Clean Energy Fuels Corp (CLNE) 2008 Q2 法說會逐字稿

Greetings, and welcome to the Clean Energy Fuels second quarter earnings conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (OPERATOR INSTRUCTIONS). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Miss Ina McGuinness of ICR. Thank you Miss McGuinness, you may begin. Thank you, you may begin.

Thank you, operator. Earlier this afternoon, Clean Energy released financial results for the second quarter and six months ended June 30, 2008. If you have not received the press release, it is available on the Investor Relations section of the Company's website at www.CleanEnergyFuels.com. This call is being web cast and replay will be available on the Company's website for 30 days.

Before we begin, I'd like to remind you that some of the information contained on the news release and on this conference call consist of forward-looking statements that involve risk and uncertainties and assumptions that are difficult to predict. Words and expressions reflecting optimism and satisfaction with current prospects, as well as words such as believe, intends, expects, plans, anticipates, and similar variations identify forward-looking statements, but their absence does not mean that a statement is not forward-looking. Such forward-looking statements are not a guarantee of performance and the Company's actual results could differ materially from those contained in such statements. Several factors that could cause or contribute to such differences are described in the risk factors in Clean Energy's Form 10-K filed with the SEC on March 19, 2008 and subsequent filings. These forward-looking statements speak only as of the date of the release and the Company undertakes no obligation to publicly update any forward-looking statements to reflect new information, events or circumstances after the date of this release.

Joining me on today's call is CEO, Andrew Littlefair and Chief Financial Officer, Rick Wheeler and now, at this point I'd like to turned call over to CEO, Andrew Littlefair. Andrew.

Thank you, Ina and good afternoon, everyone. We viewed this as a mixed quarter as with we were pleased with our revenue growth and industry prospects, but disappointed with our volume growth. This is primarily related to long lead item -- long lead time nature of our business. Because of this we have faced a challenge so far this year, which I've discussed before in achieving meaningful volume growth as some of our projects have been slower to come online than anticipated. But you need only look at the industry trends and our station activity to know that our business plan and strategies are on track. Case in point, if you saw the substantial growth for the June quarter of one of our friends, West Port Innovations, in particular the Cummins West Port partnership, their sales were up 62% for their June quarter. You will see a positive trend that bodes well for us. They manufacture medium, heavy duty engines that run on natural gas and natural gas engines are, of course, the first step in leading to fuel cells. We kind of view them as a leading indicator of things to come. Someone has to order an engine and then a body et cetera and eventually the fuel will follow.

As you all know, oil prices have remained high in the $115 range or so and natural gas prices have decreased into the $8 range and today $8.50. Consequently, the spread between the price of oil and natural gas continues to be very favorable to us. In previous calls, I've talked about the spreads in the range of 10 or 11 to 1. In recent weeks we've even seen the spreads in the 13 to 14 to 1 range, which allows us to provide even more economically compelling solutions to our customers.

Let's look at how this translates at the pump. In Los Angeles last week, the price of diesel was approximately $4.80 per gallon while at the same time we were selling CNG in Los Angeles at $3.30 a gallon and we're selling LNG at our port station for $3.70. These, of course, are both on a per diesel gallon equivalency basis. Our high volume fleet customers are paying even less per gallon, which often allows them to save up to $1.50 a gallon. This savings really adds up for fleets using significant volumes of fuel. In addition to the compelling economics there is an increasing awareness of the significant availability of natural gas in the United States. I think Aubrey McClendon, CEO of Chesapeake has been on this point and done very well describing it, but this point needs to be underscored. Based on a 2008 study from Navigant Consulting recently released by the American Clean Skies Foundation, there is enough natural gas in the country for up to 118 years at 2007 levels. This is up considerably from recent estimates of ten years of reserve life of natural gas. For years we believed that there was about 200 TCF or so and today that number looks to be closer to 700 TCF or triple. In place, the number gets significantly larger, some saying that it could be as much as 1500 TCF. So it's clear there's plenty supply of natural gas right here in America.

We see more interests by our customers in OEMs or NGVs in North America. In a recent development that reflects our bullish outlook for this, we recently announced to invest up to $10 million as part of $160 million funding effort in a new company called the Vehicle Production Group. VPG will be building a new ground up factory natural gas vehicle made in the United States for the taxi impaired transit markets, two of our key markets. This vehicle will be the first new, purpose built, natural gas vehicle introduced in the United States in about the last ten years and VPG expects they will make deliveries in 2010. So we're very excited about that.

The positive natural gas environment is also leading to increased legislative activity focusing on natural gas vehicles. It appears the message of natural gas being cleaner, cheaper, and domestic fuel is starting to be heard. For example, there are currently two bills, one sponsored by Senator James Enoff from Oklahoma and another being proposed by Representative Rom Emmanuel of Illinois that provide incentives for and promote the use of natural gas vehicles. Although, we don't know how these bills will ultimately look and whether or not they'll pass, we see these activities as a positive sign that Washington is becoming more aware of the benefits of natural gas as a transportation fuel. These efforts bode well for the extension of VTAC, a reawakening of DOE, EPA and DOT and other federal agencies.

Also, as you remember, there was a state wide initiative on the California ballot called the California Renewable Energy and Clean Alternative Fuels Act. It will come before voters in November known as Proposition 10. If Californians pass it, the Act will invest $5 billion in projects and incentive programs to promote renewable energy in alternative fuels, including about $2.9 billion in cash incentives for the purchase of alternative fuel vehicles starting January 1, 2009. This program would be the nation's most ambitious to support the use of alternative fuels and low carbon fuels. To kind of put it in perspective, owners of newly purchased medium and heavy duty vehicles could receive incentives as much as $50,000 per vehicle encompassing almost up to 28,000 to 24,000 vehicles. That's three times the 8,000 port trucks, the Port of LA and Long Beach program is targeting to convert to LNG. Overall, the initiative tracks and supports the state and Governor's desire to reduce dependence on imported oil and to find solutions to deliver cleaner air, including lower greenhouse gas emissions.

We are also pleased with the growing number of grants that support the growth of natural gas vehicles and infrastructure. The mobile source air pollution reduction review committee and the South Coast Air Quality Management District recently approved a grant totaling $11.3 million with $3.6 million coming to us to build stations and the balance going to our customers to buy vehicles. Our funds are airmarked to help defray the costs of expanding the southern California network of natural gas fueling stations by adding nine new stations. These grants provide a great incentive for existing Clean Energy customers and prospective customers to make the switch to natural gas. Since its inception, our in-house grants department has helped secure more than $107 million in funding for both Clean Energy and our customers. We're very proud of this fact and we see this growing.

Concerning our station activity, at this point in the year, we plan to complete or begin construction on 38 stations. And that is up approximately 60% from the same if you will figure in the prior year. This is just one more data point that shows the increased activity that's tied to the growing interest in natural gas vehicle solutions.

Turning to the ports project, the Port of LA and Long Beach currently are executing purchase contracts with manufacturers of heavy duty natural gas vehicles. In the last few weeks, the ports have placed orders for 200 LNG trucks, which is in addition to the 100 we are currently rolling out. Outside of the port funding efforts, one drainage company has ordered another 130 LNG trucks. We are hopeful that the majority of these trucks will be fueling in our port stations in the fourth quarter of this year. Just last week the ports have released a new truck finance and leasing program for vehicle funding between 60,000 and $105,000 for clean LNG trucks. Ports are taking this program very seriously and while slow at first, we remain convinced many thousands of trucks will be put on the road in the next few years.

As some of you may have heard, recently the American Trucking Association filed suit against the ports because they object to certain concession requirements included in the port's plan and while we don't know what effect, if any, the suit will have on the timing of the port's truck program, we can say that the ETA is not challenging the clean truck portion of the plan. In fact, they have gone on record saying they, quote, strongly support, unquote, the emission reduction components of the port's plans, so we are hopeful that the truck program will continue to move forward as originally scheduled. To meet the demand from the ports our LNG plant under construction in Boron, California is progressing and will be operational in the fall of this year. So we'll be ready to fuel the port trucks as they roll out. We'll also be able to use this LNG for other regional trucking customers we serve in the southwestern United States.

Now, let me move on to discuss some of our recent business highlights. First, we upgraded our station at LAX, Los Angeles International Airport, to accommodate 100 more buses, nearly doubling the capacity of that station. Also, we recently announced that we're building a hydrogen fueling station in Los Angeles in partnership with General Motors which will be located at our LAX station. The station will help Clean Energy and GM better understand the synergies between hydrogen and natural gas fueling. GM has also recently announced that they are investigating a return to the natural gas vehicle market in the US. Of course, we're watching this very closely. We look forward to working with GM to broaden the awareness of the societal and customer benefits of cleaner gaseous fuels.

Next, we were awarded a five-year contract with Metro RTA, the public transit provider of Akron, Ohio, to operate and maintain their fueling station for their fleet of 45 full-size CNG buses. This is our first customer in Ohio and we believe that this will lead to other public agencies in the area converting their fleets. Also, the city and county of Sacramento renewed their LNG supply contract with us for a one-year term with an option for up to two additional years to provide fuel for their growing fleet of natural gas power refuse trucks. We are proud to say that we have been supplying LNG fuel under contract to Sacramento's Municipal Refuse agencies since 2005 and today they operate 105 LNG refuse trucks and have plans to add more.

Finally, as I'm sure you heard, we recently lost the Phoenix LNG supply contract, which was being fulfilled by us with margins that were under water as you're aware. After going through a protest period, we got a third of the contract volume reinstated with agreements to serve the city of Tempe and city of Mesa components of the contract at positive margins. In fact, we just received verbal notification yesterday the we have won the city of Los Angeles Sanitation contract which is about 3.5 million-gallons per year and moving to 4 million-gallons in 2009 as they are adding 70 more LNG trucks to their fleet of 370 LNG trucks. We have also been serving other transit customers with spot loads, which means, in effect, we're making progress on replacing all the Phoenix volume.

Before I turn the call over to Rick, let me just recap some of the movement and progress this industry is experiencing that is driving the growing awareness of the benefits of natural gas fuel. The spread between the price of natural gas and the price of oil is more favorable than it's ever been. The ports ever LA and Long Beach have gone from no trucks to approximately 4 trucks on order in the last year and we've gone from one OEM original equipment truck manufacturer providing class A trucks to the ports, now it's five OEMs. One [Indiana] manufacturer just reported their sales were up 62% in their most recent quarter. New policies are being proposed in Washington that support the use of natural gas fuel and our station activities increased approximately 60% from last year and we're currently in the final stages of finishing our LNG facility in Boron.

So when we take stock of the industry, it is clear that more and more groups are realizing the benefits of natural gas vehicles and the fact that natural gas is a transportation fuel is ready today not 15 or 20 years from now. With experienced team -- our experienced team and leadership position in the industry, I'm confident that we will be able to capitalize on this opportunity. With that, I'll turn the call over to Rick to discuss our financial results.

Thanks, Andrew. Before I review our financial results, I would like to point tout that all my references to our results will be comparing to second quarter of 2008 to the second quarter of 2007 or comparing the six-month period ended June 30, 2008 to the six-month period ended June 30, 2007 unless otherwise specified. With that clarification, for the quarter, our revenues increased to $34.6 million, which is up from 30.7 million. For the first six months, our revenues totaled 64.5 million, which is up from 58.8 million.

Adjusted margin for the quarter was 8.8 million, which compares with 9.2 million and adjusted margin for the six months was 17.4 million, which is up from 16.9 million. Our net loss for the second quarter was 2.4 million or $0.05 per share, which compares to a net loss of 3.6 million or $0.09 per share. Our net loss for the six months was 7.8 million or $0.18 per share, versus a loss of 4.4 million or $0.12 per share in the prior period. During the second quarter, we recognized -- excuse me, we recorded a mark-to-market gain of $5.7 million on certain futures contracts we purchased in connection with the fixed price bid for the city of Phoenix's LNG supply. Excluding this gain, loss per share would have been $0.18 for the second quarter and $0.31 for the six-month period ended June 30, 2008. The two largest contributors to our year to date increased loss were the gross margins on our fixed price contracts and the increase in our SG&A expenditures.

First looking at SG&A, in the first six months of 2008, stock based compensation expense increased by 1.3 million, we saw marketing expenses increase by 3.7 million, primarily related to supporting the California bond initiative, Andrew mentioned earlier and salaries and benefits increased by 1 million, primarily related to the hiring of marketing personnel and pay raises. Non-GAAP earnings per share in the second quarter of 2008 was break even on a per share basis and was $0.01 per share in the second quarter of 2007. Non-GAAP loss per share for the first six months of 2008 was $0.06 per share and was a loss of $0.02 per spare last year. Excluding the hedge gain mentioned above, non-GAAP loss would have been $0.12 for the first quarter and $0.19 for the six-month period ended June 30, 2008. Adjusted margin and non-GAAP EPS are discussed in more detail in our press release we issued earlier today.

Now, let's look at our hedging activity during the quarter. As is our policy, we bought Futures contracts to hedge the fixed price component of the Phoenix LNG supply contract bid that we submitted. We initially did not win the bid, but after we protested the award to a competitor, we were awarded a portion of the contract representing approximately one third of the contract volumes. After this process played itself out, we sold the Futures contracts related to the portion of the contract that we were not awarded. Unfortunately, the price of natural gas between the date we bought the Futures contracts and when we sold them decreased a bit and we ultimately realized a net loss of $300,000 from the sale of these contracts. As a result, you will see a $5.7 million gain in our Q2 results and a $6 million loss in our Q3 results which nets to the $300,000 overall loss on the transaction. We do, however, still own the Futures contracts applicable to the volumes we retained.

Turning to our volumes, we delivered 18.5 million gallons in the second quarter of 2008 versus 19.3 million gallons last year. Year to date, we delivered 36.1 million gallons of fuel to our customers, compared with 37.1 million gallons delivered during the same period in 2007. As we referenced on our last call, we have three non-core low margin customers that we did not renew between periods. These three customers accounted for approximately 2.5 million gallons for the first six months of 2007 that are not in our 2008 numbers. Taking these volumes out of the equation, our volumes with new and existing customers actually increased by approximately 1.5 million gallons between the first six months of 2007 and the first six months of 2008. Our margins in the second quarter continued to be negatively impacted by the increased price of natural gas during the period.

As you recall, the increased price of natural gas into our margins on our older, fixed priced contracts where we are unhedged. In fact, our Phoenix contract was under water from a margin perspective by approximately $0.60 per LNG gallon in the first six months of 2008. So on roughly 6 million LNG gallons during the period related to this contract, you can see our earnings were adversely impacted by approximately 3.6 million during the period. The good news here is this contract expired on June 30. Consequently, our actual margin in the last half of this year will improve as the negative effects that we experienced from this contract in the first half of the year will be eliminated.

In addition, our margins will improve related to Phoenix in the last half of the year as we will be earning a positive margin on the volumes we did retain through our protest process. Also, because our other large fixed price project that is unhedged expires at the end of this year, our 2009 actual margins should begin to approach our adjusted margins after the negative results associated with these large contracts go away.

And with that, operator, please open the call to questions.

Certainly. Ladies and gentlemen, we will now be conducting a question-and-answer session. (OPERATOR INSTRUCTIONS). Our first question comes from the line of Rob Brown with Craig-Hallum. Please go ahead.

Good afternoon. Can you provide some more color on the fleet -- sorry, the port fleet that's existing today and how much do you think it can hit Q3 or is this really a Q4 timing for the first port trucks?

The first port trucks, Rob -- good afternoon. The first port trucks are now rolling out and as we've discussed before, it's been a little slow and somewhat painful as everybody is getting used to this new program, but they are beginning to hit the road. In fact, one of the larger customers of this first 100 trucks got the money and has ordered -- is now taking delivery of 30 of those trucks and so those will be on the road in the latter part of this week and in the -- and next week. And so I'd say in the next month, the first hundred of those trucks will be on the road consuming fuel. The other 332 or so that I mentioned, I think, will be toward the latter part of the quarter and fourth quarter. Now, let me do -- let me say this about the port because I'm very -- very excited about this. I mean recently the port of LA has been meeting with some of the very largest trucking companies in the country and it appears that they're making head way with them to entice them to come to the port. Because after all, that's what the port has been trying to do is bring in large employee driver type fleets to help drive efficiencies there at the ports. So stay tuned there on that. I do think that eventually, as I've been saying for the last six, eight months, we'll be on this kind of 100 a month path.

Okay. Great. And then you mentioned the Proposition 10 in California. Do you have any sense for the -- has there been any polling on the likelihood of that passing or is it too early?

There was polling by the committee earlier and it polls very well. Environmental issues in California just poll extremely well and there are two -- there are actually three environmental propositions on the ballot. One has to do with electricity. There's the Prop 10, that I mentioned and there's another one that I can't remember the other one exactly, it might have to do with water. And those issues always poll pretty well. The polling was in the 60%, 60 some odd percent range. The state's having difficult budget situations. I imagine that will tighten some. But we start -- that prop starts with a nice base. We see it from conservatives and liberals and from the northern California and southern California, so, the campaign has been run right and has to get to the finish line, it looks promising to me.

Okay. Great. And maybe just comment on the volume growth, it was I guess netting out the lost contracts. Do you see volume growth returning here in Q3 here or is that more of a Q4 phenomenon?

No, I do see some volume growth kicking back in, that LA sanitation one that I'm talking about kicks in, there's a couple of others. Some of those other -- some of our existing customers, for instance, San Diego, the LAX -- San Diego is taking 100 buses that will begin coming in here any time. They'll phase in latter part of this quarter and the fourth quarter. That's 100 transit buses, so that's big. Those will finish out in the first of '09. The RTC in Las Vegas is beginning to receive 80 new buses. LAX is beginning to deliver those 100 buses at the L. AX station. And so there should be increased acceleration in volume growth in '03, but then I think in four -- in the fourth quarter -- I didn't mean '03, in Q3 and then in the fourth quarter, with the port trucks and other things that we haven't discussed here today, I think we should get back to more historical volume growth.

Okay. Great, thank you.

Thank you.

Thank you. Our next question comes from Eric Stine with Northland Securities. Please go ahead.

Hello.

Hey, Eric.

Could you first -- just a bookkeeping, give the breakdown between CNG and LNG for the quarter?

I think it's 65, 35, but Rick's pulling up his little cheat sheet here.

Actually, we filed the Q a second ago or we're in the process of filing it, so I guess it's fair game to put that out there.

Okay. I can -- I can check that after the call. I was wondering if you could talk about the process in Phoenix, the fact -- getting the RPT in Tempi back, you know, whether that -- I would think that that's pretty rare for that to happen and kind of how that played out and then, also, if you could just talk about the two remaining fixed price contracts and your retention chances there or thoughts on that?

Eric, just, I'm sorry, real quick, for the six month ended June 30, '08, it was CNG 23.4 million, LNG was 12.7 million to get you to the 36.1 million total.

Okay.

Let me handle the first part of that. And, part of this I want to be a little careful because we filed a protest and, we're talking about a competitor here, so I don't want to get into all the -- all the dirty linen. We happen to think that over the last several years, that's why we fought pretty hard, that we provided very good service and as you know by looking at the numbers, at a very terrific price to the city of Phoenix. And so we were -- we were disappointed that the staff took the position that they did on -- with the competitor that we didn't believe had the capability to deliver and provide the back up services that we do. And, in fact, since that -- since this whole thing came down in our protest, that has been the case. We actually in the first week of the new incumbent coming in, we had to provide the fuel. But -- so we knew that we were -- we knew that a couple of our other customers out there that are -- that are part of the Phoenix contract, even though they're related transit agencies, they're not the city of Phoenix, we think they liked our service and, in fact, during the protest period, they went to the city of Phoenix and they said, hey, look, let us opt out of this umbrella contract and contract with these guys who have been providing us very good service. So we, of course, were pleased with that and that's how -- that's how -- of the four loads a day, 1.5 or a little bit more than that came back to us.

Okay. And then can I just get your thoughts on the two remaining fixed contracts?

Eric, you bet. The nice thing is there's only one big one left and that's a transit agency down in Texas and it expires at the end of this year. The Phoenix one obviously was the biggest one that expired June 30.

Right.

The other one that you may be thinking about was another transit agency in Texas that also -- it reupped on June 30. We continued to do that business and we got rid of the price cap that was on our intext plus pricing mechanism we had with them, so that's how that one went away. The nice thing is related to the -- this issue is -- as we talked before, it essentially goes away at the end of 2009. When you look at our projected volumes beyond the end of this year, there's only about 4 million-gallons subject to fixed price and price cap contracts and the significant component of those is in the price cap bucket, which is obviously nicer for us since we don't get squeezed dollar for dollar in all instances like we do on a fixed price deal. So the nice thing is that's going away at the end of this year, which obviously will be nice for everybody.

Yes. That definitely will. Let me just ask one more question. This is just related to the port roll out. Just wanted to get your thoughts on thousand you think the deadline will play out as far as the ban on pre1989 trucks? On October 1, whether the ports will be pretty firm with that or whether maybe that gets delayed a little bit?

My guys that work the port really daily down there and everything I can tell from the political leadership, they continue to -- they haven't shown any weakness on that -- on that truck ban deadline and I somehow don't think that that's going to give. Obviously putting in new trucks, that is new diesels versus new LNG and introducing a new fuel for guys that have operated diesel trucks for 50 years, that takes some -- that takes some work and so we're seeing some people wanting to go with new 2007 diesel trucks, but of course you remember, the plan calls for no -- no less than 50% LNG trucks. So the port's working hard to do what it can to make sure that when they approach that deadline deadline, that the trucks that will be retired, that it will breakdown at about 50% LNG, 50% diesel. I think that's the way it's going to go. I don't see a delay. Now, will they -- will they allow you to keep a diesel truck operating until you get your new LNG truck that might take a month, they may do something like that, but I think that's only reasonable. But I don't see them backing -- backing out of the ban. In fact, next year, there's another big ban coming. That's -- which is almost as big as this one. So they don't want to start that.

Okay. I appreciate that.

And I think -- and I think, Eric, that some of the concern right now is as Kenworth and as PeterBilt and as these guys are bringing their LNG trucks up on line and I've seen pictures of the first Kenworth rolling down the line as they're getting that process rolling out, some of the concern in the early going is can they produce enough trucks. Kenworth assures us by later this year, they can give you as many LNG trucks as you want. That being the pressure that, hey, we can't get these things as quickly as we want, that pressure will go away later this year.

And didn't recently the port of Long Beach issue a jump start order to begin to get that process going?

They both did, I think, LA did and Long Beach both and that's the couple of hundred that I was mentioning in my remarks.

Okay. Thanks a lot, guys.

Thank you.

Our next question comes from Brian Gamble with Simmons & Company. Go ahead.

Good afternoon, guys. Kind of a big picture question to start out with. You mentioned Aubrey, and he's been pretty verbose in talking about his views that the [nat] gas and didn't go a long way in helping the transportation infrastructure in the US. Is there any monetary push from companies like that that is making a strategic investment in clean or is it purely on the basis of trying to get people's awareness up and get things rolling?

Well, I can't talk about all the things that we're doing with Chesapeake, but I can say this, that we work closely with them, me with Aubrey and our team with Chesapeake officials at many levels on the public policy part of it. We're also working with them on policies for Oklahoma and policies in Texas to promote increased use in those states and we're looking for other ways to work together.

In light of --

That's really all I can say right now in light of that.

That's fine. In light of kind of this increased visibility that he's getting for the industry, are you seeing any new competitors either start to spring up or hearing things of people potentially getting into the market given what gas prices have done recently?

We haven't yet. I haven't yet. I think the proof, though, will be in the pudding. I think, for instance, when you see some of these large -- large national truck companies do what I think they're going to do here shortly and you start seeing more size, that will -- and I've always said this, that will drive more competition in our business and that's a good thing, I think. I haven't seen gas producers -- I think Aubrey's a little ahead of some of them on thinking that they should go out and retail fuel. That just gets to be kind of one more big step out of their normal business and it actually probably works better for many of them to work with guys like us to provide gas or some other mechanism rather than for them to go out and get in the retail fuel distribution business.

Then could you maybe go over a little bit on your LNG purchase contracts with Exxon and Williams and how that -- how that shapes up in light of kind of continued delays in regard to both your plan and continued delays at the ports and how -- where the volumes are going and how that's shaping up?

Sure. We just reupped the deal with Williams. It now goes for a couple of more years. And we're good for four loads a day, our current production and we have an option to maintain that level going forward, starting at the first of next year. The Exxon one expired June 30. Apparently they had a little transition for whoever's responsible for this kind of business, so while that person is getting up to speed, we did a one-month extension on that contract and we're working on that one and we think we'll get that done. In essence those are going to the same places that they are, into California primarily and into Texas. Then once Boron comes up and SES, it will allow us more flexibility to source product closer to our customers wherever they happen to be as well as have capacity for the growth we think is coming.

So there will probably be a little bit of shuffling once everything comes on line, but we think that will be advantageous for us. We also provide a buffer in the event of plant maintenance or plant going down for whatever reason or -- so that's how we see that going down.

The Boron plant really is kind of coming on about when we need it. I don't know that I'd like to be explaining to everybody why we have this plant if it came out a year ago sitting there without all those trucks. So it's really coming on commensurate with when I'm going to need it and really in a timely fashion.

And then just finally, real quick, on the ports deal, in light of that remark, kind of when you talk about what -- what trucks are coming on at the end of Q3 and then rolling into Q4, kind of in line with what you said back in the spring on the per month type of volume growth from the truck side of things, how does that look as you look into '09? Are we still thinking the first half of '09 is going to be around that 100 truck mark or are we thinking that could double or triple on a monthly basis?

I'm getting goosy, I'm making port predictions. I do think -- I think it's unreasonable to think that you're going to field trucks into port at more than 100 or 200 a month. I mean the reason is, guys, , they just don't turn over their fleets that fast, they have to drill a hole in their old truck in order to get funding, they have to buy new trucks, there's a lot of stuff they have to do and I think that in a -- in a universe of 16,000 trucks, a couple of hundred a month is a pretty -- pretty good turn over. So I would say -- I'm going to stick here for a while that I think I'll be right that when you -- everything shakes out here over the next few months, you're going to start seeing these things at about a 100 a month. And if we get some bigger fleets that buy more trucks, then you'll see it move past that. But I think that's the way it's going to go and frankly that will be a lot of volume for us.

Thanks, guys, appreciate it.

Thank you.

Thank you. Our next question comes from the line of Ron Oster with Broadpoint Capital. Please go ahead.

Good afternoon. I was wondering if you could provide a little more details on the LA Sanitation contract you mentioned? I think you said 3.5 million LNG gallons. Is that going to be phased in as trucks are introduced or is that going to be an immediate up tick to your volume?

Immediate up tick.

That's an existing fleet, so that's an immediate up tick. And then it will also have the additional 70 trucks that I believe are being phased in over the rest of this year, so have a little incremental volume going up to 4 million starting roughly the beginning of next year.

Okay. So I assume you were able to take this from a competitor. Are there any other types of contracts like that that are outstanding that can move the needle like this contract?

I'm not going to tell you all of my secrets here, but that's what I was trying to allude to is we've done a pretty good job replacing the Phoenix loads and, yes, there are other contracts we're working on that kind of fall in that category.

This came from our competitor that took the Phoenix load from us, so it's a little bit of a shuffle game that, they got Phoenix and we got this one, so kind of the whole shaking out of -- end up roughly in the same volume level perhaps with different customers that we talked about before, semi starting to take hold.

Got you.

And there are a couple of other large ones that are sort of in play right now.

Okay. And Andrew, did you mention when you -- you mentioned talking about volume growth, potentially ticking up in 3 Q versus this level, were you talking about total volumes or did you mean just from your existing customers?

Well, I think both Ron.

Kind of sequentially, looking on a quarterly basis, I think we're looking, the stuff is going to come on. The stuff we've been working on in our station activity and the stations we've been working on for the last four, five, six months are going to start coming to fruition, coupled with hopefully the port trucks start rolling out as well during this time period.

So it's a combination of -- I was alluding to San Diego's, these 100 buses are being delivered and striped now. They don't put them into service that fast, but they're beginning to show up in San Diego. So that's an existing customer, existing business. And then sanitation, LA sanitation is a brand new business and so it's -- and then port trucks are brand new trucks. So there is a combination of both.

Got you. And can you also comment on your international operations in Peru and how that's developing and if there's any -- plans are imminent for the next station or if one will do for now?

Well, we got the first one up. We wanted it -- we all along wanted to get the first one up and operating. It is operating. I checked the volumes yesterday. We fueled about -- almost 1500 taxicab. You'll recall that really that station had three pieces to the business, which was a light duty piece, which is about 3 -- 3500-gallons to 4,000-gallons a day. We're at that, in that range now. Then it is getting ready to receive transit buses, Peru transit buses. Those have been slow to come on. We haven't seen them yet, but we know the engines have been delivered to the country, so we're awaiting those and we're just now getting the final permitting done for the trailers that are on site that will be doing the stationary distribution at LNG to Kimberly Clark and other stationary users. That's the other sort of 5,000-gallons a day that hasn't been on, but will come on here shortly. So that station hasn't reached its full potential, but it's operating well. We like the way it's going and, yes, what it's done is it's now given us something to point to, we're in working with other fuel retailers, those that are in the CNG business and those in the gasoline business to see if we can't expand the network.

Got you.

They're still doing lots of things down in Lima and still supporting it and so we continue to like the business and we have a group of our guys going down, I think, next week to see if we can't sign up some deals.

Okay. And so just one last one. Did you say 38 stations are under construction now? Is that what you said in your prepared comments?

That's what I said. Either that we think we'll have done by year end, so 38 that are in some phase of construction. Some of them are almost completed -- well, several of completed, some of them are halfway and some are in the permitting phase right now.

Okay. And, Rick, with that in mind, is there any update for CapEx for the second half of the year and maybe directionally, what '09 might look at -- might look like?

Yes, for the rest of the year you'll see in our Q we're projecting or anticipating we're going to need about $6 million for the rest of the year to complete the capital plans that currently exist. Same story as last quarter, we're going to go out and look to do a debt deal to take care of that need and if that doesn't present itself, then we'll avail ourselves to equity options. Hopefully they'll be available or we'll figure out something, '09, hard to say. Obviously we think it's going to be, significant. We haven't sat down and kind of planned that yet, but just looking at the activity and the industry and where it's going and all the deals and the pipeline that we're seeing, people calling us, that we can't put an exact number on it, but we certainly think it's going to be robust.

Okay. Great. Thank you.

Thank you.

Thank you. Our next question comes from Graham Mattison with Lazard Capital Markets.

Hi, guys.

Hey, Graham.

Couple of quick questions. Just looking at -- looking at gallons for the rest of the year, is there any reason to think that we wouldn't see year-over-year growth in the gallons from 2007? Was there enough gallon replacement coming from these other contracts or additional ones that you've put on that you think you'd be able to achieve that?

Yes, I think you will.

Okay. Great. And then in terms of the funding for the new taxi vehicle, are there other opportunities? I mean is this something -- is this a one off type of thing or is this something you guys might look to do more in the future just to grow the overall market?

Are you referring to the VPG or the standard taxi investment?

Yes, yes.

Well, this is a vehicle that is -- it's pretty interesting just for -- just quickly. We got wind of this particular vehicle, it used to go by the name of Standard Taxi a while back and this was -- this was the lead investor -- instigator of this product is the largest cab owner in the United States and it occurred to him that we really don't have a good, clean taxicab that the taxicab that's the standard, the Crown Victoria, is likely to go away and it's hard to get into and, in fact, the elderly and the physically disabled have a hard time getting into it, can't use it and so they went out and canvassed the market and found out that, yes, there's a great need to look at something that looks more like a London taxi, let's just use that as an example, where you can put two wheelchairs in it and can board it with good height and wouldn't it be nice if it was on a clean fuel so that you could avail yourself to these kinds of programs we're seeing in all of these cities. That's what they did and that's how they started and that's when we got involved with them to work with them.

So we're very excited about it and we're not so sure that as you look at the marketing of this vehicle when it finally reaches the market, that it won't be well received, let's call it in the consumer, maybe quotes on that, the consumer market for people that have elderly folks or family members that need to have a vehicle that can move people around. So that -- that's the concept behind it. It's a really fabulous vehicle and we're very excited about it. Now, going -- we're not in the vehicle business, but, you know, we don't have people knocking down our door every day to build ground up natural gas taxi cabs, you know, in plants in North America. And so we'll continue to look at this. We hope that some of our OEMs will come back. So that's why we've been talking to General Motors and others to see what we can do to help them -- funding for General Motors is probably not in our bailiwick, but other things we could do for them to help them and we're talking to them now.

Great. And the $10 million investment, that's not -- has that already been made or will that be made in the future and is that part of the $6 million of the CapEx for this year?

No. That will actually be extra. That just came down the pike. The 10 million total commitment is two tranches, 6 million in the first tranch, 4 million in the second tranch. The 6 million will be phased in, the second may or may not happen, it kind of depends on if they need it or if they can go out and raise other financing, that being the vehicle production group. We're basically in for 6 now and it may go to 10. We'll see how that goes. That's how that's going to play out.

Okay. Great. Thanks very much.

Thank you.

Thank you. Our next question comes from the line of Eric Rainer with WR Hambrecht

Good afternoon, guys, how are you?

Good.

Most of my questions have been answered at this point, but if you could comment on a couple of small items. In regards to the ports, do you currently just have the single filling station there?

We do. We have one there. We have one that will be the largest in the world, I guess, that's under construction now. It will actually end up having ten lanes. It will look pretty much like a truck stop. That will be number two. Number three is in the permitting phase now. That should get us for a while. And then the next LNG stations will go out toward the staging area of the freight in the rail yards and out east. If you're familiar with California, out toward the distribution centers in Ontario, Fontana, that's where we need other stations and we're working with fueling people out there now and fleets to site locations.

Great. Thank you. And just in regards to the SG&A, if you could maybe comment on how we should look at this going into the back half of the year?

In theory, it should come down a touch just from the perspective of the California bond costs should be mostly absorbed in the first half of the year because it's on the ballot in November, so, down the stretch our spending in theory should drop off a touch. We'll continue to hire some people, obviously we want to be opportunistic or make sure our sales force is adequately staffed to take care of the opportunities before us. We might hire a few more sales people the back half of the year. There's nothing else out there that we really know about. We do have some Sarbanes compliance work that's coming that will cost us a little bit of money. But it should hold in there pretty consistent with the caveat we always put out there, that's always contingent upon if there's an opportunity for another legislative or policy type deal or if there comes a big push to redoing VTAC or something, we may need to spend some money or we may decide to do some extra thing on the bond to the extent we think it makes sense. So barring any kind of extraordinary items, it should, kind of hang in there with current levels.

Okay. Great, thank you very much.

Thank you.

Thank you. Our next question comes from the line of Patrick McGlinchey with Sidoti & Company.

Good afternoon. Just real quick, with Boron, that plant coming on the line, you're saying that's perfect timing. Just say that the ports, they're not rolling out trucks quite as quickly as you'd line and you have kind of a bit of oversupply of LNG. What are the possibilities for you to do with that extra inventory if that were the case?

Well, there's other opportunities for LNG. For instance, from time to time, we've used it in stationary -- stationary programs, we've used it for line reinforcement, things that the utilities want from time to time. There's potential opportunities for it in Mexico. So there's other opportunities for it. But remember that some of what will happen is some of our loads that are now coming from the east will get shifted. Like, for instance, this 350 -- or 3.5 million gallons for the 370 trucks in LA, I mean that's beautifully suited for that Boron plant which is 85 miles away and we don't have to bring from 8500 miles away. So you will see shifting from some of our product from the third-party. We think we're going to need all of it. We think what will happen is you'll begin to shift west. We kind of call it the shuffle. But you'll begin to shift some of the loads to the west.

Okay. Great. And you just mentioned that you're going to constantly add a bit to your head counts on the sales force. What is the sales force, the head count now?

We're in the low 40s right now, low to mid-40s.

We've also -- we've -- we see such a big back log coming, we're adding a new engineers as well and some LNG expert -- expertise.

All right. Great. Thanks, guys.

Thank you.

Sure.

Thank you. Our next question comes from Rob Stone with Cohen & Company. Please go ahead.

Hi, guys. First of all, I wanted to clarify something you said earlier and make sure I got it right. Are the fixed price contracts essentially going away at the end of this year or at the end of 2009?

End of this year.

Okay.

The two biggest ones -- well, one -- the biggest one was Phoenix, the fixed price deal expired June 30. There was another large price cap contract that expired June 30 and there's one other large fixed price deal that expires 12-31-08. Once those are all gone, the fixed price and price cap contract scenario goes down significantly.

So the pricing model for the portion of the Phoenix business that you recovered through the protest is what?

It's a fixed price deal, but that's the deal where we hedged and we bought the gas contracts to cover our economics. So in essence, it's, baked in at our margin that we bid it on and that's the number that will flow into our P&L over the course of the last half of the year as we deliver the fuel and those contracts expire and mature.

So --

Kind of in accordance with our new hedging policy.

But you will continue to have, then, that one fixed price contract beyond the end of this year and the related hedging and so forth?

No. The one that's unhedged expires at the end of this year. That's the transit agency in Texas. But we do -- the existing Phoenix -- or the Phoenix load that we retained, that contract runs through the middle of next year, expires June of '09 and we have contracts -- futures contracts bought through that date to protect us and lock in our margins and our economics on that -- on that volume.

Okay.

So it's kind of a transition from our old hedging policy into our new one, whereby now we're -- this is a good example of that, obviously, where we do offer a fixed price to a customer, we'll go out, get the futures contracts, hold on to them and basically lock in our economics.

So with respect to the margin model after the end of this year, can you stay in general what you target for margins in a variable environment?

Well, we don't provide guidance, so we need to be a little careful here. But we would say that in theory, if you look at our adjusted margin in 2008, we should start to approach that number in 2009 since it is in essence, the same contracts that are the base load of our '09 volumes, coupled with all the new business we're bringing on, we think a healthy chunk of that is going to be in this commercial retail model, i.e., the port et cetera, whereby we're selling fuel at our infrastructure -- our existing or new stations that we're building and we're pricing our fuel relative to gas or diesel, gasoline, that is, and that's our highest margin business. So by the time you figure all that out or factor that in, in theory, we should start to approach our adjusted margins in our actual numbers in 2009.

And with respect to the split between fixed price and fixed price with a hedge and floating contracts, I recognize you're not in a position to give guidance for 2009, but can you give us a sense of how you think the demand breaks down between your different types of customers? With all the talk of natural gas supply increasing in the US faster than demand and big reserve build up and so forth, it would seem like there would not be that much incentive for customers to want to go into fixed price deals in the next couple of years?

Well, but the only reason they might, and I would argue they should, is do they think diesel is going to get a lot -- go down? And I think what's happen -- what we've seen recently is that -- it's been -- it's been almost -- it's been really amazing, but despite our diesel -- I was in New York City talking to one of the largest milk guys in the region and they're paying $5 for diesel and, that's a huge move up from where it's been. And what's happened is that the fellows using diesel have gotten spooked that they're not so sure that they won't see someday -- it may come down now, but they're not sure they won't see $6 diesel and they know that 2010 engines are coming and they're going to be less efficient and the fuel is going to be more expensive and et cetera, et cetera. It may be that some of them want to take advantage of low natural gas fuel commodity prices and put in a margin that would still make a very -- you know, very nice margins for us and still lock them in, say, at a dollar under diesel or 1.50 under diesel and if they can lock in a significant portion of their business like that, you know, for five years, they may want to do it.

A lot of it is kind of subject to the customer's risk appetite. Andrew's theory could hold that they want to lock in and like the concept of fixing it and think it will be advantageous relative to diesel and they like that theory or it could be that they don't like that and in theory if the price of natural gas dips, why would I want to lock in if I think it's going to go down. There could be that theory. It's hard to predict or tell what the customers are going to want to do. Sometimes they like fixed, sometimes they like variable. What we like to bring to the table is we'll do whatever they want. If they want a fixed price deal, we'll lock it in. If they don't want a fixed price deal, then that's fine and we would actually prefer that. But it's kind of whatever they want and then we just tailor a pricing package to fit that.

Okay. Further to your comments about the lead times for trucks, engines and so forth, do you foresee potentially another bottle neck -- if this California bill passes, would there be difficulty for the vehicle supply to react in order to fulfill that or what might be the lead time to catch up with incremental demand that would fall out of the California bill?

Sure. I mean I think the result -- there could always be a bottle neck. You've got to get the supply chain for LNG tanks up and running. I think the good news is that with these OEMs coming to the party, that's what they do. They're -- they're into supply chain management and bringing some stability to that, and so I like the fact we've got both their companies and international and these other guys all kind of in the game, auto car and freight liner because they know how to manage that stuff. And so that will help. But,, do you have enough tanks laying around right now for 24,000 trucks? No. But you'll get there. We have full confidence in people's ingenuity and the markets to respond.

A final question, if I may, and this is more of a big picture policy philosophy one. There's been some press coverage recently about the California initiative and about natural gas in general, the potential to shift transportation over to natural gas as a fuel and that has included comments by some purported experts that it really isn't that big a benefit in terms of emissions and the well to wheel energy impact. It feels as though there's a contingent out there that sees policy only through the environmental lens as opposed to through the economic and geopolitical or domestic versus imports and I feel like the economic argument by itself, even if natural gas were equal to petroleum-based fuels on an emissions basis is a powerful one. Do you feel like, from a policy standpoint there's a, fork in the road here where there are those who would like to just move over to battery and fuel cell and some other type of non-internal combustion vehicles?

Well, we struggle and I'm familiar with the articles that you've seen and frankly we've talked to a couple of those people to remind them that natural gas in their own studies show anywhere between 26 and 30% less carbon. There really isn't another fuel today that's available today that does that. So it does irk me occasionally that we're going for something that doesn't even exist when you have something that's -- the state of California is apparently going to put everybody out of business by saying they want to roll back greenhouse gases by 20%, here we have a fuel today that can do 22 or 24%. We're working with them to make sure they remember that and understand that. But, yes there are some who want to go to batteries and hydrogen and all of that. What we try to remind them is -- I'm fine with that. If we didn't believe that gaseous fuels didn't have a role, we wouldn't be working with GM on this hydrogen fuel. But the truth is for goods movement -- 30% of the fuel that we're using every day in the United States, 70% which we import is to move goods around and we have a fuel that's domestic and we just talked about this plentiful that gives you a 25%, 24% greenhouse gas benefit, happens to be a buck and a half cheaper and it's domestic and, oh, by the way, it's 50% cleaner than the current diesel, I think that's pretty damn good. So, yes, there are some that always want to look at the cutting edge environmental and there are others who understand the economics and the geopolitical angle. I think they come together. But we do have that tension often out there and in other places as well.

Maybe it needs to be more clearly bifurcated between light duty vehicles and needs that you're targeting -- fleets that you're targeting.

That's why the bill -- it's kind of funny because the proposition was crafted to allow all the clean technologies in, the fuel cells, the batteries, the plug-in hybrids, all those play. Now there's complaints that maybe natural gas is going to take it all. Honda is talking about putting 600 fuel cell vehicles in California next year. They'd all get funding to this do deal. Light duty -- much of the light duty will go to these other advanced technologies eventually. But on the heavy duty, I think for quite a while CNG and LNG is going to be the fuel of choice and people are going to understand that. We're not ready for a plug-in hybrid trash truck or a hydrogen trash truck and those are way out. So that's your bridge. That's your fuel that really ought to be used in goods movement for the next 20, 25 years as you work on all this other stuff.

Great. Thanks very much.

Thank you.

Thank you. Our final question comes from the line of Pearce Hammond with Simmons & Company. Please go ahead.

Good afternoon, guys. Good afternoon. Andrew, you were talking when you were referencing Rob Stone's question about the customer -- potential customer in New York with the milk business and I know you've got a good pipeline potential, but what is the major obstacle that your sales people face in trying to turn that pipeline into actual customers?

Well, I think it's a good question and I think part of it is getting people to change. I think part of -- in this last quarter, not to come up with a whole bunch of excuses, part of it, though, is we've been -- especially for the trucking guys, we've been in a difficult environment, their business is off, their fuel price went way up and I don't have a lot of imperical evidence, except I can tell by the sale of diesel trucks, that's way off, so they've been careful on running out and buying new trucks. Education is always something that we need to do and it's tough to get -- somebody's been moving milk for the last 50 years in Queens with diesel, it's not easy to get him to change his heart. I think it's change, it's education. It's getting easier, though. Pearce, I was trying to say on the pipeline what we see -- what I haven't talked about -- maybe I've talked about the back log, we see 150 stations in the pipeline out there that I'm not ready to say are going to break ground, but that I know -- and the milk guy who we had an excellent meeting with, I think they will move forward and that will be next year -- that will be in next year's business. But it just takes a while to get people to change, get them comfortable with the technology.

And then when you have a discussion with, say, a Wal-Mart or a Vaughn or a Kroger or whatnot, some of which may already be customers, do you think we're getting to the point because pricing between diesel and natural gas is extremely attractive and only looks to get more attractive over time, are we going to start to see some of these -- this pipeline turn into large customers next year? I know it's hard to -- to nail the timing exactly, but are we -- are we getting to that pressure point where they start to break over to the customer's side?

We're seeing two things on that. We're talking to, now, some of the very largest fleets in the nation, which is good. And Wal-Mart, for one, is testing for LNG trucks, I don't know if they're LNG. I think they are. Four LNG trucks. And they'll put them through the paces. And -- but this is, I think, what we saw with the diesel. Most of the trucking industry relied on the model where you passed the fuel through to your customer. We saw this in our own case where our hauler came to us and said, my God, my diesel has come from $3.40 to $5 bucks, I need to redo our deal. What's happening is you're seeing these large customers like Wal-Mart who have -- half of their goods are moved by contract hauler, say, hey, guys, you can't float this through to me. You've got to come up with something else and we understand natural gas is cheaper, why don't you go check that out. So we're beginning to see it flow back from the customer to the trucking guys. That's the best -- that's better than me going to see Wal-Mart when you have -- when you have Wal-Mart going to -- or seeing a trucking company when you have Wal-Mart go to the trucking company, that's what you want.

Thank you.

I do think we'll see some of those large fleets sooner rather than later.

Thank you.

Thank you. We have no further questions at this time. I would like to turn the floor back over to Mr. Littlefair for any close are comments.

Well, I think we covered it. I appreciate your interest in our company. We continue to be very optimistic about the future and the macro trends and we're hard at work making this happen for the shareholders. Thank you very much.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.