news is because of the increased momentum of natural gas we have seen some important things with Volvo and Navistar’s recent announcement about their 13 and the Cummins 13 leader products. There is now really dramatic three or four more platforms kind of in the works right now that weren’t even in the works three months ago or four months ago so I like that. I’d say your choke point though will be the breadth of product and it will take a while, but I have full confidence in the industrial capacity of the country and certainly, in these equipment manufacturers, engine manufacturers.

My take of nine months, 12 months to really get cranked up, but boy, once they get cranked up they turn out a lot of trucks. That will take a while to get tuned up. And then I’d say looking out in a year, year and a half, you need to see some LNG production capability come on line. If not come on line, be announced. I think we’re okay for a year or so in the country, but I really think that the summer of 2011 we’re going to see a lot of activity, lot of stations being built, and we will be meeting LNG capacity coming on later in 2011, early 2012. So, it’s those two things. You got it. It’s engines, selection of engines and platforms and it eventually will be LNG.

The LNG production capability, it can happen. There’s a lot of gathering plants, gathering systems compression. There are a lot of facilities out there that could be augmented and can come on line, but those producers need to see that there is a need for it. I think the NAT GAS Act will give them that signal.

Pearce Hammond – Simmons & Company

Well, thanks and congratulations on a great quarter.

Andrew Littlefair

Thank you.

Operator

(Operator instructions) Our next question is from the line of Eric Stein with Northland Securities. Please proceed with your question.

Eric Stein – Northland Securities

Hi, everyone. Thanks for taking the questions.

Andrew Littlefair

Hey, Eric.

Eric Stein – Northland Securities

I was wondering if we could just go back to the stations you recently announced you will be building in Southern California. Just to get a sense of the size again should we think of those more like the Carson Street Station or more the Anaheim and I the Port Station?

Andrew Littlefair

The Carson Street Station. These will be stations that will be smaller. They will have a plenty of capability. You can produce a lot of volume through those because unlike a CNG station that’s really limited by the compressor capacity, all you need to do on LNGs is keep pouring more and more LNG in the tank. You can pour a lot in there. But some will have one, some will have two, 15,000 gallon tanks, because you remember we like to dump 10,000 gallons in at a time and usually you will have 2 hoses to 4 hoses.

Eric Stein – Northland Securities

Okay. We should think about those just given the size that those maybe come on sooner in the year rather than later?

Andrew Littlefair

Yes, as I said, some are under construction now, some of them haven’t. We haven’t turned the shovel yet. We’re in permitting. They will sprinkle in. I don’t need them all right this second. But they will sprinkle in. Those stations will all be done by the end of the year.

Eric Stein – Northland Securities

Okay. There are no anchor tenancies or are going to be public so that certainly helps your margins. And I assume that’s based on conversations with fleet.

Andrew Littlefair

That’s right. I don’t want to say there aren’t any anchor tenants, because that wouldn’t be right. There are some anchor tenants. That’s our model. We like that. But they will be open to the public. So, you will have a blend of commercial retail pricing and also some discounted volume pricing.

Eric Stein – Northland Securities

Okay. Maybe we can just switch to the station pipeline. Pretty impressive numbers you talked about. Can you give us a sense of maybe the percentage that is O&M that you see versus supplying the fuel and if that’s changed with this growth?

Andrew Littlefair

Okay. Some of our refuse stations are construction and O&M. And I would say that is probably of our refuse stations that are sort of in the pipeline. 40% of them are O&M in construction and the other 60% are full boat. But of the numbers that I gave you, I’m kind of shooting off the top of my head I would say a vast majority of the 52 are not O&M, but are commercial retail.

Eric Stein – Northland Securities

Okay, that’s helpful. And then lastly, just going back to BAF, you talked about the 1,000 additional beyond AT&T and the national fleet. Can you just update us on the Verizon RFP that was out there and is that something we should think about as potentially being incremental?

Andrew Littlefair

Other than they went out to bid and they haven’t made an announcement yet. I don’t have really anything other than to say about Verizon though I feel very confident that, that’s likely to happen anytime.

Eric Stein – Northland Securities

Okay, thank you very much.

Andrew Littlefair

Okay.

Operator

Mr. Littlefair, there are no further questions at this time. I’d like to turn the floor back over to you for closing comments.

Andrew Littlefair

Okay. Well, thank you very much. In summary, 2009 was a great year for Clean Energy. And we are optimistic that 2010 will be even better. There is tremendous awareness about the benefits of natural gas and Americans really never before have been more committed to green initiatives.

And so to ensure that we capitalize on the growing number of opportunities we beefed up our engineering team to enable us to build these stations and meet the anticipated increasing demand. And we have added sales staff. And now we are spread out in about 10 sales offices or 11 sales offices across the country. So we’ve never been talking and working with more fleets as we are now.

As the leading provider of natural gas for transportation, we think we are in the right place at the right time. We look forward to seeing where this opportunity takes us. We look forward to reporting to you on our next call. Thank you very much.

Operator

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Source: Clean Energy Fuels Corp. Q4 2009 Earnings Call Transcript
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