Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (the “MD&A”) should be read together with the unaudited condensed consolidated financial statements and the related notes included in this report. For additional context with which to understand our financial condition and results of operations, refer to the MD&A for the fiscal year ended
December 31, 2016
included in our Annual Report on Form 10-K for our fiscal year ended
December 31, 2016
, which was filed with the Securities and Exchange Commission (“SEC”) on March 7, 2017, as well as the audited consolidated financial statements and notes included therein (collectively, our “2016 10-K”). Unless the context indicates otherwise, all references to “Clean Energy,” the “Company,” “we,” “us,” or “our” in this MD&A and elsewhere in this report refer to Clean Energy Fuels Corp. together with its majority and wholly owned subsidiaries.
Cautionary Statement Regarding Forward Looking Statements
This Management’s Discussion and Analysis of Financial Condition and Results of Operations (the “MD&A”) and other sections of this report contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements relate to future events or circumstances or our future financial performance and are based upon our current assumptions, expectations and beliefs concerning future developments and their potential effect on our business. In some cases, you can identify forward-looking statements by the following words: “if,” “may,” “might,” “shall,” “will,” “can,” “could,” “would,” “should,” “expect,” “intend,” “plan,” “goal,” “objective,” “initiative,” “anticipate,” “believe,” “estimate,” “predict,” “project,” “forecast,” “potential,” “continue,” “ongoing” or the negative of these terms or other comparable terminology, although the absence of these words does not mean that a statement is not forward-looking. We believe the statements we make in this MD&A about our future financial and operating performance, our growth strategies and anticipated trends in our industry and our business are forward-looking by their nature. Although the forward-looking statements in this MD&A reflect our good faith judgment, based on currently available information, they are only predictions and involve known and unknown risks, uncertainties and other factors that may cause our or our industry's actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. Factors that might cause or contribute to such differences include, among others, those discussed under “Risk Factors” in this report and in our 2016 Form 10-K. As a result of these and other potential risk factors, the forward-looking statements in this MD&A may not prove to be accurate. All forward-looking statements in this MD&A are made only as of the date of this document and, except as required by law, we undertake no obligation to update publicly any forward-looking statements for any reason, including to conform these statements to actual results or to changes in our expectations.
Overview
We are the leading provider of natural gas as an alternative fuel for vehicle fleets in the United States and Canada, based on the number of stations operated and the amount of gasoline gallon equivalents ("GGEs") of renewable natural gas ("RNG"), compressed natural gas ("CNG") and liquefied natural gas ("LNG") delivered. Our principal business is supplying RNG, CNG and LNG (RNG can be delivered in the form of CNG or LNG) for light, medium and heavy-duty vehicles and providing operation and maintenance ("O&M") services for vehicle fleet customer stations. As a comprehensive solution provider, we also design,
build, operate and maintain fueling stations; manufacture, sell and service non-lubricated natural gas fueling compressors and other equipment used in CNG stations and LNG stations; offer assessment, design and modification solutions to provide operators with code-compliant service and maintenance facilities for natural gas vehicle fleets; transport and sell CNG and LNG to industrial and institutional energy users who do not have direct access to natural gas pipelines; procure and sell RNG; sell tradable credits we generate by selling natural gas and RNG as a vehicle fuel, including credits under the California and Oregon Low Carbon Fuel Standards (collectively, "LCFS Credits") and Renewable Identification Numbers ("RIN Credits" or "RINs") under the federal Renewable Fuel Standard Phase 2; help our customers acquire and finance natural gas vehicles; and obtain federal, state and local tax credits, grants and incentives.
We serve fleet vehicle operators in a variety of markets, including heavy-duty trucking, airports, refuse, public transit, government fleets, and industrial and institutional energy users. We believe these fleet markets will continue to present a growth opportunity for natural gas vehicle fuel for the foreseeable future. As of
June 30, 2017
, we serve nearly
1,000
fleet customers operating over
46,000
natural gas vehicles, and we own, operate or supply approximately
575
natural gas fueling stations in
42
states in the United States and four provinces in Canada.
Performance Overview
The following performance overview discusses matters on which our management focuses in evaluating our financial condition and operating performance and results.
Sources of Revenue
The following table represents our sources of revenue:
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Revenue (in millions)
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|
Three Months
Ended
June 30,
2016
|
|
Three Months
Ended
June 30,
2017
|
|
Six Months
Ended
June 30,
2016
|
|
Six Months
Ended
June 30,
2017
|
Volume Related (1)
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$
|
71.6
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|
|
$
|
63.3
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|
|
$
|
139.5
|
|
|
$
|
136.9
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Compressor Sales
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8.8
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5.2
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17.1
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11.7
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Station Construction Sales
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21.1
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12.3
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34.3
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21.6
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VETC (2)
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6.5
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—
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12.9
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—
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Other
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—
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0.2
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—
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0.3
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Total
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$
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108.0
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$
|
81.0
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$
|
203.8
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$
|
170.5
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(1)
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Our volume-related revenue primarily consists of sales of CNG, LNG and RNG fuel, sales of RINs and LCFS Credits and performance of O&M services.
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(2)
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Represents a federal alternative fuels tax credit that we refer to as "VETC," which expired December 31, 2016.
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Key Operating Data
In evaluating our operating performance, our management focuses primarily on: (1) the amount of CNG, LNG and RNG gasoline gallon equivalents delivered (which we define as (i) the volume of gasoline gallon equivalents we sell to our customers, plus (ii) the volume of gasoline gallon equivalents dispensed at facilities we do not own but where we provide O&M services on a per-gallon or fixed fee basis, plus (iii) our proportionate share of the gasoline gallon equivalents sold as CNG by our joint venture with Mansfield Ventures, LLC called Mansfield Clean Energy Partners, LLC (“MCEP”), plus (iv) our proportionate share (as applicable) of the gasoline gallon equivalents of RNG produced and sold as pipeline quality natural gas by the RNG production facilities we owned or operated), (2) our station construction cost of sales, (3) our gross margin (which we define as revenue minus cost of sales), and (4) net income (loss) attributable to us. The following tables, which should be read in conjunction with the condensed consolidated financial statements and notes included in this report and the consolidated financial statements and notes included in our 2016 Form 10-K, present our key operating data for the years ended December 31, 2014, 2015, and 2016 and for the
three and six
months ended
June 30, 2016
and
2017
:
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Gasoline gallon equivalents
delivered (in millions)
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|
Year Ended
December 31,
2014
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Year Ended
December 31,
2015
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|
Year Ended
December 31,
2016
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Three Months
Ended
June 30,
2016
|
|
Three Months
Ended
June 30,
2017
|
|
Six Months
Ended
June 30,
2016
|
|
Six Months
Ended
June 30,
2017
|
CNG (1)
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182.6
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229.2
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|
259.2
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63.9
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71.1
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125.0
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139.6
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RNG (2)
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12.2
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8.8
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3.0
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0.6
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0.6
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1.6
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1.2
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LNG
|
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70.3
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|
70.5
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66.8
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18.4
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16.7
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|
33.8
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|
|
32.7
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Total
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265.1
|
|
|
308.5
|
|
|
329.0
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|
|
82.9
|
|
|
88.4
|
|
|
160.4
|
|
|
173.5
|
|
|
|
|
|
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Gasoline gallon equivalents
delivered (in millions)
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|
Year Ended
December 31,
2014
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Year Ended
December 31,
2015
|
|
Year Ended
December 31,
2016
|
|
Three Months
Ended
June 30,
2016
|
|
Three Months
Ended
June 30,
2017
|
|
Six Months
Ended
June 30,
2016
|
|
Six Months
Ended
June 30,
2017
|
O&M
|
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137.3
|
|
|
159.3
|
|
|
176.6
|
|
|
44.4
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50.3
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|
|
84.7
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|
|
97.0
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Fuel (1)
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|
108.2
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|
|
130.1
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|
128.5
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32.6
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31.8
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64.5
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64.4
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Fuel and O&M (3)
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19.6
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19.1
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23.9
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5.9
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6.3
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11.2
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12.1
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Total
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265.1
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|
308.5
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|
329.0
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|
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82.9
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88.4
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160.4
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|
173.5
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Other operating data (in millions)
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Year Ended
December 31,
2014
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Year Ended
December 31,
2015
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Year Ended
December 31,
2016
|
|
Three Months
Ended
June 30,
2016
|
|
Three Months
Ended
June 30,
2017
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|
Six Months
Ended
June 30,
2016
|
|
Six Months
Ended
June 30,
2017
|
Station construction cost of sales
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56.3
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32.3
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57.0
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17.8
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11.3
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29.1
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|
|
19.7
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Gross margin
|
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$
|
120.2
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$
|
125.8
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|
$
|
147.1
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|
39.3
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23.7
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|
75.8
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|
52.3
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|
Net income (loss) attributable to Clean Energy Fuels. Corp (4)
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$
|
(89.7
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)
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$
|
(134.2
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)
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$
|
(12.2
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)
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$
|
1.5
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|
$
|
(17.8
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)
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$
|
4.4
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$
|
43.3
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(1) As noted above, amounts include our proportionate share of the GGEs sold as CNG by our joint venture MCEP. GGEs sold by this joint venture were 0.0 million, 0.4 million, and 0.5 million, for the years ended December 31, 2014, 2015, and 2016, respectively,
0.1 million
and
0.1 million
for the three months ended
June 30, 2016
and
2017
, respectively, and
0.2 million
and
0.3 million
for the
six
months ended
June 30, 2016
and
2017
, respectively.
(2) Represents RNG sold as non-vehicle fuel. RNG sold as vehicle fuel, also known as Redeem™, is included in CNG and LNG.
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(3)
|
Represents gasoline gallon equivalents at stations where we provide both fuel and O&M services.
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(4)
|
Includes the following amounts of VETC: $28.4 million, $31.0 million, and $26.6 million for the years ended December 31, 2014, 2015, and 2016, respectively,
$6.5 million
and
$0.0
million for the three months ended
June 30, 2016
and
2017
, respectively, and
$12.9 million
and
$0.0 million
for the
six
months ended
June 30, 2016
and
2017
, respectively. See the discussion under “Recent Developments—VETC Expiration” below.
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Recent Developments
Purchase of Natural Gas Heavy -Duty Trucks.
On July 25, 2017, the Company entered into an arrangement for the purchase of 147 used natural gas heavy -duty trucks valued at $9.4 million by December 29, 2017, with the intention of selling the trucks to our customers.
NG Advantage's Arrangement with BP Energy.
In June 2017, our subsidiary NG Advantage, LLC (“NG Advantage”) entered into an arrangement for the purchase, sale and transportation of CNG over a five-year period. The arrangement is customary and ordinary course and provides for a payment of a nonrefundable amount of $8.35 million to reserve a specified volume of CNG transportation capacity under the arrangement, which advance was paid to NG Advantage on July 3, 2017.
Contribution of Milton CNG Station.
On July 14, 2017, we contributed to NG Advantage all of our right, title and interest in and to a CNG station located in Milton, Vermont. We purchased the Milton CNG station from NG Advantage in October 2014 and, also in October 2014, entered into a lease agreement with NG Advantage pursuant to which we leased the station to NG Advantage. This lease agreement relating to the Milton CNG station was terminated contemporaneously with the contribution. As consideration for the contribution, NG Advantage issued to us Series A Preferred Units with an aggregate value of $7.5 million. The Series A Preferred Units provide for an accrued return in the event of a liquidation event with respect to NG Advantage and will convert into common units of NG Advantage if and when it completes a future equity financing that satisfies certain specified conditions, but the Series A Preferred Units do not, in themselves, increase our controlling interest in NG Advantage. As a result, following the contribution, our controlling interest in NG Advantage remains at 53.3%.
Termination of ATM Program.
On May 31, 2017, we terminated our equity distribution agreement (the “Sales Agreement”) with Citigroup Global Markets Inc. (“Citigroup”), as sales agent and/or principal. The Sales Agreement was terminable at will upon written notification by us with no penalty. Pursuant to the Sales Agreement, we were entitled to issue and sell, from time to
time, through or to Citigroup shares of our common stock having an aggregate offering price of up to $200.0 million in an “at-the-market” offering program (the “ATM Program”). The ATM Program commenced on November 11, 2015 when we and Citigroup entered into the original equity distribution agreement, which was amended and restated on September 9, 2016 and again on December 21, 2016 prior to its termination.
Asset Sale
. On February 27, 2017, Clean Energy Renewable Fuels ("Renewables"), our subsidiary, entered into an asset purchase agreement (the “APA”) with BP Products North America, Inc. (“BP”), pursuant to which Renewables agreed to sell to BP certain assets relating to its RNG production business (the “Asset Sale”), consisting of Renewables’ two existing RNG production facilities, Renewables’ interest in the RNG Ventures and Renewables’ third-party RNG supply contracts (the “Assets”). The Asset Sale was completed on March 31, 2017 for a sale price of
$155.5 million
, plus BP assumed the obligations under the Canton Bonds (as defined in Note
12
) which totaled
$8.8 million
as of March 31, 2017.
On March 31, 2017, BP paid Renewables
$30.0 million
in cash and delivered to Renewables a promissory note with a principal amount of
$123.5 million
, which was paid in full on April 3, 2017. In addition, on June 22, 2017, BP paid Renewables an additional
$2.0 million
related to the determination of certain post-closing adjustments. Renewables recognized a gain of
$69.9 million
as of June 30, 2017 from the Asset Sale. Pursuant to the APA, the valuation date of the Asset Sale was January 1, 2017, and the APA included certain adjustments to the purchase price to reflect a determination of the amount of cash accumulated by Renewables from the valuation date to the closing date, net of permitted cash outflows. Control of the Assets was not transferred until the Asset Sale was completed on March 31, 2017. Accordingly, the full operating results of Renewables are included in the condensed consolidated statement of operations through March 31, 2017.
In addition, under the APA, BP is required, following the closing of the Asset Sale, to pay Renewables up to an additional
$25.0 million
in cash over a five-year period if certain performance criteria relating to the Assets are met.
We incurred
$3.7 million
in transaction fees in connection with the Asset Sale, and paid all such fees subsequent to March 31, 2017. Also, subsequent to March 31, 2017, we paid
$8.6 million
in cash and issued
770,269
shares of common stock to holders of Renewables Option Awards (as defined and discussed below). The net proceeds from the Asset Sale, net of
$1.0 million
cash transferred to BP were
$142.2 million
.
Following completion of the Asset Sale, we are continuing to procure RNG from BP under a long-term supply contract and from other RNG suppliers, and resell such RNG through our natural gas vehicle fueling infrastructure as Redeem™, our RNG vehicle fuel. We collect royalties from BP on gas purchased from BP and sold as Redeem™ at our stations, which royalty is in addition to any payment obligation of BP under the APA.
Renewables Options.
In September 2013, Renewables established the 2013 Unit Option Plan (the “Renewables Plan”) and granted unit option awards thereunder (the “Renewables Option Awards”) to certain of its service providers. In connection with the closing of the Asset Sale, all holders of outstanding Renewables Option Awards entered into a surrender agreement with us and Renewables, pursuant to which (i) all Renewables Option Awards held by holders who were not members of Renewables’ Board of Managers were surrendered and canceled in full in exchange for, upon the closing of the Asset Sale and Renewables’ receipt of any future cash payment pursuant to the terms of the APA, a cash payment in an amount determined based on such holder’s percentage ownership of Renewables following a cashless “net exercise” of such holder’s Renewables Option Awards, and (ii) all Renewables Option Awards held by members of Renewables’ Board of Managers were surrendered and canceled in full in exchange for, upon the closing of the Asset Sale and Renewables’ receipt of any future cash payment pursuant to the terms of the APA, awards of shares of our common stock (the “Company Stock Awards”). The number of shares of our common stock subject to each Company Stock Award was calculated by dividing the cash payment to which the applicable holder would have been entitled as described in (i) above by the closing price of our common stock on March 31, 2017, the closing date of the Asset Sale. All Company Stock Awards were granted under our 2016 Performance Incentive Plan and are fully vested upon grant, and the shares subject to such awards are freely tradable upon issuance, subject to applicable securities laws relating to shares held by our affiliates.
Debt Repurchase.
In February 2017, we purchased from one of our directors and significant stockholders, T. Boone Pickens ("Mr. Pickens"), the 7.5% Convertible Note due July 2018 having an outstanding principal amount of $25.0 million held by Mr. Pickens for a cash purchase price of $21.75 million. See Note
12
to the condensed consolidated financial statements included in this report for additional information about our outstanding debt.
VETC Expiration.
On December 31, 2016, the VETC alternative fuels tax credit expired and ceased to be available and may not be available in any subsequent period. Under VETC, we were eligible to receive credits of $0.50 per gasoline gallon equivalent of CNG and $0.50 per diesel gallon equivalent of LNG that we sold as a vehicle fuel from January 1, 2016 through December 31, 2016.
Business Risks and Uncertainties
Our business and prospects are exposed to numerous risks and uncertainties. For more information, see “Risk Factors” in Part II, Item 1A of this report.
Key Trends
Market for Natural Gas.
CNG and LNG are generally less expensive than gasoline and diesel on an energy equivalent basis. Additionally, according to studies conducted by the California Air Resources Board ("CARB") and Argonne National Laboratory, a research laboratory operated by the University of Chicago for the U.S. Department of Energy, CNG and LNG are cleaner than gasoline and diesel fuel. According to the U.S. Energy Information Administration, demand for natural gas fuels in the United States has increased in recent years and is expected to continue to increase. We believe this growth in demand is attributable primarily to the higher prices of gasoline and diesel relative to CNG and LNG, increasingly stringent environmental regulations affecting vehicle fleets and increased supply of natural gas.
Since approximately mid-2014, however, the prices of oil, gasoline, diesel and natural gas have been significantly lower and volatile, and these trends of lower prices and volatility may continue. These conditions have resulted in lower revenue levels in certain recent periods, which we believe is due in large part to slowed and reduced growth in overall demand for natural gas as a vehicle fuel caused by a decreased pricing advantage when comparing natural gas prices to diesel and gasoline prices. These conditions have also caused us to reduce the prices we have been charging our customers for CNG and LNG in certain periods, which has reduced our profit margins. Additionally, to the extent these conditions have contributed to curtailed demand or slowed growth in the market for natural gas as a vehicle fuel, we believe they have also contributed to decreases in compressor sales and station construction activity in certain periods, as the success of these components of our operations is dependent upon the success of the natural gas vehicle fuels market generally. If these volatile and lower-pricing conditions and other uncertainties persist, our financial results may continue to be adversely affected.
Our Performance.
Our gross revenue mostly consists of volume -related revenue, compressor and other equipment sales, station construction sales, and historically, VETC revenue. Our revenue can vary between periods due to a variety of factors, including, among others, the amount and timing of compressor and other equipment sales, station construction sales, sales of RINs and LCFS Credits and recognition of any other government credits, fluctuations in commodity costs and natural gas prices and sale activity. Our volume-related revenue, which is further discussed below, increased from 2014 to 2016 due largely to the increase in gallons delivered across this period; however, volume-related revenue declined in the three and six months ended June 30, 2017 compared to the same periods in 2016, primarily due to decreased revenue from sales of RINs and LCFS Credits as a result of the Asset Sale. We expect this trend of lower volume-related revenue primarily due to decreased revenue from sales of RINs and LCFS Credits as a result of the Asset Sale to continue.
Our cost of sales can also vary between periods due to a variety of factors, including fluctuations in commodity costs, compressor equipment, station construction, and labor costs.
In addition, our performance in certain recent periods has been materially affected by certain non-cash gains relating to particular transactions or events. For example, our results for the six months ended June 30, 2016 and 2017 were positively affected by gains related to repurchases and retirements of our outstanding convertible debt, and our results for the six months ended June 30, 2017 were also positively affected by the gain from the Asset Sale. These or other gains or losses may not recur regularly, in the same amounts or at all in future periods and, with respect to non-cash gains and losses, which do not impact our liquidity.
See "Results of Operations" below for a further discussion of our performance.
Volume-Related Revenue.
The amount of CNG, LNG and RNG GGEs we delivered increased by
24.1%
from
2014
to
2016
and by
8.2%
from the first
six
months of
2016
compared to the same period in
2017
.
The RNG we sell for vehicle fuel is delivered in the form of CNG or LNG and is distributed under the name Redeem™. The amount of Redeem™ vehicle fuel we delivered increased by 190.1% from 20.2 million GGEs in
2014
to 58.6 million GGEs in
2016
, and by
14.0%
from
30.1 million
GGEs in the first
six
months of
2016
to
34.3 million
GGEs for the same period in
2017
.
We believe demand for Redeem™ is largely attributable to the lower greenhouse gas emissions that it produces relative to gasoline and diesel, and we expected our Redeem™ business will continue to grow. Our sales of increasing volumes of CNG, LNG and RNG for use as a vehicle fuel has caused us to generate increasing amounts of RINs and LCFS Credits, which together with the increasing prices for RINs and LCFS Credits, has resulted in increased revenue associated with these credits.
The following table summarizes our revenue from RINs and LCFS Credits in the periods presented:
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|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
Six Months Ended June 30,
|
(In millions)
|
2016
|
|
2017
|
|
2016
|
|
2017
|
RIN Credits
|
$
|
7.5
|
|
|
$
|
3.7
|
|
|
$
|
13.1
|
|
|
$
|
13.4
|
|
LCFS Credits
|
5.5
|
|
|
0.4
|
|
|
10.9
|
|
|
2.9
|
|
Total
|
$
|
13.0
|
|
|
$
|
4.1
|
|
|
$
|
24.0
|
|
|
$
|
16.3
|
|
Although we will continue to generate revenue relating to the sale of RINs and LCFS Credits from our continued sales of our Redeem™ RNG vehicle fuel, the amount of revenue we will receive from the sale of these credits has decreased as a result of the Asset Sale, which adversely affects our results of operations, in particular our volume -related revenue, and reduces our effective price per gallon. Pursuant to the terms of the APA, $5.1 million of revenue attributable to sales of RINs and LCFS Credits in the first quarter of 2017 was included as a reduction of the gain from the Asset Sale, as an adjustment to the purchase price (See Note
2
).
The markets for RINs and LCFS Credits have historically been volatile, and the prices for these credits have been subject to significant fluctuations. Additionally, the value of RINs and LCFS Credits may be adversely affected by any changes to the federal and state programs under which such credits are generated and sold. For example, CARB recently raised the carbon intensity rating of the RNG we sell in California, which will reduce the amount of LCFS Credits we generate.
Anticipated Future Trends
Although natural gas continues to be less expensive than gasoline and diesel in most markets, the price of natural gas vehicle fuel has been closer to the prices of gasoline and diesel in recent years as a result of lower oil prices, thereby reducing the price advantage of natural gas as a vehicle fuel. We anticipate that, over the long term, the prices for gasoline and diesel will continue to be higher than the price of natural gas as a vehicle fuel and will increase overall, which would improve the cost savings of natural gas compared to gasoline and diesel. It is uncertain, however, whether and when the prices for gasoline and diesel will increase, and we expect that adoption of natural gas as a vehicle fuel and growth in our customer base and revenue will be negatively affected while oil and diesel prices remain low. Our belief that natural gas will continue, over the long term, to be a cheaper vehicle fuel than gasoline or diesel is based in large part on the growth in recent years of natural gas production in the United States, as well as increasingly stringent environmental regulations affecting vehicle fleets, which we believe drives the market for alternative vehicle fuels generally.
We believe natural gas fuels are well-suited for use by vehicle fleets that consume high volumes of fuel, refuel at centralized locations or along well-defined routes and/or are increasingly required to reduce emissions. As a result, we believe there will be growth in the consumption of natural gas as a vehicle fuel among vehicle fleets, and our goal is to capitalize on this trend if and when it materializes. Our business plan calls for expanding our sales of natural gas vehicle fuel in the markets in which we operate, including heavy-duty trucking, airports, refuse, public transit, government fleets and industrial and institutional energy users, and pursuing additional markets as opportunities arise. Additionally, we expect that the lower greenhouse gas emissions associated with our Redeem™ vehicle fuel will result in increased demand for this fuel, resulting in our delivery of increasing volumes of Redeem™ to our vehicle fleet customers. If these projections materialize and our business grows as we anticipate, then our operating costs and capital expenditures will increase, primarily from the anticipated expansion of our station network, additional investments in ANGH stations to add CNG fueling, purchases of additional CNG trailers by NG Advantage, LNG plant maintenance costs, and increased RNG purchases from third-party producers, as well as the logistics of delivering more natural gas fuel to our customers. We also may seek to acquire assets and/or businesses that are in the natural gas fueling infrastructure, which may require us to spend additional capital.
We expect competition in the market for natural gas vehicle fuel to remain steady in the near-term, but we expect competition in the vehicle fuels market generally to increase. Any such increased competition may reduce our customer base and revenue and may lead to amplified pricing pressure, reduced operating margins and fewer expansion opportunities.
Several factors create potential uncertainties relating to the future market for natural gas as a vehicle fuel. These factors include growing favor by lawmakers, regulators, other policymakers, environmental organizations or other powerful groups for non-natural gas fuels and vehicles, including long-standing support for gasoline and diesel-powered vehicles and growing favor for electric and/or hydrogen-powered vehicles, and the availability and effect on our business of environmental and other regulations, programs or incentives. Subsequent to December 31, 2016, our stock price has declined due to adverse macroeconomic conditions surrounding the energy industry which could also lead to decreased cash flows which may indicate the carrying value of our goodwill or long lived assets is impaired. As a result of the recent volatility of our market capitalization and possible
decrease in cash flows, it is possible that our goodwill or long lived assets could become impaired, which could result in a material charge and adversely affect our results of operations. See “Risk Factors” in Part II, Item 1A of this report for additional information.
Debt Compliance
Certain of the agreements governing our outstanding debt, which are discussed in Note
12
to our condensed consolidated financial statements included in this report, have certain non-financial covenants with which we must comply. As of
June 30, 2017
, we were in compliance with all of these covenants.
Risk Management Activities
Our risk management activities are discussed in the MD&A of our
2016
Form 10-K. In the
six
months ended
June 30, 2017
, there were no material changes to our risk management activities.
Critical Accounting Policies
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our condensed consolidated financial statements.
|
|
•
|
Impairment of goodwill and long-lived assets;
|
Our critical accounting policies and estimates are discussed in the MD&A of our
2016
Form 10-K. For the
six
months ended
June 30, 2017
, there were no material changes to our critical accounting policies.
Recently Issued and Adopted Accounting Standards
For a description of recently issued and adopted accounting standards, see Note
18
to the condensed consolidated financial statements included in this report.
Results of Operations
Three Months Ended
June 30, 2016
Compared to Three Months Ended
June 30, 2017
The table below presents our results of operations as a percentage of total revenue and the narrative that follows provides a detailed discussion of certain line items for the periods presented.
|
|
|
|
|
|
|
|
|
Three Months Ended June 30,
|
|
|
2016
|
|
2017
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
Product revenue
|
87.7
|
%
|
|
83.7
|
%
|
|
Service revenue
|
12.3
|
|
|
16.3
|
|
|
Total revenue
|
100.0
|
|
|
100.0
|
|
|
Operating expenses:
|
|
|
|
|
|
|
Cost of sales (exclusive of depreciation and amortization shown separately below):
|
|
|
|
|
|
|
Product cost of sales
|
57.3
|
|
|
62.7
|
|
|
Service cost of sales
|
6.3
|
|
|
8.0
|
|
|
Selling, general and administrative
|
23.4
|
|
|
28.8
|
|
|
Depreciation and amortization
|
13.8
|
|
|
17.7
|
|
|
Total operating expenses
|
100.8
|
|
|
117.2
|
|
|
Operating loss
|
(0.8
|
)
|
|
(17.2
|
)
|
|
Interest expense
|
(7.5
|
)
|
|
(5.3
|
)
|
|
Interest income
|
0.3
|
|
|
0.6
|
|
|
Other income (expense), net
|
(0.1
|
)
|
|
0.2
|
|
|
Income (loss) from equity method investments
|
0.1
|
|
|
0.0
|
|
|
Gain from extinguishment of debt
|
9.4
|
|
|
—
|
|
|
Gain (loss) from sale of certain assets of subsidiary
|
—
|
|
|
(0.9
|
)
|
|
Income (loss) before income taxes
|
1.4
|
|
|
(22.6
|
)
|
|
Income tax benefit (expense)
|
(0.4
|
)
|
|
(0.2
|
)
|
|
Net income (loss)
|
1.0
|
|
|
(22.8
|
)
|
|
Loss attributable to noncontrolling interest
|
0.6
|
|
|
0.9
|
|
|
Net income (loss) attributable to Clean Energy Fuels Corp.
|
1.6
|
%
|
|
(21.9
|
)%
|
|
Revenue.
Revenue decreased by
$27.0 million
to
$81.0 million
in the
three months ended June 30,
2017
, from
$108.0 million
in the
three months ended June 30, 2016
. This decrease was primarily due to the expiration of VETC in addition to lower volume -related revenue, compressor revenue and station construction sales.
Volume -related revenue decreased by
$8.3 million
between periods primarily due to reduced revenue received from sales of RINs and LCFS Credits. Although we continue to generate revenue from the sale of RINs and LCFS Credits in connection with sales of our Redeem™ RNG vehicle fuel, the amount of revenue we receive from the sale of these credits has decreased as a result of the Asset Sale. See "Recent Developments" and Note
2
to the condensed consolidated financial statements included in this report for additional information about the Asset Sale. The decrease in volume -related revenue was partially offset by an increase of
5.5 million
gallons delivered.
This increase in gallons delivered was due to a
7.2 million
gallon increase in CNG gallons delivered, which was primarily attributable to 23 new refuse customers, five new transit customers, and two new trucking customers. This increase was partially offset by a
1.7 million
decrease in LNG gallons delivered as non-vehicle fuel. Our effective price per gallon charged was
$0.72
for the three months ended
June 30, 2017
, a
$0.14
per gallon decrease from
$0.86
per gallon for the three months ended
June 30, 2016
. Our effective price per gallon is defined as revenue generated from selling CNG, LNG, RNG, and any related RINs and LCFS Credits and providing O&M services to our vehicle fleet customers at stations we do not own and for which we receive a per-gallon or fixed fee, all divided by the total GGEs delivered less GGEs delivered by non-consolidated entities, such as entities
that are accounted for under the equity method. The decrease in our effective price per gallon between periods was primarily due to lower revenue from sales of RINs and LCFS Credits.
Compressor revenue from our subsidiary, Clean Energy Compression, decreased by
$3.6 million
between periods due to lower compressor sales, which was due to continued low global demand.
Station construction sales decreased by
$8.8 million
between periods, principally due to a decrease in large, full -station projects.
VETC revenue decreased by
$6.5 million
between periods due to the expiration of VETC on December 31, 2016.
Cost of sales.
Cost of sales decreased by $
11.4 million
to $
57.3 million
in the three months ended
June 30, 2017
, from $
68.7 million
in the three months ended
June 30, 2016
. This decrease was primarily due to a
$6.4 million
decrease between periods in station construction costs due to lower station construction sales, a
$4.0 million
decrease between periods in compressor costs due to lower compressor sales.
Our effective cost per gallon decreased by
$0.04
per gallon between periods, to $
0.47
per gallon in the three months ended
June 30, 2017
from
$0.51
per gallon in the three months ended
June 30, 2016
. Our effective cost per gallon is defined as the total costs associated with delivering natural gas, including gas commodity costs, transportation fees, liquefaction charges, and other site operating costs, plus the total cost of providing O&M services at stations that we do not own and for which we receive a per-gallon or fixed fee, including direct technician labor, indirect supervisor and management labor, repair parts and other direct maintenance costs, all divided by the total GGEs delivered less GGEs delivered by non-consolidated entities, such as entities that are accounted for under the equity method. The decrease in our effective cost per gallon was primarily due to the sale of Renewables’
two
RNG production facilities in the Asset Sale and therefore, the costs to operate those facilities were not incurred in the three months ended June 30, 2017.
Selling, general and administrative.
Selling, general and administrative expenses decreased by $
2.0 million
to $
23.3 million
in the three months ended
June 30, 2017
, from $
25.3 million
in the three months ended
June 30, 2016
. This decrease was primarily driven by continued cost reduction efforts and reduced administrative costs due to the Asset Sale in 2017.
Depreciation and amortization.
Depreciation and amortization decreased by $
0.6 million
to $
14.3 million
in the three months ended
June 30, 2017
, from $
14.9 million
in the three months ended
June 30, 2016
, primarily due to the sale of Renewables’
two
RNG production facilities in the Asset Sale.
Interest expense.
Interest expense decreased by $
3.8 million
to $
4.3 million
in the three months ended
June 30, 2017
, from $
8.1 million
in the three months ended
June 30, 2016
. This decrease was primarily due to a reduction of outstanding indebtedness between periods.
Other income (expense), net.
Other income (expense), net, increased by
$0.2 million
to $
0.1 million
of income in the three months ended
June 30, 2017
, compared to $
(0.1) million
of expense in the three months ended
June 30, 2016
. This increase in other income was primarily due to our incurrence of fewer losses in the three months ended
June 30, 2017
than the comparable
2016
period from sales denominated in foreign currencies.
Income tax benefit (expense)
. Income tax benefit (expense) decreased by
$0.3 million
to $
(0.1) million
of tax expense in the three months ended
June 30, 2017
, compared to $
(0.4) million
of tax expense in the three months ended
June 30, 2016
. The decrease in income tax expense was primarily attributable to the reduction of goodwill amortization following the Asset Sale.
Loss from noncontrolling interest.
During the three months ended
June 30, 2016
and 2017, we recorded a
$0.6 million
and $
0.7 million
loss, respectively, for the noncontrolling interest in the net loss of NG Advantage. The noncontrolling interest in NG Advantage represents a 46.7% minority interest that was held by third parties during the applicable periods.
Gain from extinguishment of debt.
Gain from extinguishment of debt decreased by
$10.1 million
in the three months ended
June 30, 2017
compared to the three months ended
June 30, 2016
. This decrease was primarily due to our repurchase of a lower principal amount of debt at higher prices in the three months ended
June 30, 2017
compared to the comparable 2016 period.
Six Months Ended
June 30, 2016
Compared to Six Months Ended
June 30, 2017
The table below presents our results of operations as a percentage of total revenue and the narrative that follows provides a detailed discussion of certain line items for the periods presented.
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
2016
|
|
2017
|
|
Statement of Operations Data:
|
|
|
|
|
|
|
Revenue:
|
|
|
|
|
|
|
Product revenue
|
87.7
|
%
|
|
84.5
|
%
|
|
Service revenue
|
12.3
|
|
|
15.5
|
|
|
Total revenue
|
100.0
|
|
|
100.0
|
|
|
Operating expenses:
|
|
|
|
|
|
|
Cost of sales (exclusive of depreciation and amortization shown separately below):
|
|
|
|
|
|
|
Product cost of sales
|
56.5
|
|
|
61.8
|
|
|
Service cost of sales
|
6.2
|
|
|
7.5
|
|
|
Selling, general and administrative
|
25.0
|
|
|
27.6
|
|
|
Depreciation and amortization
|
14.7
|
|
|
17.4
|
|
|
Total operating expenses
|
102.4
|
|
|
114.3
|
|
|
Operating loss
|
(2.4
|
)
|
|
(14.3
|
)
|
|
Interest expense
|
(8.6
|
)
|
|
(5.4
|
)
|
|
Interest income
|
0.3
|
|
|
0.4
|
|
|
Other income (expense), net
|
0.1
|
|
|
0.0
|
|
|
Income (loss) from equity method investments
|
0.0
|
|
|
0.0
|
|
|
Gain from extinguishment of debt
|
12.8
|
|
|
1.9
|
|
|
Gain (loss) from sale of certain assets of subsidiary
|
—
|
|
|
41.0
|
|
|
Income (loss) before income taxes
|
2.2
|
|
|
23.6
|
|
|
Income tax benefit (expense)
|
(0.4
|
)
|
|
1.3
|
|
|
Net income (loss)
|
1.8
|
|
|
24.9
|
|
|
Loss attributable to noncontrolling interest
|
0.5
|
|
|
0.6
|
|
|
Net income (loss) attributable to Clean Energy Fuels Corp.
|
2.3
|
%
|
|
25.5
|
%
|
|
Revenue.
Revenue decreased by
$33.3 million
to
$170.5 million
in the
six
months ended
June 30, 2017
, from
$203.8 million
in the
six
months ended
June 30, 2016
. This decrease was primarily due to the expiration of VETC in addition to lower volume -related revenue, compressor revenue and station construction sales.
Volume -related revenue decreased by
$2.6 million
between periods, primarily due to reduced revenue received from sales of RINs and LCFS Credits. Although we continue to generate revenue from the sale of RINs and LCFS Credits in connection with sales of our Redeem™ RNG vehicle fuel, the amount of revenue we receive from the sale of these credits has decreased as a result of the Asset Sale. See "Recent Developments" and Note
2
to the condensed consolidated financial statements included in this report for additional information about the Asset Sale. The decrease in volume -related revenue was partially offset by an increase of
13.1 million
gallons delivered.
This increase in gallons delivered was due to a
14.6 million
gallon increase in CNG gallons delivered, which was primarily attributable to 22 new refuse customers, nine new transit customers, and three new trucking customers. This increase was partially offset by a
1.1 million
decrease in LNG gallons delivered in a non-vehicle fuel and a
0.4 million
decrease in RNG gallons delivered as non-vehicle fuel. Our effective price per gallon charged was
$0.79
for the
six
months ended
June 30, 2017
, a
$0.08
per gallon decrease from
$0.87
per gallon for the
six
months ended
June 30, 2016
. The decrease in our effective price per gallon between periods was primarily due to lower revenue from sales of RINs and LCFS Credits
Compressor revenue from our subsidiary, Clean Energy Compression, decreased by
$5.4 million
between periods due to lower compressor sales, which was due to continued low global demand.
Station construction sales decreased by
$12.7 million
between periods, principally due to a decrease in large, full -station projects.
VETC revenue decreased by
$12.9 million
between periods due to the expiration of VETC on December 31, 2016.
Cost of sales.
Cost of sales decreased by
$9.8 million
to
$118.2 million
in the
six
months ended
June 30, 2017
, from
$128.0 million
in the
six
months ended
June 30, 2016
. This decrease was primarily due to a
$9.4 million
decrease between periods in station construction costs related to lower station construction sales and a
$6.1 million
decrease between periods in compressor costs due to lower compressor sales. This decrease was offset by a
$5.7 million
increase in cost of sales due to the increased natural gas volumes delivered.
Our effective cost per gallon was $
0.51
per gallon in each of the
six
months ended June 30, 2016 and 2017.
Selling, general and administrative.
Selling, general and administrative expenses decreased by
$3.8 million
to
$47.1 million
in the
six
months ended
June 30, 2017
, from
$50.9 million
in the
six
months ended
June 30, 2016
. This decrease was primarily driven by continued cost reduction efforts and reduced administrative costs due to the Asset Sale in 2017.
Depreciation and amortization.
Depreciation and amortization decreased by
$0.2 million
to
$29.7 million
in the
six
months ended
June 30, 2017
, from
$29.9 million
in the
six
months ended
June 30, 2016
, primarily due to the sale of Renewables’
two
RNG production facilities in the Asset Sale.
Interest expense.
Interest expense decreased by
$8.2 million
to
$9.2 million
in the
six
months ended
June 30, 2017
, from
$17.4 million
in the
six
months ended
June 30, 2016
. This decrease was primarily due to a reduction of outstanding indebtedness between periods.
Other income (expense), net.
Other income (expense), net, decreased by
$0.1 million
in the
six
months ended
June 30, 2017
. This decrease was primarily due to a $0.4 million loss from sales denominated in foreign currencies, partially offset by a $0.2 million decrease in losses recorded from the disposal of assets between periods.
Income tax benefit (expense)
. Income tax benefit (expense) increased by
$2.9 million
to
$2.1 million
of tax benefit in the
six
months ended
June 30, 2017
, compared to
$(0.8) million
of tax expense in the
six
months ended
June 30, 2016
. The increase in income tax benefit was primarily due to the deferred tax benefit attributable to the reduction of goodwill amortization following the Asset Sale.
Loss from noncontrolling interest.
During the
six
months ended
June 30, 2016
and 2017, we recorded a
$0.9 million
and
$1.1 million
loss, respectively, for the noncontrolling interest in the net loss of NG Advantage. The noncontrolling interest in NG Advantage represents a 46.7% minority interest that was held by third parties during the applicable periods.
Gain from extinguishment of debt.
Gain from extinguishment of debt decreased by
$22.8 million
to
$3.2 million
in the
six
months ended
June 30, 2017
, from
$26.0 million
in the
six
months ended
June 30, 2016
. This decrease was primarily due to our repurchase of a lower principal amount of debt at higher prices in the
six
months ended
June 30, 2017
compared to the comparable 2016 period.
Gain from sale of certain assets of subsidiary.
In the
six
months ended
June 30, 2017
, we recorded a gain of
$69.9 million
related to the Asset Sale. We recorded no comparable gain in the
six
months ended
June 30, 2016
.
Seasonality and Inflation
To some extent, we experience seasonality in our results of operations. Natural gas vehicle fuel amounts consumed by some of our customers tend to be higher in summer months when buses and other fleet vehicles use more fuel to power their air conditioning systems. Natural gas commodity prices tend to be higher in the fall and winter months due to increased overall demand for natural gas for heating during these periods.
Historically, inflation has not significantly affected our operating results; however, costs for construction, repairs, maintenance, electricity and insurance are all subject to inflationary pressures, which could affect our ability to maintain our stations adequately, build new stations, expand our existing facilities or pursue additional facilities, and could materially increase our operating costs.
Liquidity and Capital Resources
Liquidity
Liquidity is the ability to meet present and future financial obligations through operating cash flows, the sale or maturity of investments or the acquisition of additional funds through capital management. Our financial position and liquidity are, and will continue to be, influenced by a variety of factors, including the level of our outstanding indebtedness and the principal and interest we are obligated to pay on our indebtedness, our capital expenditure requirements and any merger, divestiture or acquisition activity, as well as our ability to generate cash flows from our operations. We expect cash provided by our operating activities to fluctuate as a result of a number of factors, including our operating results, and the timing and amount of our billing, collections and liability payments, completion of our station construction projects and receipt of government grants and tax and other fuel credits.
Cash Flows
Cash used by operating activities was
$5.3 million
in the
six
months ended
June 30, 2017
, compared to
$27.6 million
provided by operating activities in the comparable
2016
period. The
$32.9 million
decrease in cash provided by operating activities was primarily due to payment of transaction fees related to the Asset Sale and a reduction in operating results due to the decreased revenue from RIN and LCFS Credits as a result of the Asset Sale and the expiration of VETC.
Cash provided by investing activities was
$62.5 million
in the
six
months ended
June 30, 2017
, compared to
$13.4 million
provided by investing activities in the comparable
2016
period. The
$49.1 million
increase in cash provided by investing activities was primarily attributable to
$154.5 million
in cash received, net of cash transferred, in connection with the Asset Sale (see "Recent Developments" and Note
2
to the condensed consolidated financial statements included in this report for additional information). The increase was partially offset by incremental purchases of short-term investments, net of maturities, of
$101.1 million
in the
six
months ended
June 30, 2017
, compared to the comparable 2016 period.
Cash used in financing activities in the
six
months ended
June 30, 2017
was
$43.8 million
, compared to
$16.2 million
provided by financing activities in the comparable
2016
period. The
$60.0 million
increase in cash used in financing activities was primarily due to a
$41.7 million
decrease in gross proceeds from the ATM Program, which was terminated on May 31, 2017, a
$9.8 million
increase in debt repurchases, net of borrowings, and a
$8.6 million
payment to holders of Renewables Option Awards associated with the Asset Sale in the
six
months ended
June 30, 2017
, compared to the comparable 2016 period.
Capital Expenditures and Other Uses of Cash
We require cash to fund our capital expenditures, operating expenses and working capital requirements, including costs associated with fuel sales, outlays for the design and construction of new fueling stations, additions or other modifications to existing fuel stations, debt repayments and repurchases, purchases of CNG tanker trailers and natural gas heavy-duty trucks, maintenance of LNG production facilities, manufacturing natural gas fueling compressors and other equipment, mergers and acquisitions (if any), financing natural gas vehicles for our customers and general corporate purposes, including geographic expansion (domestically and internationally), pursuing new customer markets and supporting our sales and marketing activities, including supporting legislative and regulatory initiatives.
Our business plan calls for approximately
$29.0 million
in capital expenditures for all of
2017
, primarily related to the construction of CNG and LNG fueling stations, additional investments in ANGH stations to add CNG fueling, the purchase of natural gas heavy-duty trucks, the purchase of additional CNG trailers and equipment by NG Advantage to support its transport and sale of CNG to industrial and institutional energy users, and LNG plant maintenance costs. In addition, NG Advantage
anticipates spending an additional $24.0 million in the last six months of 2017 to purchase other equipment to support its arrangement with BP Energy established in June 2017. See “Recent Developments” for additional information.
We had total indebtedness of approximately
$256.0 million
in principal amount as of
June 30, 2017
, of which approximately
$2.4 million
,
$139.4 million
,
$53.5 million
,
$53.5 million
,
$2.9 million
and
$4.3 million
is expected to become due in
2017
,
2018
,
2019
,
2020
,
2021
and thereafter, respectively. Additionally, we expect our total interest payment obligations relating to our indebtedness to be approximately
$17.1 million
in
2017
,
$8.9 million
of which had been paid when due as of
June 30, 2017
. We generally intend to make payments under our various debt instruments when due and pursue opportunities for earlier repayment and/or refinancing if and when these opportunities arise.
We may also elect to invest additional amounts in companies, assets or joint ventures in the natural gas fueling infrastructure, vehicle or services industries or use capital for other activities or pursuits, including those described above.
Sources of Cash
Historically, our principal sources of liquidity have consisted of cash on hand, cash provided by our operations, including, if available, grants, VETC and other credits, cash provided by financing activities and sales of assets. As of
June 30, 2017
, we had total cash and cash equivalents and short-term investments of $
201.2 million
, compared to $
109.8 million
at
December 31, 2016
.
We expect cash provided by our operating activities to fluctuate depending on our operating results, which can be affected by the amount and timing of compressor and other equipment sales, station construction sales, sales of RINs and LCFS Credits and recognition of any other government credits, fluctuations in commodity costs and natural gas prices and sale activity, and the amount and timing of our billing, collections and liability payments, among other factors. See "Risk Factors" in Part II, Item 1A of this report for further information.
From the commencement of the ATM Program in November 2015 until our termination of the Sales Agreement on May 31, 2017, we received aggregate net proceeds of
$117.9 million
from sales of our common stock under the Sales Agreement.
The following table summarizes the activity under the ATM Program for periods presented:
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Six Months Ended June 30,
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Six Months Ended June 30,
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Inception through May 31,
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(in millions)
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2016
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2017
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2017
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Gross proceeds
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|
$
|
54.3
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|
|
$
|
10.8
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$
|
121.3
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Fees and issuance costs
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1.3
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0.3
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3.4
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Net proceeds
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$
|
53.0
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|
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10.5
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$
|
117.9
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Shares issued
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17.5
|
|
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3.8
|
|
|
36.4
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|
|
On February 29, 2016, we entered into a loan and security agreement with, and issued a related promissory note to PlainsCapital Bank ("Plains"), pursuant to which Plains agreed to lend us up to $50.0 million on a revolving basis for a term of one year (the "Credit Facility"). Simultaneously, we drew $50.0 million under the Credit Facility, which we repaid in full on August 31, 2016. On October 31, 2016, the Credit Facility's maturity date was extended from February 28, 2017 to September 30, 2018. On December 22, 2016, we drew $23.5 million under the Credit Facility, which we repaid in full on March 31, 2017.
See Note
12
to the condensed consolidated financial statements included in this report for additional information about our outstanding debt.
On March 31, 2017, Renewables completed the Asset Sale. The net proceeds to us from the Asset Sale were approximately
$142.2 million
. See “Recent Developments” and Note
2
to the condensed consolidated financial statements included in this report for additional information.
We believe our current cash and cash equivalents and short-term investments and cash provided by our operating and financing activities will satisfy our routine business requirements for at least the next 12 months from the date of this report; however, we would need to raise additional capital to fund any capital expenditures, investments or debt repayments that we cannot fund through available cash, cash provided by our operations or other sources, such as with our common stock.
The timing and necessity of any future capital raise would depend on various factors, including our rate of new station construction, debt repayments (either prior to or at maturity), any potential merger or acquisition activity and the other factors that influence our liquidity, as described under “Performance Overview” above.
We may seek to raise additional capital through one or more sources, including, among others, selling assets, obtaining new or restructuring existing debt, obtaining equity capital, or any combination of these or other potential sources of capital. We may not be able to raise capital when needed, on terms that are favorable to us or our stockholders or at all. Any inability to raise necessary capital may impair our ability to build new stations, develop natural gas fueling infrastructure, invest in strategic transactions or acquisitions or repay our outstanding indebtedness and may reduce our ability to build our business and generate sustained or increased revenue.
Off-Balance Sheet Arrangements
As of
June 30, 2017
, we had the following off-balance sheet arrangements that had, or are reasonably likely to have, a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources:
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•
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Outstanding surety bonds for construction contracts and general corporate purposes totaling
$24.7 million
;
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•
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Two
long-term take-or-pay contracts for the purchase of natural gas; and
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•
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Operating leases where we are the lessee.
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We provide surety bonds primarily for construction contracts in the ordinary course of our business, as a form of guarantee. No liability has been recorded in connection with our surety bonds as we do not believe, based on historical experience and information currently available, that it is probable that any amounts will be required to be paid under these arrangements for which we will not be reimbursed.
We have
two
long-term take-or-pay contracts that require us to purchase minimum volumes of natural gas at index based prices which expire in March 2020 and December 2020, respectively.
We have entered into operating lease arrangements for certain equipment and for our office and field operating locations in the ordinary course of our business. The terms of our leases expire at various dates through 2038. Additionally, in November 2006, we entered into a ground lease for 36 acres in California on which we built our California LNG liquefaction plant. The lease is for an initial term of 30 years and requires payments of $0.2 million per year, plus up to $0.1 million per year for each 30 million gallons of production capacity utilized, subject to adjustment based on consumer price index changes. We must also pay a royalty to the landlord for each gallon of LNG produced at the facility, as well as a fee for certain other services that the landlord provides.
Item 3.—Quantitative and Qualitative Disclosures about Market Risk
In the ordinary course of our business, we are exposed to various market risks, including commodity price risks and risks related to foreign currency exchange rates.
Commodity Price Risk
We are subject to market risk with respect to our sales of natural gas, which have historically been subject to volatile market conditions. Our exposure to market risk is heightened when we have a fixed-price sales contract with a customer that is not covered by a futures contract, or when we are otherwise unable to pass through natural gas price increases to customers. Natural gas prices and availability are affected by many factors, including, among others, drilling activity, supply, weather conditions, overall economic conditions and foreign and domestic government regulations.
Natural gas costs represented $72.8 million of our cost of sales in
2016
and
$43.4 million
of our cost of sales for the
six
months ended
June 30, 2017
.
To reduce price risk caused by market fluctuations in natural gas, we may enter into exchange traded natural gas futures contracts. These arrangements expose us to the risk of financial loss in situations where the other party to the contract defaults on the contract or there is a change in the expected differential between the underlying price in the contract and the actual price of natural gas we pay at the delivery point. We did not have any natural gas futures contracts outstanding at
June 30, 2017
.
Foreign Currency Exchange Rate Risk
Because we have foreign operations, we are exposed to foreign currency exchange gains and losses. Since the functional currency of our foreign subsidiaries is their local currency, the currency effects of translating the financial statements of those foreign subsidiaries, which operate in local currency environments, are included in the accumulated other comprehensive income component of consolidated equity in our consolidated financial statements and do not impact earnings. Foreign currency transaction gains and losses not in our subsidiaries’ functional currency, however, do impact earnings and resulted in approximately
$0.2
million of losses in the
six
months ended
June 30, 2017
. In this period, our primary exposure to foreign currency exchange rates related to our Canadian operations that had certain outstanding accounts receivable and accounts payable denominated in the U.S. dollar, which were not hedged.
We have prepared a sensitivity analysis to estimate our exposure to market risk with respect to our monetary transactions denominated in a foreign currency. If the exchange rates on these assets and liabilities were to fluctuate by 10% from the rates as of
June 30, 2017
, we would expect a corresponding fluctuation in the value of the assets and liabilities of approximately
$1.3 million
.