Clean Energy Fuels Corp. — Q3 2013 Form 10-Q Summary
Reporting period: Quarterly and nine-month periods ended September 30, 2013; unaudited financial statements. The company sells CNG, LNG and RNG fueling solutions, operates or supplies more than 440 natural-gas fueling stations in the United States and Canada, provides station construction and maintenance, manufactures compressors, and sells environmental credits.
Financial performance and key metrics
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Total revenue | $86.3 million | $91.5 million | $267.5 million | $234.9 million |
| Gross margin | $31.5 million | $20.2 million | $100.0 million | $59.3 million |
| Operating loss | $11.6 million | $13.7 million | $32.6 million | $49.0 million |
| Net loss attributable to Clean Energy | $18.8 million | $16.3 million | $34.7 million | $59.5 million |
| Loss per share | $0.20 | $0.19 | $0.37 | $0.69 |
| Gasoline-gallon equivalents delivered | 56.4 million | 50.9 million | 158.9 million | 143.2 million |
Q3 gross margin was approximately 36.5% of revenue versus 22.1% in the prior-year quarter. Nine-month gross margin was approximately 37.4% versus 25.2%. The improvement primarily reflected lower station-construction and BAF-related costs, higher fuel volumes and $6.0 million of third-quarter federal volumetric excise tax credit revenue.
- Product revenue was $75.4 million in Q3 and $237.2 million for the first nine months; service revenue was $10.9 million and $30.2 million, respectively.
- SG&A increased to $33.5 million in Q3 and $101.6 million for the first nine months, driven by expanded sales and management staffing, professional costs, travel, and growth initiatives.
- Interest expense increased to $7.4 million in Q3 and $18.8 million for the first nine months, primarily because of additional convertible notes, the Mavrix Note and the September 2013 notes offering.
- Operating results included non-cash Series I warrant valuation gains of $1.4 million in Q3 and $0.9 million for the first nine months.
Cash flow, liquidity and capital structure
- Cash used in operating activities was $2.4 million for the first nine months of 2013, compared with $18.9 million used in the prior-year period.
- Cash used in investing activities was $45.8 million, including $60.0 million of property and equipment purchases, compared with $126.5 million used in the prior-year period.
- Cash provided by financing activities was $292.0 million, principally from $250.0 million of 5.25% convertible senior notes, $50.0 million of additional 7.5% Notes and $10.0 million of Mavrix advances.
- Cash and cash equivalents increased to $352.1 million at September 30, 2013 from $108.5 million at December 31, 2012. Short-term investments were $54.3 million; restricted cash totaled $11.2 million.
- Total debt and capital lease obligations were $620.2 million, compared with $331.0 million at December 31, 2012. Long-term debt and capital lease obligations, including the related-party debt classification, totaled approximately $594.4 million.
- The company reported compliance with the covenants for IMW, DCEMB, the 7.5% Notes, SLG Notes, GE Credit Agreement, Mavrix Note and 5.25% Notes at September 30, 2013.
Material changes versus the prior comparable period
- Revenue declined 5.6% in Q3 despite a 10.8% increase in delivered volumes, primarily because large station-construction projects in the prior-year quarter did not recur and BAF was sold in June 2013.
- Nine-month revenue increased 13.9%, supported by higher CNG, LNG and RNG volumes, increased IMW compressor revenue, and $38.1 million of VETC revenue, including $20.8 million related to 2012 fuel sales.
- Station-construction revenue declined by approximately $25.8 million in Q3 and $33.4 million for the first nine months.
- IMW revenue increased by $5.6 million in Q3 and $14.8 million for the first nine months. BAF contributed approximately $7.0 million of nine-month 2013 revenue versus $18.3 million in the comparable period before its sale.
- The company acquired MGES in May 2013 for approximately $21.0 million, paid with cash and common stock, and sold BAF in June 2013 for consideration valued at approximately $27.2 million, recognizing a $15.5 million gain.
- The company sold its 49% Peru joint-venture interest in March 2013 for $6.1 million after receiving a $1.1 million dividend and recognized a $4.7 million gain.
Guidance, outlook and management commentary
- Management expects long-term growth in natural-gas vehicle fuel demand and plans to expand CNG, LNG and RNG sales across trucking, refuse, airports, taxis, transit, marine and rail markets.
- America’s Natural Gas Highway had 70 completed stations as of September 30, 2013, with 11 open and selling fuel, in addition to six earlier stations. Expansion is being paced with adoption of suitable heavy-duty natural-gas engines and tractors.
- The company expected approximately $54.5 million of capital expenditures from October 1 through December 31, 2013, primarily for fueling stations, LNG and RNG facilities, and LNG trailers. It stated that additional capital may be required for future expenditures, investments or acquisitions.
- The company expected its North Shelby, Tennessee RNG facility to be operational in the first quarter of 2014 and planned to expand its California LNG plant and landfill-gas processing facilities.
- GE had committed up to $200.0 million for two LNG production facilities, but no amounts had been drawn at September 30, 2013. Funding remained subject to conditions including site control, permits, utilities and construction contracts.
Risks, contingencies and unusual items
- Profitability remains dependent in part on government incentives. The company recognized $38.1 million of VETC revenue in the first nine months; the credit was extended through 2013 and made retroactive to January 1, 2012.
- ANGH requires substantial capital and depends on availability and adoption of heavy-duty natural-gas trucks, particularly the Cummins-Westport 11.9-liter engine. Delays, weak adoption or underutilized stations could materially impair results and debt repayment capacity.
- The company had two LNG take-or-pay contracts, one expiring in June 2014 and the other in October 2017, creating potential costs if LNG demand is insufficient.
- RNG production at the McCommas Bluff and Canton facilities was below expectations due to plant-performance and equipment issues. The company was pursuing remedies and corrective actions, but success was not assured.
- Off-balance-sheet arrangements included $68.7 million of surety bonds, operating leases and LNG purchase commitments.
- Legal proceedings and tax audits arise in the ordinary course. The filing states that ultimate liabilities cannot be determined, although management did not expect a material adverse resolution.
- Potential dilution was significant: outstanding options, RSUs, warrants and convertible notes represented substantial additional shares, including approximately 35.2 million shares related to anti-dilutive instruments as of September 30, 2013.
Investor verification points
- Verify the sustainability of operating performance excluding the $38.1 million of VETC revenue and other nonrecurring gains.
- Assess whether higher fuel volumes and gross margins can offset rising SG&A, depreciation, interest expense and capital requirements.
- Review the maturity, conversion, collateral and covenant terms of the approximately $620.2 million debt balance.
- Monitor ANGH station utilization, heavy-duty natural-gas truck adoption and the availability of the Cummins-Westport 11.9-liter engine.
- Evaluate LNG supply, take-or-pay exposure, RNG plant performance and the timing and cost of planned capital expenditures.
- Confirm the status of the $3.0 million BAF consideration holdback and potential indemnification obligations, as well as the $1.0 million MGES purchase-price retention.