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Clean Energy Fuels Corp. (NASDAQ:CLNE)

Q4 2010 Earnings Call

March 10, 2011 4:30 pm ET

Executives

Ina McGuinness – Senior Vice President, ICR Inc.

Andrew J. Littlefair – President and Chief Executive Officer

Richard R. Wheeler – Chief Financial Officer

Analysts

Rob Brown – Craig-Hallum Capital Group

Graham Madison – Lazard Capital Markets

Brian Gamble – Simmons & Company International

Eric Stine – Northland Capital Markets

Peter Christiansen – Bank of America Merrill Lynch

Pavel Molchanov – Raymond James

Jade Green – Barclays Capital

Operator

Greetings and welcome to the Clean Energy Fuels Fourth Quarter Fiscal 2010 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, Ina McGuinness. Thank you, Ms. McGuinness. You may begin.

Ina McGuinness

Thank you, operator. Earlier this afternoon, Clean Energy released financial results for the fourth quarter and year ended December 31, 2010. If you did not receive the release, it’s 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 website 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 predict. Words of expression reflecting optimism, satisfaction with current prospects, as well as words such as “believe”, “intend”, “expect”, “plan”, “anticipate”, and similar variations identify forward-looking statements, but their absence does not mean that the statement is not forward-looking.

Such forward-looking statements are not a guarantee of performance and the company’s actual results could differ materially from those contained in such statements. Several factors that could cause or contribute to such differences are described in detail in the Risk Factors section of Clean Energy’s Form 10-K that will be filed later today. These forward-looking statements speak only as of the date of its release, and the company undertakes no obligation to publicly update any forward-looking statements or supply new information regarding the circumstances after the date of this release.

The company’s non-GAAP EPS and adjusted EBITDA will be reviewed on this call and 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 and should not be considered as a substitute for or superior to GAAP results.

For 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 press release, which has been furnished to the SEC on Form 8-K today.

Participating on today’s call from the company is President and Chief Executive Officer, Andrew Littlefair, and Chief Financial Officer, Rick Wheeler.

And with that, I’ll turn the call over to Andrew.

Andrew J. Littlefair

Thank you, Ina and good afternoon everyone. Today, we reported a very strong quarter in 2010. For the year, our revenues grew 61% and our adjusted EBITDA grew 37%. I’d like to begin this call by outlining some of the major strategic accomplishments of 2010.

As you know, we believe the demand for natural gas fueling is accelerating both for CNG and LNG in North America as well as globally. Our primary goal is to be positioned to take advantage of this opportunity. We made great progress by completing several acquisitions and securing a partnership that we believe will maintain our industry leadership.

I’ll start with our acquisition of IMW Industries, a leading global supplier of CNG equipment for vehicle fueling. Our acquisition on IMW was driven by three desires. First, we wanted to ensure we could satisfy our internal compressor needs, since compressor is one of the most important piece of the equipment for a CNG station. As the adoption of natural gas vehicles has increased, our CNG station construction backlog has increased and our compressor requirements have risen as well.

Second, the acquisition of IMW allows us the ability to provide our customers with an equipment-only offering. Since some customers just want a station, we can now offer them a high quality and low cost solution.

Third, IMW gives us the ability to participate in the global growth of natural gas vehicle fueling. IMW has a well-known and respected reputation in the global arena with over 1,200 units in more than 24 countries.

In 2010, 53% of IMW’s sales came from outside of North America and we’ve made great progress in China, we’ve the task of building 4,000 natural gas fueling stations, it’s been assigned to just three local distribution gas companies. We are working with two of the three so far and hope to supply a significant amount of their compressor needs in the future.

In July 2010, we signed an agreement with Pilot Flying J to build, own and operate public access LNG fueling facilities and agreed upon Pilot Flying J travel centers throughout North America. They are the largest truck fueling operator in the country with 550 locations. We believe that as additional heavy-duty natural gas engine become available, there will be substantial adoption of Class A trucks that run on LNG. By partnering with Pilot Flying J we are in a good position to build LNG stations, along interstate highway corridors to fuel these trucks.

We also acquired Northstar in December 2010. Northstar provides LNG station design, construction operations and maintenance services. Northstar is built over 65% of all the LNG stations in the U.S. Northstar is also as a leader in LNG fueling system technologies, being the manufacturer of one of only two weights and measures certified LNG dispensers. We will be well positioned with Northstar for the roll-out of LNG stations at Pilot Flying J travel centers.

Given these strategic moves, we now can offer customers a variety of options from what we call our customer solutions metrics. We can offer full service fueling contracts that includes construction, operations, maintenance, government grants assistance, vehicle funding and fuel contracts. For customers who want only equipment and want to do their own maintenance, we can serve them equipment at a very competitive price. And we can offer everything in between, we can offer CNG, LNG or renewable bio-methane in North America and where makes sense internationally. We are the only company that can say this.

BAF or vehicle conversion business converted 1,820 AT&T vans and 500 Verizon vans in 2010. We continue to work with other major fleets to place orders in 2011. And I’m pleased to report that BAF is now the only certified Ford Qualified Vehicle Modifier for CNG systems.

All BAF converted vehicles now carry a full Ford factory warranty. BAF has been selected by Knapheide Manufacturing as the exclusive provider of aftermarket CNG fuel systems for light-duty Ford trucks configured with Knapheide service bodies. BAF also recently made an investment in Silver Tech. That will help us design future fueling systems with Ford.

Silver Tech will reduce our development time for new Ford vehicle gaseous fuel systems to weeks for months. As you know, we did get the vehicle excise tax credit of $0.50 per gallon retroactive to the beginning of 2010 and extended through 2011. Of course, we are very pleased to have this additional revenue and legislative support, but it’s important to remember that our model does not depend on these subsidies.

In the refuse sector, the incremental cost of a natural gas refuse truck can be as low as 10,000 with more than $1 per gallon savings fleets are recognizing a payback in less than a year and they realize significant savings over the remaining life of the truck. This explains why in the refuse sector, our 2010 volumes were up 50% over 2009.

(inaudible) since we announced our agreement with Republic, we booked on six new sites and we are working on six more. We are also in the process of reviewing about 25 of their largest sites with them to see where natural gas makes sense.

There are also several RFPs out on the street right now for other refuse projects including Oyster Bay, Lafitte and Freeport in Louisiana; Augusta, Georgia, El Paso, and Dallas, Texas. We believe seeing the refuse sector moving forward natural gas deployments as a strong testament to the fact these programs work without incentives.

The only other most promising markets where the economics are also quite compelling and work without any vehicle tax credits is trucking. You need only look at the latest diesel price in Los Angeles of more than $4.15 per gallon to know that fleet operators are feeling a pressure to find cost savings.

For our national fleet operator of a Class 8 trucks they each use about a thousand gallons per month, he can cover the incremental monthly cost of leasing an LNG truck compared to diesel and realize an additional incremental monthly savings. And that’s why national fleets including Wendy, Coca-Cola, Ryder, Oxbow, and Pepsi are all currently testing natural gas trucks.

Of course, you know, we believe that our country can and should accelerate the use of natural gas for vehicles to be begin to address the dangerous addiction to foreign oil. We believe that there will be another verge of the Nat Gas Act introduced this spring, but I’m kind of done trying to predict when we will see this bill get final approval, but do we see increasing support. It hasn’t heard our case to see oil prices over $100 a barrel, which has increased the spread between oil and natural gas to about 25 to 1.

Turning to some of our recent deals, you likely saw our UPS announcement. This is a good example that our fueling corridors will develop. The UPS has selected Clean Energy to design, build, own and operate an LNG fueling station that will fuel their new fleet of 48 LNG package transportation trucks, which will travel between key destinations in the L.A. basin. When operational, their LNG fuel requirements just for those 48 trucks are expected to exceed 1.2 million gallons per year. As a reminder, today there are more than 1,300 Class A trucks in operation in the U.S., and we fuel approximately 90% of them.

Here let me digress a moment and explain the way the infrastructure works. I know several months ago or maybe even almost a year ago, we made an announcement that we were developing station or selected to develop a station at DFW Airport for their new rental cars. While we built that station and DFW had to go out and purchase their buses, those buses arrived right about the holiday season and those buses took awhile to get put into service, but today and in January a handful of buses were in service.

Today now they have 32 new CNG buses in service with eight more to be delivered later this month. So now, that station does 2,000 gallons a day and this equates to about 550,000 to 650,000 gallons per year. The parking spot, which contracted with us a while back has ordered 63 new CNG shuttles, 12 of which have arrived at Denver airport. And we expect all 63 to be in place this month adding 300,000 gallons per year to our existing infrastructure.

In the transit sector, we took over two more LAMTA stations during the year. These two stations total approximately 9 million gallons annually. We’re also scheduled to begin operations on another three stations in the first two quarters of 2011 that will utilize about 10 million gallons on an annualized basis. As you recall, we have no invested capital in these deals, but although they’re lower margin, they're still economic for us.

For the year, we bid on 10 transit deals. We won eight of them and lost two. We think this is a pretty good win rate and we're pleased that the LAMTA win more than offsets the gallons on the two projects we lost.

Let me finish up my section of today's remarks with an update on the pipeline. Looking back on 2010, we built 55% more stations than in 2009. In the fourth quarter alone we completed 20 stations while continuing to add construction and engineering capabilities. For the year, we built 45 stations. Already we built eight stations in the first quarter of 2011 and that compares to two in the first quarter of last year.

Projects in our pipeline are approximately 330. A lot of work has been done for a project to meet our criteria for being added to the pipeline. And within the pipeline there are several categories of projects, we are either negotiation, validation, or qualified prospects. Of the 330, 150 are in the validation and negotiation stages. We now have 61 projects on the carpet. Those are stations under contract, up from 52 three weeks ago. And we believe we will exceed last year's station construction record.

Now with that, let me turn the call over to Rick.

Richard R. 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 2010 to the fourth quarter of 2009 and the year ended December 31, 2010 to the year ended December 31, 2009 unless otherwise specified.

For the quarter, our revenues were $83.2 million, up from $42.2 million. For 2010, revenue totaled $211.8 million, which is up from $131.5 million a year ago. BAF contributed $6.1 million of our fourth quarter increase and IMW contributed another $14.5 million. IMW also sold the Clean Energy $5.6 million of product during the quarter, which gets eliminated in our consolidated financial statements. For 2010, BAF contributed $35.4 million to our revenue increase and IMW contributed $17.8 million, which excludes $6.7 million of sales of Clean Energy.

During the fourth quarter of 2010, we recorded $16 million of VETC revenues. This amount represents our claim for credits earned in all of 2010, as the credit was reinstated in the fourth quarter of 2010 and made retroactive to January 1. The credit was also extended to 2011 when it was reinstated.

Adjusted EBITDA in the fourth quarter of 2010 was $20.2 million, which compares to $5.6 million in the fourth quarter of 2009. For 2010, adjusted EBITDA was $21.3 million, compared with $15.5 million last year.

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 our Series I warrant valuation and our stock-based compensation charges for our option and certain tax benefits, foreign currency gains, and impairment charges we incurred in 2010. Adjusted EBITDA is described in more detail in the press release we issued earlier today.

We had earnings of $0.17 per share on a non-GAAP basis in the fourth quarter of 2010, which compares with non-GAAP earnings of $0.02 per share in the fourth quarter of last year. For 2010, non-GAAP loss per share was $0.04 versus $0.03 per share for the 2009.

The gross margin this quarter was $33 million, and was $15.9 million in the prior period. BAF contributed $1.7 million towards this increase and IMW contributed $3 million. For 2010, our margin was $69.9 and it was $48.6 million in 2009. For 2010, BAF contributed $10 million and IMW contributed $3.8 million to our margin increase.

Our margin per gallon on our fuel sales was $0.26 in the fourth quarter of 2010, which compares with $0.32 in the fourth quarter of 2009. Our net income on a GAAP basis for the fourth quarter was $13.8 million, or $0.18 per share. This compares to a net loss of $1.9 million, or $0.03 per share. Keep in mind, we recorded our full 2010 VETC amount in the fourth quarter of 2010. The increase is also related to the change in the amounts we recorded for valuing the Series I warrants between periods.

We recorded a non-cash gain of $4.4 million in the fourth quarter of 2010, and a non-cash gain of only $400,000 in the fourth quarter of 2009. For 2010, net loss for the period was $2.5 million, or $0.04 per share, which compares to $33.2 million or $0.60 per share. The 2010 amount included a non-cash gain of $10.3 million related to valuing the Series I warrants, non-cash stock-based compensation charges of $11.9 million, $2.2 million of impairment charges, $1.9 million of foreign currency gains on the notes we issued to purchase IMW and an AMT refund of $1.3 million recorded in the first quarter of 2010. The 2009 amount includes a $17.4 million of non-cash Series I warrant charges and $13.1 million of non-cash stock based compensation charges.

During the fourth quarter of 2010, approximately $1.2 million of the Series I warrants were exercised, so the magnitudes of our gains and losses related to valuing the remaining $2.1 million Series I warrants should be less as we go forward.

Volumes during the quarter rose to 31.7 million gallons, up from 29.5 million gallons. For 2010, we delivered 122.7 million gallons, which is up 21% from 101 million gallons in 2009.

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

Question-and-Answer Session

Operator

Thank you. (Operator Instructions) Our first question comes from Rob Brown from Craig-Hallum.

Rob Brown – Craig-Hallum Capital Group

Good afternoon.

Andrew J. Littlefair

Good afternoon, Rob.

Rob Brown – Craig-Hallum Capital Group

I’m wondering if you could give us a little color on your pipeline, has that amount accelerated since the fuel price spiked or has that been growing pretty consistently, maybe just give us a sense of how much difference you’re seeing in terms of the interest level with high fuel prices?

Andrew J. Littlefair

Well, it’s interesting our Vice President of Sales is at about five or six meetings in Connecticut today. He noticed fuel price is $4.25. And so we are getting a lot of things like, once again we knew that when fuel went to $4 that really was the tipping point. Now, specifically on the pipeline, I think since the last time I talked to you, the pipeline grew from about, I believe, it was 280 to now it’s standing at 330. So we’re seeing an increase, I can’t break it down for you, Rob, you know on the last three weeks or four weeks how much it’s grown up by 20% of 30%.

Rob Brown – Craig-Hallum Capital Group

Okay. Good. And let’s turn over to BAF, you mentioned you made an investment in the company, I think it was ServoTech, how much was that investment and maybe help us understand how that accelerated into your development pipeline that you mentioned?

Andrew J. Littlefair

Sure, that investment was $1.2 million and I think that’s outlined in the document.

Richard R. Wheeler

Yeah, that’s for 19.9% interest.

Andrew J. Littlefair

ServoTech is unique because they are headquartered there before in Dearborn and they are one of the few companies that has very close working relationship with Ford on the development of fuel systems. And so if you go back with me, Rob, a few years ago, really a lot of the history in the natural gas vehicle business, we’ve had kid companies and others in the business of having to essentially hire smart guys to go in and reengineer the codes and crack the codes of the auto companies.

On this case, ServoTech actually has a close relationship with Ford and has access to those codes. So for instance on our latest project development that we did working closely with ServoTech, we literally we were able to get that put in place, get the new fuel system algorithms et cetera, all put to that in a matter of three or four weeks, which used to take three or four months. So this will save us a lot of money and we will be able to bring more products to market faster and we’re doing it with somebody that Ford thinks enough off of to that has provided them with this kind of access. So I think it’s a pretty important step.

Rob Brown – Craig-Hallum Capital Group

Great. Thank you.

Operator

Thank you. Our next question comes from Graham Madison from Lazard Capital Markets.

Graham Madison – Lazard Capital Markets

Hi, good afternoon guys.

Andrew J. Littlefair

Good afternoon.

Graham Madison – Lazard Capital Markets

Just a quick question for Rick on the margin per gallon, you were going through a lot of figures at the end there. You said that margin per gallon was $0.26 in the fourth quarter, did that include contributions from VETC?

Richard R. Wheeler

No, that excludes VETC.

Graham Madison – Lazard Capital Markets

So actually if you were to add VETC in there to compare it to quarters prior to 2010, what would the margin be?

Richard R. Wheeler

It’d probably add another $0.12 or $0.13 a gallon to the fourth quarter number, the $0.26 would probably go to the mid 30s.

Graham Madison – Lazard Capital Markets

Mid 30s.

Richard R. Wheeler

Upper 30s.

Graham Madison – Lazard Capital Markets

Okay. Great. And then staying on BAF, can you give a sense of what the guess on the revenues in the K, but a sense of what the gross margins were in the quarter and then if possible give a sense of what the backlog and the outlook for that is in 2011?

Andrew J. Littlefair

Rick is going to look on the gross margins. Graham, we continue to push sales through there and we have a continuing relationship with AT&T and a continuing relationship with Verizon and some other very large fleets. And so this can be a bit lumpy, but those companies have committed that they are moving forward and even looking at ramping up their numbers and so we feel pretty good about those two large customers and we have about three or four other very large fleets that are just beginning to take some vehicles to test. So, we like the outlook for 2011.

Graham Mattison – Lazard Capital Markets

Okay, great, Jim. And Rick, did you fund the...

Richard R. Wheeler

Yeah, basically for the fourth quarter the gross margin was about $4 million and for the year it was about $12 million.

Graham Mattison – Lazard Capital Markets

All right, great. Thank you very much.

Operator

Thank you. Our next question comes from Brian Gamble from Simmons & Company.

Brian Gamble – Simmons & Company International

Good morning or afternoon guys, how are you doing?

Richard R. Wheeler

Good.

Brian Gamble – Simmons & Company International

Back to the $0.26 a galloon, so Rick, the $0.26 actually compares what you have reported the last three quarters because that was all excluding VETC, correct?

Richard R. Wheeler

Absolutely. Yeah, because there wasn’t any VETC in any of the 2010 quarters.

Brian Gamble – Simmons & Company International

So, maybe walk me through Q2 to Q4, the decline from $0.35 to $0.31 to $0.26 and then talk about maybe your expectations for where the volumes are coming from ’11 and what that should ultimately do that number?

Richard R. Wheeler

Sure. Essentially, it’s kind of phenomenon we’ve talked about that is the transit O&M volumes become a bigger piece of our overall volumes, since those are lower margins they are going to skew our margin per gallon down. So it’s kind of just the math of that happening as we brought on more LAMTA business and other transits that basically – what you guys know just more in the O&M bucket, so with more LAMTA volumes coming on during 2011 as Andrew alluded to with those other sites that are coming on, as well as the LAMTA sites we brought on in 2010 will be in 2011 for a full-year instead of a partial year in ’10, you know that’s probably going to pull that number down some more and we don’t give guidance on that as you know, but it certainly would offer up to, you know the margin for gallon numbers probably going to dip down some more in 2011 and our theory on where and when and how we’d get that back up is, for regional trucking and the other national fleets and deals Andrew alluded to earlier that comes back into the mix and that’s high volume type business and that’s in our commercial retail world where margins are higher. Hopefully, we will be able to offset the transit volumes coming on with the new retail margins, which are bigger and you get that number back up. So that’s going to be a little while as that kind of transitions happens, but that’s our plan.

Brian Gamble – Simmons & Company International

And then Andrew maybe you could, you gave some decent detail on what you see going forward and totally appreciate the fact that you’re not wanting to get the NAT GAS bill again and that’s been frustrating for everybody, but maybe you could you’re your top two sort of hopes for 2011 that have the best chance to come to fruition that would help you during the year?

Andrew J. Littlefair

Sure, let me speak to that and I want to also quote a press conference that happened just moments ago in Washington. But on the federal legislation side, I know you’ll ask me walk back out of the plant to get here.

Brian Gamble – Simmons & Company International

I will never do that.

Andrew J. Littlefair

But I feel well and feel very strongly that it’s moving in the right direction and that there will be a reintroduction of NAT GAS Act like bill very similar and maybe just a bit trimmer, but that reintroduction is going to happen relatively soon.

We have lots of active support from Congressman Sullivan, Congressman Boren, Larsen, and you remember they were our leaders last time around. And two or three leading members on the House ways and means committee. We know that those members have talked to leadership, leadership wants this bill to come through the committee process and that’s fine. The NAT GAS Act, let’s call version two, it’s been drafted, it’s being vetted, beginning to be vetted draft among those original cosponsors, and I think that it will be introduced maybe as early as the end of the month.

Now, there is still a long way to go, having said that. The House wants to take lead on this first and then it will go – they will take through the committees and then it will obviously at some point it go for a vote and then it'll over to the Senate.

Interestingly today and of course it has I'm sure a lot to do with what Americans are seeing at the pump, let me just read what Speaker Vander said in the press conference a few minutes ago. And this is a quote, he said, the days of big comprehensive bills I think should be over, Vander said.

I’d rather deal with this and what I call bite-size chunks, why wouldn't we have a bill to encourage vehicles to use natural gas and do it by itself. Why wouldn't we have a bill to encourage more oil and gas (inaudible) support more green energy development and why wouldn't we do that by itself, why wouldn't we do a nuclear energy bill for example by itself.

So I think great, I guess umbrage in the fact that you’ve got the speaker Ross talking about energy legislation and leads to something talk about natural gas vehicle, I'm not sure we’ve been there before. So I like that and feel strongly that this thing is going to happen. I think it has more support today than it did before

Brian Gamble – Simmons & Company International

Appreciate it.

Andrew J. Littlefair

Okay.

Operator

Thank you. Our next question comes from Eric Stine from Northland Capital Markets.

Eric Stine – Northland Capital Markets

Hi, everyone. Thanks for taking the questions.

Andrew J. Littlefair

Hi, Eric.

Richard R. Wheeler

Hi, Eric.

Eric Stine – Northland Capital Markets

You know I would ask this question, but just bookkeeping, can you give the GGE breakdown between CNG, LNG and bio-methane in the quarter and also kind of practicing that number the upsets in the quarter?

Richard R. Wheeler

Sure. Bio-methane was $1.8 million, CNG was $21.4 million and LNG was $8.5 million to get you to your $31.7 million and BAF did almost $2,800 – during the quarter or the year?

Eric Stine – Northland Capital Markets

Either. I guess quarter. Quarter is fine.

Richard R. Wheeler

For sake, I got year.

Eric Stine – Northland Capital Markets

$2,800 for the year?

Richard R. Wheeler

$2,800 for the year.

Eric Stine – Northland Capital Markets

Okay. Thanks a lot for that. I'm wondering if you could touch on the construction revenue in the quarter. I mean, it was a noticeable number, was that related to the Northstar acquisition or was that just project – timing of completion of stations in the quarter?

Richard R. Wheeler

Yeah, more timing in completion. We’re working on a couple of big projects for the LAMTA where we are electrifying some their compressors. The other big thing that’s going on is our relationship with Republic where we doing already stations with them. In most stances, these were selling on the station and then doing O&M after that. So a lot of those stations got done in the fourth quarter as well. So it’s a kind of just timing coupled with our station activity just picking up in general on the ones we’re selling to our customers.

Eric Stine – Northland Capital Markets

Okay. That’s great. Maybe just turning to AT&T, I know they are over a quarter away through their 8,000 outfits that they want to do. I know they have more plan beyond that. Have they gotten to the point where they're considering the fueling station side of it, I know that you have the rights to do that, I'm just wondering any thoughts on timing in would be helpful?

Richard R. Wheeler

Well, we’re underway in the final stages of building their first station. That's Carson, California. And Eric, I can’t remember, I know we looked at, I think we are in the process of looking very closely doing three or four others, believe its in the Texas market and maybe in Florida, a little rusty there on that.

We have had recently a few very important meetings with AT&T to look at their further vehicle rollout and stations is a part of that. We show them a program whereby we can put in mobile refueling and essentially very quickly put mobile refueling in virtually almost any location that they’d like in a matter of weeks. So we feel like we can address their infrastructure needs, we got to nail more of them down though.

Eric Stine – Northland Capital Markets

And is it still their plan to have a public aspect to those stations eventually?

Richard R. Wheeler

Well some of them will, some locations lend themselves to public. I believe the one in Carson, the first one out of the box, that’s where we are doing a public access. It just kind of depends on the location and how the piece of the property is added and whether or not work or not.

I think they’ve been persuaded that they see it as a public good to provide public access where possible and that I think they have kind of embraced.

Eric Stine – Northland Capital Markets

Okay. Thanks for that. Maybe just a last question just on the pipeline. In the past you’ve talked about the mix being very much more supplying the fuel versus O&M, is that still the case even with the growth you’ve seen.

Richard R. Wheeler

It just kind of depends. Like for instance, we have a three Flying J stations right now on the carpet, okay, that were under construction and we have 12 others that we’re looking at that I would say are in the pipeline. Those would all be because of the nature of that business relationship, we’re building the station and providing the fuel.

Now we’re public, in most of the cases we are public, they’ve elected to buy equipment and enter in a long-term operations agreement with us, which is good for both parties and we’re selling them equipment and it’s all a bit different. So this kind of depends.

We have probably 30 or 40 projects that kind of are in the airport, taxi, those are all places where we supply fuel. And so it’s heritage, it kind of depends on the customer right now. As we do more national fleets to be a Class 8 shipping companies, those will all be fuel related for the most part. Now, there will be certain of those that have their own fleets and don’t want ground stations, but a lot of them won’t be that way. So I can’t really give you a percentage break out.

Eric Stine – Northland Capital Markets

No, I understand, but like you said, as you fuel of these national fleets, it should be skewed more towards supplying the fuel?

Andrew J. Littlefair

That’s obviously what I like to do, right. But we’ve also adopted the – customer just wants equipment, so they want a certain level of service to do that, they want a full boat, we can do that. We can engineer and construct, so really what I said on the call, the metrics of services and we’re really the only ones that can do that. And I should say, that’s good business to be able to provide the customer what they want.

Eric Stine – Northland Capital Markets

Yeah, absolutely. Thanks a lot for your color.

Operator

Thank you. Our next question comes from Peter Christiansen from Bank of America Merrill Lynch.

Peter Christiansen – Bank of America Merrill Lynch

Good afternoon, Peter in for Steve Maulana, thanks for taking my question. As it relates to some of your SG&A and depreciation going forward with all these new acquisitions, should we think this fourth quarter results as more of what the normalized run rate should be going forward or do you expect some other different trend there?

Andrew J. Littlefair

Yeah, there’s couple of things (inaudible) considerable going forward. Our stock based compensation, which is in there, I think it’s probably going to go up a little bit, we issued some more options recently. There is a 1.2 million of legal in the accounting expenses we incurred to do all the acquisitions during 2010, that in theory will not recur again, but to the extent we do other acquisitions it may come back, so that’s a little bit as a wild card.

The two impairment charges that are in there, in theory those won’t be back again, so it’s probably 2.2 million you could pull out. I guess we always are a little careful here just to caution everybody that we are a growth company and we are spending money to get the legislation passed and both the federal and state level, doing lot of things that kind of create industry awareness and growth and advance and all that kind of stuff.

So we always kind of tell people we’re watching our money and we’re trying to spend wisely, but we don’t want to be penny wise and pound foolish if there is an opportunity to be that we can go out and do something to help this business grow or be more successful long-term, we’re going to do that.

So with all that said, I mean if you cancel out the extraordinary items I alluded to, that will get to somewhere close and then just always know the caveat there that we may do something that we think makes sense over the longer term, the pulse and just watching every dime.

Peter Christiansen – Bank of America Merrill Lynch

Do you see any potential acquisitions over the near-term horizon?

Andrew J. Littlefair

We can’t comment on that. Always you can tell from what we did in 2010, I mean we’re looking to do anything we can to enhance our position or our advantage and put us in good stead to capture the market share or the lion’s share of the growth that we think is coming. So to the extent something like that present itself, we would obviously look at it, but obviously we can’t comment on specifics.

Richard R. Wheeler

Peter, the good news is that we are fortunate and we look at all of things. And we’re in a lot of – so we see a lot of equipment suppliers and fuel providers and have relationships with the fleets.

And so it wouldn’t surprise me if you’d see other acquisitions. What we did last year is we wanted this to set ourselves up to be able to fully participate in what we see is a very exciting growing market and there are other opportunities out there. So we’re looking on it very closely. Just like the ServoTech type thing, that’s small, but it’s very strategic. And it really helps us and it could really blossom into something much bigger.

Andrew J. Littlefair

Peter, couple of things, just to think about on SG&A, I mean IMW was only in our numbers in 2010 for four months, they’ll be in for a full year this year. Same thing with Northstar, it was only in for two weeks during 2010, that’ll be in for a full year in ’11, plus we plan on growing obviously based on what we talked about, all the projects in the pipeline, so anytime we’re going to grow, just your general business expenses are going up.

So I’ve just showed out also in there, for you to think about and I guess we’ve also told people that we think this business is leverageable as we go forward. So our whole or one of our focuses is just to make sure SG&A as a percent of sales is going down as we go forward. So we watch that as well, just to gather the check to make sure we’re kind of in line and spending our money wisely.

Peter Christiansen – Bank of America Merrill Lynch

Great. And then finally, I was just wondering if you just provide us a little bit more color on the this NAP-5 distribution agreement, has BAF been involved in the aftermarket business before and also how do you see this expanding going forward?

Andrew J. Littlefair

Well, BAF has been, (inaudible) the after market business. This is following a strategy to work with these large ship-to companies, NAP-5. They have a very large, that’s a big business and I don’t know what percentage, Peter, but an awful lot of the work body type trucks that go and end up in the market gets shift from a Ford factory through NAP-5 to the customer. And so there are other companies like NAP-5 that are in different segments of the business, it’s like, for instance like limousine companies and these other ship throughs we think it’s very important strategy for us to have those relationships exclusive if we can because they’re the ones selling the vehicles to the end user.

Peter Christiansen – Bank of America Merrill Lynch

Great. Thanks for taking my questions.

Andrew J. Littlefair

Okay.

Operator

Thank you. Our next question comes from Pavel Molchanov from Raymond James.

Pavel Molchanov – Raymond James

Hi, guys, just a couple of housekeeping items. How many stations did you got in the course of 2010 and what’s the trajectory for 2011?

Richard R. Wheeler

45.

Andrew J. Littlefair

We finished our 45 projects under the engineering carpet, we lost a few stations. Some of those were upgrades, so we basically already had that in our station count. I would say, 25-ish, maybe, net, maybe a little higher.

Again, going forward, we don't really focus on stations as much as lot of guys want to. We look at it more from project perspective in generating volume and doing good economic deals that would offer up that, our CapEx probably you will see in our 10-K that we filed for next year is $80 million and obviously, the bulk of that is building new stations and doing various projects.

So I don’t remember the exact station number in there and again we don’t like to kind of put that number out there because a lot of times things slide, if you don’t get your permit on the state or the utility doesn’t show up and get the gas connected on time, pushes you out. So there is a lot of kind of flux in there, but I think the important thing is look at that pipeline, looking at our activity everything seems to be heading in the right direction that more and more projects are coming on and as that happens I think you are going to see our results improve and start to pick up.

Pavel Molchanov – Raymond James

And then let me ask you also kind of little more boarder, to the best of your knowledge, how many NGVs do you have on the road today in U.S.?

Andrew J. Littlefair

150,000, somewhere in there.

Richard R. Wheeler

Yeah, I think that’s right

Pavel Molchanov – Raymond James

Okay. And any sense just based on your discussions within the industry, how that number is trending higher, so are we adding 10,000 a year or 20,000 a year, how is that working?

Andrew J. Littlefair

Well, right, I mean, last year we added a couple of thousand trash trucks and we did a few thousand.

Richard R. Wheeler

1,000 port trucks.

Andrew J. Littlefair

1,000 port trucks and we did a few thousand at BAF and then – I guess one way to look at it is volume as well and a lot of buses were put on the road. I know 2000 to 2010 really doubled the volume of natural gas and that’s been increasing at a more rapid rate.

You know, it’s interesting, in the world, you're adding 4,000 natural gas vehicles a day and eight stations a day. Now obviously, the United States is not moving that fast. But we’ve had our friends in the trucking business begin to move the numbers of the penetration rates up for Class 8 trucks. And so when you go from the United States putting about a 150,000 to 160,000 new Class 8 trucks on the road, now you’ve seen what I’ve seen the different reports talking about as maybe as many as a quarter of a million, and you use some of the adoption rates that you're beginning to see with transit and refuse, you apply those adoption rates. Go back a year or two and put those adoption rates on that Class 8 trucking class, you get a lot of vehicles. For instance, we know in 2011 and 2012 you're going to have, certainly 2012, you’re going to have a lot more product to choose from and that is really product that the trucking guys need.

Today, we have some products, we have good products and works well, but our friends at Cummins Westport, they have the ISL G, which is a nine-liter engine and they have the big HPDI, which is a 15-liter. For most trucking guys rear-wheel drive had a 13-liter. And so Cummins is coming with 11.9 and Aberstar is coming with 13 and Volvo is coming with 13. That’s really a 2012 story.

So I feel really good about where we are headed and the product that will be available. But I wouldn’t just say, well, last year we did 13,000 and that’s the rate, I think you have to look at the adoption curves.

A few years ago, you were doing just a handful of refuse trucks and today about 30% or 30 somewhat percent of all the refuse trucks I believe are being purchased in here are natural gas and that’s from just a couple of years ago when it was negligible. So you put some sort of ramp up to get to that kind of adoption rate and the reason you have that adoption rate because it’s economic. So the Class 8 guys are really economic to use so much fuel. And you get some pretty big numbers.

Pavel Molchanov – Raymond James

I appreciate the color. Thanks guys.

Andrew J. Littlefair

And Pavel just FYI, it’s put on our K, there is gas vehicle report February 2011, actually says there is a 110,000 natural gas vehicles in the United States. (inaudible) might be a little less than what we originally said, that’s accurate.

Pavel Molchanov – Raymond James

Got it.

Operator

(Operator Instructions) Our next question comes from Vishal Shah from Barclays Capital.

Jade Green – Barclays Capital

Hi, this is Jade Green for Vishal. Couple of just quick housekeeping questions. In terms of the INW and the BAF segments, can you give us any idea as to what we can think about for revenue and gross margin for 2011?

Andrew J. Littlefair

No, we don’t give guidance. INW, we’ve said in the past on the call that they were clipping along at about $40 million of revenue, we thought that we could add 50% of that. So those things are going to still be hanging in there on track. The other ones again, we just don’t provide guidance, so sorry.

Jade Green – Barclays Capital

That’s fine, worth a shot. And then I wanted to just ask about the Northstar acquisition, how can we think about that, where is that going to get included, I guess in Q1, in 2011, where from our side can we think about revenue from there?

Richard R. Wheeler

Interestingly, I think a lot of their business is going to be with us, because the concept there is they are going to help us roll out LNG stations at various Pilot Flying J locations around the country as we kind of build our network and that all gets eliminated in our financial statements.

So kind of the way the accounting works, you’re probably not going to see a time of outside revenue although they do have some maintenance contracts and certainly have some deals with outside parties (inaudible) stations next year, maybe you can do some math, some of them do the stations, the others just doing the equipment, roughly what a station and the equipment piece is, maybe you can kind of figure out some numbers.

Jade Green – Barclays Capital

Okay, but it’s not a separate line item, it’s going to be included mostly in the instrument gallons and restructuring?

Richard R. Wheeler

Yeah, it’ll just be in basically our product sales line in the gallons for the O&M stuff will be in our gallon number.

Jade Green – Barclays Capital

Okay, that’s helpful. And then one broader base question. You guys got a lot of trust over the UPS deal and maintain your times, and obviously helped both you and some of the other players in the industry, kind of given names, natural gas in the United States. How have you seen sales and just overall customer interest since that deal happened, do you think that can be a real turning point for you as far as regional trucking market goes?

Andrew J. Littlefair

Yes, I do, Jade. We can’t talk about all of different things we are doing, right, because of the competition, but there has been a much increase in interest in what I’d call the national shipment fleets. They have a low carbon plants and they have sustainability plants and they are the ones paying – if you just look at, let’s just use an example of, maybe Home Depot or some big company, they’re going to pay for fuel though. They’re very sensitive right now, so you got their attention and they saw us before but they weren’t necessarily convinced. And so I think having a well known fleet like UPS to get the coverage of a bid, it’s not a loss the fleet directors at these major national fleets around the country. So it has helped and it’s important.

Jade Green – Barclays Capital

Great, thanks.

Operator

Thank you. At this time we’re going to close the conference, I’ll turn the floor over to Mr. Littlefair for any closing comments.

Andrew J. Littlefair

Thank you, operator. Let me just close by saying that we see continued volume growth and an acceleration of our business in 2011. We’re pushing extremely hard to put all the pieces in place for aggressive growth in the future. And we look forward to reporting to you on our progress again in a few months. Thank you and have a good day.

Operator

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

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