Clean Energy Fuels Corp. quarterly report, Q2 FY2019

Clean Energy Fuels Corp. — Q2 2019 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. It also provides station design, construction, operation and maintenance services; sells renewable fuel credits; transports compressed natural gas through NG Advantage; and supports natural-gas vehicle financing. The filing covers the unaudited three and six months ended June 30, 2019, compared with the periods ended June 30, 2018.

As of June 30, 2019, the company served more than 1,000 fleet customers operating over 47,000 natural-gas vehicles and owned, operated or supplied approximately 540 stations in 41 U.S. states and four Canadian provinces.

Financial highlights

Metric	Q2 2019	Q2 2018	Six months 2019	Six months 2018
Total revenue	$72.3 million	$70.5 million	$150.0 million	$172.9 million
Gross margin	$24.7 million	$24.8 million	$43.6 million	$72.4 million
Operating income (loss)	$(5.8) million	$(8.4) million	$(19.5) million	$7.6 million
Net income (loss) attributable to Clean Energy	$(5.4) million	$(12.0) million	$(16.3) million	$0.2 million
Operating cash flow	Not separately disclosed for the quarter	Not separately disclosed for the quarter	$8.8 million	$22.9 million

Q2 revenue increased 2.6% year over year, while six-month revenue declined 13.2%.
Q2 gross margin was approximately 34.2% of revenue, compared with 35.2% in Q2 2018. Six-month gross margin was approximately 29.1%, compared with 41.9% in the prior-year period.
Q2 net loss attributable to Clean Energy improved by $6.6 million, but the company remained unprofitable. The six-month result declined from a small profit in 2018 to a $16.3 million loss in 2019.
Gasoline-gallon equivalents delivered increased to 99.6 million in Q2 and 194.8 million for the first six months, compared with 89.4 million and 174.5 million, respectively, in the comparable periods.
Volume-related revenue increased to $66.3 million in Q2 and $140.8 million for the first six months. RIN and LCFS credit revenue rose to $5.1 million and $3.0 million, respectively, in Q2, and to $11.2 million and $6.8 million for the first six months.

Liquidity, debt and capital resources

At June 30, 2019, cash, cash equivalents and current and long-term restricted cash totaled $46.5 million; short-term investments totaled $66.6 million. Cash, cash equivalents and short-term investments therefore totaled approximately $107.5 million.
Total debt, net of financing costs, was $80.5 million, including $55.6 million classified as current and $24.9 million classified as long term. Finance lease obligations totaled $3.9 million, and operating lease obligations totaled $25.8 million.
Approximately $55.9 million of debt and finance lease principal was expected to mature in 2020, including the company’s $50.0 million of 7.5% convertible notes due June 2020. The company may issue up to approximately 14.0 million common shares to repay part of certain convertible notes.
The company had no borrowings under its $50.0 million PlainsCapital revolving credit facility as of June 30, 2019. It also had access to a Société Générale term facility of up to $100.0 million for the Zero Now truck financing program, but had not drawn on it.
Management stated that existing cash, investments and anticipated operating and financing cash flows should satisfy requirements for at least the 12 months following the filing date, while noting that additional capital may be needed thereafter.
Cash provided by investing activities was $3.0 million in the first six months of 2019, versus $78.1 million used in the prior-year period. Capital expenditures were $7.7 million during the period, and management expected approximately $18.5 million of company capital expenditures for full-year 2019.

Material changes versus the prior comparable period

The six-month revenue decline was primarily attributable to the absence of $26.9 million of Alternative Fuels Excise Tax Credit revenue recognized in the first half of 2018, lower station construction revenue and the absence of certain used-truck sales.
Higher fuel volumes and increased RIN and LCFS credit revenue partly offset the loss of AFTC revenue. However, the company recorded a $4.4 million unfavorable change in the fair value of commodity swaps and customer fueling-contract derivatives for the first six months of 2019.
Six-month cost of sales increased by $6.0 million to $106.4 million, primarily due to higher gas commodity costs and increased volumes. SG&A declined by $2.4 million to $36.4 million, and depreciation and amortization declined by $1.0 million to $25.1 million.
Interest expense declined by $5.3 million to $3.7 million for the first six months, primarily because of lower outstanding indebtedness.
The company adopted ASC 842 lease accounting on January 1, 2019, adding $24.5 million of operating lease right-of-use assets and $25.8 million of operating lease liabilities at June 30, 2019. Management stated that adoption materially affected the balance sheet but not the income statement or cash flows.
Clean Energy’s controlling interest in NG Advantage increased to 64.6% by June 30, 2019, and the company provided additional financing. NG Advantage had $8.7 million outstanding under a June 2019 convertible note due no later than December 31, 2019 or upon default; the intercompany balance was eliminated in consolidation.

Guidance, outlook, commentary and risks

The filing provides a 2019 capital-expenditure expectation of approximately $18.5 million for Clean Energy and indicates that NG Advantage may spend up to $28.0 million on additional CNG trailers and equipment. It does not provide a clear revenue or earnings guidance range.
Management highlighted continued uncertainty in natural-gas vehicle adoption, including slower or volatile growth in heavy-duty trucking, airports, refuse and public transit, and declining LNG volumes in some markets.
RIN and LCFS credit prices are volatile; management noted that RIN prices had trended lower since approximately early June 2019. Credit prices materially affect revenue and cash generation.
The Zero Now truck financing program creates additional debt capacity, guaranty fees, commodity-swap exposure and potential obligations even if participating fleets do not generate expected fuel volumes. The program also exposes the company to LIBOR transition risk.
The company had two take-or-pay natural-gas purchase contracts, additional fixed-supply commitments, $29.9 million of surety bonds and a guaranty of up to $30.0 million plus fees for certain NG Advantage obligations to BP.
Other key risks include the $50.0 million of convertible notes due in June 2020, possible need for refinancing or additional equity, competition from diesel, electric, hydrogen and other fuels, regulatory and incentive changes, commodity-price volatility, customer and counterparty credit risk, and the continuing losses of NG Advantage.
Management reported compliance with applicable debt covenants as of June 30, 2019, no material pending legal proceedings and effective disclosure controls and procedures.

Important facts for investors to verify

Near-term liquidity and refinancing plans for the $50.0 million of convertible notes due June 2020.
Actual cash generation relative to planned 2019 capital expenditures and NG Advantage’s potential equipment spending.
Participation, fuel volumes, margins and debt utilization under the Zero Now program.
RIN and LCFS credit prices, regulatory eligibility and the effect of credit revenue on reported profitability.
NG Advantage’s operating performance, financing needs, BP obligations and repayment of the June 2019 convertible note.
Exposure to take-or-pay and fixed-supply contracts, commodity swaps, lease obligations and other contingent commitments.
Whether higher delivered volumes can offset lower effective pricing, commodity costs and the absence of AFTC revenue.