Clean Energy Fuels Corp. Q2 2008 Earnings Call Transcript

Aug.14.08 | About: Clean Energy (CLNE)

Clean Energy Fuels Corp. (NASDAQ:CLNE)

Q2 2008 Earnings Call

August 13, 2008 4:30 pm ET

Executives

Ina McGuinness - ICR

Andrew J. Littlefair - President and CEO

Richard R. Wheeler - Chief Financial Officer

Analysts

Robert Brown - Craig Hallum

Eric Stein - Northland Securities

Brian Gamble - Simmons & Company

Ron Oster - Broadpoint Capital

Graham Madison - Lazard Capital Markets

Eric Greiner - WR Hambrecht

Patrick McGlinchey - Sidoti & Company

Rob Stone - Cohen & Company

Pearce Hammond - Simmons & Company

Operator

Welcome to the Clean Energy Fuels second quarter earnings conference call. (Operator Instructions) It is now my pleasure to introduce your host, Ina McGuinness of ICR.

Ina McGuinness

Earlier this afternoon, Clean Energy released financial results for the second quarter and six months on June 30, 2008. If you’ve not received the press release, it is available on the Investor Relations section of the company’s website at www.cleanenergyfuels.com. This call’s been webcast and a replay will be available on the company’s website for thirty days.

Before I begin we’d 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 “believe,” “intend,” “expect,” “plan,” “anticipate,” 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 the Risk Factors in Clean Energy’s Form 10-K filed with the SEC on March 19, 2008 and subsequent filings. These forward-looking statements speak only as of the date of the 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.

Joining me on today’s call is CEO, Andrew Littlefair, and Chief Financial Officer, Rick Wheeler. And now at this point I’d like to turn the call over to CEO, Andrew Littlefair.

Andrew J. Littlefair

We view this as a mixed quarter as we were pleased with our revenue growth and industry prospects but disappointed with our volume growth. This is primarily related to long lead time nature of our business. Because of this, we have faced a challenge so far this year, which I’ve discussed before, in achieving meaningful volume growth as some of our projects have been slower to come online than anticipated. I can need only look at the industry trends and our station activities to know that our business plan and strategy are on track. Case in point, if you saw the substantial growth for the June quarter of one of our friends, Westport Innovations, in particular the Cummins Westport partnership, their sales were up 62% for their June quarter. You will see a positive trend that bodes well for us. They manufacture medium heavy-duty engines that run on natural gas and natural gas engines are, of course, the first step in leading the fuel sales. So we kind of view them as a leading indicator of things to come. And if someone has to order an engine and then the body, etc. and eventually the fuel will follow.

As you all know, oil prices have remained high in the $115 range or so and natural gas prices have decreased into the $8 range and today $8.50. Consequently, the spread between the price of oil and natural gas continues to be very favorable to us. In previous calls, I’ve talked about the spread in the range of 10 or 11:1. And in recent weeks, we’ve even seen the spreads in the 13-14:1 range, which allows us to provide even more economically compelling solutions to our customers.

Let’s look at how this translates at the pump. In Los Angeles last week, the price of diesel was approximately $4.80 per gallon while at the same time we were selling CNG in Los Angeles at $3.30 a gallon and we’re selling LNG at our port station for $3.70. These, of course, are both on a per diesel gallon equivalency basis. And our high volume fleet customers are paying even less per gallon, which often allows them to save up to $1.50 a gallon. This savings really adds up for fleet choosing significant volumes of fuel.

In addition to the compelling economics, there’s an increasing awareness of the significant availability of natural gas in the United States. I think Aubrey McClendon, CEO of Chesapeake, has been on this point and done very well of describing it. But this point needs to be underscored. Based on a 2008 study from Navigant Consulting recently released by the American Clean Skies Foundation, there’s enough natural gas in the country for up to 118 years at 2007 levels. This is up considerably from recent estimates of ten years of reserve life of natural gas. For years, we believed that there was about 200 TCF or so and today, that number looks to be closer to 700 TCF or triple. In place, the number gets significantly larger. Some saying that it could be as much as 1,500 TCF. So, it’s clear there’s plenty supply of natural gas right here in America.

We see more interest by our customers in OEMs for NGVs in North America. In a recent development that reflects our bullish outlook for this, we recently announced to invest up to $10 million as part of a $160 million funding effort in a new company called The Vehicle Production Group. VPG will be building a new ground up factory of natural gas vehicle made in the United States for the taxi and paratransit markets, two of our key markets. This vehicle will be the first new purpose-built natural gas vehicle introduced in the United States in about the last ten years and VPG expects they will make deliveries in 2010. So we’re very excited about that.

The positive natural gas environment is also leading to increased legislative activities focusing on natural gas vehicles. It appears the message of natural gas being cleaner, cheaper and domestic fuel is starting to be heard. For example, there are currently two bills, one sponsored by Senator James Inhofe from Oklahoma and another being proposed by representative Rahm Emanuel of Illinois, that provide incentives for and promote the use of natural gas vehicles. Although we don’t know how these bills will ultimately look and whether or not they’ll pass, we see these activities as a positive sign that Washington is becoming more aware of the benefits of natural gas as a transportation fuel. These efforts bode well for the extension of VTEC, reawakening a deal with EPA and DOT and other federal agencies. Also as you remember there’s a state-wide initiative on the California ballot called the California Renewable Energy and Clean Alternative Fuels Act. It will come before voters in November known as Proposition 10. If Californians pass it, the act will invest $5 billion in projects and incentive programs to promote renewable energy and alternative fuels, including about $2.9 billion in cash incentives for the purchase of alternative fuel vehicles starting January 1, 2009. This program would be the nation’s most ambitious to support the use of alternative fuels and low carbon fuels. To put it in perspective, owners of newly purchased medium and heavy-duty vehicles could receive incentives as much as $50,000 per vehicle, encompassing up to almost 20,000-24,000 vehicles. And that’s three times the 8,000 port trucks of the Port of LA and Long Beach program that’s targeting to convert to LNG. Overall, the initiative tracks and supports the state and governor’s desire to reduce the penance on deported oil and to find solutions to deliver cleaner air including lower greenhouse gas emissions.

We are also pleased with the growing number of grants that support the growth of natural gas vehicles and infrastructure. The Mobile Source Air Pollution Reduction Review Committee and the South Coast Air Quality Management District recently approved a grant totaling $11.3 million with $3.6 million coming to us to build stations and the balance going to our customers to buy vehicles. Our funds are earmarked to help defray the cost of expanding the Southern California network of natural gas fueling stations by adding nine new stations. These grants provide a great incentive for existing clean energy customers and prospective customers to make the switch to natural gas. Since its inception, our in-house grants department has helped secured more than $107 million in funding for both clean energy and our customers. We’re very proud of this pact and we see this growing.

Concerning our station activity, at this point in the year we plan to complete or begin construction on 38 stations. And that is up approximately 60% from the same figure in the prior year. So this is just one more data point that shows the increased activity that’s tied to the growing interest in natural gas vehicle solutions.

Turning to the ports project, the Port of LA and Long Beach currently are executing purchase contracts with manufacturers of heavy-duty natural gas vehicles. In the last few weeks, the ports have placed orders for 200 LNG trucks, which is in addition to the 100 we are currently rolling out. Outside of the port funding efforts, one drayage company has ordered another 130 LNG trucks. We are hopeful that a majority of these trucks will be fueling in our port stations in the fourth quarter of this year.

Just last week, the ports have released a new truck finance and leasing program for vehicle funding between $60,000 and $105,000 for clean LNG trucks. The ports are taking this program very seriously and while slow at first, we remain convinced many thousands of trucks will be put on the road in the next few years.

As some of you may have heard recently, the American Trucking Association filed suit against the ports because they object to certain concession requirements included in the ports’ plan. And while we don’t know what effect, if any, that the suit will have on the timing of the ports’ truck program, we can say that the ATA is not challenging the clean truck portion of the plan. In fact, they have gone on record saying that they “strongly support” the emission reduction components of the ports’ plans. So we are hopeful that the truck program will continue to move forward as originally scheduled.

To meet the demands from the ports, our LNG plan under construction at Boron, California is progressing and will be operational in the fall of this year. So we’ll be ready to fuel the port trucks as they roll out. We’ll also be able to use this LNG for other regional trucking customers we serve in the Southwestern United States.

Now let me move on to discuss some of our recent business highlights. First, we upgraded our station at LAX, Los Angeles International Airport, to accommodate 100 more buses, nearly doubling the capacity of that station. Also, we recently announced that we’re building a hydrogen fueling station in Los Angeles in partnership with General Motors, which will be located at our LAX station. The station will help Clean Energy and GM better understand the synergy between hydrogen and natural gas fueling. GM has also recently announced that they are investigating a return to the natural gas vehicle market in the US and of course we’re watching this very closely. We will look forward to working with GM to broaden the awareness of the societal and customer benefits of cleaner gaseous fuels.

Next, we were awarded a 5-year contract with Metro RTA, the public transit provider of Akron, Ohio, to operate and maintain the fueling station for their fleet of 45 full-sized CNG buses. This is our first customer in Ohio and we believe that this will lead to other public [A’s and C’s {11:19}] in the area converting their fleets.

Also, the City and County of Sacramento renewed their LNG supply contract with us for a one-year term with an option for up to two additional years to provide fuel for their growing fleet of natural gas power refuse trucks. We are proud to say that we’ve been supplying LNG fuel under contract to Sacramento’s municipal refuse agencies since 2005. And today, they operate 105 LNG refuse trucks and have plans to add more.

Finally, as I’m sure you’ve heard, we recently lost the Phoenix LNG supply contract, which was being fulfilled by us with margins that were under water, as you’re aware. And after going through a protest period we got a third of the contract volume reinstated with agreements to serve the City of Tempe and the City of Mesa components of the contract at positive margins. In fact, we just received verbal notification yesterday that we have won the City of Los Angeles’ sanitation contract, which is about 3.5 million gallons per year and moving to 4 million gallons in 2009, as they’re adding 70 more LNG trucks to their fleet of 370 LNG trucks. We have also been serving other transit customers with spot loads, which means in effect we’re making progress on replacing all the Phoenix volumes.

Before I turn the call over to Rick, let me just recap some of the movement and progress this industry is experiencing that are driving the growing awareness of the benefits of natural gas fuels. The spread between the price of natural gas and the price of oil is more favorable than it’s ever been. The ports of LA and Long Beach have gone from no trucks to approximately 4 trucks on order in the last year and we’ve gone from one OEM original equipment truck manufacturer providing class-A trucks to the ports, now it’s five OEMs. One manufacturer just reported their sales were up 62% in the most recent quarter. New policies are being proposed in Washington that supports the use of natural gas fuel and our station activities increased approximately 60% from last year and we’re currently in the final stages of finishing our LNG facility in Boron. So, when we take stock of the industry, it is clear that more and more groups are realizing the benefits of natural gas vehicles and the fact that natural gas is a transportation fuel is ready today, not fifteen or twenty years from now. Our experienced team and leadership position in the industry, I’m confident that we’ll be able to capitalize on this opportunity. With that, I’ll turn the call over to Rick to discuss our financial results.

Richard R. Wheeler

Before I review our financial results, I would like to point out that all my references to our results will be comparing the second quarter of 2008 to the second quarter of 2007 or comparing the 6-month period ended June 30, 2008 to the 6-month period ended June 30, 2007, unless otherwise specified. And with that clarification, for the quarter, our revenues increased to $34.6 million which is up from $30.7 million. For the first six months, revenues totaled $64.5 million which is up from $58.8 million.

Adjusted margin for the quarter was $8.8 million, which compares with $9.2 million and adjusted margin for the six months was $17.4 million, which is up from $16.9 million.

Our net loss for the second quarter was $2.4 million or $0.05 per share, which compares to a net loss of $3.6 million or $0.09 per share. Our net loss for the six months was $7.8 million or $0.18 per share versus a loss of $4.4 million or $0.12 per share in the prior period. During the second quarter, we recorded a mark-to-market gain of $5.7 million on certain futures contracts we purchased in connection with a fixed-price bid for the City of Phoenix’s LNG supply. Excluding this gain, loss per share would have been $0.18 for the second quarter and $0.31 for the 6-month period ended June 30, 2008. The two largest contributors to our year-to-date increase loss, with the gross margins on our fixed priced contracts and the increase in our SG&A expenditures.

First looking at SG&A, in the first six months of 2008, stock-based compensation expense increased by $1.3 million. We saw marketing expenses increased by $3.7 million, primarily related to supporting the California bond initiative Andrew mentioned earlier and salaries and benefits increased by $1 million, primarily related to the hiring of marketing personnel and pay raises.

Non-GAAP earnings per share in the second quarter of 2008 was break even on a per share basis and was $0.01 per share in the second quarter of 2007. Non-GAAP loss per share for the first six months of 2008 was $0.06 per share and was a loss of $0.02 per share last year. Excluding the hedge gain mentioned above, non-GAAP loss per share would have been $0.12 for the first quarter and $0.19 for 6-month period ended June 30, 2008. Adjusted margin and non-GAAP EPS are discussed in more detail on our press release that we issued earlier today.

Now, let’s look at our hedging activity during the quarter. As is our policy, we bought futures contracts to hedge to the fixed price component of the Phoenix LNG supply contract bid that we submitted. We initially did not win the bid but after we protested the award to a competitor, we were awarded a portion of the contract representing approximately one-third of the contract volumes. After this process played itself out, we sold the futures contract related to the portion of the contract that we were not awarded. Unfortunately, the price of natural gas between the date we bought the futures contract and when we sold them decreased a bit. And we ultimately realized a net loss of $300,000 from the sale of these contracts. As a result, you will see a $5.7 million gain in our Q2 results and a $6 million loss in our Q3 results, which nest to the $300,000 overall loss on the transaction. We do, however, still own the futures contract applicable to the volumes we retained.

Turning to our volumes, we delivered 18.5 million gallons in the second quarter of 2008 versus 19.3 million gallons last year. Year-to-date, we delivered 36.1 million gallons of fuel to our customers, compared with 37.1 million gallons delivered during the same period in 2007. As a reference on our last call, we had three non-core low margin customers that we did not renew between periods. These three customers accounted for approximately 2.5 million gallons for the first six months of 2007 that are not in our 2008 numbers. Taking these volumes out of the equation, our volumes with new and existing customers actually increased by approximately 1.5 million gallons between the first six months of 2007 and the first six months of 2008.

Our margins in the second quarter continued to be negatively impacted by the increased price of natural gas during the period. As you recall, the increased price of natural gas eased into our margins on our older fixed price contracts where we are unhedged. In fact, our Phoenix contract was under water from a margin perspective by approximately $0.60 per LNG gallon in the first six months of 2008. So on roughly 6 million LNG gallons are in the period related to this contract, you can see our earnings were adversely impacted by approximately 3.6 million during the period. The good news here is this contract expired on June 30th. Consequently, our actual margin in the last half of this year will improve as the negative effect that we experienced from this contract in the first half of the year will be eliminated.

In addition, our margins will improve related to Phoenix in the last half of the year as we will be earning a positive margin on the volumes we did retain through our protest process. Also, because our other large fixed price contract that is unhedged expires at the end of this year, our 2009 actual margin should begin to approach our adjusted margins after the negative results associated with these large contracts go away. And with that, Operator, please open the call for questions.

Question and Answer Session

Operator

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

Robert Brown - Craig Hallum

Maybe you could probably provide some more color on the port fleet that’s existing today and how much do you think it can hit Q3 or it’s really a Q4 timing for the first port truck?

Andrew J. Littlefair

The first port trucks, Rob, are now rolling out and as we’ve discussed before, it’s been a little slow and somewhat painful as everybody’s getting used to this new program but they are beginning to hit the road. In fact, one of the larger customers of this first 100 trucks got the money and is now taking delivery of 30 of those trucks. So those will be on the road the latter part of this week and next week. So, I’d say in the next month, the first hundred of those trucks will be on the road consuming fuel. The other 332 or so that I mentioned, I think will be toward the latter part of the quarter and fourth quarter.

Now, let me say this about the port because I’m very excited about this. I mean recently the Port of LA has been meeting with some of the very largest trucking companies in the country and it appears that they’re making head way with them to entice them to the come to the port. Because after all, that’s what the ports’ been trying to do is bring in large employee driver-type fleet to help drive efficiencies there at the port. So, stay tuned there on that. I do think that eventually, as I’ve been saying now for the last 6-8 months, we’ll be on this kind of 100-a-month pact.

Robert Brown - Craig Hallum

And then you mentioned the Proposition 10 in California. Do you have any sense for the--is it already polling on the likelihood of that passing?

Andrew J. Littlefair

There was polling by the committee earlier and it polls very well. Environmental issues in California just poll extremely well and there’s actually three environmental propositions on the ballot. One has to do with electricity. There’s the Prop 10 that I mentioned and there’s another one. I can’t remember that one exactly. Might have to do with water. And those issues always poll pretty well. The polling was in the 60%, 60-some odd percent range. The state’s having difficult budget situations. I imagine that’ll tighten some but that Prop starts with a nice base. We see it from Conservatists and Liberals and from Northern California and Southern California. So, the campaign has to be run right and have to get to the finish line but it looks promising to me.

Robert Brown - Craig Hallum

And maybe just comment on the volume growth that was standing out in the loss contract. Do you see volume growth returning in Q3 here is that more of a Q4 phenomenon?

Richard R. Wheeler

No, I do see some volume growth kicking back in. That LA station 1 that I’m talking about kicks in. There’s a couple of others and some of our existing customers, for instance, San Diego, the LAX. San Diego’s taking 100 buses that will begin coming in here anytime. They’ll phase in the latter part of this quarter and in the fourth quarter. That’s 100 transit buses. So that’s big. Those will finish out in the first of ‘09. The RTC in Las Vegas is beginning to receive 80 new buses. LAX is beginning to deliver those 100 buses at the LAX station. And so, there should be increased acceleration and volume growth in Q3. But then I think in the fourth quarter with the port trucks and other things that we haven’t discussed through today. I think we should get back to more historical volume growth.

Operator

Your next question comes from Eric Stein - Northland Securities.

Eric Stein - Northland Securities

Just a bookkeeping, could you first give the breakdown between CNG and LNG for the quarter?

Richard R. Wheeler

I think it’s 65/35 but Rick’s pulling up this little cheat sheet here. Well, actually we filed the queue a second ago or we’re in the process of filing it so I guess it’s fair game to put that out there.

Eric Stein - Northland Securities

Okay, I can check that after the call. I was wondering if you could talk about the process in Phoenix, getting the RPT in Tempe back. I would think that that’s pretty rare for that to happen and kind of how that played out. And also, if you could just talk about the two remaining fixed-price contract in your retention chances there, or thoughts on that.

Richard R. Wheeler

Eric, just I’m sorry, real quick: For the 6-months that ended June 30, ‘08, it was CNG 23.4 million, LNG was 12.7 million to get you to the 36.1 million total.

Andrew J. Littlefair

Let me answer the first part of that. And a little part of that I’m going to be a little terrible because we filed a protest and we’re talking about a competitor here. So, I don’t want to get into all the dirty linen. I mean we happen to think that in over the last several years, and this is why we fought pretty hard, is that we provided very good service and as you know by looking at the numbers, at a very terrific price to the City of Phoenix. So we were disappointed that the staff set the positions they did with the competitors that we didn’t believe had the capability to deliver and provide the back-up services that we do. And in fact, since this whole thing came down on our protest, that has been the case. We actually in the first week of the new incumbent coming in, we had to provide the fuel. So, we knew that a couple of our other customers out there that are part of the Phoenix contract, even though their related transit agencies are not the City of Phoenix, we think they liked our service and in fact during the protest period, they went to the City of Phoenix and they said, “Hey look. Let us opt out of this umbrella contract and contract with these guys who’ve been providing us very good service.” So, of course, we’re pleased with that and that’s how the four loads a day, 1.5 for a little bit more than that, came back to us.

Eric Stein - Northland Securities

Okay, and then can I just get your thoughts on the two remaining fixed contracts.

Andrew J. Littlefair

The nice thing is there’s only one big one left and that’s the transit agency down in Texas and it expires at the end of this year. The Phoenix one, obviously, was the biggest one that expired June 30. Another one that you may be thinking about was another transit agency in Texas that also, I’d say, re-upped on June 30. We continued to do that business and got rid of the price cap that was on our index, plus pricing mechanism we had with them. So, that’s how that one went away. The nice thing related to this issue is as we’ve talked before that it essentially goes away at the end of 2009. When you look at our projected volumes beyond the end of this year, there’s only about 4 million gallons subject to fixed price and price cap contracts. And a significant component of those is in the price cap bucket, which is obviously nicer for us since we don’t get squeezed dollar for dollar and all instances like we do on a fixed-price deal. So, nice thing is that’s going away at the end of this year, which obviously will be nice for everybody.

Eric Stein - Northland Securities

Oh yeah, that definitely will. Let me just ask one more question. This is just related to the port rollout. Just wanted to get your thoughts on how you think the deadline will play out as far as the ban on pre-1989 trucks on October 1st, whether the ports will be pretty firm with that or maybe that gets delayed a little bit?

Andrew J. Littlefair

My guys that work the ports really daily down there and everything I could tell from the political leadership, they haven’t shown any weakness on that truck ban deadline. And I somehow don’t think that that’s going to give. Obviously, putting in new trucks, that is, new diesel versus new LNG and introducing a new fuel for guys that have operated diesel trucks for 15 years, that takes some work. And so, we’re seeing some people wanting to go with new 2007 diesel trucks but of course you remember the plan calls for no less than 50% LNG trucks. So, the port’s working hard to do what it can to make sure that when they approach that deadline that the trucks will be retired that it’ll break down about 50% LNG/50% diesel. I think that’s the way it’s going to go. I don’t see a delay.

Now, will they allow you to keep a diesel truck operating until you get your new LNG truck? It might take a month. They may do something like that. Well, I think that’s only reasonable but I don’t see them backing out of the ban. In fact, next year there’s another big ban coming. That’s which is almost as big as this one. So, they don’t want to start that.

Andrew J. Littlefair

And I think, Eric, that some of the concern right now is as Kenworth and as Peterville and as these guys are bringing their LNG trucks up online, and I’ve seen pictures of the first Kenworth rolling down the line, if they’re getting that processed figured out. Some of the concern in this early going has been well, can they produce enough trucks? Kenworth, for one, assures us by later this year. They can give you about as many LNG trucks as you want. So, that being the pressure that, “Hey, we can’t get these things as quickly as you want,” that pressure will go away later this year.

Eric Stein - Northland Securities

And didn’t recently the Port of Long Beach issue a jumpstart order to get that process going?

Andrew J. Littlefair

They both did. I think LA did and Long Beach both. And that’s the couple hundred that I was mentioning.

Operator

Your next question comes from Brian Gamble - Simmons and Company.

Brian Gamble - Simmons and Company

You mentioned Aubrey and he’s been pretty robust in talking about is the view that natural gas can go a long way in helping the transportation infrastructure in the US. Is there any monetary push from companies like that that is making strategic investments in Clean or is it purely on the basis of trying to get people’s awareness up and get things rolling?

Andrew J. Littlefair

Well, I can’t talk about all the things that we’re doing with Chesapeake but I can say this, that we work closely with them, me with Aubrey and our team with Chesapeake vessels at many levels, on the public policy part of it. We’re also working with them on policies for Oklahoma and policies in Texas to promote the increased use in those states. And we were looking for other ways to work together. That’s really all I can say right now on that.

Brian Gamble - Simmons and Company

In light of this increased visibility that you’re getting for the industry, are you seeing any new competitors either start to spring up or hearing things of people potentially getting into the market, given what gas prices have done recently?

Andrew J. Littlefair

I haven’t yet. I think that Provecho will be in the pudding. I think, for instance, when you see some of these large national truck companies do what I think they’re going to do here shortly and you start seeing more size, I’ve always said that that’ll drive more competition in our business. And that’s a good thing, I think. I haven’t seen gas producers. I think Aubrey’s a little ahead of some of them on thinking they should go out of retail fuel. It just gets to be kind of a one-more-big-step out of their normal business and it’ll actually probably works better for many of them to work with guys like us to provide [? Inaudible {32:14}] of gas or some other mechanism rather than for them to go out and get into the retail fuel distribution business.

Brian Gamble - Simmons and Company

And then could you maybe go over a little bit on the LNG purchase contract with Exxon, Williams and how that shapes up in light of kind of continued delays in regards to both your Boron plant and continued delays at the ports, where those volumes are going and that’s shaping up?

Richard R. Wheeler

We just re-upped the deal with Williams, which now goes for a couple more years and we’re good for four loads a day, our current production. And we have an option to maintain that level going forward, starting at the first of next year. The Exxon one expired at June 30. Apparently, they had a little turnover transition on their side for whoever’s responsible for this aspect of their business. So, while that person’s getting up to speed, we just did a kind of a one-month extension of our existing contract and will be working on extending that one as well, which we think will get done. But in essence, those volumes are still going right now to the same places as they are, into California, probably [Marilee {33:23}] and a little bit into Texas. And then once Boron comes up and FDS, it’ll allow us just more flexibility to source products closer to our customers wherever they happen to be, as well as, have capacity for the growth we think is coming. So, there’ll probably be a little bit of shuffling once everything kind of comes on line that we think that’ll be advantageous for us and helps to provide buffering in the instance of a plant maintenance or plant going down for whatever reason or whatever. So, that’s how we kind of see that shaken out.

Andrew J. Littlefair

The Boron plant is really kind of coming on about when we need it. I don’t know that I’d like to be explaining to everybody why I have this plant. It came out a year ago sitting there without all those trucks. So, it’s really coming on to measure with when I’m going to need it and really, in a timely fashion.

Brian Gamble - Simmons and Company

And then just finally real quick on the ports deal, in light of that remark, when you talked about what structure coming on at the end of Q3 and then rolling into Q4, kind of in line with what you said back in the Spring on the per month type of volume growth. How does that look as you look into ‘09? In the first half of ‘09, is it going to be around that hundred sharp mark or were you thinking that could double or triple on a monthly basis?

Andrew J. Littlefair

I’m getting goosy on making port predictions but I do think that it’s unreasonable to think that you’re going to fuel trucks in the port at more than 100 or 200 a month. And the reason is guys, they just don’t turn over their fleets that fast. They have to drill a hole in their old truck in order to get funding. They have to buy new trucks. There’s a lot of stuff they have to do. And I think that in a universe of 16,000 trucks, a couple hundred a month is a pretty good turnover. So, I would say I’m going to stick here for a while with that. I think I’ll be right that if everything shakes out here over the next few months, you’re going to start seeing these things at about 100 a month. And if we get some bigger fleets that buy more trucks then you’ll see it move past that but I think that’s the way it’s going to go. And frankly, that’ll be a lot of buying for us.

Operator

Your next question comes from Ron Oster - Broadpoint Capital.

Ron Oster - Broadpoint Capital

I was wondering if you could provide a little more details on the LA sanitation contract you mentioned. I think you said 3.5 million LNG gallons. Is that going to be phased in as trucks are introduced or is that going to be an immediate uptake to your volume?

Andrew J. Littlefair

Immediate uptake.

Richard R. Wheeler

That’s an existing fleet so that’s an immediate uptake. And then it’ll also have the additional 70 trucks that I believe are being phased in over the rest of this year. We’ll have a little incremental volume as well going up to 4 million and starting roughly at the beginning of next year.

Ron Oster - Broadpoint Capital

Okay, and so I assume you were able to take this from a competitor. Are there any other types of contracts like that that are outstanding, that can move the needle like this contract?

Andrew J. Littlefair

Well, I’m not going to tell you all of my secrets here but what I’m trying to allude to is that we’ve done a pretty good job replacing the Phoenix loads and yes, there are other contracts that we’re working on that kind of fall in that category.

Richard R. Wheeler

And this came from our competitors that took the Phoenix load from us. So, it’s a little bit of a shuffle game, that they got Phoenix and we got this one. So, kind of the whole shaking out, ending up roughly in the same volume level, perhaps with different customers that we talked about before semi starting to take hold.

Andrew J. Littlefair

And there are a couple of large ones that are sort of in play right now.

Ron Oster - Broadpoint Capital

And Andrew, when you were talking about volume growth potentially kicking up in 3Q versus this level, were you talking about total volume or did you mean from just your existing customers?

Andrew J. Littlefair

Well, I think both, Ron.

Richard R. Wheeler

Looking sequentially on a quarterly basis, I think we’re just looking that stuff’s going to start coming on. The stuff we’ve been working on in our station activity and stations we’ve been working on for the last 4-6 months are going to start coming to fruition, coupled with hopefully these four trucks start rolling as well during this time period.

Andrew J. Littlefair

It’s a combination. I was alluding to the San Diego’s. These hundred buses are being delivered in stripe now. They don’t put them into service that fast but they’re beginning to show up in San Diego. So that’s an existing customer, existing business, and then sanitation is brand new business. And the port trucks are brand new trucks. So there’s a combination of both.

Ron Oster - Broadpoint Capital

Sure, and can you also comment on your international operations in Peru and how that’s developing, if there’s any plans on that for our next station or if one will do for now?

Andrew J. Littlefair

All along, we wanted to get the first one up and operating and it is operating. I checked the volumes yesterday. We fueled about almost 1,500 taxicabs. You’ll recall that really, that station had three pieces to the business, which is a light-duty piece which is about 3,500 gallons to 4,000 gallons a day. We’re at that in that range now. If then is getting ready to receive Peru transit buses. Those have been slow to come on. We haven’t seen them yet but we’re told the engines have been delivered to the country. So we’re awaiting those and we’re just now getting the final permitting done for the trailers that are on site that will be doing the stationary distribution of LNG to Kimberly Clarke and other stationary users. That’s the other sort of 5,000 gallons a day that hasn’t been on but will come on near shortly. So, that station has a recent slow potential but it’s operating well. We like the way it’s going and yes, what it’s done is it’s now giving us something to point to. We’re in working with other fuel retailers, those that are in the CNG business and those in the gasoline business, to see if we can expand the network.

They’re still doing lots of things down in Lima and still supporting it. And so we continue to like the business. We have a group of our guys going down, I think, next week to see if we can sign up some deals.

Ron Oster - Broadpoint Capital

Did you say 38 stations are under construction now? Is that what you said in your prepared comments?

Andrew J. Littlefair

That’s what I said, that we think will have done by year-end. And so, 38 that are in some phase of construction. Some of them are almost completed. Well, several are completed, some of them are half way and some are in the permitting phase right now.

Ron Oster - Broadpoint Capital

Okay, and really with that in mind, is there any update for cap ex for the second half of the year and maybe direct to me what ‘09 might look like?

Richard R. Wheeler

Yes, for the rest of the year you’ll see in our Q, we’re projecting or anticipating that we’re in need about $6 million for the rest of the year to complete the capital plans that currently exist. Same story as last quarter. We’re going to go out and look to do with that deal, to take care of that need and if that doesn’t present itself, then we’ll avail ourselves to equity options. Hopefully, they’ll be available. We’ll figure out something. ‘09 is hard to say. Obviously, we think it’s going to be significant. We haven’t sat down and kind of planned that yet. But just looking at the activity and the industry and where it’s going and all the deals and the pipeline that we’re seeing, the people calling us that we can’t put an exact number on it, but we certainly think it’s going to be robust.

Operator

Your next question comes from Graham Madison - Lazard Capital Markets.

Graham Madison - Lazard Capital Markets

Just looking at gallons for the rest of the year, is there any reason to think that we wouldn’t see year-over-year growth in gallons from 2007? Is there enough gallon replacement coming from these other contracts or additional ones that you put on that you think you’ll be able to achieve?

Andrew J. Littlefair

Yes, I think you will.

Graham Madison - Lazard Capital Markets

And then in terms of the funding for the new taxi vehicles, are there other opportunities or is this a one-off type of thing or is this something you guys might look to do more in the future just to grow the overall market?

Andrew J. Littlefair

Are you firms with the VPG or the Standard Taxing Investment?

Graham Madison - Lazard Capital Markets

Yes, yes.

Andrew J. Littlefair

Well, this is a vehicle that is pretty interesting, just quickly. We got wind of this particular vehicle, used to go by the name of Standard Taxi a while back, and this was the lead investor instigator of this product is the largest cab owner in the United States. And it occurred to him that we really don’t have a good, clean taxicab that the taxicab as the standard, the Crown Victoria’s likely to go away and it’s hard to get into and in fact, the elderly and the physically disabled have a hard time getting into it. Can’t use it. And so they went out and canvassed the market and found out yes, there’s a great need to look at something that looks more like a London taxi, we’ll just use that as an example, where you could put two wheelchairs in it and can board it with a good height. And wouldn’t it be nice if it was on a clean fuel so that you could avail yourself to these kinds of programs we’re seeing in all these cities? And so that’s what they did and that’s how they started and that’s when we got involved with them to work with them. So we’re very excited about it and we’re not so sure that as you look at the marketing of this vehicle when it finally reaches the market that it won’t be well received, what’s called in the “consumer market for people that have elderly folks or family members that need to have a vehicle that can move people around.” So, that’s the concept behind it. It’s really a fabulous vehicle and we’re very excited about it.

Now, we’re not in the vehicle business but we don’t have people knocking down our door everyday to build net ground up natural gas taxicabs in plants in North America. So, we’ll continue to look at this. We hope that some of our OEMs will come back. And so that’s why we’ve been talking to General Motors and others to see what we can do to help them. Funding for General Motors is probably not in our bailey wick but other things we can do for them to help them and we’re talking to them now.

Graham Madison - Lazard Capital Markets

And the $10 million investment, has that already been made or will that be made in the future? And is that part of the $6 million of the cap ex this year?

Richard R. Wheeler

No, that will actually be extra. That just came down the pike. The $10 million, the total commitment, is two tronges: $6 million in the first tronge and $4 million in the second tronge. The $6 million in theory will be phased in over the rest of the year. The second tronge may or may not ever happen. It kind of just depends on if they need it or if they can go out and raise other financing. That being the vehicle production group. So we’re basically in for $6 million now and it may go to $10 million. We’ll see how that goes. That’s how that’s going to play out.

Operator

Your next question comes from Eric Greiner - WR Hambrecht.

Eric Greiner - WR Hambrecht

In regards to the ports, do you currently just have the single sowing station there?

Andrew J. Littlefair

We do. We have one there. We’ve got one that’ll be the largest in the world, I guess, that’s under construction now. It’ll actually end up having ten lanes. It’ll look pretty much like a truck stop. That’ll be number two. Number three is in the permit phase now. That should get us for a while. And then the next LNG stations will go out toward the staging area of the freight in the rail yards and out east, familiar with California, out toward the distribution centers in Ontario, Fontana. That’s where we need other stations and we’re working with fueling people out there now and fleets to site locations.

Eric Greiner - WR Hambrecht

And just in regards to the SG&A, if you could maybe comment on how we should look at this going into the back half of the year.

Richard R. Wheeler

In theory, it should come down a touch just from the perspective of the California bond clause. It should be mostly absorbed in the first half of the year because it’s on the ballot in November so down a stretch. Our spending, in theory, should drop off a touch. We’ll continue to hire some people. Obviously, we want to be opportunistic or make sure our sales force is adequately staffed to take care of the opportunities before us. So, we might hire a few more sales people the back half of the year. There’s nothing else out there that we really know about. We do have some Sarbanes compliance work that’s coming that’ll cost us a little bit of money but it should hold in there pretty consistent with the caveat we always put out there. That’s always contingent on if there’s an opportunity for another legislative or policy-type deal or if there becomes a big push to redo VTEC or something. We may need to spend some money or we may decide to do some extra things on the bond, if the extent we think it makes sense. So, barring any kind of extraordinary items should kind of hang in there with current levels.

Operator

Your next question comes from Patrick McGlinchey - Sidoti & Company.

Patrick McGlinchey - Sidoti & Company

Just real quick with the Boron plant coming on line, you’re saying that it’s perfect timing just about. Just say that the ports are not rolling out trucks quite as quickly as you’d like and you’ve got kind of a bit of an over supply there of LNG. What are the possibilities for you to do with that extra inventory, if that were the case?

Andrew J. Littlefair

Well, there’s other opportunities for LNG. For instance, from time to time, we’ve used it for stationary programs; we’ve used it for line reinforcement of things that the utilities want from time to time. There’s potential opportunities for it in Mexico. So, there’s other opportunities for it. But remember that some of what’ll happen is some of our loads that are now coming from east will get shipped. Like for instance, this 3.5 million gallons for the 370 trucks in LA. I mean that’s beautifully suited for that Boron plant, which is 85 miles away and we don’t have to bring from 800 miles away. So, you’ll see some shifting of some of our products from the third parties. We think we’re going to need all of it but we think what’ll happen is you’ll begin to shift west. We kind of call it the shuffle but you’ll begin to shift some of the loads to the west.

Patrick McGlinchey - Sidoti & Company

You just mentioned that you’re going to possibly add a bit to your headcount on the sales force. What is the sales force’s headcount stand at now?

Richard R. Wheeler

We’re in the low-40’s right now, low to mid-40’s.

Andrew J. Littlefair

We see such a big backlog coming. We’re adding a few engineers as well and some LNG expertise.

Operator

Your next question comes from Rob Stone - Cohen & Company.

Rob Stone - Cohen & Company

I wanted to clarify something you said earlier and make sure I got it right. Are the fixed-price contracts essentially going away at the end of this year or at the end of 2009?

Richard R. Wheeler

End of this year. The two biggest ones. The biggest one was Phoenix. The fixed-price deal expired June 30. There was another large price cap contract that expired June 30. There’s one other large fixed-price deal that expires 12/31/08. Once those are all gone, the fixed-price and price cap contract scenario goes down significantly.

Rob Stone - Cohen & Company

So the pricing model for the portion of the Phoenix business that you recovered through the protest is what?

Richard R. Wheeler

It’s a fixed-price deal but that’s the deal where we hedged and we bought the gas contracts to cover our economics. So in essence, it’s baked in at our margin that we bid it on and that’s the number that’ll flow into our P&L over the course of the last half of the year, as we deliver the fuel and those contracts expire and mature. Not if it accords with our new hedging policy.

Rob Stone - Cohen & Company

But you will continue to have then that one fixed-price contract at the end of this year and the related hedging and so forth?

Richard R. Wheeler

No, the one that’s unhedged expires at the end of this year. That’s the transit agency in Texas. But the Phoenix load that we retained, that contract runs through the middle of next year. It expires June of ‘09. And we have futures contracts bought through that date to protect us and lock in our margins and our economics on that volume. So, it’s kind of a transition from our old hedging policy into our new one where by now, it’s a good example that actually where we do offer fixed-price contracts to a customer, we’ll go out and get the futures contract, hold on to them and then basically lock in our economics.

Rob Stone - Cohen & Company

So, with respect to the margin model after the end of this year, can you say in general what you target for margins in a variable environment?

Richard R. Wheeler

Well, we don’t provide guidance so we need to be a little careful here but we would say that in theory, if you look at our adjusted margin in 2008, we should start to approach that number in 2009, since it is in essence, the same contracts. They’re the base load of our ‘09 volumes. Coupled with all the new business we’re bringing on, we think a healthy chunk of that is going to be in this commercial retail model (i.e. the port, etc.) where we’re selling fuel at our existing, or new, stations that we’re building. And we’re pricing our fuel relative to gas or diesel. Gasoline, that is. And that’s our highest margin business. So, by the time you figure all that out or factor that in, in theory, we should start to approach our adjusted margins in our actual numbers in 2009.

Rob Stone - Cohen & Company

And with respect to the split between fixed-price and not fixed-price with a hedge and floating contracts, I recognize you’re not in a position to give guidance for 2009, but can you give us some sense of how you think the demand breaks down between your different types of customers? With all the talk of natural gas supply increasing in the US facets in demand and big reserves build up and so forth, it would seem like there would not be that much incentive for customers to want to go into fixed-price deals in the next couple of years.

Andrew J. Littlefair

But the only reason they might, and I would argue they should, is do they think diesel’s going to go down? And I think what we’ve seen recently is that it’s been really amazing but despite our diesel, I was in your city talking to one of the largest milk guys in the region and they’re paying $5 for diesel. And that’s a huge move up from where it’s been. And what’s happened is that the fellows using diesel have gotten spooked that they’re not so sure that they won’t see someday, they may come down right now, but they’re not so sure they won’t see $6 diesel. And they know that 2010 engines are coming and they’re going to be less efficient and the fuel’s going to be more expensive and etc. etc. So, it may be that some of them want to take advantage of low natural gas fuel commodity prices and put in a margin. That would still make a very nice margins for us and still lock them in on, say, $1 under diesel or $1.50 under diesel. If they can lock in a significant portion of their business like that for five years, they may want to do it.

Richard R. Wheeler

A lot of it’s just kind of subject to the customer’s risk appetite. I mean Andrew’s theory could hold that they want to lock in and they like the concept of fixing it and they think it’s going to be advantageous relative to diesel and they like that theory. Or it could be that they don’t like that theory and I think where you were starting to go is, in theory, if there’s more supply in natural gas and the price of natural gas dips, why would I want to lock in if I think it’s going to go down? So there could be that theory. So, it’s hard to predict or tell what the customers are going to want to do. Sometimes they like fixed; sometimes they like variable. What we like to bring to the table is we’ll do whatever they want. If they want a fixed-price deal, we’ll lock it in. If they don’t want a fixed-price deal, then that’s fine. We would actually prefer that but it’s kind of whatever they want and then we just tailor a pricing package to fit that.

Rob Stone - Cohen & Company

Further to your comments about the lead time for truck engines and so forth, do you foresee essentially another bottleneck, if this California bill passes, would there be a difficulty for the vehicle supply to react in order to fulfill that or what might be the lead time to catch up with incremental demand that would fall out of the California bill?

Andrew J. Littlefair

I think the results could always be a bottleneck because you got to get the supply chains for LNG tanks up and running. I think the good news is that with these OEMs coming to the party, that’s what they do. They’re into supply chain management and bringing some stability to that. And so I like the fact we’ve got PACAR, both their companies, and International and these other guys all kind of in the game, Autocar and Freightliner, because they know how to manage that stuff. And so that’ll help but do you have enough tanks laying around right now for 24,000 trucks? No, but you’ll get there. We have full confidence in people’s ingenuity and then in the markets to respond.

Rob Stone - Cohen & Company

There’s been some press coverage recently about the California initiative and about natural gas in general, the potential to shift transportation over to natural gas as a fuel. And that has concluded a comment by some purported expert that well, it really isn’t that big a benefit in terms of emissions and the well-to-wheel energy impact. It feels as though the contingent out there that sees the policy only through the environmental whims as opposed to through the economic and give political or domestic versus import. And I feel like the economic argument by itself, even if natural gas were equal to petroleum FA fuels on an emissions basis, is a powerful one. Do you feel like from a policy standpoint there’s a fork in the road here where there are those who would like to just move over to battery and fuel cell and some other type of non-internal combustion vehicles?

Andrew J. Littlefair

We struggle and I’m familiar with the articles that you’ve seen and frankly, we’ve talked to a couple of those people to remind them that natural gas, in their own studies, show up anywhere between 26-30% less carbon. There really isn’t another fuel today that’s available today that does that. So it does hurt me occasionally that we’re going for something that doesn’t even exist when you have something. The state of California is apparently going to put everybody out of business by saying they want to roll back greenhouse gases by 10%. Well, here we have a fuel today that can do 23-24%. So, we’re working with them to make sure they remember that and understand that. But yes, there are some that want to go to batteries and hydrogen and all that. What we try to remind them is, and I’m fine with that. I mean if we didn’t believe that gaseous fuels didn’t have a role, we wouldn’t have been working with GM on this hydrogen fuel. But the truth is for goods movement. And you know 30% of the fuel that we’re using everyday in the United States, 70% of which we import, is to move goods around. And we have a fuel that’s domestic and we just talked about this plentiful. That gets you a 24% greenhouse gas benefit. It happens to be $1.50 cheaper and it’s domestic and by the way, it’s 50% cleaner than the current diesel. I think that’s pretty damn good. So yes, there are some that want to always look at the cutting-edge and environmental. And then there are others that understand the economics and the geo-political angle. I think they come together but we do have that tension often out there and in other places as well.

Rob Stone - Cohen & Company

Or maybe you need to be more clearly bifurcated between light-duty vehicles and tweaks that you’re targeting.

Andrew J. Littlefair

It’s kind of funny because the Proposition was crafted to allow all the clean technologies in, the fuel cells, the hydrogen, the batteries, the plug-in hybrids, all those play. Now the complaint is that maybe natural gas is going to take it all. Well, that’s not the way it’s going to go. Honda’s talking about putting 600 fuel cell vehicles in California next year. They don’t get funding under this thing. So, you’ll see a lot of the light-duty go to some of these other deals. Natural gas will be a piece of that but much of the light-duty will go to these other advanced technologies eventually. But on the heavy-duty, I think for quite a while, CNG and LNG is going to be the fuel of choice and people are going to understand that we’re not ready for a plug-in hybrid trash truck or a hydrogen trash truck. And those are way out. So, that’s your bridge; that’s your fuel that really ought to be used in goods movement for the next 20-25 years as you work on all these other stuff.

Operator

Your final question comes from Pearce Hammond - Simmons & Company.

Pearce Hammond - Simmons & Company

Andrew, you were talking when you were referencing Rob Stone’s question about the potential customer in New York with the milk business, and I know you’ve got a good pipeline potential, but what is the major obstacle that your sales people face in trying to turn that pipeline into actual customers?

Andrew J. Littlefair

I think part of it is getting people to change. I think part of it in this last quarter, not to come up with a whole bunch of excuses, part of it is though, especially for the trucking guys, we’ve been in a difficult environment. Their business is off. The sales are down. Their fuel price went way up and I don’t have a whole lot of empirical evidence other than I could tell by the sales of diesel trucks and everything. That’s all off. So, I think there’s been a soft in their business and so they’ve been careful on running out, buying new trucks. Education is always something that we need to do and it’s tough to get. Somebody’s been moving milk for the last 50 years in Queens using diesel. It’s not easy to get them. Change is hard. And so I say it’s change, it’s education. It’s getting easier though and that’s what, Pearce, I was trying to say on the pipeline and what we see. And what I haven’t really talked about, well maybe I’ve talked about the backlog, we see 150 stations in the pipeline put out there that I’m not ready to say are going to break ground, but that I know. And the milk guy, who we had an excellent meeting with, I think they will move forward. And that will be next year’s business. But it just takes a while to get people to change. Getting comfortable with the technology.

Pearce Hammond - Simmons & Company

And then when you have a discussion with, say, a Walmart or a Vons or the Kroger or what not, and some of which may already be customers, do you think we’re getting to the point there’s pricing between diesel and natural gas is extremely attractive and only looks to get more attractive over time? Are we going to start to see some of this pipeline turn into large customers next year? I know it’s hard to nail the timing exactly but are we getting to that pressure point when it starts to break over to the customer side?

Andrew J. Littlefair

We’re seeing two things on that. We’re talking to, now, some of the very largest fleets in the nation, which is good. And Walmart, for one, is testing for LNG trucks. I don’t know if they’re LNG. I think they are. For LNG trucks. And they’ll put them through the paces. But what we saw with the squad at the diesel, most of the trucking industry would rely on the model where you pass the filter to your customer. And we saw it in our own case when our hauler came to us and I say, “My God, my diesel’s gone from $3.40 to $5. I need to redo our deal.” And what’s happening is you’re seeing these large customers like Walmart, who have half of their good moved by contract haulers, say, “Hey guys, you can’t flow this through to me. You got to come up with something else and we understand that there’s natural gas is cheaper. Why don’t you go check that out?” So we’re beginning to see the fallback from the customers to the trucking guys. That’s better than me going to see a trucking company when you have Walmart go to the trucking company. That’s what you want.

Andrew J. Littlefair

I do think we’ll see some of those large fleets sooner rather than later.

Operator

We have no further questions at this time.

Andrew J. Littlefair

Well, I think we covered it. I appreciate your interest in our company. We continue to be very optimistic about the future and the macro trends and we’re hard at work making this happen for the shareholders. Thank you very much.

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Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

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