Clean Energy Fuels Corp. — 2018 Q2 Form 10-Q Summary
Business Context and Reporting Period
Clean Energy Fuels supplies renewable natural gas (RNG), compressed natural gas (CNG) and liquefied natural gas (LNG) for vehicle fleets in the United States and Canada. It also provides station construction, fueling-station operation and maintenance, natural-gas transportation, renewable-fuel credit sales and customer vehicle-financing services. As of June 30, 2018, the Company served nearly 1,000 fleet customers operating more than 46,000 natural-gas vehicles and owned, operated or supplied approximately 530 stations.
This unaudited Form 10-Q covers the three and six months ended June 30, 2018, compared with the corresponding 2017 periods. The Company adopted ASC 606 revenue recognition and the restricted-cash cash-flow standard during 2018; management stated that the effects were not material to reported operations.
Financial Performance and Key Metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $70.5 million | $81.0 million | $172.9 million | $170.5 million |
| Gross margin | $24.8 million | $23.7 million | $72.4 million | $52.3 million |
| Operating income (loss) | $(8.4) million | $(14.0) million | $7.6 million | $(24.4) million |
| Net income (loss) attributable to Clean Energy | $(12.0) million | $(17.8) million | $0.2 million | $43.3 million |
| Basic earnings (loss) per share | $(0.07) | $(0.12) | $0.00 | $0.29 |
| Gasoline-gallon equivalents delivered | 89.4 million | 88.4 million | 174.5 million | 173.5 million |
Q2 revenue declined 13.0%, primarily because of lower station-construction revenue, the elimination of compressor-sales revenue following the December 2017 CEC Combination, and lower volume-related revenue. Q2 gross margin was approximately 35.2% of revenue, versus approximately 29.3% in the prior-year quarter. The improvement reflected lower natural-gas and former compressor-business costs.
Six-month revenue increased 1.4%, but the comparison benefited from $26.9 million of Alternative Fuels Excise Tax Credit (AFTC) revenue recognized in 2018. Excluding AFTC, reported revenue would have been lower year over year. Six-month gross margin was approximately 41.9% of revenue, compared with approximately 30.7% in 2017. The 2017 period included a $69.9 million gain from the BP asset sale and a $3.2 million debt-extinguishment gain; neither recurred in 2018.
Six-month operating results improved substantially because of lower cost of sales, reduced selling, general and administrative expense, lower depreciation and amortization, and the absence of certain 2017 charges. However, the Company remained slightly loss-making before allocation to noncontrolling interests and continues to report a large accumulated deficit.
Cash Flow, Liquidity and Debt
- Operating cash flow was $22.9 million for the first six months of 2018, compared with $(5.1) million in 2017, primarily because AFTC proceeds were collected in June 2018 and working-capital timing improved.
- Investing cash flow was $(78.1) million, driven largely by net purchases of short-term investments and approximately $9.8 million of property and equipment spending.
- Financing cash flow was $61.5 million, principally reflecting $83.4 million of gross proceeds from the Total private placement, partly offset by debt repayments.
- Cash, cash equivalents and restricted cash totaled $43.4 million at June 30, 2018. Cash, cash equivalents and short-term investments totaled $252.7 million, compared with $177.5 million at December 31, 2017.
- Total debt and capital-lease obligations were approximately $240.4 million in principal, or $239.9 million net of financing costs. Approximately $113.3 million was expected to mature during 2018, including the $110.5 million principal balance of the 5.25% convertible notes due October 1, 2018.
- The Company had no borrowings outstanding under its $50.0 million Plains revolving credit facility and stated that it was in compliance with debt covenants.
- Management expected approximately $16.6 million of 2018 interest payments and planned approximately $15.0 million of 2018 capital expenditures. NG Advantage could spend up to $45.0 million on additional trailers and equipment, with most expected to be third-party financed.
Management believed available liquidity and anticipated operating and financing cash flows would satisfy requirements for at least the next 12 months, while acknowledging that refinancing or additional debt or equity financing may be needed depending on operating performance and debt repayment decisions.
Material Changes, Outlook and Unusual Items
- Total investment: On June 13, 2018, the Company issued Total 50.9 million shares at $1.64 per share for $83.4 million of gross proceeds. Total held approximately 25% of outstanding shares and received board-designation and registration rights. The issuance materially increased the share count and diluted existing holders.
- AFTC: Legislation reinstated the credit for 2017 fuel sales. The Company recognized $25.5 million in the first quarter of 2018 and an additional $1.4 million in Q2 for prior-year claims. AFTC was not available for fuel sales after December 31, 2017 and may not be reinstated.
- Business portfolio: The Company no longer produces RNG at its former facilities following the 2017 BP Transaction and no longer records compressor-sales revenue following the CEC Combination. The Company retains a 49% equity-method interest in SAFE&CEC and recorded a $2.1 million investment loss for the first six months of 2018.
- Operating trends: Delivered volumes were broadly stable, but LNG volumes declined year over year while CNG volumes increased. Management noted flatter customer and volume growth in certain markets, including airports, refuse and public transit, and continued uncertainty regarding heavy-duty natural-gas truck adoption.
- Potential Total truck program: The Company and Total had a non-binding letter of intent concerning a truck-financing program and up to $100 million of related credit support. The arrangement required definitive agreements and might not be completed or launched.
Risks and Contingencies
- The Company has a history of losses and may not achieve sustainable profitability. Results are highly sensitive to fuel volumes, natural-gas prices, station construction activity, renewable-fuel credit prices and government incentives.
- Approximately $113.3 million of principal was expected to mature in 2018, creating refinancing, repayment and potential dilution risk.
- Off-balance-sheet commitments included $29.1 million of surety bonds, a take-or-pay natural-gas contract through December 2020, operating leases and a guaranty of up to $30.0 million plus fees for NG Advantage obligations.
- Natural-gas vehicle adoption remains uncertain and faces competition from gasoline, diesel, electric, hydrogen, renewable diesel and other fuels. Lower gasoline or diesel prices, higher natural-gas prices or limited vehicle availability could reduce demand.
- Government programs and credits, including AFTC, RINs and LCFS credits, are subject to expiration, legislative change, regulatory review and pricing volatility.
- Station construction, station closures, environmental and safety incidents, permitting, commodity-price volatility, customer credit risk and potential asset impairments could adversely affect liquidity and margins.
- Legal proceedings were described as ordinary-course matters, and management stated that no material legal proceedings were pending. Management also stated that environmental compliance expenditures were not expected to be material.
Important Facts for Investors to Verify
- How the Company funded or refinanced the $110.5 million 5.25% convertible notes due October 1, 2018 and the remaining 2018 maturities.
- Whether operating cash flow remains positive after the one-time AFTC collection and whether AFTC or similar credits will recur.
- Underlying revenue, gross margin and cash flow excluding AFTC and other nonrecurring items.
- Progress, final terms and economics of the proposed Total truck-financing and credit-support program.
- Whether stable aggregate delivered volumes can offset lower LNG volumes, reduced credit revenue and the loss of compressor-sales revenue.
- The effect of Total’s 25% ownership, board rights and potential future share sales on governance and dilution.
- NG Advantage’s performance, additional equipment financing needs and the Company’s $30.0 million guaranty exposure.