Business Context and Reporting Period
Clean Energy Fuels Corp. supplies CNG, LNG and RNG vehicle fuel and related fueling solutions, including station construction, operation and maintenance, compressor equipment, customer vehicle financing and tradable-credit sales. It served nearly 1,000 fleet customers operating more than 46,000 natural-gas vehicles and owned, operated or supplied more than 575 stations as of March 31, 2017. This unaudited Form 10-Q covers the three months ended March 31, 2017, compared with the three months ended March 31, 2016.
Financial Performance and Position
- Revenue: $89.5 million, down 6.6% from $95.8 million. Product revenue declined to $76.2 million from $84.0 million; service revenue increased to $13.3 million from $11.8 million.
- Revenue drivers: Volume-related revenue increased $5.8 million to $73.6 million, while compressor sales declined to $6.5 million from $8.3 million and station construction sales declined to $9.3 million from $13.3 million. The federal VETC tax credit contributed $6.4 million in the prior-year quarter and none in 2017.
- Volumes: Total gallons delivered increased 9.8% to 85.1 million gasoline-gallon equivalents, including CNG of 68.5 million, LNG of 16.0 million and RNG of 0.6 million.
- Gross profit and margin: Gross profit was approximately $28.6 million, compared with $36.5 million. Gross margin declined to approximately 32.0% from 38.1%, primarily because of the loss of VETC revenue, lower construction and compressor sales, and higher fuel costs.
- Operating results: Operating loss widened to $10.5 million from $4.0 million; operating margin was approximately negative 11.7% versus negative 4.2%. SG&A decreased to $23.8 million from $25.6 million, while depreciation and amortization increased to $15.3 million from $15.0 million.
- Net income: Net income attributable to Clean Energy was $61.1 million, or $0.41 basic and $0.40 diluted per share, compared with $2.8 million, or $0.03 per share, in the prior-year quarter. The 2017 result included a $70.6 million gain on the RNG asset sale and a $3.2 million gain from debt extinguishment.
- Cash flow: Operating cash flow was $1.4 million, down from $26.8 million, largely because of working-capital timing and the absence of comparable VETC collections. Investing cash flow was $43.2 million, including $29.0 million of cash proceeds from the asset sale. Financing cash flow was negative $33.7 million, including repayment of the $23.5 million PlainsCapital revolver.
- Liquidity: Cash and cash equivalents were $47.1 million and short-term investments were $50.8 million at March 31, 2017, for total liquidity of approximately $97.9 million. The company stated this liquidity and expected cash flows should fund routine requirements for at least the next 12 months, but additional capital may be needed for capital expenditures, investments or debt repayments.
- Debt: Principal indebtedness was approximately $256.7 million at March 31, 2017. Expected principal maturities were $3.2 million in 2017 and $139.3 million in 2018. Expected 2017 interest obligations were approximately $17.2 million. The company reported compliance with applicable debt covenants and no debt defaults.
- Capital expenditures: Management expected approximately $29.0 million of 2017 capital expenditures, primarily for fueling stations, ANGH station modifications, CNG trailers and LNG plant maintenance.
Material Changes Versus the Prior Comparable Period
- Revenue declined despite higher fuel volumes, primarily because VETC expired on December 31, 2016 and compressor and station-construction sales decreased.
- Volume-related revenue rose, but the effective price per gallon declined to $0.87 from $0.88, while effective cost per gallon increased to $0.55 from $0.52.
- The company completed the sale of certain RNG production assets to BP on March 31, 2017 for $155.5 million, including $30.0 million in cash and a $123.5 million promissory note that BP paid on April 3, 2017. The transaction generated a $70.6 million gain and net proceeds of $143.2 million.
- Following the sale, the company retained the ability to procure and resell RNG as Redeem and will receive certain royalties, but expects lower future RIN and LCFS credit revenue from the divested assets.
- Interest expense decreased to $4.9 million from $9.3 million because of lower indebtedness. The company repurchased a $25.0 million related-party 7.5% convertible note for $21.75 million, recognizing a $3.2 million gain.
- Shares outstanding increased to 149.7 million at March 31, 2017 from 145.5 million at December 31, 2016. The ATM program issued 3.8 million shares for $10.5 million of net proceeds during the quarter.
Guidance, Outlook, Commentary and Risks
- Management expects long-term growth in natural-gas vehicle fuel demand, particularly in heavy-duty trucking, refuse, transit, airports, government fleets and other high-volume fleet markets, but acknowledges that low and volatile oil and diesel prices reduce the fuel-cost advantage of natural gas.
- The company expects continued growth in Redeem RNG fuel, while warning that the RNG asset sale will reduce future credit-related revenue. RIN and LCFS credit prices and regulatory programs remain volatile.
- Management expects operating costs and capital expenditures to increase if station expansion and natural-gas vehicle adoption accelerate. As of March 31, 2017, 38 completed ANGH stations were not open for fueling operations.
- Key risks include the expiration of VETC, dependence on government incentives and environmental programs, competition from gasoline, diesel, electric and hydrogen vehicles, natural-gas and credit-price volatility, execution of station construction, take-or-pay gas commitments, debt refinancing and repayment requirements, and the need for additional capital.
- The company had $62.7 million of outstanding surety bonds, two long-term take-or-pay natural-gas contracts expiring in 2020, and operating leases extending through various dates, including 2038 for certain arrangements.
- Legal proceedings and tax audits arise in the ordinary course. Management does not expect their ultimate resolution to have a material adverse effect, although an unfavorable outcome could materially affect liquidity or results.
Important Facts for Investors to Verify
- Confirm the April 3, 2017 receipt and final settlement of BP’s $123.5 million promissory note and the $2.0 million post-closing adjustment.
- Assess the recurring earnings and cash-flow impact of the $70.6 million RNG asset-sale gain and the expiration of VETC.
- Monitor future RIN and LCFS credit volumes, pricing and revenue after the RNG asset divestiture.
- Review the $139.3 million of debt principal due in 2018 and the company’s ability to refinance, repay in cash or use permitted equity settlement provisions.
- Evaluate whether operating cash flow can support the approximately $29.0 million 2017 capital-expenditure plan, debt service and take-or-pay obligations.
- Track the utilization and economics of the 38 unopened ANGH stations and the pace of natural-gas heavy-duty vehicle adoption.
- Consider dilution from the ATM program, convertible notes, options, restricted stock units and future equity financing.