Clean Energy Fuels Corp. quarterly report, Q1 FY2018

Clean Energy Fuels Corp. 2018 Q1 Form 10-Q Summary

Business Context and Reporting Period

Clean Energy Fuels supplies renewable natural gas, compressed natural gas and liquefied natural gas for vehicle fleets in the United States and Canada, and provides fueling-station construction, operation and maintenance, transportation and related services. As of March 31, 2018, it served nearly 1,000 fleet customers operating more than 46,000 natural-gas vehicles and owned, operated or supplied more than 530 stations.

The filing covers the unaudited three months ended March 31, 2018, compared with the three months ended March 31, 2017. The company adopted ASC Topic 606 revenue recognition and new restricted-cash presentation requirements effective January 1, 2018. Topic 606 adoption increased opening accumulated deficit by $1.3 million but did not materially affect the financial statements.

Financial and Operating Highlights

Metric	Q1 2017	Q1 2018	Change
Total revenue	$89.5 million	$102.4 million	+$12.9 million
Gross margin	$28.6 million	$47.6 million	+$19.0 million
Gross margin percentage	31.9%	46.5%	+14.6 percentage points
Operating income (loss)	$(10.5) million	$16.0 million	Improved by $26.4 million
Net income attributable to Clean Energy	$61.1 million	$12.2 million	Down $48.8 million
Diluted earnings per share	$0.40	$0.08	Down $0.32
Cash flow from operations	$1.4 million provided	$2.3 million used	Declined by $3.7 million

Revenue growth was primarily driven by $25.5 million of reinstated federal Alternative Fuels Excise Tax Credit revenue relating to 2017 fuel sales. The credit is not currently available for post-2017 sales.
Volume-related revenue declined to $67.2 million from $73.6 million, principally because of lower RIN and LCFS credit revenue following the BP RNG asset sale. Compressor revenue fell from $6.5 million to zero following the December 2017 CEC Combination, and station construction revenue declined from $9.3 million to $5.8 million.
Natural-gas gallons delivered were 85.1 million in both periods. CNG volume increased to 70.8 million gallons from 68.5 million, while LNG declined to 14.3 million from 16.0 million and RNG volumes reported separately declined to zero from 0.6 million.
Operating expense reductions reflected lower cost of sales, selling, general and administrative expense, and depreciation and amortization. SG&A declined to $18.8 million from $23.8 million.
Q1 2017 net income included a $70.6 million gain on the BP Transaction, a $3.2 million gain from debt extinguishment and a $2.3 million tax benefit. These items did not recur in Q1 2018.

Balance Sheet, Liquidity and Debt

Cash, cash equivalents and restricted cash were $47.1 million at March 31, 2018, compared with $37.2 million at December 31, 2017. Short-term investments were $128.1 million, producing total cash, cash equivalents and short-term investments of approximately $173.3 million.
Total assets were $818.8 million and total stockholders’ equity was $460.8 million at March 31, 2018.
Total debt and capital lease obligations were $266.2 million net of financing costs, including $140.7 million classified as current. Principal debt outstanding was approximately $267.0 million.
Expected principal maturities were approximately $139.7 million in 2018, $55.5 million in 2019 and $55.3 million in 2020. Expected 2018 interest obligations were approximately $16.6 million, of which $2.9 million had been paid by March 31.
The company had no borrowings under its $50.0 million Plains revolving credit facility and was in compliance with applicable debt covenants.
Management expects current cash, short-term investments and anticipated operating and financing cash flows to satisfy requirements for at least the 12 months following the filing date, excluding proceeds from the proposed Total transaction.

Cash Flow, Capital Spending and Commitments

Operating cash flow was negative $2.3 million, primarily because the $25.5 million AFTC receivable had not yet been collected and working-capital timing was unfavorable.
Investing activities provided $7.3 million, including net maturities and sales of short-term investments, partially offset by $7.1 million of property and equipment purchases.
Financing activities provided $5.0 million, principally from $6.3 million of debt proceeds, partially offset by $1.2 million of debt and capital-lease repayments.
The 2018 business plan contemplated approximately $15.0 million of capital expenditures. NG Advantage could spend up to $45.0 million on additional CNG trailers and equipment, most of which management expected to finance through third parties.
Off-balance-sheet arrangements included $27.0 million of surety bonds, two take-or-pay natural-gas contracts, a fixed-volume natural-gas transportation commitment and a guaranty of up to $30.0 million plus related fees for NG Advantage obligations.

Material Changes, Outlook and Unusual Items

The company completed the BP Transaction in March 2017, selling certain RNG production assets and shifting to purchasing RNG from BP and other suppliers. The transaction reduced operating costs and future credit revenue but also eliminated the large 2017 gain from the sale.
The company completed the CEC Combination in December 2017 and retained a 49% equity-method interest in SAFE&CEC S.r.l. The investment generated a $1.4 million loss in Q1 2018; compressor revenue is not expected after the combination.
Management stated that station closures, cost reductions and the CEC Combination are expected to reduce revenue and expense levels in the near term. A sustained decline in market capitalization could trigger more frequent goodwill impairment testing and potentially a material impairment charge.
On May 9, 2018, after quarter-end, the company agreed to sell up to 50.9 million shares to Total Marketing Services at $1.64 per share for gross proceeds of up to $83.4 million. If completed in full, Total would own approximately 25% of the outstanding shares and receive rights to designate up to two directors. If required approvals are not obtained, the transaction could be reduced to up to approximately $50.0 million of proceeds.
The company also signed a non-binding letter of intent with Total regarding a potential heavy-duty natural-gas truck leasing and credit-support program. No assurance was provided that definitive agreements or the program will be completed.

Key Risks and Contingencies

Continued losses, negative operating cash flow and substantial debt maturities may require refinancing, asset sales or additional equity or debt financing.
Revenue and profitability depend on fleet adoption of natural-gas vehicles, natural-gas and oil price differentials, availability of vehicle platforms, competition from electric, hydrogen and other fuels, and government incentives.
RIN, LCFS and AFTC revenue is subject to regulatory changes, credit-price volatility and compliance requirements. The AFTC is not currently authorized for fuel sales after December 31, 2017.
Take-or-pay and fixed-volume contracts could create costs without corresponding revenue if customer demand or fuel sales decline.
Station construction risks include permitting delays, cost overruns, labor shortages, project execution issues and potential asset impairments. Safety, environmental and greenhouse-gas regulations may also increase costs or liability.
The Total investment remains conditional and would dilute existing stockholders. The company may also need additional capital after the 12-month liquidity assessment period.

Investor Verification Checklist

Verify collection timing and ultimate realization of the $25.5 million AFTC receivable and the sustainability of revenue excluding this non-recurring benefit.
Review 2018 debt maturities, refinancing plans and the company’s ability to fund approximately $139.7 million of current principal obligations.
Assess post-divestiture trends in fuel volumes, RIN and LCFS credit revenue, RNG supply economics and gross margin.
Confirm completion, share issuance, dilution, governance rights and use of proceeds under the Total private placement.
Monitor goodwill and long-lived-asset impairment indicators, station closures, NG Advantage performance and the $30.0 million guaranty exposure.
Evaluate the effect of natural-gas prices, competing vehicle technologies and changes to federal and state alternative-fuel programs.