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Clean Energy Fuels Corporation (NASDAQ:CLNE)

Q3 2011 Earnings Call

November 8, 2011 4:30 PM ET

Executives

Ina McGuinness – IR

Andrew Littlefair – President and CEO

Analysts

Rob Brown – Craig-Hallum

Graham Mattison – Lazard Capital Markets

Brian Gamble – Simmons & Company

Steven Milunovich – Bank of America Merrill Lynch

Eric Stein – Northland securities

Pavel Molchanov – Raymond James

Rupert Myrr – National Bank Financial

Operator

Welcome to the Clean Energy Fuels’ Third Quarter Fiscal 2011 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 third quarter ended September 30, 2011. 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’d like to remind you that some of the information contained in the news release and on this conference call contains forward-looking statements that involve risks, uncertainties and assumptions that are difficult to predict. Words of expressions reflecting optimism, satisfaction with current prospects, as well as words such as believe, intend, expect, plan, anticipate, and similar variations identify forward-looking statements, but their absence does not mean that the statement is not forward-looking.

Such forward-looking statements are not a guarantee of performance and the company’s actual results could differ materially from those contained in such statements. Several factors that could cause or contribute to such differences are described in detail in the Risk Factors section of Clean Energy’s Form 10-Q filed 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 will be reviewed on this call and exclude certain expenses that the company’s management does not believe are indicative of the company’s core business operating results. Non-GAAP financial measures should be considered in addition to results prepared in accordance with GAAP and should not be considered as a substitute for or superior to GAAP results.

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 these non-GAAP and GAAP figures is provided in the company’s press release, which has been furnished to the SEC on Form 8-K today.

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

Andrew Littlefair

Thank you, Ina and good afternoon everyone. Today we reported revenue of $72.1 million, up 58% from 45.7 million in the third quarter of 2010. Again delivered 40.9 million for the quarter, which is up 31% from 31.3 million gallons a year ago.

From a broad start market perspective; this has been a very volatile time for investors. However, from a company perspective, we’ve remained extremely focused on building long-term value by executing on our business plan, and we have made substantial progress.

Let me start today’s update with a progress report on our LNG truck-stop network, which we have branded America’s natural gas highway. Today we have 92 truck-stop stations in various stages of development. This is in addition to the stations on our traditional construction carpet. These stations include 700 construction, one that’s completed and 61 stations in various stages of engineering, permitting and site investigation, and 23 stations where more work is needed on location approvals.

By the middle of next year, we expect to see the construction phase of these projects accelerate. On average we will invest about $1.5 million to build new station. And while this will impact our bottom-line during this rapid phase of expansion, we expect to start to benefit from growth in volumes and profit as vehicles are deployed.

To keep in mind these trucks typically use 20,000 gallons a year of LNG, so just one hundred trucks will use two million gallons of fuel per year. With just 100 trucks, our station economics become very attractive and will get even better as more trucks are added. And also keep in mind this market has 3 million trucks. So you can see it is critical we put this platform in place now in order to set the stage for the enormous growth we see on the horizon.

During the quarter, we secured $300 million to help us build out America’s Natural Gas Highway. This investment was led by our friends at Chesapeake, and we believe they’ve found our breadth of assets and capabilities to be the best in the business. Chesapeake’s investment was followed by investment companies Temasek and RRJ Capital.

America’s Natural Gas Highway is a big undertaking. We are bringing to bear our expertise in engineering, design, installation and compressors and equipment, station construction, service and support, LNG production and distribution to make this all happen.

It’s important this project, I’m pleased to announce that we recently acquired Weaver Construction. Weaver is a Southern California based construction and engineering firm that specializes in natural gas fueling stations. 13 of approximately 38 engineers in construction employees will be key in terminal resource for supporting our station construction activities.

We’ve been working with Weaver for years. In fact, they were recently our general contractor on the big (inaudible) electrification projects. As a result of our long-standing relationship, we understand their capabilities and how well suited they are for the projects.

In addition to these internal resources we’ve engaged five survey companies, a national geo debt firm, three engineering and design firms and three outside construction firms.

Let me talk a bit about how we intend to load America’s Natural Gas Highway. We have an entire marketing division dedicated to serving heavy-duty trucking fleets. Today we have nearly 40 companies under non-disclosure agreements so that we can work very closely with them. Many of these are Fortune 500 companies, and if we analyze just the fleets under NDA, it would represent about 2.8 billion gallons of fuel annually.

And our part is really remarkable when we think about how really little these clients understood about the potential scenes of natural gas trucks less than a year ago. By adding America’s Natural Gas Highway in process and the 12-liter engine in customer trials, are timing – we are having the base of the corridor in place should coincide with the release of these engines. We think this market will show rapid growth in the next several years similar to what we have seen in the revenue sector.

Fuel usage in heavy duty trucking market is about 15 times greater though than in the refuge market. Ryder is a great case study for the compelling benefits of natural gas in heavy duty sector. They have at least nearly 200 trucks that now operate in California and Arizona, many of which fuel at our public CNG and LNG stations. Included in the Ryder deal are various companies that either lease trucks from Ryder or testing natural gas vehicles. They include Pepsi, Coca-Cola, Fresh & Easy, International Paper, Mohawk Industries, Dean Foods, Rite Aid, Bridgestone Tires and Home Depot just to name a few.

Also we just signed an exciting deal with Saddle Creek, a third-party logistics company that does hauling for Wal-Mart, Hydro Bush and Publix.

They’re in contract with us to build and operate a large private station at the Florida distribution center. They will operate 80 trucks that are expected to consume in excess of 1.5 million gallons a year.

Let me give you an update on our refuse transit in an airport markets. Refuse companies large and small are moving to adopt natural gas. In fact, the two largest natural refuse companies, Waste Management and Republic have given strong indications of their commitment to converting their fleets to natural gas. They have more than 30 CNG stations between the two companies.

As you hopefully saw last week, we announced that Waste Management has engaged us to provide maintenance services for their stations throughout the United States. This underscores our capabilities and substantial leadership in the sector. In addition, we have a similar relationship with Republic, in which we build and maintain their space.

It is very exciting to see these two companies setting the tone and showing leadership in the conversion of the waste industry to natural gas. With a strong commitment now coming throughout the refuse industry, we project that 40% of all new trash trucks purchased in 2012 will be natural gas.

Today, we have 26 refuse stations on the construction carpet, and already this year we’ve completed 11 stations, and we’re on track to build 20 refuse stations this year in total. These stations are located in eight states, and our refuse sector has projected annual volumes of more than 24 million gallons.

Looking back in 2007, we built three new refuse stations and sold eight million gallons to all of our refuse customers. Also I am pleased to report on our new relationship with Covanta. They are a large landfill generator company that has dozens of landfills and energy from waste facilities.

Our waste project with them is a station we’re building at their landfill in north. This station will service about 400 trucks per day and primarily serve public, private and municipal waste haulers of the New Jersey turnpike. We’re excited about this relationship, and there is the potential for more Covanta sites.

Turning to our taxi, airport market and several market we had strong growth in our airport markets in Los Angeles, Dallas, Atlantic City, Las Vegas, San Francisco, Seattle, Chicago and Connecticut. Collectively, we added 200 shuttle buses, 50 vans and more than 500 taxis.

In Connecticut, beside the public access station we built for a large taxi operator facility in West Haven, Metro Taxi roll out the first MV-1 CNG taxi and Ford Transit Connects. We’re also building two more stations, one in Hartford airport and another in Hartford area for a large taxi operator that has more than 150 vehicles on order.

I’m very pleased to give you an update on the VPG taxi project. You’ll recall we were early investor in the MV-1, which is the first and only vehicle built from the ground up on natural gas to meet the Americans with disabilities act vehicle guidelines. We’re very proud of its introduction. It was recently named as an approved vehicle for public transportation in New York City, and just last week, the VPG Group received outside funding of $40 million, which allows them to scale their production.

We really believe that MV-1 will be very well received by transit authorities and municipalities where dial-a-ride and other public transit services in the need of repaired transit vehicles.

In the transit sector our team has just returned from the American Public Transit Association Convention in New Orleans, and it seems to be a new day as it’s becoming overwhelmingly obvious across the country that natural gas is much cheaper. Numerous manufacturers display their CNG offerings and the interest in CNG buses and smaller paratransit vehicles was positive and far reaching.

Of note there are 40 more buses going into service with regional transportation commission in Las Vegas where we fuel. As part of our partnership with OE, we opened another station on their property in LA, service their growing fleet of buses. And during the quarter, 76 full-size buses were delivered to transit properties where we fuel. These buses are expected to add close to 1 million gallons per year; and as of today we fuel about 6,000 buses every night across the country.

Before I move to discussion on the performance of our subsidiaries, let me talk about my last interaction with the Congress and the senate regarding the status of the net gas act or H.R. 1380.

As you know on September 22nd, I provided testimony to the subcommittee on select revenue measures and the subcommittee on oversight with the house ways and means committee. During reception, I spoke about the immediate positive impact of replacing natural gas would have on job creation and reducing foreign oil and reducing greenhouse gases. And my testimony was well received by the committee, and we expect in the near future that a companion bill will be introduced in the senate by Senators Menendez and Burr. So, we continue to see positive momentum.

Turning to a discussion of our subsidiaries we believe the growth pains INW experienced have been resolved. In the first half of the year several large company projects tied up INW’s engineering department. This engineering bottleneck created a drop in production. So that has been cleared out, and we’ve returned to previous eight compressors per week.

We also see sales picking back up in China next year. And during the quarter, INW signed a two-year contract with United Technology’s UPC division to be their exclusive provider of natural gas reforming and cooling modules for their fuel cells. Meanwhile INW’s innovative portable refueling station is in production, and we’re producing our first 20 units.

Northstar is fully integrated in the company. We’ve ramped up their capabilities. Last year Northstar built and installed about 10 LNG skids, and now we’re producing one skid per week. We anticipate we’ll be able to produce two LNG skids per week in the second quarter of 2012.

Turning to BAF, so far this year we’ve completed over 1,500 converts. Even with the exploration of vehicle credits, the cars were raced to fall. BAF is still the largest conversion company of unit volume by any outfitter in the country. And thanks to our investment in ServoTech, we continue to add miles in the Ford lineup, and we think sales will pick up in 2012.

AT&T is ramping up again as well, and we now have orders from them for 464 transit connections in the first quarter, and we are seeing an acceleration of orders from other major customers.

With respect to our biomethane subsidiary, the build out of our Michigan plant and the expansion improvement of our (inaudible) facility continues as planned. We expect our investment in both products will begin – we expect our investment in both projects will begin enjoying real volume returns in mid-2012. As our biomethane production volume s increase, we also plan to offer our customers a unique new fueling option, including a blended fuel product.

And finally let me close by talking about our construction carpet, which is larger than ever and is growing rapidly, and remember this does not include the stations we are building for America’s Natural Gas Highway. It currently includes 93 stations of which four have been completed so far this year.

Looking at our product line it now totals 444 projects, which is less than 348 last time we spoke. The pipeline encompasses stations in varying stations of validation, qualification and negotiations, as well as new fleet and vehicle deals which add volume. Year-to-date we’ve closed 130 such deals. So as you can see we are laying the groundwork for what we expect will be a very robust 2012.

With that let me turn the call over to Rick.

Andrew Littlefair

Thanks, Andrew. Before I review our financial results, I’d like to point out that all of my references to our results will be comparing the third quarter of 2011 with the third quarter of 2010 to the first nine month of 2011 to the first nine months of 2010 unless otherwise noted.

Volumes rose to 40.9 million gallons during the quarter up from 31.3 million gallons a year ago. For the first nine months of 2011 volumes increased 115.6 gallons, up from 91 million gallons. The increases between periods were primarily due to the addition of several LA MTA stations, several stations for republic and other new refuse customers, few additional airport stations and the new LNG customers we obtained with the Northstar acquisition.

For the quarter revenue increased to 72.1 million from 45.7 million. INW contributed 12.5 million of the increase. Northstar contributed another 1.9 million of the increase and BAF’s revenues were down 3.1 million between quarters to 6.2 million for the period.

For the first nine month of 2011, revenues increased to 226.5 million, up from 128.7 million a year ago. On a non-GAAP basis for the third quarter, we reported a loss of $0.11 per share. This compares with a non-GAAP loss of $0.10 per share in the third quarter of 2010.

For the first nine months of 2011, our non-GAAP loss per share was $0.26 per share and $0.23 per share in the prior period. Our net loss on a GAAP basis for the third quarter was 11.4 million or $0.16 per share, which included a non-cash gain of 1.5 million related to valuing our Series I Warrants, a 1.7 foreign currency loss related to the issue to purchase INW and non-cash stock based compensation charges of 3.2 million.

This compares with a net loss of 1.8 million or $0.03 per share in 2010, which included a non-cash gain of 7.9 million related to valuing our Series 1 Warrants and non-stock based compensation charges of 3.3 million.

For the first nine months of 2011, our net loss on a GAAP basis was 26.7 million or $0.38 per share and included non-cash gain of 3.1 million related to valuing the Series 1 Warrant, a 1.3 million foreign currency loss related to the notes we issued to purchase INW, and non-cash stock based compensation charges of 10.1 million.

For the first nine months of 2010 our net loss on a GAAP basis was 16.3 million or $0.27 per share and included a non-cash gain of 5.9 million related to valuing the Series I warrants, non-cash stock based compensation charges of 9.2 million and an AMT refund of 1.3 million.

As I mentioned before, but I want to be clear, the Series I warrants 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 the warranties each period due to certain anti-dilution features contained in the warrant. The non-cash charge increases or decreases each period based primarily on increase or decrease in our stock price during the period.

We will need to continue to devalue the warrant in each period and record a non-cash gain or loss until they’re exercised or they expire, which is May 2016.

Adjusted EBITDA in the third quarter of 2011 was 1.8 million which compares to a loss of 600,000 in 2010. For the first nine months of 2011 adjusted EBITDA was 6.6 million compared to 1.8 million last year. The first three quarters of 2010 do not include any Volumetric Excise Tax Credits or VTAC revenue, as VTAC expired on November 31, 2009 and was not reinstated until the fourth quarter of 2010 when it was made retroactive to January 1, 2010. VTAC revenue for the third quarter and the first 9 months of 2011 was 4.3 million and 11.9 million respectively.

Adjusted EBITDA and non-GAAP EPS are financial measures we developed to highlight our operating results, excluding certain large non-cash or non-recurring charges which are not core to our business including the amounts we are incurring for the Series I warrant valuation, foreign currency gains or losses related to our IMW purchase notes and our stock based compensation charges for our options. Adjusted EBITDA and non-GAAP EPS are described in more detail in the press release we issued earlier today.

Our gross margin this quarter was 19.3 million, which compares to 12.1 million in 2010. For the first 9 months of 2011 our gross margin was 56.4 million compared to 37 million. Our margin per gallon on a fuel sales this quarter was $0.24 per gallon, which is consistent with the past two quarters.

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

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions) Our first question is coming from the line of Mr. Rob Brown with Craig-Hallum. Your line is now open. You may proceed with your question.

Rob Brown – Craig-Hallum

Good afternoon. Just wondering if you can give us a little more color on the customers you’ve brought to the table since America’s Natural Gas Highway was introduced. I know you gave some NDA disclosures. But people that are under NDA, excuse – can you give us a sense of kind of what these customers are thinking and how this brought them to the table? And then second, maybe how you see these customers rolling out once the structure is in? How should we think about how should that happen?

Andrew Littlefair

Right. Let me – Rob, thanks for the question. Let me try to give you some color on this. And yet some of the information and some of the things we’re working with remains proprietary for us. And the reason for the NDAs is because we’re working with these fleets, and we’re sensitive to their information. So we have to be kind of careful on that.

But just broadly, we’re working both with trucking companies and those companies that contract with trucking companies. The latter is very significant. So we’re working very closely with them, and we’re trying to ascertain the information to give us an idea about where we may need to build infrastructure to augment the National Highway that we’re building and what stations that we might want to prioritize first on America’s Natural Gas Highways, so that they’ll be able to load those more quickly.

So we’re working also with what we call the shipper fleets, but also the trucking fleets, those that are higher, because after all they have very large bases, and they operate a lot of trucks, and ultimately they have to be comfortable that these trucks work and work well.

It’s been very impressive that our offering today with the engines that are coming to the marketplace by the middle of next year and by the – and some of the engines that are already in the market comes Westport product, 9-liter. I think that when you can show the economics – the economics today, that essentially for the 9-liter engine that the incremental cost is coming down to the $30,000 level, $35,000 level, and some of these customers use 20,000 to 30,000 gallons. You’re saving $1.5 of gallon or more. The economics are pretty compelling, and we know from our refuse experience that I talked before, you need to get these fleets comfortable to begin to test, and that’s what we’re seeing.

And so I think since we’ve announced the highway and started to show our plans to these trucking fleets, these shipping fleets we’ve gotten a lot of them from and begin to start the requisite tests. So I don’t know if that’s enough detail for you, but I think that’s all I’m going to give you.

Rob Brown – Craig-Hallum

Right, right. No, that’s helpful. Thank you. And then I know you mention the Covanta deal. Could you just give us a little more sense there of how you’re working with the landfill gas business, are you trying to get that to grow?

Ina McGuinness

Covanta is a very large company, as you know and they’re very sophisticated in handling waste to power and operating these landfills. So we’re very excited about that potential, working with them, and they are as well. We’ve actually are working to review many of their sites to see if they’ll work quite like the one in Newark.

In Newark, they have about 400, 500, 600 trucks a day comes to their facility; and by building the station there on natural gas, we’re able to begin to have fleets that maybe aren’t large enough in themselves to add their own station; but they go back and forth to that particular Covanta site every day, switching to natural gas.

So we see them as very important hubs; and Covanta is very aggressive, and they want to move their facilities as best they can into natural gas as well, because they can see that it will help – in the areas where they operate, it will help them to attract more trucks and, therefore, more fees; and by having the cleaner trucks, it helps their business as well. So it looks to be kind of a win-win situation. We’re starting our first project with them, and we hope to expand.

Rob Brown – Craig-Hallum

All right. Thank you.

Operator

Thank you. Our next question is coming from the line of Mr. Graham Mattison with Lazard Capital Markets. Your line is now open. You may proceed with your question.

Graham Mattison – Lazard Capital Markets

Hi. Good afternoon, guys.

Ina McGuinness

Hey, Graham.

Graham Mattison – Lazard Capital Markets

Just a follow up on the question about the MDAs. So the 40 companies with an MDA – they do about 2.8 billion gallons of fuel a year. Is there anything in – how does it work from your standpoint? Is there a follow-on contract with it or are there any sort of contractual terms that locked them into using you as a fuel provider?

Ina McGuinness

All right. So every deal is going to be a little different, right, Graham. In some cases these fleets are going to want us to build stations at locations, and some places we’ll sign long-term contracts to fuel at the – quote, unquote – ‘public LNG stations on America’s highway.’

So they’re all a little different. The reason for this is to be able to see what it is that they need, so that we can move forward, and that’s about really all I can say; but each of these will be a little different depending if they want their own fueling stations and depending on their lane landing.

Graham Mattison – Lazard Capital Markets

Gotcha. And then just a question on the political side. Do you have any outlook in terms of the have VETC? I know that’s due to expire at the end of the year, the outlook for that being extended into future years or is it still the goal to get that rolled in when that gas comes?

Ina McGuinness

As you know Graham it’s the VETC, the fuel credit, is invented in that gas act. I think you’re also probably aware that the VETC, which is current fuel credit for our ethanol friends is under heavy pressure. And it also expires at the end of the year, and of course, you’ve probably seen what I have, that the ethanol lobby is working to try to extend the ethanol credit.

There’s been some talk about eliminating it. There’s been some talk about extending it, but at a lower rate. So, we’re in there working with the various skill providers. We’re obviously – we have it in the net gas act. We were working with those members that are working on VETC extensions on a different extender-type bills.

But Congress, as you all know, is really consumed right now with the super committee and those things, and seems like they have a hard time focusing on a lot of these things as once. So, I think, you’ll have to get by the super committee and that before you’re going to see how the end of this year shakes out. There will be many kind of bills that need to be passed to extend certain spending of government. And obviously we’d like to see the VETC included in that. But I think we’d be foolish in today’s current environment to think that the VETC is going to have clear sailing either.

So, we obviously hope that it will end up being in pieces of the net gas act, again, adopted later. But we are also know that certain other of the industries really needs to have to have the VETC. And I would say, in our business, the VETC isn’t as important as other – as for instance the vehicle it’s in.

Graham Mattison – Lazard Capital Markets

Got you. All right. Great. That’s very helpful. I’ll jump back in queue. Thank you.

Operator

Thank you. Our next question is coming from the line of Mr. Brian Gamble from Simmons & Company. Your line is now open. You may proceed with your question.

Brian Gamble – Simmons & Company

Good afternoon, guys. On the – want to walk through the station build-out and the potential to accelerate that. Obviously you’ve got two different paths, your traditional one and then the highway deal. Can you do more bolt-ons like you recently bought the construction firm? Can you do more bolt-on like that to up your adjustability to build a station faster? You’ve obviously got the cash to move a little quicker at this point? What is your current view on that?

Andrew Littlefair

Well, we’ve bolted some stuff on that. We have to expand our capability. For instance, we brought Northstar on and by having INW giving us a lot better ability to be able to fall on compressors and get those designed and brought to market faster. And obviously without Northstar, I think, would have been very difficult position to be in. So we’ve done some things. We now have our engineering and construction, operations team that’s getting close to numbering 300 people.

So we’ve dramatically increased our capability. Now where I sit today, it looks to me like America’s Natural Gas Highway will be somewhere around 60 odd stations next year by the end of the year, and that your sort of traditional market stations will be somewhere in that number as well. So you kind of go from last year, 45 stations to something in the high 60s this year to next year being closer to 150 stations. That’s building a station every two days.

I don’t know that we should expect that we can dramatically ramp that up, but I am putting a lot of pressure on our construction, and that’s why we bought weaver electric, to beef-up our internal resource capability. Brian you might be able to get another 15 or 20 build. I don’t know that you can build another 150 or 100 something. It’s true I don’t know that you need that many next year. So, we don’t want to have a lot of stranded stuff out there. I think we’re doing it as quickly as you want to at this time.

Brian Gamble – Simmons & Company

You’re definitely wrapping it up. That’s a good decision in relation to the 2 billion in fuel and 40 customers. Seems like if you had more in place the discussions might move along quicker, but not the fault of your current track record. I think it’s accelerating admirably.

Andrew Littlefair

Brian I do think you’re on to something. If it goes the way we think it’s going to go, you need to be our company, and others will be there as well, but our company needs to be in a position in 2013 and 2014 to be building a few hundred stations a year. And that’s what you’re going to need.

Brian Gamble – Simmons & Company

Yeah. No. I agree with that completely. I wanted to touch on the legislative side, but I think you’ve pretty much already hit it. If you had to pick today between – between the definitive solution that ended up not going in your favor and the gas getting pushed out further and eliminated for now versus this continual just uncertainty, do you think your customers would see a conclusion even if it was negative as a positive?

Andrew Littlefair

I know where you’re at. We’re not waiting for the net gas. And really Wall Street is focused on it, and you guys are often pretty focused on it, and some other pundits are really focused on it. The refuse sector has gone from 20% to this year 40% of all vehicles purchase will be natural gas.

And so, people keep an eye on it. We’re not totally preoccupied on it. I don’t think it’s as big a chilling effect as some people think it is. I think the incentive would be helpful and it would expedite this business. I don’t think there’s any doubt about it. But the business is not going to wait. It’s going to move ahead.

And you’re going to see some rather large announcements from some pretty big fleets in the coming months. Look, when they figure out they can save. When they figure out they can save a dollar on half a gallon, they don’t need the federal government really at this point. It would move the business along faster. It would probably bring more manufacturers into the business, but the industry is not waiting for us. It’s going to move without it. So I would say, the way I think the industry – and there were some protocol today for industry association on this point.

We’re going to support the effort of what’s happening in the senate, and we’re going to walk through here over the next several months and see how it goes and the end of this year and into the next Congress, and my guess would be if for some reason the Nat Gas Act cannot make its way through the legislative calendar, before we get to the presidential campaign season here in six, eight and nine months now, if we’re not any further along than we are now, you probably won’t hear us talk much more about it.

But I tend to think that that they are going to try to do something on this. So we’re not going to give up at this point. And you know that as I look at pieces of the Nat Gas Act, I really want the vehicle incentives. So I’m not as hung up on the fuel incentive as on the vehicle incentive.

Brian Gamble – Simmons & Company

Perfect, Andrew. Thank you.

Operator

Thank you. Our next question is coming from the line of Mr. Steve Milunovich with Bank of America Merrill Lynch. Your line is now open. You may proceed with your question.

Steven Milunovich – Bank of America Merrill Lynch

Hey, Andrew on those – the 92 stations in development for the natural gas highway, are those all at Pilot Flying J facilities, or what percentage of those are?

Andrew Littlefair

No. They’re not all, Steve. I’m kind of doing this by – I think of the 92, 23 right now are still to be determined that aren’t. Most – so what that’s math. 69 of them – 66 of them I think are Pilot Flying J. There’s still 23 where we’re working that out. Some of them might end up being a Pilot Flying J, and some of them won’t be probably, and that’s not because we don’t want them with them, it’s because particular locations where we need one because of the customer information that we’ve obtained. They may not – they may have something small or for some reason it just doesn’t work. So the majority so far clearly over 60 – probably two-thirds of them are Pilot Flying J, but not all.

Steven Milunovich – Bank of America Merrill Lynch

And how do you approach the build-out? You indicated that some customers may want certain stations in certain places. You had that map, I think, showing potentially a station every 250 miles. Alternatively, you could just build out a particular corridor in a fairly big way and sort of demonstrate that this works for a couple of customers. How do you think about that?

Andrew Littlefair

Yeah. So we’re going to do both, right. We think for the truck dealers and the trucking companies that do move across the country and the goods, the certain percentage that does move across the country, we think once and for all that there is enough business to put these corridors across the country. Now, keep in mind that really you should think of these trance continental corridors as almost more regional corridors, because often some trucking fleets will just use them in the Southwest or the Southeast or in a portion of Texas.

But we’re not going to build those national corridors. What you’re going to do is as you work with these other companies. You’re going to see two or three nodes, either distribution centers they have or plants that they have, that also tie into the national corridors, and I kind of think of it like in the oil field as infilling.

So you’ll put these corridors in place here over the next year and a half, get that opened up so the country really can – you really can move a truck across the country. In the meantime you’re going to begin to in-fill that with these more customized fleet focused approaches. That will also tie into the national corridor.

Steven Milunovich – Bank of America Merrill Lynch

Okay. And could you comment on the Westport/Shell relationship and generally how you see potential competition and if you’re likely to work with any of the LNG engine or truck companies as a tandem sales approach?

Andrew Littlefair

Well, we are working with several of the truck OEMs now. We don’t have anything that we can announce at this point but we have very – in fact, we have one of the major OEM truck companies in resale division is in truckers from right around the corner (inaudible) about an hour ago. So we are working with all of them on how we can help work together and some of the large OEMs have lease facilities where trucks come and go.

We talked about fueling them, et cetera, et cetera. We’re working with them to make sure that there’s a great understanding about how CNG is going to work and how LNG is going to work. So as we roll – they roll their product out, we’re working with them. We’re also working with them on the desk on the customer trials right now. So we have a very good relationship on it. Many of the trucking companies really don’t – I would say the OEMs, they’re into just doing an exclusive with a fuel provider like us, since there’s so many fuel providers. But we have a very good working relationship with all of them. Now the first part of your question I kind of forgot.

Steven Milunovich – Bank of America Merrill Lynch

Shell – competition.

Andrew Littlefair

Yeah Shell. We have talked to Shell and I made a presentation with several of my management team went to their world headquarters in Houston and did a speech about our natural gas and LNG stuff to all of their LNG supervisors that came in from around the world. As I understand it, the relationship with Westport is going to start out mainly focused in Canada and that Shell is going to build LNG production plant there. In my subsequent conversations with Shell, which I’ve had, I have tried to ascertain how we might work with them.

And I think there’s a potential on that. Shell today, as I sit here, obviously Shell has got a lot of natural gas and a lot of capability. But they don’t really have a lot of LNG, so that’s available here in the United States to go to a trucking fleet. So I think there’s maybe ways for us to work together as they begin to try to refine their plan.

Steven Milunovich – Bank of America Merrill Lynch

All right. And finally, are you still counting on the warrant conversions from T. Boone this year and how does that impact your build-out plan?

Andrew Littlefair

Right. So I still have no reason to believe that Boone won’t exercise those warrants. And of course, I believe he intends to do, it doesn’t mean he has to; but I think he will. And, as you know, those will expire at the end of the year. We’re sitting here currently at somewhere between 225 million in cash and 250 million in cash. So I think we’re fairly well funded. Boone’s warrants will bring another $150 million in. And I think that really goes a long way to help us do get through 2011 and well into 2012. And be able to do the things that Brian was talking about and even expand the highway or the national highway more.

Ina McGuinness

And so we got another 50 coming from Chesapeake in the June of next year and June of the following year as well, so that will play into the mix also.

Steven Milunovich – Bank of America Merrill Lynch

Right, Rick. Thank you.

Operator

Thank you. (Operator Instructions) Our next question is coming from the line of Mr. Eric Stein with Northland securities. Your line is now open. You may proceed with your question.

Eric Stein – Northland securities

Hi, guys. Thanks for taking the questions.

Andrew Littlefair

Hey, Eric.

Eric Stein – Northland securities

I was just wondering if we can just quick bookkeeping if you could just break down the volumes CNG, biomethane and LNG and then also provide the number of up-fits in the quarter for BAF.

Andrew Littlefair

Sure, Eric. CNG was 26.8 million; LNG was 12.3 million; biomethane was 1.8 million. That will get you there 40.9, and BAF did 406 conversions. Thank God we got that is last one in there to get to north of 405, and that’s it.

Eric Stein – Northland securities

Okay. Maybe just focused on BAF – well, so the AT&T, it sounds like you – a recent contract for 1Q for next year. Maybe just give some context into what levels with AT&T have been this year? I mean, does that signify to you that they’re ramping their program and that it may get back to what it looked like in 2010?

Andrew Littlefair

I don’t want to put words in AT&T’s mouth. But as you know I think I talked enough about the fact they were off of their – you go to give them credit, right? There’s not any police in America that have added 4,000 nitrous vehicles to their fleet over the last couple of years, so kudos to them. They’ve slowed up a little bit this year on their – on what has been their path at least with us, and I think in general, I think they went from cutting about almost about 2,000 vehicles to something substantially less than that.

But all in all, we’ve worked closely with them to work on mobile fueling solutions for them. We actually certified some other models that they wanted to have. They actually has gotten impressive – their CEO, Randall Stephenson, took delivery of a Transit Connect in Houston, and drove it around, and the next thing you know they were at 672 of those. So, that’s pretty strong. We have every reason to believe that they’re kind of going to get back on track to do the couple thousand more – I guess it was 2,500?

Ina McGuinness

It’s about – AT&T did 1,800.

Andrew Littlefair

1,800 is kind of where they’ve been, and we think that they’ll be back on that track. In addition you have this other 607. So we actually see them kind of knock on wood, we see them ramping up for next year.

Eric Stein – Northland securities

Okay. And then maybe if you can just talk about how that business has involved as far as diversifying. I mean, clearly this year has been a lot outside of AT&T, just how that looks maybe versus...

Andrew Littlefair

No. Our history – I mean, I’ve worked with BNAF, I don’t know 10 years ago, when they were called something else. And it was a good month when those guys did seven taxi cabs or something, and they have really stepped up their quality control. They train Ford fleets for dealerships all across the country. They have the relationship with Napa High and some of these other very large vehicle conversion companies that do sort of one-stop conversions for vehicles with this steel well and some of the others, so they train those. They’re using dealer networks. They are ISO 9000 compliant. They’re the first QBM, gas QBM by Ford. We bought ServoTech. And so we went from buying EMCo systems and doing our own. And now we’re using all of our own under the hood component, has all been carved certified and also EPA certified. So their capability has been – has grown dramatically. And this year, because we lost some of our – couple of our big customers, Verizon, our order and AT&T orders substantially off.

We replaced a lot of that and/or biggest year ever other than having the AT&T year. So we’ve had to go on the road and so in municipalities and other customers. And I think we’ve done a pretty good job. We have a full complement of four vehicles now from a 150 to a 550, dedicated natural gas.

We’re also looking into some GM platforms and a Chrysler platform. So we’re going to expand the offering. And remember, Eric this is an year when you didn’t have any vehicle tax credits, which is a big thing for an incremental $15,000 ban. Now it’s a big deal on a $300 trash truck where the incremental is down $10,000. But on a taxi cab or transit connect, the way we’re doing them so far, that was a big change in the marketplace.

Ina McGuinness

One thing that’s nice, if you pull out the AT&T and Verizon business, if you look at the other business, it’s actually up between periods. So they’ve done a nice job of catering other customers, adding on new products and working on additional products by fuel, take your engine, all kind of different shuttles and such. So the business is actually doing pretty well. If we can get AT&T, Verizon, some other states back in the mix, we’re looking forward to the 2012.

Andrew Littlefair

Yeah.

Eric Stein – Northland securities

Okay. That’s helpful. Last one for me, just if you can comment how the mix is shaking out in the station pipeline between OEM and fuel supply. Thanks a lot.

Andrew Littlefair

I think a majority – the vast majority on fuel supply. I don’t have the exact number, but I think rough magnitude that’s right.

Ina McGuinness

Right. I mean, your America’s Natural Gas Highway, virtually all of that’s fuel supply. You have some of your big refuse customers where it’s an O&M and of course some of our transits that came on board are O&M. But I would say it’s all heavily – it’s all heavily skewed toward fuel supply. Did we lose our call?

Operator

Actually we have another question coming from the line of Mr. Pavel Molchanov with Raymond James. Your line is now open, you may proceed with your question.

Andrew Littlefair

Okay.

Pavel Molchanov – Raymond James

Yeah. Thanks very much. A quick one if I may. I guess this is a little more conceptual. On the earlier question that alluded to Shell and West Board collaborating. How far are we from moving towards the consumer market for NGVs in this country? Because clearly the conversation that we’re generally having revolves around fleets, almost entirely. I’m curious your thoughts on the retail opportunity and what the time lines for that may be.

Andrew Littlefair

As you know we tried to stay focused on the fleets, because that’s what we have today, and we think that’s the kind of low hanging fruit. Something still tells me that we’re in a country that’s importing 60% of its oil. And that you’re starting to see $4 gasoline again. And when you don’t even really have a real good robust economy anywhere in the world. And when the automakers can produce 62 makes and models in Europe of natural gas vehicle and we’re a country that has the most natural gas reserves of any country in the world, something tells me that eventually –

Ina McGuinness

Somebody has got to put that together.

Andrew Littlefair

Somehow that all comes together, but I don’t know when. It is not rocket science to make these on natural gas. General Motors alone makes 14 vehicles in different parts of the world. So I don’t know, Pavel, I really don’t like to talk about it. People that go net me like I’m off in someplace I shouldn’t be, but I think some day it’s going to happen.

And I just don’t see why it won’t. I think it will. But I don’t know if you’re two years out or three-and-a-half years out. We know that the Chrysler CEO said he’s going to bring some models, and we know that GM has a pickup and a van that they say they’re going to bring more into factory. So I just don’t know – and I don’t know how the electric thing goes. I’m for all of these different technologies; but I don’t know if the electric experience is going well or not. So, I think you’ll look at this. . You might be surprised to begin to see some options creep into the lineup. I have a feeling it’s a few years out still.

Pavel Molchanov – Raymond James

Okay. Appreciate the color on that. A quick follow-up if I may. As you’re axle berating the build-out of the network with new capital, are you running into any additional permitting issues that perhaps you were not encountering as you were, you know, running at a slower pace in terms of your build-out?

Andrew Littlefair

Well, permit sag big deal, and entitlements are a big deal; and as we’ve been working with our friends in pilot in the truck stop world, yeah, we’ve had to kind of come up to speed with maybe a little bit different capability on entitlement, and so, therefore permitting than we’ve kind of saw in the old days here in Southern California where we were counting on everybody familiar with it. So you are putting stations in places where it’s not quite as familiar. I think we have 150 fueling stations in Southern California. So, fire marshals know about it, and permitting people will know about it.

I don’t think it’s a big deal. So we bull you could up on the permitting, and we actually have three companies helping us do the entitlement work. I think we have it in hand. We’ve had to beef up a little bit to be able to do it. Now, we do – it’s not something – it’s not a one week.

You don’t just go and pull the papers in a week. It does take longer. It’s a throw these-month six-month permitting process at a minimum. Some places the entitlement work is a year. It would be a year to date to put at a truck stoplight or two years. So, not easy to build stuff in this country as it turns out.

Pavel Molchanov – Raymond James

Understand. Appreciate the color, guys.

Andrew Littlefair

Thank you.

Operator

Thank you. Our next question is coming from the line of Mr. Rupert Myrr with National Bank Financial. Your line is now open. You may proceed with your question.

Rupert Myrr – National Bank Financial

Hello everyone.

Andrew Littlefair

Hey, Rupert.

Rupert Myrr – National Bank Financial

For the LNG stations you’re building on the highway, what’s the design capacity of the stations initially? If you could let us know how much fuel they’ll be able to design to deliver and how easy it is to entail them up.

Andrew Littlefair

We’re kind of starting them up. We have a standard design, which would be a 1,000 gallon tank, space for another 15,000 gallon tank. Normally one island that has a couple of dispensers and maybe two to four hosts. That’s sort of the bare-bones approach that we’re using to start. With now, that configuration will have a – I would say doing very well, can deliver – certain has the capacity to do between 3 and 4 million gallons a year.

Rupert Myrr – National Bank Financial

Okay. Great. So if things...

Andrew Littlefair

Yeah. After 3, 4 million, you’re going to need to probably – because of the queuing, probably not because of any other reason, just because you get that many trucks through that capacity, you’re going to have to start then augmenting out their other islands. That is sort of the (inaudible) and you’ll be able, because you’re designing it, to be able to put that other extra 15,000 gallon tank in. Eventually you’ll have enough fuel on-site, but you’re going to have to do some plumbing to again get put – re-plumb some other island.

Rupert Myrr – National Bank Financial

And what does the cost look like to scale up then? Is it going to be much less? I imagine the permitting work will be less?

Andrew Littlefair

Yeah. There will still be some permitting as you expand, but it will be less. It will be more civil stuff. You’ll be Jack hammering up, putting in some piping, you’re probably do it overhead rather than underneath, because this is cryogenic stuff and I don’t think it will be that difficult. It’s not – it won’t have – we’ve talk about this being a $1.5 million. I don’t know, I’m kind of guessing here, to put in another island is $500,000, and dropping it in the tank is another $200,000 for another tank. So you kind of double the station for $700,000 compared to the original cost of a 1.5 million and be in that sort of range.

Rupert Myrr – National Bank Financial

Excellent. Thank you. And if things go to plan, how long before you would be looking at increasing your LNG production capacity?

Andrew Littlefair

Well, we’re doing that now, right. And we didn’t talk about it today; but we are moving forward on our third train at WORON. We have a crew now working on LNG supply in different parts of the country. So, you know, if this goes the way we think and we build 100 stations here in the next 18 month or so, and if we do our job right, and eventually those are doing as you and I just discussed, three million gallons or four million gallons that means you just added 400 million gallons of LNG over the next few years, you’ll need more LNG. So we’re busy at work on that. We’ve ordered some, getting ready to order some more trailers and we’re working with LNG partners in various parts of the country.

Rupert Myrr – National Bank Financial

Is there any risk that can become a bottleneck for you, or do you think, you can...

Andrew Littlefair

Sure. It’s been for past fiscal, we sort of think there’s sort of need (inaudible) I’m an sold salesman, right but this is sort of an easy – not precise. I think that’s a billion gallons of LNGs were there to be had, and that’s pretty easily accessible, maybe even 1.5 billion gallons.

Now you’re going to have to do some stuff to get that. You’re going to have to do some truck loading facilities and do some stuff. But that – you have that now. When you start – when we start talking and I fully expect this to happen. When you begin to – you talk that – remember we talked before. You take that refuse truck adoption rate and you apply that starting in 2012 or so to the nation’s Class 8 trucks and that tells me then four or five years, you need 3.5 billion gallons.

And so to get there, you’re going to need more LNG. But it’s there already and you’re just going to need to work with the gas producers to begin to put in cryogenic facilities to produce more LNG. Up until now you haven’t needed it, so you haven’t done it. But that’s what you’ll do. And I think you’ll have enough visibility and enough timing to get that done.

Rupert Myrr – National Bank Financial

Great. Thank you very much.

Andrew Littlefair

Thank you.

Operator

Thank you. Ladies and gentlemen, our next question is coming from the line of Mr. Eric Stein with Northland Securities. Your line is now open. You may proceed with your question.

Eric Stein – Northland securities

You know, actually all of my questions have been answered. Thanks.

Operator

Thank you. Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the floor back to management for any closing comments.

Andrew Littlefair

All right. Thank you, Operator. Let me close today’s call by saying that we will continue to stick to our meeting. As of today we have more station development and vehicle projects underway than ever under the company’s history. We are, in fact, setting a record for station completion this year with growth across all of our target markets.

One of the many great aspects of our business model is that we do not – that we are not rely on one-time sales. These stations will be selling fuel for a long time into the future and growing volumes for the next 10 to 20 years.

We will continue to work on station expansion as well as on driving same-store sales growth where we can, and we have the subsidiaries in place, the sales force in place, the partnerships and resources aligned, and we’re very focused on what we’re seeking to achievement.

I want to thank you for your continued interest and we look forward to reporting to you on our progress on the next call.

Operator

Ladies and gentlemen, this concludes today’s teleconference. You may disconnect your lines at this time. Thank you very much for your participation and have a wonderful afternoon.

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