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Clean Energy Fuels Corp.(NASDAQ:CLNE)

Q4 2007 Earnings Call

March 17, 2008 4:30 pm ET

Executives

Ina McGuinness - ICR

Andrew Littlefair - President and Chief Executive Officer

Richard Wheeler - Chief Financial Officer

Analysts

Sean Boyd - Westler Capital Management

Marvin Loh - WR Hambrecht

Rupert Merer - National Bank Financial

Ron Oster - Broadpoint Capital

Brian Gamble - Simmons and Company

Robert Brown - Craig Hallum

Operator

Good afternoon ladies and gentlemen and welcome to the Clean Energy Fuels fourth quarter earnings conference call. (Operator Instructions) I would now like to turn the conference over to Ina McGuinness with ICR. Please go ahead.

Ina McGuinness

Thank you operator. Earlier this afternoon, Clean Energy released financial results for the fourth quarter and year ended December 31, 2007. If you have not received the press release, it is available on the Investor Relations section of the Company’s website at www.cleanenergyfuels.com. This call is being webcast and a replay will be available on the Company’s 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 consists of forward-looking statements that involve risks, uncertainties and assumptions that are difficult to predict, words and expressions reflecting optimism and satisfaction with current prospects as well as words such as believes, intends, expects, plans, and anticipates and similar variations identify forward-looking statements, but their absence does not mean that a 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 quarterly report on Form 10-Q filed with the SEC on August 14, 2007 and November 13, 2007. 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 to reflect new information, events or circumstances after the date of this release.

Participating on today's call from the Company are President and Chief Executive Officer, Andrew Littlefair and Chief Financial Officer, Richard Wheeler and with that I would like to turn the call over to Andrew Littlefair. Andrew?

Andrew Littlefair

Thank you Ina and good afternoon everyone. We are pleased to have you join us as we report on our fourth quarter and year end financial results and update you on our progress.

We had a good first year as a Public Company. We grew our customer base across the country, added talented personnel and began to expand our operations internationally.

There’s a lot changed today with energy, fuels and goods movement and looking back at 2007 we saw the medium and heavy-duty transportation industry go through a significant transition period. During the year they had to deal with operating challenges and expenses of new diesel engines that had to meet the 2007 federal emission standards and they saw the overall price of diesel fuel increase significantly.

With these changes combined with more stringent 2010 federal emission standards that are around the corner we believe that many fleet operators are beginning to take another look at their use of diesel vehicles. Subsequently we see 2008 as a year in which Clear Energy will lay the ground work for improved growth in 2009.

Operator

Time out on the Clean Energy call, we’ll be back.

Andrew Littlefair

This is not our people, so I don’t know where this is coming from.

Operator

Ladies and gentleman we are experiencing technical difficulties, one moment please. Ladies and gentlemen we do apologize for the technical difficulty. Gentlemen please continue with your presentation.

Andrew Littlefair

Well sorry about that everyone. I hope you are still with us. That was disconcerting, but where I was headed was that there is a lot of changes there with energy, fuels and goods movement and looking back at 2007, we saw the medium and heavy duty transportation industry go through a significant transition period.

During the year they had to deal with operating challenges and expensive new diesel engines that had to meet the 2007 federal emission standards and they saw the overall price of diesel fuel increase significantly. With these changes combined with the more stringent 2010 federal emission standards that are just around the corner we believe that many fleet operators are beginning to take another look at their use of diesel vehicles and consequently we see 2008 as a year in which Clean Energy will lay the ground work for improved growth in 2009 and 2010 as we continue to spread our message; natural gas is a cleaner, cheaper and domestic alternative to diesel and gasoline.

As an illustration of our increasing business activity let me highlight the growth in our station construction. In 2007 for the entire year we built or upgraded 20 stations and here in the first quarter alone of 2008 we have 20 stations in various stages of construction. So as you can see we are preparing for expected, strong future growth. Our station growth is supported by the continued improvement in natural gas economic advantages over gasoline and diesel. We saw this trend continue in 2007, particularly in the latter half. As we all know trends have continued in 2008 as oil has recently touched a $110 per barrel. Last time we spoke the average pump price of diesel was $3.50 per gallon and last week, diesel was more than $4 per gallon in many areas around the country and we have seen it as high as $4.59 in California. At the same time, we are seeing LNG, at our LNG station we recently opened near the ports of L.A. and Long Beach for $2.99 per gallon.

Gasoline in Southern California averaged $3.54 per gallon last week and at the same time, the pump prices of Clean Energy CNG stations in the L.A. area was $2.79 per gallon.

With these types of savings it is possible for our refuse and transit customers to save any anywhere between $8,000 to $15,000 a year in each of their vehicles. These economics are very compelling to fleet operators and will help us expand our customer base in the years to come.

Now let me recap some of the key items that we accomplished in 2007. Turning to the progress of the ports of Los Angeles and Long Beach which are the two largest container ports of the United States, several major milestones were reached. First, the ports approved the container fee that they estimate will generate approximately $1.6 billion over five years for the replacement of a substantial portion of the current truck fleet. Following that last month, the Port of Long Beach approved its portion of the Clean Air Action Plan and in this plan, they specifically reference natural gas as they state that they will require to quote no less than 50% of the drainage trucks be replaced within five years by alternative fuels proven to be cleaner than diesel such as liquefied natural gas. This represents a potential of more than 8,000 LNG trucks. That number is larger than we previously anticipated.

In December, we opened the first major LNG truck fueling station adjacent to the port complex. Within the next 18 months, we expect to have up to five LNG fueling stations completed to support fueling needs of the ports and regional haulers. These five stations combined will be able to dispense more than 125,000 LNG gallons per day to 1,800 trucks and that’s about 45 million gallons per year.

Notably one of these five stations will be the largest LNG station ever constructed, an LNG truck stop if you will with ten lines. This is important because in February, the contracts were approved for the first 158 LNG trucks and will begin replacing the diesel trucks in the ports. We are eager for the next announcement for the ports as to their next round of implementation of clean trucks as they continue to execute on their clean truck program.

In short, this is a big opportunity for us. In order to meet the demand for LNG trucks the ports we were happy to see that Kenworth announce in January they will begin producing heavy duty class A trucks on their factory line. Production of these vehicles will go a long way in assuring an adequate supply of LNG trucks to meet the convergent timeframes of the ports.

Now let me give you an update on the construction of our large-scale LNG production plant in California. This plant is designed to meet the future fueling demands of the port trucks as well as demand from fleets in the Southwestern United States. Construction is well underway at the plant. The 1.8 million gallon storage tank is nearly completed and the coal boxes are installed and the compressors are onsite. So we are on track to start commercial production in August/September timeframe.

In November of 2007 we also signed an LNG sales agreement with Spectrum Energy Services. The agreement allows us to purchase on a take-or-pay basis over ten years, 16 million gallons of LNG per year from a plant in Arizona that Spectrum is building. We are bullish on the growing demand for LNG as a fleet fuel and therefore we are ramping up supply to meet the anticipated demand.

Let me mention some of our highlights in our target markets. Airports; At LAX we are expanding our station to accommodate 67 new 40 foot airport terminal buses. This will add 35% to 40% volume per year to our current business of LAX and that’s over a million gallons annually. We are recently been ordered a station that will serve Atlanta’s Hartsfield Jackson airport. The base load for this station includes Atlanta area transit buses as all those shuttles and refuse trucks and they too plan CNG terminal buses and shuttles. We are in negotiations with it on top -- Ontario Airport which is part of the LA world airports and they have mandated CNG to fuel shuttles, terminal buses as well as taxi and shuttle vans.

Taxi’s in San Francisco, Mayer Newsom just announced the new taxi program whereby new taxies going into service in San Francisco must either be hybrids or natural gas beginning June 1, 2008. We expect this will generate up to 300 natural gas taxi editions per year for the next four years. In several markets we are seeing strong interest in the limousine black car market. Black cars or typically sedans are unlike in town cars. In the last quarter 25 have been deployed in LA and New York. This is a new market for us, but several large financial institutions are interested in reducing their carbon food print and the black car fleet is an opportunity to do so.

Refuses; as I have said to many of you this is an exciting market for us. In 2007 we expanded our sales effort for refuse and with the compelling economics it’s paying off. We are in discussions with refuse companies and a significant number of subsidies in the United States. Literally we have proposals and advance negotiations with dozens of companies in more than 20 states. These Companies represent ten’s of thousands of vehicles. These refuse companies replace about 10% of their fleet per year. So it starts out modestly but deals to be very strong.

Our job in 2008 as it was in 2007 is to get as many of these fleets starter on the program as possible and we have a targeted sales program underway now from municipalities as well as private haulers. In 2007 and early 2008, we have new refuse skilling relationships with CalMet services where disposal consolidated services, Amador Valley Industries after it’s disposal, Burtek waste in the city of San Antonio our recent success story for natural gas refuse trucks with BCL. The city recently awarded two private haulers contracts requiring 65% of their fleets to run on CNG.

But we have great optimism for this segment of our business and on a related refuse business note; we just signed the contract with Nationwide Environmental Services, one of the Southern California’s largest private street sweeping contractors. They have deployed 36 new CNG street sweepers for contracted cities in L.A and Orange County’s. By-the-way street sweepers burn about 6,000 to 7,000 gallons of fuel per year.

Finally transit we are awarded a TNGC station contract for up to 200 shuttles going Orange County transportation authority and in the greater Phoenix area we expect more than 70 new additions and at least 50 in San Diego and 50 in El Paso. On average these trends of buses use about 16,500 gallons of fuel per year, so these three trends of properties alone are expected to burn about 3 million gallons of CNG once they are fully implemented.

On the international front we have approved the joint venture that I mention on our last call. Gas is now flowing at our first CNG station in the joint venture and it’s about to open as it is in the final commissioning stages. This station which we believe is a largest in the world with 32 fueling hoses located at taxi fleets and transit buses. We estimate demand for CNG at this station will eventually reach more than $5 million gallons per year as the Peruvian government continues to support natural gas, the transportation fuel in their country. We are now working on other station opportunities in Lima.

In the last year 2 million NGV’s have been added world-wide. So we continue to look at other international opportunities to supplement our domestic initiatives in key regions around the world. One of our senior executives just got back last week from India, Thailand and Hong Kong. So right now we are assessing which markets are appropriate for us to see how they might fit into our plans.

Before we turn it over to Rick, I want to talk about some potentially significant developments in the public policy arena. Here in California, the Attorney General recently approved the title and summary for a $5 billion bond initiative called the California Renewable Energy and Clean Alternative Fuels Act and that should go on the ballet before the California voters this November.

The initiative is collecting signatures right now and if successful this initiative allocates more than $3 billion for the purchase of 70,000 medium to heavy duty trucks and more than 150,000 passenger vehicles that will run on clean fuels like natural gas. These vehicles present the potential to displace roughly 1.2 billion gallons or 29 million barrels of oil annually. It’s very exciting for us because as you imagine if this initiative should pass and we are supporting it, it will be quite significant for the Company and the industry.

Now I will turn it over to Rick Wheeler to cover our financial results.

Richard Wheeler

Thanks Andrew. For the fourth quarter of 2007, our revenues increased to $29.7 million which is up from $26.7 million in the fourth quarter of 2006. For the year revenues totaled $117.7 million which is up 29% from our revenues of $91.5 million in 2006.

Adjusted margin for the fourth quarter of 2007 was $8.8 million which compares with $8.3 million in the fourth quarter of 2006. Adjusted margin for 2007 was $35.1 million which was up from $21.4 million in 2006.

Our net loss for the fourth quarter of 2007 was $2.9 million or $0.07 per share which compares to a net loss $14.6 million or $0.43 per share in the fourth quarter of 2006. One thing to keep in mind, last year’s financial results includes derivatives losses from our prior hedging practices that we no longer engage in.

Our net loss for the year ended December 31, 2007 was $8.9 million or $0.22 per share which compares to a net loss of $77.5 million or $2.45 per share in 2006.

Non-GAAP loss per share in the fourth quarter of 2007 was $0.02 per share and was $0.43 per share in the fourth quarter of 2006. Non-GAAP loss per share for the year ended December 31, 2007 was $0.04 per share and was $2.45 for 2006.

Our volumes increased to 18.2 million gallons in the fourth quarter of 2007 which is up from the 17.7 million gallons that we delivered in the fourth quarter of 2006. For the year we delivered 75.3 million gallons of fuel to our customers which is up from 68.4 million gallons delivered in 2006.

While historically it has been rare that we lose customers, we did lose two non-core low margin customers in 2007 who accounted for 2.4 million gallons of loss volume in 2007. Factoring this in our volume growth with new customers and projects was 9.3 million gallon during the year.

Concerning our adjusted margin calculations, I think it’s important to note that it will largely go away over the course of 2008 as the vast majority of our fixed price and price cap contracts that give rise to the calculation expired during the year. Consequently, our adjusted margin amount should transition into our actual margin in our statement of operations in 2009 if we are successful in renewing these contracts.

Adjusted margin to non-GAAP which in essence just add the back of our employee related stock based compensation charges, net of related tax benefits to our GAAP net loss amount are discussed in more detail in our press release that we issued earlier today and with that operator. Please open the call to questions.

Question-and-Answer-Session

Operator

Yes Sir. Ladies and gentleman at this time we will begin the question-and-answer session. (Operator Instructions) Our first question comes from Robert Brown with Craig Hallum. Please go ahead.

Robert Brown - Craig Hallum

Good afternoon. Could you maybe just provide some background? You mentioned the bonding bill in California, 7.2 billion gallons. Could you just give us some more info on what types of vehicles could be funded and how that would related to your sales and your case of customers.

Andrew Littlefair

Sure Rob. In California we have the initiative process where people can put -- citizen can put items on the ballot and so this initiative is one of those, just little bit of a background. You have to submit the item for the ballot through the attorney general. He approves how it’s labeled and then you go out and collect the signature’s, that’s what is going on right now. I think the ballot initiative will require somewhere between 600,000 or 700,000 signatures, they have been added for a few weeks and so it may that likely we will get qualified for the ballad. It will be voted on in November. It’s a general obligation bond, $5 billion bond. It’s pretty -- it’s very straight forward and that one point -- I believe Rob it’s $1 billion is to subsidize some large scale sour, about $3 billion falls into the vehicle transportation category and the idea is without creating a new bureaucracy or spending a lot of money on the government. If a fleet operator for instance that operates a heavy duty truck like these port trucks I have been talking about in the port of L.A. They would essentially -- all they would do is they would take their bill of sale, they would forward into the franchise tax board which is our state tax agency here in California and they would get remitted up to in that case, a heavy duty class-A vehicle $50,000 cash payment. The notion here is to really push alternative fuels. We try to reduce pollution and also try to reduce imported oil and low carbon fuel, so in this initiative there are certain categories in the light duty area, electric vehicles will qualify, cell fuel vehicles will qualify, E-85 ethanol vehicles would qualify not little buoyance and natural gas vehicles would qualify. Also super high mileage vehicles would qualify which we haven’t seen many of those but that will qualify as well and then on the heavy duty side it’s a little bit more narrow, but natural gas vehicles certainly would qualify and the payments would range depending on light duty any more from $2000 to up to $50,000 depending on the size of the vehicle.

Robert Brown - Craig Hallum

Okay great and that will be over to bob everything that’s out there today.

Andrew Littlefair

That’s right.

Robert Brown - Craig Hallum

That’s great.

Andrew Littlefair

And of course for us Rob it’s big. I mean since we have a leading position it would be very important and what I am seeing in the port of Oakland and these other places and what I have -- the interesting I am seeing in regional trucking, I really think a lot of these fleet operators will avail themselves to wanting this kind of help.

Robert Brown - Craig Hallum

Okay great. And then you mentioned about -- just kind of switching to the higher oil prices and the cost of equipment. I think in the past the payback period is from one to two years in some of these investments. What’s kind of the payback period looking like today with kind of a new mix of prices?

Andrew Littlefair

Of course our margins on some of our new public access stations were in the nice territory right now. I mean when you look at $9.00, $9.25, $9.30 gas today and you compare it to oil, I mean you are still seeing that relationship as we have discussed before in these calls of 11:1, so we have quite a bit of room to be very competitive to diesel and gasoline. As I said in my prepared remarks, it’s really kind of breadth taking right now, our diesel friends and our fleets that we are talking to. We have really seen a dramatic rise in the cost of diesel fuel and so we are very competitive right now. The payback on stations all have to do with the volume and so if we can get on some of these large ONG projects, give them appropriately, get the volume up, the payback is going to be between two years, two to three years, so that’s kind of what we shoot for and because those are long life stations.

Robert Brown - Craig Hallum

Okay great, then last question.

Andrew Littlefair

Now the payback on the vehicles, the -- right now -- I always like to use the example of going out for a refuge truck, so today if I can just use the example waste management to go to market and buy a factory made vehicle, the incremental cost, the net incremental cost because there are some tax credits available and those vehicles can be anywhere between, oh I don’t know $6,000 to $10,000 and so you can see that those vehicles are paying out in less than a year, six months and so they keep that thing 10 years or longer and so the payout is very attractive right now on the vehicle investment.

Robert Brown - Craig Hallum

Excellent, great. And then last question on you mentioned Peru can ram to 5 million gallon annual capacity. How soon should we look for that to happen and when does it actually start selling fuel?

Andrew Littlefair

Yeah we were actually -- this was one of these things where I was hoping that I’ll be able to tell you, we’ve already had a successful month of it under our belt, but it’s called little sorey want, the station is finished, it’s completely done. The gas as of last week is in the pipes if you will at the dispensers; we are going through the last check-off list with one of the permitting agencies. That station could literally be operating any day. I mean it could be tomorrow, it could be the next day. I mean I’m hopeful, it’s very, very soon and it will start commercial operation immediately, it’s ready to go. Our people are down there, we have already done the commissioning, our vendors have done it, so we should see that come online immediately and then I think the more important thing is for us to get on with the process of developing other stations down there as well.

Robert Brown - Craig Hallum

Okay and then does it -- once it’s opened it can go to that 5 million gallon?

Andrew Littlefair

Yeah, I mean I know. We have high hopes for that. There are still down there lines of two hour lines at the stations that have four hoses, ours will have 32. I’d like to think on day one, we could be on that. Let’s hope, I am an optimist, but I’d like to think that that could have substantial volume right out of the shoe and we designed it that way, we believe it will happen that way and so it’s not inconceivable that in the first few days of operation you could be on that kind of volume path. Okay, now we’ve always thought that that station could do 15,000 gallons a day easily and I think that’s what it will do.

Robert Brown - Craig Hallum

Okay great, thank you.

Operator

Our next question comes from Brian Gamble with Simmons and Company. Please go ahead.

Brian Gamble - Simmons and Company

Good afternoon guys. Andrew, wondering if you could go over a little bit on VTA, you give us an update there as far as what’s going on in Washington and what definitive thing you hope to have transferred over the next couple of months?

Andrew Littlefair

You know that -- the VTA thing is I guess it’s really an example of Washington and how Washington works. It’s been sort of murky there. As we have talked before the extension of the VTA for us now has been in the Senate Farm Bill. The House is working on negotiating on their part of the form bill with Senate. It’s not clear to me that a tax package is going to make it through -- it’s pretty expensive right now and we are concerned over the economy. I'm not sure that the Farm Bill would -- tax pieces going to make and so I'm not sure that right now the VTA extension as we have contemplated in the Senate side of the farm bill is going to happen. I think it’s -- I was just talking to our man that heads up our Washington office this morning and I think it’s safe to say that there seems to be consensus on the House and Senate, both sides of the aisle that we need to extend these credits for all of us, for the propane, ethanol and the others. And some of the thinking now is our credit -- some of the other feels actually goes away in September of 2009. I think the ethanol credit is in place till December 2010. There has been some thought to get everybody and the incentives on the infrastructure, fuel and vehicles all trued up so that they are uniform and my guess is when we see this happen and I'm not sure it will be in this Farm Bill, I'm not sure where it will be but we feel pretty comfortable and all the fuels are supporting us to get the fuels extended so that they all expire in the 2010 December timeframe and then from there it will be easier for the Congress I think to really look at what they have got. So I wouldn’t see anything getting extended anytime soon, though I feel pretty comfortable that for all the important reasons we are reducing our depended ness of foreign oil and what the Congress did earlier this year on the fuel standard promoting renewable fuels, I think that there is no doubt that those fuel credits will get extended.

Richard Wheeler

And we are working at it hard all the time and we are on it but it’s like watching sausage being made every so often up there but I feel pretty comfortable on it.

Brian Gamble - Simmons and Company

I understand completely on the Washington factor. Why don’t you get a little bit more detail on the downtick in volumes for the quarter? What went on there? What was the catalyst on that side of things?

Andrew Littlefair

The question is on the volume, the volume for the quarter?

Brian Gamble - Simmons and Company

Yes.

Andrew Littlefair

Yeah, well as Rick said, we are not only happy with the volume growth, we like to see it higher, and on the last call, I told you if I thought there was any difficult news it is that some of our projects have been slower to develop than we would like to see. Certainly the port of L.A. falls in that category. I was really as happy as I could be with the progress of the ports of L.A. and Long Beach. In fact, watch for the Port of Los Angeles to make their announcement on their portion of the Clean Truck Program. I think I just saw a release here a few minutes ago on March 20, so that’s coming right down trail as well, and I think we will be pleased with their push for clean vehicles and that -- but that -- there is no doubt that that’s one thing that is slower. Those 158 trucks didn’t come on at the end of the -- middle of last year like we thought they have been slower they are just now starting. So, the ports been a little slower developed but that it is developing. I think it took a minute for our fleet customers to understand that some of the things that we’ve been telling them on the diesel was true and now that’s the case. The new diesel engines are more expensive, they are less sufficient, the price of fuel is gone up dramatically. I am very pleased with our refuse effort out there and so as I mentioned on my remarks those things start out little slow, but I think we will have a whole lot of projects that will come on this year and they take a while to come on but we’ll put a lot of them on and then they grow 10% or so a year, so I am very optimistic on the volume, it’s probably slipped a little bit may be six, eight months than where I would like to have seen it, but we’ve got more staff in the field, we have got more projects ever then we’ve had and we’ve got more stations under construction. So, it’s coming; might be a little bit further behind than we would like to have seen it in. We have that situation where last year we lost a couple 2.5 million, almost 3 million gallons and we have to replace that and so it’s wasn’t as robust in the latter part of 2007 as I would have like to have seen but I feel good about it in general.

Brian Gamble - Simmons and Company

Can you give us specific reasons on that loss volume that you just mentioned? Why would those customers go that route?

Andrew Littlefair

One of the larger ones was up in the British Columbia and it was a LNG, sort of a legacy customer. It was a LNG customer that actually used LNG on a lot of LNG on a relatively thin margin basis to drive lumber and they went to woodchips, they converted their plan to woodchip, so that was one and help me on what was the other one that….

Richard Wheeler

The other one was the big transit agency that we were just providing the commodity, we weren’t providing any ONM or vehicle services and they just locked into a I think I heard like a 50 year supply of natural gas from somebody somewhere so. At least went out and basically got the commodity somewhere else and…

Andrew Littlefair

That’s was a four.

Richard Wheeler

That was another legacy carrier over from the old blue energy days.

Brian Gamble - Simmons and Company

Was that just a CapEx stands on price. They just signed and went with that, is that I mean -- when you talk a 50 year contract, I mean you guys obviously have plans or infrastructure in the lack of being around that long. What was the second point on that reopening that in your favor?

Richard Wheeler

They just went out and did it and didn’t really coming to us to do it, so I assume it was some sort of just decision within the transit agency that they want to do it or whatever reason they just did it without consulting us.

Brian Gamble - Simmons and Company

Got it, got it. Now that makes sense.

Andrew Littlefair

It was -- I think it was and we will get back to you on this but I believe I mean we are talking about foreword. I think it was actually a city or a fleet. It might have been just more than the transit agency down there as well.

Brian Gamble - Simmons and Company

Okay and then finally just a question as we are seeing kind of the financial markets in the U.S not hold up there into the bargain or kind of in this recessionary type fear across the industries. Have you seen any slow down in the orders due to just a general market Malays as suppose to individual issues like the port issue and such. I mean is there the fear that may be this is a longer term issue and that the economics and just the dollars to convert some of these vehicles might be put on hold while we kind of see where the economy is going.

Andrew Littlefair

But we haven’t seen that yet and of course one of the reasons I think it’s a little bit different than where we saw it seven or eight years ago when we had this kind of economy was that the economics are pretty good, so lets use my private Refusalar case; there isn’t much of an incremental cost, these guys do have to replace and some times they slow up on their replacement but they get themselves strong out where these are 10 and 12 year old vehicles they have to replace, because the things are just falling apart and the economics today because of our price of our fuel versus diesel and the high price of oil is really working and so to answer your question, no we haven’t seen municipalities, we haven’t seen people pull back orders because of their concern and I think that’s being a buttress because of the economic case that we can make for the fleet operators where they can actually save money on our fuel.

Brian Gamble - Simmons and Company

That’s great Andrew, thank you very much.

Andrew Littlefair

Thank you.

Operator

Our next question comes from Ron Oster with Broadpoint Capital. Please go ahead.

Ron Oster - Broadpoint Capital

Good afternoon guys. A quick question on the port Andrew, I believe last week I heard you speak there was -- you mentioned potentially about 100 trucks per month; that might be a good run rate to use. I'm assuming about a May 2008 start-up. Is that -- does that still seem like a good number or do you think that’s fallen off a bit?

Andrew Littlefair

I still think -- I mean I’ve been as little up on the month every so often, but I still think that’s reasonable. Our fellows were in the meeting with the executive director of the Long Beach Port and his team just last Thursday; they had a very good meeting with them. We are in very close communication with Westport as they are working with Kenworth. I still think that’s a -- I think that’s a safe way to model 2008. We don’t give all those kind of numbers but that still makes sense to me. I think when you look at 2009 to get to where the ports say they want to be, I have to go above that, but I think that’s a good rule of thumb to use as we begin to deploy these things and certainly as I mentioned we are building a few more stations, we have land for that and we will do more here in the next few days when Port of L.A. makes their announcement on how they see this rolling out but a lot of pieces have been put in place to make this happen and the truck ban where they are going to actually tell these guys they have to get rid of their trucks because that in place, I don’t see that changing, so I think that would be a safe to go.

Ron Oster - Broadpoint Capital

Okay. And then with regards to the port stations? Did I hear you correctly? You mentioned five additional and any timing on that with regards to those stations?

Andrew Littlefair

Yeah, I said Ron that those five would be in the next 18 months. We have got -- we have one opened, we have got two in permitting right now, we have ordered all the material for the long lead items stuff actually in, so the destruction of those will begin very shortly and we expect both of those will be done in the latter part of the summer, early fall and we are just working on the other really two to three locations, right now. So I think my guess here of the five and 18 months is safe. We will be able to handle the first tranche of trucks with the one station that we have got. In this other one, we are going in on pre station. It will be up later this summer and the timing of that will be good because it will be very large, can handle a lot of trucks but I think the five and 18 months could be more than that but I think that’s a safe way to look at.

Ron Oster - Broadpoint Capital

Okay. And then to your knowledge, has there been any other permits filed to build another LNG plant in California or do you guys still have the one and only?

Andrew Littlefair

Not that I am aware of.

Ron Oster - Broadpoint Capital

Okay.

Andrew Littlefair

And as I said, that stations come along nicely and in fact I think tomorrow they are putting the lid on our 1.8 million gallon tank and so it’s moving on pretty well. It’s on schedule.

Ron Oster - Broadpoint Capital

Okay. And then internationally, you mentioned the start-up in Peru at the first station there. What -- I think you mentioned previously maybe having an additional two by year end. Does that still seem reasonable in Peru?

Andrew Littlefair

It is, I mean we are working; we are not getting into too much detail. We are working on two or three different proposals for stations in key -- kind of in our key market target areas if you will. We are also working with the large -- a couple of the large transit agencies on proposal, so we -- as I have always said that we wanted to go to Peru to build one station. As proud as we are in that one and when it gets up and that we need to get into the market and develop more. So we have a general manger there and our senior VP operation is getting ready to make a trip down there where we will hopefully make some headway on getting some other locations.

Ron Oster - Broadpoint Capital

Okay and then last one from me on the number of contracts rolling off, the skinny margin type of contracts, can you just comment on the -- how the renegotiations are going with some of those customers, has there been a lot of push back or just how those talks are advancing?

Andrew Littlefair

Sure the biggest ones are municipal transit agencies to go through in RFP process and the biggest one is the upper renewal in June of ’08 of this year and we put our bid in on that, we are just waiting to hear on it. The other two are bid situations which will be towards the end of the year because those contracts expire in December of ’08, so we RFP’s for those should be out soon and I know we are already talking to one of them just trying to redo our deal with them, so they’ll just speak to the RFP process, the biggest one will hopefully know about in a couple of months here and then the other two we should know about hopefully shortly into the fourth quarter. We like to think that have been a good provider for those fleets, we worked with them for several years, we’ve got increased LNG capability with our new plant that will come online and we’ve got the most LNG tankers in the business from what we have done to tankers and so we we’d like to think that we’ve got -- not only have we provided very good service, now we have good pricing, but that we’ve developed a very good reputation with them and we think that will pay off as these things get redone.

Richard Wheeler

And the two to expire in December in Texas, we are the only ones with really LNG close to their operations. We certainly ought to have a cost advantage on those two, pretty significant ones as a matter of fact.

Ron Oster - Broadpoint Capital

Okay great thank you.

Operator

Our next question comes from the Rupert Merer with National Bank Financial. Please go ahead.

Rupert Merer - National Bank Financial

Good afternoon gentleman.

Andrew Littlefair

Hi, Rupert.

Rupert Merer - National Bank Financial

You mentioned the two customers that you lost for $2 million gallons of fuels. The -- those customers I assume they weren’t lost till early in the year. What was the run rate of fuel per year those two customers were using? Were they are using about 3 million gallons a year, 4 million gallons a year. Can you give us a little more detail on those plans?

Andrew Littlefair

The bigger one actually was lost earlier in the year, we lost it in February. The run rate of the two of them is probably 4 million gallons, 4.5 million gallons a year.

Rupert Merer - National Bank Financial

Okay and if you look at the ports. Do you see any competition on the fueling side at the ports? Or are you the only ones building infrastructure at the ports to fuel the truck driver.

Andrew Littlefair

I always believe that as the port business goes and regional trucking goes that will have competition and I have always said that in a helping business you want competition. We have a little bit of a head start as you know because little bit we have that a big LNG plant that will be in California, so in terms of excess LNG supply this is the way things worked out. We are little ahead of everybody. We are the only one’s right now, but I am sure there will be others and as more trucks go and you will see other people come into the business, but we’ve got a little bit of a lead on some of our soon to be competitors, I’m sure.

Rupert Merer - National Bank Financial

It sounds to be a reasonable market share assumption to make. I mean the ports are ramping up, the numbers of trucks so for the next four years, so you will have to see competition move in pretty quickly I would think.

Andrew Littlefair

I think we are well ahead of the competitions, so I don’t want to predict the sound of, the sound of -- to brag but I think we are going to do well on that volume here in the near and middle term. As we have talked before, really LNG supply is some what constrain and we have been aggressive, right. We have signed that deal with spectrum, we built our first plant in California history, LNG plant and so we are just ahead and we have taken some risk to do that, but we think it’s paying off and others are kind of doing the same thing, but as we found out, it takes two to three, three and a half years to build them you see. So we’ll have some lead on the competitors here for the short and middle term.

Rupert Merer - National Bank Financial

On the LNG supply, can you discuss the supply demand balance for the next couple of years if you could discuss a little bit about how much LNG you have contracted and how much you expect to produce in ’08 and ’09 versus what the market might look like in that time frame?

Andrew Littlefair

Well, let me take a crack at it this way and then Rick’s busy doing the math here on a sheet. We think we are going to need it all, so obviously while we are taking somewhere like six loads a day. If -- right now we are doing a more or less 130,000 gallons of LNG a day, six or seven of that is coming from our third party suppliers. Obviously as our new plant comes online and the volume from the port that’s going to -- the percentage of down will go down dramatically but we don’t want to loose that volume, so it will shift -- the volume of L&G will shift west. We’ll still need the volume from the Rocky Mountains of Wyoming and the others Colorado, but imagine that a big emphasis of it will shift west to the spectrum plant and of course to our California LNG plant and I would guess that if it goes the way we think, we are going to need all of that supply and so the -- your going to end up needing, well to say 27 loads, 35 loads a day and today you are 13, so it’s going to triple, but we see a great deal of growth coming. I may be light on that but a great deal of growth coming. The third part stuff will obviously be much more of a percentage when we get out to 2009.

Rupert Merer - National Bank Financial

How flexible will your own tides be in production, so if your -- for example if you find that you have a little too much capacity, is it easy enough to turn the plant down?

Andrew Littlefair

Yeah it is, it is. The one in California is being designed that way and one of the reasons we put such a large tank in it to give us that flexibility. So yeah, we can. It’s the type that we can actually shut it down if we need to.

Rupert Merer - National Bank Financial

Okay great. Just one more. Can you give us a break down of CNG and LNG volumes for the quarter if you have it?

Andrew Littlefair

Let’s see here. I guess it’s going to be 60/40, but -- we are on a paper here.

Rupert Merer - National Bank Financial

Maybe I can follow up with you later on.

Andrew Littlefair

Hold on, he’s got…

Richard Wheeler

Yeah, why don’t you call me Rupert, I don’t have it handy on my finger tips.

Andrew Littlefair

It’s generally been in that sort of range.

Rupert Merer - National Bank Financial

Okay, great. Thank you very much.

Andrew Littlefair

Thank you.

Operator

Our next question comes from Marvin Loh with WR Hambrecht. Please go ahead.

Marvin Loh - WR Hambrecht

Hey, good afternoon guys.

Andrew Littlefair

Hey Marvin.

Marvin Loh - WR Hambrecht

With regard to the legacy fixed price and price cap contracts, can you give us a sense of what the value of those contracts -- I guess the cost of those contracts are now, given where natural gas prices are and maybe remind us as to when we can expect a drop-off in the volume of those contract deliveries?

Andrew Littlefair

Sure, yeah, as we were kind of alluding to earlier, the biggest one will drop off in the middle of this year in June.

Marvin Loh - WR Hambrecht

Okay.

Andrew Littlefair

The next two biggest will drop off at the end of ’08 and according to our run-off table, roughly 80% of these contracts will be gone by the end of 2008. So the nice thing is that there will be this whole adjusted margin concept on an essence kind of phase out during 2008 and as we renew these contracts, either on an index plus basis or if we do a fixed price deal, we will do our hedging policy and get the futures contracts etcetera, so that we won't have to go through the adjusted margin process. We will have -- basically the results will just show up in our margin or actual margin that you are going to see in our P&L.

Marvin Loh - WR Hambrecht

Right, now during this past quarter, you had about 730,000 in contract adjustments, kind of where the market has been trending so far this quarter? Would it be higher or lower?

Andrew Littlefair

Probably a little higher. I think at the end of the year, we were in the 3.5 million to 4 million range is our estimated run off, the dollars that we will spend to service those contracts, GAAP has picked up since then, so it’s probably up a little bit.

Marvin Loh - WR Hambrecht

Okay, great. And kind of just jumping around a little bit here, on the international front, as you look at kind of some of the additional markets that you were talking about, India and Hong Kong and I remember China was mentioned in the past. Is the value proposition that you bring to those conversation different per country or is there some homogeniality associated with what you bring to the table.

Andrew Littlefair

We -- it’s good question. We -- a lot of people around the world have built small stations for small vehicles and that’s been kind of the model as this has gotten started in some of the -- a lot of the countries. Not many countries -- but it’s beginning to change, not many countries have much experience or providers in those countries have experience with very large stations, servicing large vehicles. A little bit of that in China, but for the most part, not though we were beginning to see it, for the same reasons, it works well for a taxi, works well for a trash truck in Paris and we are beginning to see that and that’s one of the things that we can bring to the parties. We do have experience fueling thousands of heavy duty vehicles every night and that’s a little bit different than maintaining a very small station as some of these stations are 10 times the size of the stations or 15 times what you see in these small markets. So that’s one place where we see a snitch and we have been asked about that. For instance in Thailand, the government made several decrees that basically changed all the buses there now. We have to have the right partner. We have to get comfortable about the country risk and other things but that looks to be for real and that’s why we were there and so some people -- a couple of those big companies there that are well positioned have asked us to come and look at whether or not we have interest doing business there because they recognize that we have ability with the heavy duty fleets, with operating large stations, constructing, building, owning, and operating these large stations. The other place where we have got a snitch and I see it as really a pretty exciting as what’s going on in the port of L.A at Long beech is a little ahead of some other places in the country and in the world but it’s really the same. Ports end up being the dirtiest place, in fact we are seeing it in Canada, we are seeing it in Hong Kong, really many places around the world these ports are all seeing increased air pollution, increased traffic and many of them are needing to do something and in those places it looks like it will be LNG and so we really have the most experience on providing LNG for vehicles and certainly heavy duty vehicles and so that may be our snitch, may be one of the things that we do is if you will a international port, a business and bring in our experience that we are gaining here, that we are done here on LNG.

Marvin Loh - WR Hambrecht

Alright and one of the beauties of your model is that, yeah there is -- of course there is competition and it always a competitive market but there is very few in the United States that has kind of the depth and breadth that you bring to any of this kind of larger kind of discussions. When you look internationally is the landscape similar or do you find that they are multinationals out there that they can play with you in this place.

Andrew Littlefair

Well, we are the largest one, I mean when you look at it worldwide, we are really the large. That doesn’t mean that the multinational couldn’t do it, but what we see internationally in many places, it would cover a large percentage of the countries we are looking at. It’s actually its often state owned oil and gas companies and state own utilities so that in a way has precluded some of the players and often those state owned want somebody that has our kind of experience. So it’s because this thing started out kind of slow and quite it’s kind of creped up but we don’t see many large companies our size or even our size in any of these places. Some of them are -- have been vague in South America, but most of them are focused on producing equipment. So I think there is plenty of room and there is certainly plenty of growth and it’s certainly for us it’s -- we’ve done well positioning ourselves in the United States, we feel comfortable the growth is coming here near and you know boon emphasis that to us all the time that for all the right reasons we are going to get to where we want to be, but we want to make sure we don’t miss out on some interesting international opportunities, but yet we are not going to be foolish about it.

Marvin Loh - WR Hambrecht

Okay great thank you.

Andrew Littlefair

Thank you.

Operator

Our next question comes from Sean Boyd with Westler Capital Management. Please go ahead. Shawn Boyd with Westler Capital your line is open. You are using a speaker phone please lift your handset we are unable to hear you. Mr. Boyd?

Sean Boyd - Westler Capital Management

(Inaudible)

Operator

Yes, we do sir, please go ahead. Mr. Boyd please go ahead we can’t hear you.

Andrew Littlefair

Well, why don’t we give him a minute to get his phone deal Sorted away and we’ll -- is there any other questions operator?

Operator

There are no further questions in the queue at this time, sir. One moment please and Mr. Boyd please go ahead with your question if you are actually there on the line.

Sean Boyd - Westler Capital Management

Gentleman

Andrew Littlefair

Yes.

Sean Boyd - Westler Capital Management

Okay. Very quickly I want to get active margins for a second.

Andrew Littlefair

Okay.

Sean Boyd - Westler Capital Management

in terms of the $0.47 that we are at on the year, we saw in the past that our kind of the total potential and then also an incentive to keep operators very interested in making sure that they are looking at the different tax credits etcetera and I'm wondering can you give us a feel as to go into the ’08 and more important that into ’09. Where you see the margins if you see continued growth there? Can you give us some idea on magnitude and timing?

Andrew Littlefair

Sure. We don’t provide guidance, we need to be a little careful here, but our philosophy on margins is with the spread between the price of natural gas either in CNG or LNG form relative to $4 dollar diesel and $3.65 regular gasoline, there is a lot of room in there for us to expand our margin as -- that’s kind of -- those types are deals we do in our commercial retail world where we are selling through our infrastructure of pumps like at these port stations or our station at LAX or other stations that are just around on municipalities, those are our higher margin stations and as more of our business moves into this particular segment, we think that’s going to be good for us. We also like the opportunities as we re-priced a lot of our old legacy contracts to increase the margin. We think that’s going to help us because a lot of those are baked into that $0.47 that you are seeing. So we don’t know where it’s going to or how fast or how high but we are pushing to get that up.

Sean Boyd - Westler Capital Management

Okay. And the other thing I was thinking about, in terms of the accounts that moved away from Clear Energy last year, there is a stickiness factor that maybe we need to think about. Andrew you mentioned are in particular the plants that moved away for a very long dated contract, really wasn’t clean energy for infrastructure or other services, can you help us out in terms of maybe what the average account looks like now and what you are doing in helping or hedge financing, the infrastructure that you are doing on the stations, etcetera?

Andrew Littlefair

You know our goal has been a big proponent of Wyking to have our infrastructure that we own with our customers. I have always felt like that -- it gives us the longest and best position with our customers. The one legacy customer talking to was the one that we inherited when we bought a Company where really -- and this is -- I’ve talked about this before and I think it’s important to note, the early adopters in the natural gas vehicle business were public transit agencies and that’s because they got -- most people don’t realize but $0.87 to $0.90 on every dollar spent for a bus in Texas or New York or L.A. comes from the federal government and because of that and they get money for bus washes and stations and so it’s been very hard for us to compete with free money, when they are getting free money and then they match it with the local match and so often it’s relegated us in those businesses to providing either fuel or just services but not owning the station and reduces our margins and reduces our importance to those customers but those are the first guys to the party. Now we are seeing this expand past public transit and we are seeing private haulers and private trucking companies and private shuttle companies, etcetera where I think our business model is really proved and better and makes for longer a relationships and bigger margins and those have always been the ones that we like best but when you are starting a new business or starting a new industry you have to kind of take what you get.

Sean Boyd - Westler Capital Management

Understood, understood. And last question along those lines, Andrew, when we think about the volume growth here and kind of being a little bit behind plan in ’07 but we think about what you are building and what’s going on in Peru, the expansion at LAX that -- we look at a lot of different efforts so that’s coming on it, so I am wondering is there -- are there any metrics that you can give us on a total Company basis that help to show that inflation on the growth in volumes coming to us.

Andrew Littlefair

As Rick said we have been, we haven’t at this point been giving guidance so we got to kind of get into quick sand there, but I mean that’s why I mentioned that before that’s why I mentioned it today and that is I look at just that station engineering carpet and look at the numbers of stations that we are building and so that’s one thing. We will try to -- we don’t announce a request every time a customer shows up, we don’t announce it. We try to announce some of the big ones, but I think I have watched the port, I have watched regional trucking because I think there is a inflection point coming on the regional trucking. I mean for instance we are seeing Wal-Mart right now testing vehicles. It will take them a while because they are so sophisticated but they are testing LNG vehicles right now we. Well they are the largest trucking fleet in the United States, so that tells me something and we see another AT&T has just filled the test demonstration for 25 vans and they say if it goes well part get in trouble here that they wanted to go to a 1000 vans, so we haven’t seen that kind of thing and that’s because the economics are so strong and because we are concerned of the environment and green house gas a low carbon, etcetera. So, a lots changed today, but I think we are there right now and certainly as we are -- few years ago we’d be lucky if we are talking to six or eight transit, six or eight refuse companies at a time and literally we are into talking to 25 plus. So I can see it happening, so I’d say keep your eye on for station backlog and this kind, you can see those things coming on that will help.

Sean Boyd - Westler Capital Management

Good enough thank you.

Andrew Littlefair

Thank you

Operator

And this does conclude the question-and-answer session I would like to turn the call back over to management for their concluding remarks.

Andrew Littlefair

Thank you very much for participating today and we appreciate your interest and we look forward to reporting to you on our programs in the coming weeks and months and so good day. Thank you very much.

Operator

Ladies and gentleman this does conclude the Cleans Energy Fuels fourth quarter earnings conference call. You may now disconnect and have a pleasant day.

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Source: Clean Energy Fuels Q4 2007 Earnings Call Transcript
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