UNITED
STATES
SECURITIES AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT
TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period
ended March 31, 2008
Commission File Number:
001-33480
CLEAN ENERGY FUELS CORP.
(Exact
name of registrant as specified in its charter)
Delaware
|
|
33-0968580
|
(State or other jurisdiction of incorporation)
|
|
(IRS Employer Identification No.)
|
3020 Old Ranch Parkway,
Suite 200, Seal Beach CA 90740
(Address
of principal executive offices, including zip code)
(562) 493-2804
(Registrants
telephone number, including area code)
Indicate
by check mark whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
x
Indicate by check mark whether
the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of
large accelerated filer, accelerated filer, and smaller reporting company
in Rule 12b-2 of the Exchange Act. (Check one):
Large
accelerated filer
o
|
|
Accelerated
filer
o
|
|
|
|
Non-accelerated
filer
x
|
|
Smaller
reporting company
o
|
(Do
not check if a smaller reporting company)
|
|
|
Indicate by check mark whether
the registrant is a shell company (as defined by Rule 12b-2 of the Act).
Yes
o
No
x
As of May 12, 2008, there were 44,297,685
shares of the registrants common stock, par value $0.0001 per share, issued
and outstanding.
CLEAN ENERGY FUELS CORP. AND SUBSIDIARIES
INDEX
Table of Contents
2
PART I.
FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Clean Energy Fuels Corp. and Subsidiaries
Condensed Consolidated Balance Sheets
December 31, 2007 and March 31, 2008 (Unaudited)
|
|
December 31,
2007
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|
March 31,
2008
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
|
Current assets:
|
|
|
|
|
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Cash and cash equivalents
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$
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67,937,602
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|
$
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17,476,431
|
|
Short-term investments
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|
12,479,684
|
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42,580,469
|
|
Accounts receivable, net of allowance for
doubtful accounts of $501,751 and $669,621 as of December 31, 2007 and March
31, 2008, respectively
|
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11,026,890
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10,037,671
|
|
Other receivables
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23,153,904
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27,925,169
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Inventory, net
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2,403,890
|
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2,580,848
|
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Deposits on LNG trucks
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15,515,927
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17,355,927
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|
Prepaid expenses and other current assets
|
|
3,633,318
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|
3,353,015
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|
Total current assets
|
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136,151,215
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121,309,530
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|
|
|
|
|
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Land, property and equipment, net
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88,676,318
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99,392,400
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Capital lease receivables
|
|
763,500
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|
663,750
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|
Notes receivable and other long-term assets
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2,511,813
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2,953,852
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Goodwill and other intangible assets
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20,922,098
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20,913,226
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Total assets
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$
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249,024,944
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$
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245,232,758
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|
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Liabilities and Stockholders Equity
|
|
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Current liabilities:
|
|
|
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Current portion of capital lease obligation
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$
|
63,520
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|
$
|
65,121
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|
Accounts payable
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10,547,451
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8,342,694
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|
Accrued liabilities
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5,381,541
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6,850,244
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Deferred revenue
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677,826
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717,466
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Total current liabilities
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16,670,338
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15,975,525
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|
|
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Capital lease obligation, less current
portion
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161,377
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144,484
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Other long-term liabilities
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1,260,755
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1,187,743
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Total liabilities
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18,092,470
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17,307,752
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Commitments and contingencies
|
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|
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Stockholders equity:
|
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Preferred stock, $0.0001 par value.
Authorized 1,000,000 shares; issued and outstanding no shares
|
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|
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Common stock, $0.0001 par value. Authorized
99,000,000 shares; issued and outstanding 44,274,375 shares and
44,293,768 shares at December 31, 2007 and March 31, 2008, respectively
|
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4,428
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4,430
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Additional paid-in capital
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297,866,745
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300,449,498
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Accumulated deficit
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(69,086,583
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)
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(74,515,282
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)
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Accumulated other comprehensive income
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2,147,884
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1,986,360
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Total stockholders equity
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230,932,474
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227,925,006
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Total liabilities and stockholders equity
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$
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249,024,944
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$
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245,232,758
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|
See accompanying notes to condensed consolidated financial statements.
3
Clean Energy Fuels Corp. and Subsidiaries
Condensed Consolidated Statements of Operations
For the Three Months Ended
March 31, 2007 and 2008
(Unaudited)
|
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Three Months Ended
March 31,
|
|
|
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2007
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2008
|
|
|
|
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Revenue
|
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$
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28,167,044
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$
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29,947,357
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|
Operating expenses:
|
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|
|
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Cost of sales
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21,321,159
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22,413,676
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Selling, general and administrative
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6,299,878
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11,587,718
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Depreciation and amortization
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1,576,057
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2,063,421
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|
Total operating expenses
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29,197,094
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36,064,815
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Operating loss
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(1,030,050
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)
|
(6,117,458
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)
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Interest income, net
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292,212
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839,216
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Other income (expense), net
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(123,372
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)
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38,356
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Equity in losses of equity method investee
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(145,046
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)
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Loss before income taxes
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(861,210
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)
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(5,384,932
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)
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Income tax expense
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8,969
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43,767
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Net loss
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$
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(870,179
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)
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$
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(5,428,699
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)
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|
|
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Loss per share
|
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|
|
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Basic
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$
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(0.03
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)
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$
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(0.12
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)
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Diluted
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$
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(0.03
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)
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$
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(0.12
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)
|
|
|
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Weighted average common shares outstanding
|
|
|
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Basic
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34,192,786
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44,282,492
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Diluted
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34,192,786
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44,282,492
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See accompanying notes to condensed consolidated financial statements.
4
Clean Energy Fuels Corp.
Condensed Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 2007 and 2008
(Unaudited)
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Three Months Ended
March 31,
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2007
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2008
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Cash flows from operating activities:
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Net loss
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$
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(870,179
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)
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$
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(5,428,699
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)
|
Adjustments to reconcile net loss to net
cash provided by (used in) operating activities:
|
|
|
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Depreciation and amortization
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1,576,057
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2,063,421
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Provision for doubtful accounts
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641,486
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183,396
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|
Loss (gain) on disposal of assets
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122,868
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(38,356
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)
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Stock option expense
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22,500
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2,498,436
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Common stock issued in exchange for
services
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7,500
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Changes in operating assets and
liabilities:
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Accounts and other receivables
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16,952,564
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(3,965,442
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)
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Inventory
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(84,187
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)
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(176,958
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)
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Deposits on LNG trucks
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(1,840,000
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)
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Capital lease receivables
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99,750
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99,750
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Prepaid expenses and other assets
|
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(2,841,258
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)
|
(161,736
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)
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Accounts payable
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565,036
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(371,389
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)
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Income taxes payable
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(8,769
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)
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Accrued expenses and other
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1,378,591
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1,435,331
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Net cash provided by (used in) operating
activities
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17,554,459
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(5,694,746
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)
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Cash flows from investing activities:
|
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Purchases of property and equipment
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(6,905,747
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)
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(14,775,599
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)
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Proceeds from sale of property and
equipment
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48,432
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Purchase of short-term investments
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(42,580,469
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)
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Maturity or sale of short-term investments
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12,479,684
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Net cash used in investing activities
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(6,905,747
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)
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(44,827,952
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)
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Cash flows from financing activities:
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Repayment of notes payable and capital
lease obligations
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(13,843
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)
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(15,292
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)
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Proceeds from exercise of stock options
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3,700
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|
76,819
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Net cash provided by (used in) financing
activities
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(10,143
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)
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61,527
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|
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Net increase (decrease) in cash
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10,638,569
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(50,461,171
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)
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Cash, beginning of period
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937,445
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67,937,602
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Cash, end of period
|
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$
|
11,576,014
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$
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17,476,431
|
|
|
|
|
|
|
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Supplemental disclosure of cash flow
information
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|
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Income taxes paid
|
|
$
|
200
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|
$
|
3,767
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Interest paid
|
|
34,823
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|
5,496
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|
See accompanying notes to condensed consolidated financial statements.
5
CLEAN ENERGY FUELS CORP. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1
General
Nature of Business:
Clean
Energy Fuels Corp. (the Company) is engaged in the business of selling
natural gas fueling solutions to its customers in the United States and Canada.
The Company has a broad customer base in a variety of markets including public
transit, refuse, airports and regional trucking. Clean Energy operates or
supplies approximately 170 natural gas fueling locations in California, Texas, Colorado,
Maryland, New York, New Mexico, Nevada, Washington, Massachusetts, Georgia, Wyoming
and Arizona within the United States, and in British Columbia and Ontario
within Canada.
The Company also generates revenue through operation and maintenance
agreements with certain customers, through building and selling or leasing
natural gas fueling stations to its customers, and through financing its
customers' vehicle purchases. In April 2008, the Company opened its first CNG
station in Lima, Peru through the Companys joint venture, Clean Energy del
Peru.
Basis of Presentation:
The
accompanying interim unaudited condensed consolidated financial statements
include the accounts of the Company and its subsidiaries, and, in the opinion
of management, reflect all adjustments, which include only normal recurring
adjustments, necessary to state fairly the Companys financial position,
results of operations and cash flows for the three months ended March 31, 2007
and 2008. All intercompany accounts and transactions have been eliminated in
consolidation. The three month periods ended March 31, 2007 and 2008 are not
necessarily indicative of the results to be expected for the year ending
December 31, 2008 or for any other interim period or for any future year.
Certain
information and disclosures normally included in the notes to consolidated
financial statements have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission (SEC), but the resultant
disclosures contained herein are in accordance with accounting principles
generally accepted in the United States of America as they apply to interim
reporting. The condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements as of and for the year
ended December 31, 2007 that are included in the Companys Annual Report on
Form 10-K filed with the SEC.
Note 2
Cash and Cash Equivalents
The Company
considers all highly liquid investments with maturities of three months or less
on the date of acquisition to be cash equivalents. Cash and cash equivalents
generally consist of cash, time deposits, commercial paper, money market funds
and government and corporate debt securities with original maturity dates of
three months or less. Such investments are stated at cost, which approximates
fair value.
Note 3
Short-Term Investments
Short-term
investments, which are classified as available for sale, generally consist of
commercial paper and government and commercial debt securities with original
maturity dates between three and six months. Short-term investments are
marked-to-market at each period end with any unrealized gains or losses
included in the condensed consolidated balance sheets under the line item
accumulated other comprehensive income.
Note 4
Derivative Financial Instruments
The Company,
in an effort to manage its natural gas commodity price risk exposures, utilizes
derivative financial instruments. The Company, from time to time, enters into
natural gas futures contracts that are over-the-counter swap transactions that
convert its index-based gas supply arrangements to fixed-price arrangements.
The Company accounts for its derivative instruments in accordance with SFAS
No. 133,
Accounting for Derivative
Instruments and Hedging Activities
, as amended (SFAS 133). SFAS 133 requires the recognition of all
derivatives as either assets or liabilities in the consolidated balance sheet
and the measurement of those instruments at fair value. The Company did not
have any derivative instruments during the year ended December 31, 2007 and the
three months ended March 31, 2008.
The Company
marks to market its open futures position at the end of each period and records
the net unrealized gain or loss during the period in derivative (gains) losses
in the consolidated statements of operations. The Company did not own any
futures contracts in 2007 or in the three months ended March 31, 2008.
6
The Company is
required to make certain deposits on its futures contracts, should any exist.
At December 31, 2007 and March 31, 2008, the Company did not have any
outstanding futures contracts or associated deposits.
Note 5
Fixed Price and Price Cap Sales Contracts
The Company enters
into contracts with various customers, primarily municipalities, to sell
liquefied natural gas (LNG) or compressed natural gas (CNG) at fixed prices
or at prices subject to a price cap. The
contracts generally range from two to five years. The most significant cost
component of LNG and CNG is the price of natural gas.
As part of
determining the fixed price or price cap in the contracts, the Company works
with its customers to determine their future usage over the contract term.
However, the Companys customers do not agree to purchase a minimum amount of
volume or guarantee their volume of purchases. There is not an explicit volume
in the contract as the Company agrees to sell its customers volumes on an as
needed basis, also known as a requirements contract. The volume required under these contracts
varies each month, and is not subject to any minimum commitments. For U.S.
generally accepted accounting purposes, there is not a notional amount, which
is one of the required conditions for a transaction to be a derivative pursuant
to the guidance in SFAS 133.
The Companys
sales agreements that fix the price or cap the price of LNG or CNG that it
sells to its customers are, for accounting purposes, firm commitments, and U.S.
generally accepted accounting principles do not require or allow the Company to
record a loss until the delivery of the gas and corresponding sale of the
product occurs. When the Company enters into these fixed price or price cap
contracts with its customers, the price is set based on the prevailing index
price of natural gas at that time. However, the index price of natural gas
constantly changes, and a difference between the fixed price of the natural gas
included in the customers contract price and the corresponding index price of
natural gas typically develops after the Company enters into the sales contract
(with the price of natural gas having historically increased). From time to
time, the Company has also entered into natural gas futures contracts to offset
economically the adverse impact of rising natural gas prices (see note 4) and,
if the Company believed the price of natural gas would decline in the future,
periodically sold such contracts.
From an
accounting perspective, during periods of rising natural gas prices, the
Companys futures contracts have generally been marked-to-market through the
recognition of a derivative asset and a corresponding derivative gain in its
statements of operations. However, because the Companys contracts to sell LNG
or CNG to its customers at fixed prices or an index-based price that is subject
to a fixed price cap are not derivatives for purposes of U.S. generally
accepted accounting principles, a liability or a corresponding loss has not
been recognized in the Companys statements of operations during this
historical period of rising natural gas prices for the future commitments under
these contracts. As a result, the Companys statements of operations do not
reflect its firm commitments to deliver LNG or CNG at prices that are below,
and in some cases, substantially below, the prevailing market price of natural
gas (and therefore LNG or CNG).
The following
table summarizes important information regarding the Companys fixed price and
price cap supply contracts under which it is required to sell fuel to its
customers as of March 31, 2008:
|
|
Estimated
volumes (a)
|
|
Average
price (b)
|
|
Contracts
duration
|
|
CNG fixed price contracts
|
|
1,324,867
|
|
$
|
1.15
|
|
through 12/13
|
|
LNG fixed price contracts
|
|
8,410,779
|
|
$
|
0.42
|
|
through 07/09
|
|
CNG price cap contracts
|
|
3,640,662
|
|
$
|
0.85
|
|
through 12/09
|
|
LNG price cap contracts
|
|
6,948,939
|
|
$
|
0.56
|
|
through 03/09
|
|
This table
does not include two 1.2 million LNG gallon per year renewal options that one
of our customer possesses related to an LNG price cap contract. The contract contains a price cap of $7.50
per MMbtu on the SoCal Border Index.
(a)
Estimated volumes are
in gasoline gallon equivalents for CNG contracts and are in LNG gallons for LNG
contracts and represent the volumes we anticipate delivering over the remaining
duration of the contracts.
(b)
Average prices are in
gasoline gallon equivalents for CNG contracts and are in LNG gallons for LNG
contracts. The average prices represent the natural gas commodity component in
the customers contract.
At March 31,
2008, we estimate we will incur between $6.1 million and $7.5 million to
cover the increased price of natural gas above the inherent price of natural
gas embedded in our customers fixed price and price cap contracts over the
duration of the contracts. These estimates were based on natural gas futures
prices on March 31, 2008, and these estimates
7
may change based on future
natural gas prices and may be significantly higher or lower. Our estimated volumes
under these contracts, in gasoline gallon equivalents, expire as follows:
April 1, 2008 through
December 31, 2008
|
|
11,290,208
|
|
2009
|
|
2,831,296
|
|
2010
|
|
230,000
|
|
2011
|
|
230,000
|
|
2012
|
|
230,000
|
|
2013
|
|
230,000
|
|
This table
does not include the two 1.2 million LNG gallon per year renewal options that
one of our customer possesses related to an LNG price cap contract.
On April 18,
2008, the Company purchased certain natural gas futures contracts to attempt to
economically hedge the Companys exposure to cash flow variability related to
the commodity component of an LNG supply contract for which the Company has
submitted a fixed-price bid. The supply contract has not yet been awarded to
the Company. If the Company is awarded the supply contract, performance is
anticipated to begin on July 1, 2008, with LNG to be sold at a fixed price for
the first three years of the contract. The contract would have two one-year
renewal options based on an index-plus pricing methodology. While the Company
has not received final notification that the Company has been awarded the
contract, due to the fact that the contract price is fixed for the initial
three-year term, as well as the fact that natural gas prices have recently had
significant increases, the Companys derivative committee concluded it was
advisable to purchase the futures contracts in advance of the anticipated
contract award.
The futures
contracts enable the Company to purchase natural gas at fixed prices each month
from July 2008 through June 2011, which is the expected fixed-price term of the
supply contract. Until such time as the Company is awarded and enters into the
supply contract, the futures contracts will not qualify for hedge accounting as
cash flow hedges under SFAS 133. As a result, the Company will be required to
record directly in its statement of operations any changes in the fair market
value of these contracts that may occur from April 18, 2008 through the earlier
to occur of (1) the Companys entry into the fixed-price supply contract and
success in qualifying the futures contracts for hedge accounting under SFAS 133,
or (2) the sale of the futures contracts. An increase or decrease of $1.00 in
the average price per MMbtu of natural gas that we have purchased under the
futures contracts would result in a gain or loss, respectively, of
approximately $3.1 million in the fair market value of the futures
contracts. One dollar ($1.00) is equal
to approximately 10% of the average price per MMbtu of the natural gas we
purchased pursuant to the futures contracts.
To purchase
the futures contracts, the Company was required to make an initial margin
deposit of $1,236,000. The Company may be required to make additional deposits
if the Company incurs losses related to the futures contracts.
If the Company
is awarded and enters into the supply contract, (1) the Company will attempt to
qualify the futures contracts for hedge accounting as cash flow hedges under
SFAS 133, but there can be no assurances the Company will be successful in
doing so, and (2) the Company anticipates that it will hold the futures
contracts for the duration of the contract term consistent with the revised
natural gas hedging policy adopted by the Companys board of directors in February
2007. If the Company is not awarded or fails to enter into the supply contract,
the Company intends to sell the futures contracts in an orderly fashion.
Note 6 Other
Receivables
Other
receivables at December 31, 2007 and March 31, 2008 consisted of the
following:
|
|
December 31,
2007
|
|
March 31,
2008
|
|
|
|
|
|
|
|
Loans to customers to finance vehicle
purchases
|
|
$
|
1,393,549
|
|
$
|
1,670,117
|
|
Advances to vehicle manufacturers
|
|
4,871,373
|
|
4,620,264
|
|
Fuel tax credits
|
|
14,920,145
|
|
19,080,973
|
|
Other
|
|
1,968,837
|
|
2,553,815
|
|
|
|
$
|
23,153,904
|
|
$
|
27,925,169
|
|
8
Note 7
Land, Property and Equipment
Land, property
and equipment, at December 31, 2007 and March 31, 2008 are summarized
as follows:
|
|
December 31,
2007
|
|
March 31,
2008
|
|
Land
|
|
$
|
472,616
|
|
$
|
472,616
|
|
LNG liquefaction plant
|
|
12,898,178
|
|
12,898,178
|
|
Station equipment
|
|
48,318,709
|
|
49,786,092
|
|
LNG trailers
|
|
11,698,145
|
|
11,793,681
|
|
Other equipment
|
|
6,937,083
|
|
7,228,502
|
|
Construction in progress
|
|
32,297,191
|
|
43,147,174
|
|
|
|
112,621,922
|
|
125,326,243
|
|
Less accumulated depreciation
|
|
(23,945,604
|
)
|
(25,933,843
|
)
|
|
|
$
|
88,676,318
|
|
$
|
99,392,400
|
|
Note 8
Accrued Liabilities
Accrued
liabilities at December 31, 2007 and March 31, 2008 consisted of the
following:
|
|
December 31,
2007
|
|
March 31,
2008
|
|
Salaries and wages
|
|
$
|
1,495,196
|
|
$
|
912,836
|
|
Accrued gas purchases
|
|
1,837,005
|
|
3,103,525
|
|
Other
|
|
2,049,340
|
|
2,833,883
|
|
|
|
$
|
5,381,541
|
|
$
|
6,850,244
|
|
9
Note 9
Earnings Per Share
Basic earnings
per share is based upon the weighted average number of shares outstanding
during each period. Diluted earnings per share reflects the impact of assumed
exercise of dilutive stock options and warrants. The information required to
compute basic and diluted earnings per share is as follows:
|
|
Three Months Ended
March 31,
|
|
|
|
2007
|
|
2008
|
|
Basic and diluted:
|
|
|
|
|
|
Weighted average number of common shares
outstanding
|
|
34,192,786
|
|
44,282,492
|
|
Certain
securities were excluded from the diluted earnings per share calculations at March
31, 2007 and 2008, respectively, as the inclusion of the securities would be
anti-dilutive to the calculation. The amounts outstanding as of March 31, 2007
and 2008 for these instruments are as follows:
|
|
March 31,
|
|
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
Options
|
|
2,401,000
|
|
6,667,205
|
|
Warrants
|
|
15,000,000
|
|
15,000,000
|
|
Note 10
Comprehensive Income
The following
table presents the Companys comprehensive income for the three months ended March
31, 2007 and 2008:
|
|
Three Months Ended
March 31,
|
|
|
|
2007
|
|
2008
|
|
Net loss
|
|
$
|
(870,179
|
)
|
$
|
(5,428,699
|
)
|
Foreign currency translation adjustments
|
|
(48,027
|
)
|
(161,524
|
)
|
|
|
|
|
|
|
Comprehensive loss
|
|
$
|
(918,206
|
)
|
$
|
(5,590,223
|
)
|
Note 11
Stock-Based Compensation
The following
table summarizes the compensation expense and related income tax benefit
related to stock
-
based compensation expense
recognized during the periods:
|
|
Three Months Ended
March 31,
|
|
|
|
2007
|
|
2008
|
|
|
|
|
|
|
|
Stock options
|
|
|
|
|
|
Stock-based compensation expense
|
|
$
|
22,500
|
|
$
|
2,498,436
|
|
Income tax benefit
|
|
|
|
|
|
Stock-based compensation expense, net of
tax
|
|
$
|
22,500
|
|
$
|
2,498,436
|
|
10
Stock
Options
The
following table summarizes all stock option activity during the three months
ended March 31, 2008:
|
|
Number
of
Shares
|
|
Weighted-
Average
Exercise
Price
|
|
|
|
|
|
|
|
Outstanding at December 31, 2007
|
|
6,553,036
|
|
$
|
9.37
|
|
Granted
|
|
170,000
|
|
15.19
|
|
Exercised
|
|
(18,832
|
)
|
4.08
|
|
Cancelled/Forfeited
|
|
(36,999
|
)
|
14.40
|
|
Outstanding at March 31, 2008
|
|
6,667,205
|
|
9.51
|
|
|
|
|
|
|
|
Exercisable at March 31, 2008
|
|
3,228,537
|
|
5.54
|
|
|
|
|
|
|
|
|
The fair value of each option
grant is estimated on the date of grant using the Black-Scholes option pricing
model with the following weighted average assumptions used for grants in 2008:
|
|
Three Months
Ended
March 31,
2008
|
|
|
|
|
|
Dividend yield
|
|
0.00
|
%
|
Expected volatility
|
|
55.00
|
%
|
Risk-free interest rate
|
|
2.73
|
%
|
Expected life in years
|
|
6.00
|
|
The weighted
average grant date fair value of options granted using these assumptions was $8.20
for the three months ended March 31, 2008.
Note 12
Use of Estimates
The
preparation of consolidated financial statements in conformity with U.S.
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Note 13
Environmental Matters, Litigation, Claims, Commitments and Contingencies
The Company is
subject to federal, state, local, and foreign environmental laws and
regulations. The Company does not anticipate any expenditures to comply with
such laws and regulations which would have a material impact on the Companys
consolidated financial position, results of operations, or liquidity. The
Company believes that its operations comply, in all material respects, with
applicable federal, state, local and foreign environmental laws and
regulations.
From time to
time, the Company may become party to legal actions arising in the ordinary
course of its business. During the course of its operations, the Company is
also subject to audit by tax authorities for varying periods in various
federal, state, local, and foreign tax jurisdictions. Disputes may arise during
the course of such audits as to facts and matters of law. It is impossible at
this time to determine the ultimate liabilities that the Company may incur
resulting from any lawsuits, claims and proceedings, audits, commitments,
contingencies and related matters or the timing of these liabilities, if any.
If these matters were to be ultimately resolved unfavorably, an outcome not
currently anticipated, it is possible that such outcome could have a material
adverse effect upon the Companys consolidated financial position or results of
operations. However, the Company believes that the ultimate resolution of such
actions will not have a material adverse affect on the Companys consolidated
financial position, results of operations, or liquidity.
As of March
31, 2008, the Company has remaining contractual commitments related to
constructing
its LNG
liquefaction plant in California of $36.9 million.
11
Note 14
Income Taxes
FASB
Interpretation No. 48, Accounting for Uncertainty in Income Taxes, an
interpretation of FASB Statement No. 109 (FIN 48), requires that the
Company recognize the impact of a tax position in its financial statements if
the position is more likely than not of being sustained by the taxing authority
upon examination, based on the technical merits of the position.
FIN 48 requires the Company to accrue interest based on the difference
between the tax position recognized in the financial statements and the amount
claimed on the return. The net
interest incurred was immaterial for the three months ended March 31, 2007 and
2008. FIN 48 further requires that
penalties be accrued if the tax position does not meet the minimum statutory
threshold to avoid penalties. No
penalties have been accrued by the Company.
The Companys unrecognized tax benefits as of March 31, 2008 are
unchanged from December 31, 2007.
Income tax returns are
subject to audit by federal, state and local governments, sometimes several
years after a return is filed. The
Company is currently under audit by the Internal Revenue Service for tax years
2005 and 2006 and the State of California for tax years 2004 and 2005. Disputes may arise during the course of such
audits as to facts and different interpretations of tax law.
Note 15
Recently Adopted Accounting Changes
On January 1,
2008, the Company adopted the applicable provisions of SFAS No. 157,
Fair Value Measurements
(SFAS 157), which defines fair
value, establishes a framework for measuring fair value and enhances
disclosures about fair value measurements related to financial instruments. In
December 2007, the FASB provided a one-year deferral of SFAS 157 for
non-financial assets and non-financial liabilities, except those that are
recognized or disclosed at fair value on a recurring basis, at least annually.
Accordingly, the Companys adoption of SFAS 157 was limited to financial assets
and liabilities.
As of March
31, 2008, the Companys financial assets consisted of short-term investments.
The Company uses quoted market prices to measure fair value of these
securities.
SFAS 157
includes a fair value hierarchy that is intended to increase consistency and
comparability in fair value measurements and related disclosures. The fair value
hierarchy is based on inputs to valuation techniques that are used to measure
fair value that are either observable or unobservable. Observable inputs
reflect assumptions market participants would use in pricing an asset or
liability based on market data obtained from independent sources while unobservable
inputs reflect a reporting entitys pricing based upon their own market
assumptions. SFAS 157 establishes a three-tiered fair value hierarchy which
prioritizes the inputs used in measuring fair value as follows:
·
Level 1.
Observable
inputs such as quoted prices in active markets;
·
Level 2.
Inputs,
other than quoted prices, that are observable for the asset or liability,
either directly or indirectly. These include quoted prices for similar assets
or liabilities in active markets and quoted prices for identical or similar
assets or liabilities in markets that are not active; and
·
Level 3.
Unobservable
inputs in which there is little or no market data, which require the reporting
entity to develop its own assumptions.
The following
table reflects the fair value as defined by SFAS 157, of the Companys
short-term investment securities:
|
|
Balance at
March 31,
2008
|
|
Quoted Prices
In Active Markets
for Identical Items
(Level 1)
|
|
Significant Other
Observable
Inputs
(Level 2)
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Available-for-sale securities:
|
|
|
|
|
|
|
|
|
|
Short-term investments
|
|
$
|
42,580,469
|
|
$
|
42,580,469
|
|
$
|
|
|
$
|
|
|
|
|
$
|
42,580,469
|
|
$
|
42,580,469
|
|
$
|
|
|
$
|
|
|
Item 2. Managements Discussion and Analysis of Financial Condition
and Results of Operations.
The
discussion in this section contains forward-looking statements. These
statements relate to future events or our future financial performance. We have
attempted to identify forward-looking statements by terminology such as anticipate,
believe, can, continue, could, estimate, expect, intend, may,
plan, potential, predict, should, would or will or the negative of
these terms or other comparable terminology, but their absence does not mean
that a statement is not forward-looking. These statements are only predictions
and involve known and unknown risks, uncertainties and other factors, which
could cause our actual results to differ from those projected in any
forward-looking statements we make. See Risk Factors in Part I, Item 1A of our
Form 10-K for the year ended December 31, 2007, filed with the SEC on March 19,
2008, for a discussion of some of these risks and uncertainties. This
discussion should be read with our financial statements and related notes
included elsewhere in this report.
We provide
natural gas solutions for vehicle fleets in the United States and Canada. Our
primary business activity is selling CNG and LNG vehicle fuels to our
customers. We also build, operate and maintain fueling stations, and help our
customers acquire and finance natural gas vehicles and obtain local, state and
federal clean air incentives. Our customers include fleet operators in a
variety of markets, such as public transit, refuse hauling, airports, taxis and
regional trucking.
Overview
This overview discusses matters on which our management primarily
focuses in evaluating our financial condition and operating performance.
Sources of revenue
. We generate the vast majority of our revenue from selling CNG and LNG to
our customers. The balance of our revenue is provided by operating and
maintaining natural gas fueling stations, designing and constructing natural
gas fueling stations, and financing our customers natural gas vehicle
purchases.
Key operating data
. In evaluating our operating performance, our management focuses
primarily on (1) the amount of CNG and LNG gasoline gallon equivalents
delivered (which we define as the volume of gasoline gallon equivalents we sell
to our customers plus the volume of gasoline gallon equivalents dispensed to
our customers at stations where we provide O&M services but do not directly
sell the CNG or LNG) and (2) our revenue and net income (loss). The following
table, which you should read in conjunction with our condensed consolidated financial
statements and notes contained elsewhere in this report, presents our key
operating data for the years ended December 31, 2005, 2006 and 2007 and for the
three months ended March 31, 2007 and 2008:
12
Gasoline gallon equivalents
delivered (in millions)
|
|
Year ended
December 31,
2005
|
|
Year ended
December 31,
2006
|
|
Year ended
December 31,
2007
|
|
Three months
ended
March 31,
2007
|
|
Three months
ended
March 31,
2008
|
|
CNG
|
|
36.1
|
|
41.9
|
|
48.0
|
|
11.1
|
|
11.6
|
|
LNG
|
|
20.7
|
|
26.5
|
|
27.3
|
|
6.7
|
|
6.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
56.8
|
|
68.4
|
|
75.3
|
|
17.8
|
|
17.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating data
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
77,955,083
|
|
$
|
91,547,316
|
|
$
|
117,716,233
|
|
$
|
28,167,044
|
|
$
|
29,947,357
|
|
Net income (loss)
|
|
17,257,587
|
|
(77,500,741
|
)
|
(8,894,362
|
)
|
(870,179
|
)
|
(5,428,699
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Key trends
in 2005, 2006, and 2007
. Vehicle fleet demand for natural gas fuels
increased during the three years ended December 31, 2005, 2006 and 2007. We
believe this growth in demand was attributable primarily to the rising prices
of gasoline and diesel relative to CNG and LNG during these periods and
increasingly stringent environmental regulations affecting vehicle fleets. We
capitalized on this growing demand by securing new fleet customers in a variety
of markets, including public transit, refuse hauling, airports, taxis and
regional trucking.
The number of
fueling stations we served grew from 147 at December 31, 2004 to 170 at
December 31, 2007 (a 15.7% increase). The amount of CNG and LNG gasoline gallon
equivalents we delivered from 2005 to 2007 increased by 32.6%. Our cost of
sales also increased during these periods, which was attributable primarily to the
increased price of natural gas and increased costs related to delivering of CNG
and LNG to our customers.
Anticipated
future trends
. 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 more stringent emissions requirements will
continue to make natural gas vehicles an attractive alternative to traditional
gasoline and diesel powered vehicles. We believe there will be significant
growth in the consumption of natural gas as a vehicle fuel generally, and our
goal is to capitalize on this trend and enhance our leadership position as this
market expands. We have built a natural gas fueling station, and plan to build
additional natural gas fueling stations, that will provide LNG to fleet
vehicles at the Ports of Los Angeles and Long Beach. We also anticipate
expanding our sales of CNG and LNG in the other markets in which we operate,
including public transit, refuse hauling and airports. Consistent with the
anticipated growth of our business, we also expect that our operating costs
will increase, primarily from the logistics of delivering more CNG and LNG to
our customers, as well as from the anticipated expansion of our station
network. We also plan to incur significant costs related to the LNG
liquefaction plant we are in the process of building in California.
Additionally, we intend to increase our sales and marketing team as we seek to
expand our existing markets and enter new markets, which will also result in
increased costs.
Sources of
liquidity and anticipated capital expenditures
. In May
2007, we completed our initial public offering of 10,000,000 shares of common
stock at a public offering price of $12.00 per share. Net cash proceeds from
the initial public offering were approximately $108.5 million, after deducting
underwriting discounts, commissions and offering expenses. Historically, our
principal sources of liquidity have been cash provided by operations, capital
contributions from our stockholders, our cash and cash equivalents and, during
the third and fourth quarters of fiscal 2006, a revolving line of credit with
Boone Pickens, a director and our largest stockholder. The line of credit was
used to fund margin requirements on certain derivative contracts and was
terminated in December 2006. Our business plan for 2008 calls for approximately
$103.7 million in capital expenditures (primarily related to building an LNG
liquefaction plant in California and constructing new fueling stations) and for
financing natural gas vehicle purchases by our customers and for general
corporate purposes, including making deposits to support our derivative
activities, geographic expansion (domestically and internationally), expanding
our sales and marketing activities, and for working capital for our expansion. As of the date of this report, we project a
budget shortfall of approximately $13.7 million for 2008 related to planned
capital expenditures. As reported in our
10-K for the year ended December 31, 2007 and filed with the SEC on March 19,
2008, we previously anticipated that we would need to raise approximately $40 million
of additional capital during 2008 to fund our capital expenditure program in
full. The decrease in our anticipated
additional capital needs is primarily a result of accelerated collection of
fuel tax credits, which the IRS now allows us to claim on a quarterly instead
of annual basis, and lower projected costs for station construction activity
during 2008 as a result of revised construction schedules. If we are unable to raise sufficient capital
in the debt or equity markets to make up for this shortfall, we will be forced
to suspend or curtail certain expansion projects. For more information, see Liquidity and
Capital Resources below.
13
Volatility
in operating results related to futures contracts
.
Historically, we have purchased futures contracts from time to time to help
mitigate our exposure to natural gas price fluctuations in current periods and
in future periods. Gains and losses related to our futures activities, which
appear in the line item derivative (gains) losses in our consolidated financial
statements, have materially impacted our results of operations in recent
periods. For the years ended December 31, 2005, 2006 and 2007, derivative
(gains) losses were $(44,067,744), $78,994,947, and $0 respectively. For the three
month periods ended March 31, 2007 and 2008, we did not incur any derivative (gains)
or losses as we did not own any futures contracts during these periods. For
this reason and others, we caution investors that our past operating results
may not be indicative of future results. For more information, please read
Volatility of Earnings and Cash Flows and Risk Management Activities below.
Business
risks and uncertainties
. Our business and prospects
are exposed to numerous risks and uncertainties. For more information, see
Risk Factors in Part I, Item 1A of our Form 10-K filed with the SEC on March
19, 2008.
Operations
We generate
revenues principally by selling CNG and LNG to our vehicle fleet customers. For
the three months ended March 31, 2008, CNG represented 66% and LNG represented 34%
of our natural gas sales (on a gasoline gallon equivalent basis). To a lesser
extent, we generate revenues by operating and maintaining natural gas fueling
stations that are owned either by us or our customers. Substantially all of our
operating and maintenance revenues are generated from CNG stations, as owners
of LNG stations tend to operate and maintain their own stations. In addition,
we generate a small portion of our revenues by designing and constructing
fueling stations and selling or leasing those stations to our customers.
Substantially all of our station sale and leasing revenues have been generated
from CNG stations. In 2006, we also began providing vehicle finance services to
our customers.
CNG Sales
We sell CNG
through fueling stations located on our customers properties and through our
network of public access fueling stations. At these CNG fueling stations, we
procure natural gas from local utilities or brokers under standard,
floating-rate arrangements and then compress and dispense it into our
customers vehicles. Our CNG sales are made primarily through contracts with
our fleet customers. Under these contracts, pricing is determined primarily on
an index-plus basis, which is calculated by adding a margin to the local index
or utility price for natural gas. We sell a small amount of CNG under
fixed-price contracts and also provide price caps to certain customers on their
index-plus pricing arrangement. Effective January 1, 2007, we no longer intend
to offer price-cap contracts to our customers, but we will continue to perform
our obligations under price-cap contracts we entered into before
January 1, 2007. We will continue to offer fixed price contracts as
appropriate and consistent with our revised natural gas hedging policy adopted
in February 2007. Our fleet customers
typically are billed monthly based on the volume of CNG sold at a station. The
remainder of our CNG sales are on a per fill-up basis at prices we set at the
pump based on prevailing market conditions. These customers typically pay using
a credit card at the station.
In April 2008,
we opened our first CNG station in Lima, Peru through our joint venture Clean
Energy del Peru.
LNG Sales
We sell
substantially all of our LNG to fleet customers, who typically own and operate
their fueling stations. We also sell a small volume of LNG to customers for
non-vehicle use. We procure LNG from third-party producers and also produce LNG
at our liquefaction plant in Texas. For LNG that we purchase from
third-parties, we typically enter into take or pay contracts that require us
to purchase minimum volumes of LNG at index-based rates. We deliver LNG via our
fleet of 60 tanker trailers to fueling stations, where it is stored and
dispensed in liquid form into vehicles. We sell LNG principally through supply
contracts that are priced on either a fixed-price or index-plus basis. We also
provided price caps to certain customers on the index component of their
index-plus pricing arrangement for certain contracts we entered into on or prior
to December 31, 2006. Effective January 1, 2007, we no longer intend to offer
price-cap contracts to our customers, but we will continue to perform our
obligations under price-cap contracts we entered into before January 1,
2007, including two one-year renewal periods that one of our customers is
entitled to should they choose to exercise such renewals. The renewal periods, if exercised, would
obligate us to sell the customer approximately 1.2 million LNG gallons on an
annual basis subject to a price cap for each renewal year. We will continue to offer fixed price
contracts as appropriate and consistent with our revised natural gas hedging
policy adopted in February 2007. Our LNG
contracts provide that we charge our customers periodically based on the volume
of LNG supplied.
14
Government
Incentives
From
October 1, 2006 through September 30, 2009, we may receive a
Volumetric Excise Tax Credit (VETC) of $0.50 per gasoline gallon equivalent of
CNG and $0.50 per liquid gallon of LNG that we sell as vehicle fuel. Based on
the service relationship we have with our customers, either we or our customers
are able to claim the credit. We expect the tax credit will continue to factor
into the price we charge our customers for CNG and LNG in the future. The
legislation that created this tax credit also increased the federal excise
taxes on sales of CNG from $0.061 to $0.183 per gasoline gallon equivalent and
on sales of LNG from $0.119 to $0.243 per LNG gallon. These new excise tax
rates are approximately the same as those for gasoline and diesel fuel.
Operation
and Maintenance
We generate a
smaller portion of our revenue from operation and maintenance agreements for
CNG fueling stations where we do not supply the fuel. We refer to this portion
of our business as O&M. At these fueling stations, the customer contracts
directly with a local broker or utility to purchase natural gas. For O&M
services, we do not sell the fuel itself, but generally charge a per-gallon fee
based on the volume of fuel dispensed at the station.
Station
Construction
We generate a
small portion of our revenue from designing and constructing fueling stations
and selling or leasing the stations to our customers. For these projects, we
act as general contractor or supervise qualified third-party contractors. We
charge construction fees or lease rates based on the size and complexity of the
project.
Vehicle
Acquisition and Finance
In 2006, we
commenced offering vehicle finance services for some of our customers
purchases of natural gas vehicles or the conversion of their existing gasoline
or diesel powered vehicles to operate on natural gas. We loan to our customers
up to 100% of the purchase price of their natural gas vehicles. We may also
lease vehicles in the future. Where appropriate, we apply for and receive state
and federal incentives associated with natural gas vehicle purchases and pass
these benefits through to our customers. We may also secure vehicles to place
with customers prior to receiving a firm order from our customers, which we may
be required to purchase if our customer fails to purchase the vehicle as
anticipated. As of March 31, 2008, we have not generated significant revenue
from vehicle finance activities.
Volatility
of Earnings and Cash Flows
Our earnings
and cash flows historically have fluctuated significantly from period to period
based on our futures activities, as our futures contracts to date have not
qualified for hedge accounting under SFAS No. 133. See Critical
Accounting PoliciesDerivative Activities below. We have therefore recorded
any changes in the fair market value of these contracts directly in our statements
of operations in the line item derivative (gains) losses along with any
realized gains or losses generated during the period. For example, we
experienced derivative gains of $33.1 million for the three months ended
September 30, 2005 and experienced derivative losses of
$19.9 million, $0.3 million, $65.0 million and
$13.7 million for the three months ended December 31, 2005,
March 31, 2006, September 30, 2006 and December 31, 2006,
respectively. We had no derivative gains or losses for the three months ended
June 30, 2006, March 31, 2007, June 30, 2007, September 30, 2007, December
31, 2007 and March 31, 2008. Commencing with the adoption of our revised
natural gas hedging policy in February 2007, we plan to structure all
subsequent futures contracts as cash flow hedges under SFAS No. 133, but
we cannot be certain that they will qualify. See Risk Management Activities
below. If the futures contracts do not qualify for hedge accounting, we could
incur significant increases or decreases in our earnings based on fluctuations
in the market value of these contracts from period to period.
Additionally,
we are required to maintain a margin account to cover losses related to our
natural gas futures contacts. Futures contracts are valued daily, and if our contracts
are in loss positions at the end of a trading day, our broker will transfer the
amount of the losses from our margin account to a clearinghouse. If at any time
the funds in our margin account drop below a specified maintenance level, our
broker will issue a margin call that requires us to restore the balance.
Consequently, these payments could significantly impact our cash balances.
The decrease
in the value of our futures positions and any required margin deposits on our
futures contracts that are in a loss position could significantly impact our
financial condition in the future.
At March 31, 2008, we had
no futures contracts and no amounts on deposit.
15
Risk Management
Activities
Our risk management
activities, including the revised natural gas hedging policy adopted by our
board of directors in February 2007, are discussed in Part II, Item 7
(Managements Discussion and Analysis of Financial Condition and Results of
Operation) of our annual report on Form 10-K for the year ended December 31,
2007, which discussion is incorporated herein by reference.
On April 18,
2008, we purchased certain natural gas futures contracts to attempt to
economically hedge our exposure to cash flow variability related to the
commodity component of an LNG supply contract for which we have submitted a
fixed-price bid. The supply contract has not yet been awarded to us. If we are
awarded the supply contract, performance is anticipated to begin on July 1,
2008, with LNG to be sold at a fixed price for the first three years of the
contract. The contract would have two one-year renewal options based on an
index-plus pricing methodology. While we have not received final notification
that we have been awarded the contract, due to the fact that the contract price
is fixed for the initial three-year term, as well as the fact that natural gas
prices have recently had significant increases, our derivative committee
concluded it was advisable to purchase the futures contracts in advance of the
anticipated contract award.
The futures
contracts enable us to purchase natural gas at fixed prices each month from July 2008
through June 2011, which is the expected fixed-price term of the supply contract.
Until such time as we are awarded and enter into the supply contract, the
futures contracts will not qualify for hedge accounting as cash flow hedges
under SFAS No. 133. As a result, we will be required to record directly in
our statement of operations any changes in the fair market value of these
contracts that may occur from April 18, 2008 through the earlier to
occur of (1) our entry into the fixed-price supply contract and success in
qualifying the futures contracts for hedge accounting under SFAS No. 133,
or (2) the sale of the futures contracts. An increase or decrease of $1.00
in the average price per MMbtu of natural gas that we have purchased under the
futures contracts would result in a gain or loss, respectively, of
approximately $3.1 million in the fair market value of the futures contracts. One
dollar ($1.00) is equal to approximately 10% of the average price per MMbtu of
the natural gas we purchased pursuant to the futures contracts.
To purchase the
futures contracts, we were required to make an initial margin deposit of
$1,236,000. We may be required to make additional deposits if we incur
losses related to the futures contracts.
If we
are awarded and enter into the supply contract, (1) we will attempt to
qualify the futures contracts for hedge accounting as cash flow hedges under
SFAS No. 133, but there can be no assurances we will be successful in
doing so, and (2) we anticipate that we will hold the futures contracts
for the duration of the contract term consistent with the revised natural gas
hedging policy adopted by our board of directors in February 2007. If we
are not awarded or fail to enter into the supply contract, we intend to sell
the futures contracts in an orderly fashion.
Critical Accounting Policies
For
the period covered by this report, there have been no material changes to the
critical accounting policies we use and have explained in our annual report on Form 10-K
for the fiscal year ended December 31, 2007.
Recently Issued Accounting
Pronouncements
In September 2006,
the FASB issued Statement of Financial Accounting Standards No. 157,
Fair Value Measurements
(SFAS 157),
which defines fair value, establishes a framework for measuring fair value in
generally accepted accounting principles and expands disclosures about fair
value measurements. SFAS 157 does not require any new fair value
measurements. In February 2008, the FASB amended SFAS 157 to exclude SFAS
13, Accounting for Leases. In addition, the FASB delayed the effective date
of SFAS 157 for non-financial assets and liabilities to fiscal years beginning
after November 15, 2008. We adopted the provisions of SFAS 157 related to
our financial assets and liabilities on January 1, 2008, which did not
have a material impact on our financial statements. In accordance with the new
standard, we have provided additional disclosures which are included in the
notes to our condensed consolidated financial statements. With respect to our non-financial assets and
liabilities, we are currently evaluating the impact, if any, SFAS 157 may have
on our financial statements.
In February 2007,
the FASB issued Statement of Financial Accounting Standard No. 159,
The
Fair Value Option for
Financial Assets and Financial Liabilities
(SFAS 159). SFAS 159
permits entities to choose to measure certain financial instruments and other
eligible items at fair value when the items are not otherwise currently
required to be measured at fair value. Under SFAS 159, the decision to measure
items at fair value is made at specified election dates on an irrevocable
instrument-by-instrument basis. Entities electing the fair value option would
be required to recognize changes in fair value in earnings and to expense
upfront costs and fees associated with the item for which the fair value option
is elected. Entities electing the fair value option are required to
distinguish, on the face of the statement of financial position, the fair value
of assets and liabilities for which the fair value option has been elected and
similar assets and liabilities measured using another measurement attribute.
Unrealized gains and losses arising subsequent to adoption are reported in
earnings. We adopted this statement as of January 1, 2008 and elected not
to apply the fair value option to any of our financial instruments.
16
In December 2007,
the FASB finalized the provisions of the Emerging Issues Task Force (EITF)
issue No. 07-1,
Accounting for
Collaborative Arrangements
(EITF 07-1). EITF 07-1
provides guidance and required financial statement disclosures for
collaborative arrangement. EITF 07-01 is effective for financial
statements issued for fiscal years beginning after December 15, 2008. We
are currently evaluating the impact, if any, EITF 07-1 may have on our
financial statements.
In December 2007,
the FASB issued Statement of Financial Accounting Standards No. 141(R),
Business Combinations
(SFAS 141(R)).
SFAS 141(R) provides new accounting guidance and disclosure
requirements for business combinations. SFAS 141(R) is effective for
business combinations which occur in the first fiscal year beginning on or
after December 15, 2008.
In December 2007,
the FASB issued Statement of Financial Accounting Standard No. 160,
Noncontrolling Interests in Consolidated Financial
Statementsan amendment of ARB No. 51
(SFAS 160).
SFAS 160 provides new accounting guidance and disclosure and presentation
requirements for non-controlling interests in a subsidiary. SFAS 160 is
effective for the first fiscal year beginning on or after December 15,
2008. We are currently evaluating the impact, if any, SFAS 160 may have
on our financial statements.
In March 2008,
the FASB issued Statement of Financial Accounting Standards No. 161, Disclosures
about Derivative Instruments and Hedging Activities, an amendment of SFAS 133
(SFAS 161). SFAS 161 requires disclosures of how and why an entity uses
derivative instruments, how derivative instruments and related hedged items are
accounted for and how derivative instruments and related hedged items affect an
entitys financial position, financial performance, and cash flows. SFAS 161 is
effective for fiscal years beginning after November 15, 2008, with early
adoption permitted. We are currently evaluating the impact, if any, SFAS 161 may have
on our financial statements.
Results of
Operations
The
following is a more detailed discussion of our financial condition and results
of operations for the periods presented:
|
|
Three Months Ended
March 31,
|
|
|
|
2007
|
|
2008
|
|
Statement of Operations
Data:
|
|
|
|
|
|
Revenue
|
|
100.0
|
%
|
100.0
|
%
|
Operating expenses:
|
|
|
|
|
|
Cost of sales
|
|
75.7
|
%
|
74.8
|
%
|
Selling, general and
administrative
|
|
22.4
|
%
|
38.7
|
%
|
Depreciation and
amortization
|
|
5.6
|
%
|
6.9
|
%
|
Total operating expenses
|
|
103.7
|
%
|
120.4
|
%
|
Operating loss
|
|
(3.7
|
)%
|
(20.4
|
)%
|
|
|
|
|
|
|
Interest income, net
|
|
1.0
|
%
|
2.8
|
%
|
Other income (expense),
net
|
|
(0.4
|
)%
|
0.1
|
%
|
Equity in losses of equity
method investee
|
|
0.0
|
%
|
(0.5
|
)%
|
Loss before income taxes
|
|
(3.1
|
)%
|
(18.0
|
)%
|
Income tax expense
|
|
0.0
|
%
|
0.1
|
%
|
Net loss
|
|
(3.1
|
)%
|
(18.1
|
)%
|
Three Months Ended
March 31, 2008 Compared to Three Months Ended March 31, 2007
Revenue.
Revenue
increased by $1.7 million to $29.9 million in the three months ended March 31,
2008, from $28.2 million in the three months ended March 31, 2007.
This increase was primarily the result of an increase in our average price per
gallon between periods. Our effective price per gallon was $1.43 in the three
months ended March 31, 2008, which represents a $0.17 per gallon increase
from $1.26 in the three months ended March 31, 2007. Revenue also
increased between periods as we recorded $4.7 million of revenue related
to fuel tax credits in the first quarter of 2008 compared to $3.8 million in
the first quarter of 2007. The increases in price and fuel tax credits were
offset by the decrease in the number of gallons delivered between periods from
17.8 million gasoline gallon equivalents to 17.6 million gasoline gallon
equivalents. The decrease in volume was primarily related to the cancellation
of an LNG supply contract by an industrial customer who ceased using LNG in
their production process. We also experienced a $1.8 million decrease in
station construction revenues between periods.
17
Cost of sales.
Cost of sales
increased by $1.1 million to $22.4 million in the three months ended March 31,
2008, from $21.3 million in the three months ended March 31, 2007. Our
cost of sales increased between periods as our effective cost per gallon rose
to $1.28 in the three month ended March 31, 2008, which represents a $0.18
per gallon increase over March 31, 2007. Offsetting the increase in our
effective cost per gallon was the decrease in station construction costs of
$1.8 million between periods.
Selling, general and administrative.
Selling,
general and administrative expenses increased by $5.3 million to
$11.6 million in the three months ended March 31, 2008, from
$6.3 million in the three months ended March 31, 2007. A significant
portion of this increase related to a $2.5 million increase in stock option
expense between periods. Our marketing expenses increased $1.3 million between
periods, primarily due to certain advertising we conducted related to the Ports
of Los Angeles and Long Beach and costs we incurred to support the Clean
Renewable and Clean Alternative Fuels Act (Alternative Fuels Act) in
California. We believe that the Alternative Fuels Act represents a significant
opportunity for our business. The Alternative Fuels Act, if successfully
entered on the November ballot and passed by California voters, would
provide financial resources for the purchase and conversion of vehicles to run
on clean alternative fuels such as natural gas. There was also an increase of
$1.0 million in salaries and benefits between periods primarily related to
increased compensation due to our executive officers and the hiring of
additional employees. Our employee headcount increased from 102 at March 31,
2007 to 128 at March 31, 2008. Our professional service fees increased $0.5
million between periods, primarily for legal, audit and consulting services
related to our obligations as a public company.
Depreciation and amortization.
Depreciation
and amortization increased by $0.5 million to $2.1 million in the
three months ended March 31, 2008, from $1.6 million in the three
months ended March 31, 2007. This increase was primarily related to the
result of additional depreciation expense in the three months ended March 31,
2008 related to increased property and equipment balances between periods,
primarily related to our expanded station network and fleet of LNG tanker
trailers.
Interest income, net.
Interest
income, net, increased by $0.5 million from $0.3 million in the three
months ended March 31, 2007, to $0.8 million for the three months ended March 31,
2008. This increase was primarily the result of an increase in interest income
in the three months ended March 31, 2008 due to higher average cash
balances on hand associated with the proceeds received from our initial public
offering in May 2007.
Other income (expense), net.
Other
income (expense), net, was $38,000 of income in the three months ended March 31,
2008, as compared to $123,000 of expense in the three months ended March 31,
2007. The increase was primarily related to the write-off of certain costs
related to station relocation at March 31, 2007 that did not occur in the
first three months of 2008, and the sale of certain assets in the first quarter
of 2008 that did not occur in the first three months of 2007.
Equity in
losses of equity method investee.
During the three months ended March 31,
2008, we recognized $145,000 of pre-opening costs related to our joint venture
in Peru. The CNG station opened in April 2008.
Liquidity and
Capital Resources
Historically,
our principal sources of liquidity have consisted of cash provided by
operations and financing activities, cash and cash equivalents, the issuance of
common stock, sometimes in association with the exercise of certain warrants
that were callable at our option, and in 2006 a revolving line of credit with
Boone Pickens, our majority stockholder. In May 2007, we completed our
initial public offering of 10,000,000 shares of common stock at a public
offering price of $12.00 per share. Net cash proceeds from the initial public
offering were approximately $108.5 million, after deducting underwriting
discounts, commissions and offering expenses. In addition to funding
operations, our principal uses of cash have been, and are expected to be, the
construction of new fueling stations, the construction of a new LNG
liquefaction plant in California, the purchase of new LNG tanker trailers, the
financing of natural gas vehicles for our customers, and general corporate
purposes, including making deposits to support our derivative activities,
geographic expansion (domestically and internationally), expanding our sales
and marketing activities, and for working capital for our expansion. We
financed our operations in the first three months of 2008 primarily through
cash on hand. At March 31, 2008, we had total cash and cash equivalents of
$17.5 million compared to $67.9 million at December 31, 2007. At March 31,
2008, we also had $42.6 million of short-term investments, compared to $12.5
million at December 31, 2007.
Cash used
in operating activities was $5.7 million for the three months ended March 31,
2008, compared to cash provided by operating activities of $17.6 million for
the three months ended March 31, 2007. The decrease in operating cash
18
flow was primarily due to the change in certain
deposits between periods. In January 2007, we received a refund of $22.9
million of margin deposits related to the transfer of certain futures contracts
to Boone Pickens. Offsetting this increase was incremental deposits of $1.8
million we made in the first three months of 2008 related to the production of
certain LNG trucks we anticipate will be operated in the Ports of Los Angeles
and Long Beach.
Cash
used in investing activities was $44.8 million for the three months ended March 31,
2008, compared to $6.9 million for the three months ended March 31, 2007.
The $37.9 million increase between periods was in part due to increased
purchases of property and equipment and increased construction in progress
activity in the first three months of 2008, including approximately $9.0
million that we spent on developing our LNG liquefaction plant in California.
We also purchased $30.1 million of short-term investments in the first quarter
of 2008 with excess cash balances.
Cash
provided by financing activities for the three months ended March 31, 2008
was $62,000, compared to cash used in financing activities of $10,000 for the
three months ended March 31, 2007. This increase between periods is
primarily attributable to an increase in the number of stock options exercised
during the three months ended March 31, 2008.
Our
financial position and liquidity are, and will be, influenced by a variety of
factors, including our ability to generate cash flows from operations, deposits
and margin calls on our futures positions, the level of any outstanding
indebtedness and the interest we are obligated to pay on this indebtedness, and
our capital expenditure requirements, which consist primarily of station
construction, LNG plant construction, and the purchase of LNG tanker trailers
and equipment.
We
intend to fund our principal liquidity requirements through cash and cash
equivalents, cash provided by operations and, if necessary, through debt or
equity financings. We anticipate we will need approximately $13.7 million of
additional capital to fund our 2008 capital expenditure program in full. As
reported in our 10-K for the year ended December 31, 2007 and filed with
the SEC on March 19, 2008, we previously anticipated that we would need to
raise approximately $40 million of additional capital during 2008 to fund our
capital expenditure program in full. The decrease in our anticipated additional
capital needs is primarily a result of accelerated collection of fuel tax
credits, which the IRS now allows us to claim on a quarterly instead of annual
basis, and lower projected costs for station construction activity during 2008
as a result of revised construction schedules. We first intend to pursue bank
financing options; however, we may not be able to obtain bank financing on
favorable terms, or at all. If we are unable to obtain debt financing, we
intend to pursue equity financing options. If we are unable to obtain debt or
equity financing in amounts sufficient to fund our 2008 capital expenditure
program fully, we will be forced to suspend or curtail certain of our planned
expansion activities, which could harm our business, results of operations, or
future prospects.
Capital Expenditures
We
expect to make capital expenditures, net of grant proceeds, of approximately
$54.6 million in 2008 to construct new natural gas fueling stations and for
general corporate purposes. Additionally, we have budgeted approximately
$49.1 million during 2008 to complete construction of our LNG liquefaction
plant in California, which we anticipate will be operational in the fall of
2008. We also anticipate using approximately $11.6 million to finance the
purchase of natural gas vehicles by our customers during 2008.
Contractual
Obligations
The
following represents the scheduled maturities of our contractual obligations as
of March 31, 2008:
|
|
Payments Due by Period
|
|
Contractual Obligations:
|
|
Total
|
|
Remainder of
2008
|
|
2009 and
2010
|
|
2011 and
2013
|
|
2014 and
beyond
|
|
Capital lease
obligations(a)
|
|
$
|
209,605
|
|
$
|
48,228
|
|
$
|
147,690
|
|
$
|
13,687
|
|
$
|
|
|
Operating lease
commitments(b)
|
|
4,725,395
|
|
987,205
|
|
2,227,094
|
|
943,000
|
|
568,096
|
|
Take-or-pay LNG purchase
contracts(c)
|
|
2,300,675
|
|
2,300,675
|
|
|
|
|
|
|
|
Construction contracts(d)
|
|
9,113,520
|
|
9,113,520
|
|
|
|
|
|
|
|
Other long-term contract
liabilities(e)
|
|
36,923,265
|
|
36,923,265
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
53,272,460
|
|
$
|
49,372,893
|
|
$
|
2,374,784
|
|
$
|
956,687
|
|
$
|
568,096
|
|
(a)
Consists
of obligations under a lease of capital equipment used to finance such
equipment. Amounts do not include interest as the amounts are immaterial.
19
(b)
Consists
of various space and ground leases for our offices and fueling stations as well
as leases for equipment.
(c)
The
amounts in the table represent our estimates for our fixed LNG purchase
commitments under three take or pay contracts. In October 2007, we
entered into a 10-year contingent take-or-pay commitment for 45,000 LNG gallons
per day from an LNG plant to be constructed in Arizona, which commitment is not
reflected in the table above because of the contingent nature of the obligation.
This obligation is contingent on the successful commencement of operations at the
LNG plant.
(d)
Consists
of our obligations to fund various fueling station construction projects, net
of amounts funded through March 31, 2008, and excluding contractual
commitments related to station sales contracts.
(e)
Consists
of our obligations to fund certain vehicles under binding purchase agreements
and our commitments under binding purchase agreements and contracts we have
entered into to acquire certain equipment and services related to the
construction of our LNG plant in California. Amounts shown are net of amounts
funded through March 31, 2008.
Off-Balance Sheet
Arrangements
At March 31,
2008, we had the following off-balance sheet arrangements:
·
outstanding
standby letters of credit totaling $685,000,
·
outstanding
surety bonds for construction contracts and general corporate purposes totaling
$10.5 million,
·
three
take-or-pay contracts for the purchase of LNG,
·
operating
leases where we are the lessee,
·
capital
leases where we are the lessor and owner of the equipment, and
·
firm
commitments to sell CNG and LNG at fixed prices or index-plus prices subject to
a price cap.
We
provide standby letters of credit primarily to support facility leases and
equipment purchases and surety bonds primarily for construction contracts in
the ordinary course of business, as a form of guarantee. No liability has
been recorded in connection with standby letters of credit or 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 entered into contracts with three vendors to purchase LNG that require us
to purchase minimum volumes from the vendors. Two of the contracts expire in June 2008
and the other contract expires in December 2008. The minimum commitments
under these three contracts are included in the table set forth under Take-or-pay
LNG purchase contracts above. On October 2007, we entered into a
contingent take-or-pay contract from an LNG plant that is under construction
that is not included in the table above.
We
have entered into operating lease arrangements for certain equipment and for
our office and field operating locations in the ordinary course of business.
The terms of our leases expire at various dates through 2016. Additionally, in November 2006,
we entered into a ground lease for 36 acres in California on which we are
building an LNG liquefaction plant. We have budgeted approximately
$49.1 million in 2008 to finish construction of this plant. The lease is
for an initial term of 30 years, beginning on the date that the plant
commences operations, and requires annual base rent payments of $230,000 per
year, plus $130,000 per year for each 30 million gallons of production
capacity, subject to future 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 for certain other services that the landlord will provide.
As the payments are contingent obligations, they are not included in Operating
lease commitments in the Contractual Obligations table set forth above.
We are
also the lessor in various leases with our customers, whereby our customers
lease from us certain stations and equipment that we own. The leases generally
qualify as sales-type leases for accounting purposes, which result in our
customers, the lessees, reflecting the property and equipment on their balance
sheets.
20
Item
3. Quantitative and Qualitative Disclosures About Market Risk
Commodity Risk
We
are subject to market risk with respect to our sales of natural gas, which has
historically been subject to volatile market conditions. Our exposure to market
risk is heightened when we have a fixed price or price cap 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 weather
conditions, overall economic conditions and foreign and domestic governmental
regulation and relations.
Natural
gas costs represented 58% of our cost of sales for 2007 and 63% of our cost of
sales for the three months ended March 31, 2008. Prices for natural gas
over the eight-year and three-month period from December 31, 1999 through March 31,
2008, based on the NYMEX daily futures data, has ranged from a low of $1.65 per
Mcf to a high of $19.38 per Mcf. At March 31, 2008, the NYMEX index price
of natural gas was $8.96 per Mcf.
To
reduce price risk caused by market fluctuations in natural gas, we may enter
into exchange traded natural gas futures contracts. These arrangements also
expose us to the risk of financial loss in situations where the other party to
the contract defaults on its 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
account for these futures contracts in accordance with SFAS No. 133. Under this standard, the accounting for
changes in the fair value of a derivative depends upon whether it has been
designated in a hedging relationship and, further, on the type of hedging relationship.
To qualify for designation in a hedging relationship, specific criteria must be
met and appropriate documentation maintained. Our futures contracts did not
qualify for hedge accounting under SFAS No. 133 for the years ended December 31,
2005, 2006 and 2007, and changes in the fair value of any derivatives we owned
were recorded directly to our consolidated statements of operations at the end
of each reporting period.
The
fair value of the futures contracts we use is based on quoted prices in active
exchange traded or over the counter markets. The fair value of these futures
contracts is continually subject to change due to changing market conditions.
The net effect of the realized and unrealized gains and losses related to these
derivative instruments for the year ended December 31, 2006 was a
$79.0 million decrease to pre-tax income. We did not have any futures
contracts outstanding during 2007 or the three months ended March 31,
2008. In an effort to mitigate the volatility in our earnings related to
futures activities, in February 2007, our board of directors adopted a
revised natural gas hedging policy which restricts our ability to purchase
natural gas futures contracts and offer fixed-price sales contracts to our
customers. We plan to structure prospective futures contracts so that they will
be accounted for as cash flow hedges under SFAS No. 133, but we
cannot be certain they will qualify.
We
have prepared a sensitivity analysis to estimate our exposure to market risk
with respect to our fixed price and price cap sales contracts as of March 31,
2008. Market risk is estimated as the potential loss resulting from a
hypothetical 10.0% adverse change in the fair value of natural gas prices. The
results of this analysis, which assumes natural gas prices are in excess of our
customers price cap arrangements, and may differ from actual results, are as
follows:
|
|
Hypothetical
adverse change
in price
|
|
Change in
annual pre-
tax income
|
|
|
|
|
|
(in millions)
|
|
Fixed price contracts
|
|
10.0
|
%
|
$
|
(0.8
|
)
|
Price cap contracts
|
|
10.0
|
%
|
$
|
(0.9
|
)
|
This
table does not include two 1.2 million LNG gallon per year renewal options that
one of our customers possesses related to an LNG price cap contract. Had the contract been included, assuming both
renewal periods were exercised, the resulting amount for the price cap
contracts would be $(1.1) million.
Item
4. Controls and Procedures
Not applicable
21
Item 4T.
Controls
and Procedures
Disclosure
Controls and Procedures
We
maintain disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the reports we file or submit under the
Exchange Act is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commissions rules and
forms and that such information is accumulated and communicated to our
management, including our Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure. We
carried out an evaluation, under the supervision of and with the participation
of our management, including our Chief Executive Officer and Chief Financial
Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures. Based on this evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and
procedures were effective as of the end of the period covered by the report.
Changes in Internal
Control over Financial Reporting
In
addition, an evaluation was performed under the supervision of and with the
participation of our management, including our Chief Executive Officer and
Chief Financial Officer, of any change in our internal control over financial
reporting that has occurred during our last fiscal quarter that has materially
affected, or is reasonably likely to affect materially, our internal control
over financial reporting. There has been no change in our internal control over
financial reporting during our most recent fiscal quarter that has materially
affected, or is reasonably likely to materially affect, our internal control
over financial reporting.
PART II.
OTHER
INFORMATION
Item
1. Legal Proceedings
We may
become party to various legal actions that arise in the ordinary course of our
business. During the course of our
operations, we are also subject to audit by tax authorities for varying periods
in various federal, state, local, and foreign tax jurisdictions. Disputes may arise during the course of such
audits as to facts and matters of law.
It is impossible at this time to determine the ultimate liabilities that
we may incur resulting from any lawsuits, claims and proceedings, audits,
commitments, contingencies and related matters or the timing if these
liabilities, if any. If these matters
were to be ultimately resolved unfavorably, an outcome not currently
anticipated, it is possible that such outcome could have a material adverse
effect upon our consolidated financial position or results of operations. However, we believe that the ultimate
resolution of such actions will not have a material adverse affect on our
consolidated financial position, results of operations, or liquidity.
Item
1A. Risk Factors
An
investment in our company involves a high degree of risk. In addition to the
other information included in this report, we urge you to carefully consider
the risk factors set forth in our Form 10-K for the year ended December 31,
2007 (filed with the SEC on March 19,
2008) in evaluating an investment in our company. We urge you to consider these
matters in conjunction with the other information included or incorporated by
reference in this report.
Item
2. Unregistered Sales of Equity Securities and Use of Proceeds
Use of Proceeds
Our
initial public offering of common stock was effected through a Registration
Statement on Form S-1 (File No. 333-137124) that was declared
effective by the Securities and Exchange Commission on May 24, 2007. On May 31,
2007, 10,000,000 shares of common stock were sold on our behalf at an initial
public offering price of $12.00 per share (for aggregate gross offering
proceeds of $120.0 million) managed by W.R. Hambrecht + Co., LLC, Simmons &
Company International, Susquehanna Financial Group, LLP, and NBF Securities
(USA) Corp. In addition, on June 22, 2007, in connection with the exercise
of the underwriters over-allotment option, 1,500,000 additional shares of
common stock were sold by selling stockholders at the initial public offering
price of $12.00 per share (for aggregate gross offering proceeds of $18.0
million). We received no proceeds from the sale of shares by selling
stockholders. The offering terminated following the closing of the
over-allotment sale.
We
paid to the underwriters underwriting discounts totaling approximately
$7.0 million in connection with the offering. In addition, we incurred
additional costs of approximately $4.5 million of costs in connection with
the offering,
22
which when added to the underwriting discounts paid by
us, amounts to total expenses of approximately $11.5 million. Thus, the net
offering proceeds to us, after deducting underwriting discounts and offering
expenses, were approximately $108.5 million. No offering expenses were
paid directly or indirectly to any of our directors or officers (or their
associates) or persons owning ten percent or more of any class of our equity
securities or to any other affiliates.
Through
March 31, 2008, we have used the net proceeds from the offering as
follows:
·
construction
of our LNG liquefaction plant in California ($25.9 million),
·
construction
and installation of CNG and LNG stations ($9.4 million),
·
financing
customer vehicle purchases ($2.6 million), and
·
working
capital ($16.0 million).
The
balance of the proceeds has been invested in instruments that have financial
maturities no longer than six months. We intend to use the remaining proceeds
to finish building our LNG liquefaction plant in California, to build
additional CNG and LNG fueling stations, to finance additional purchases of
natural gas vehicles by our customers and for general corporate purposes,
including making deposits to support our derivative activities, geographic
expansion (domestically and internationally) and to expand our sales and
marketing activities. We cannot specify with certainty all of the particular
uses for the net proceeds from our initial public offering, and the amount and
timing of our expenditures will depend on several factors. Accordingly, our
management will have broad discretion in the application of the net proceeds.
Item
3. Defaults upon Senior Securities
None.
Item
4. Submission of Matters to a Vote of Security Holders
None.
Item
5. Other Information
None.
Item 6. Exhibits
(a)
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Exhibits
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10.1
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Amendment No. 1 to Amended and Restated 2002
Stock Option Plan (incorporated by reference to Exhibit 10.36 to the
Form 10-K we filed with the SEC on March 19, 2008)
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10.2
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2006 Equity Incentive Plan - Form of Stock
Award Agreement
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31.1
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Certification of Andrew J. Littlefair, President and
Chief Executive Officer, pursuant to Rule 13a-14(a) or
15d-14(a) of the Securities and Exchange Act of 1934, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
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31.2
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Certification of Richard R. Wheeler, Chief Financial
Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the
Securities and Exchange Act of 1934, as adopted pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.
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32.1
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Certification pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
executed by Andrew J. Littlefair, President and Chief Executive Officer, and
Richard R. Wheeler, Chief Financial Officer.
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23
SIGNATURE
Pursuant
to the requirements of the Securities and Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
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CLEAN ENERGY FUELS CORP.
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Date: May 15, 2008
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By:
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/s/
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Richard R. Wheeler
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Richard R. Wheeler
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Chief Financial Officer
(Principal financial officer and duly authorized
to sign on behalf of the registrant)
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24
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