Clean Energy Fuels Corp (CLNE) 2012 Q2 法說會逐字稿

Greetings, and welcome to the Clean Energy Fuels Second Quarter 2012 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, Mr. Tony Kritzer, Director of Investor Relations. Thank you Mr Kritzer, you may begin.

Thank you, operator. Earlier this afternoon, Clean Energy released financial results for the second quarter ended June 30, 2012. If you did not receive the release, it is available on the Investor Relations section of the Company's website at www.cleanenergyfuels.com, where the call is also being webcast. There will be a replay available on the website for 30 days.

Before we begin, we'd like to remind you that some of the information contained in the news release and on this conference call contain forward-looking statements that involve risks, uncertainties, and assumptions that are difficult to predict. Words of expression reflecting optimism, satisfaction of current prospects, as well as words such as believe, intend, expect, plan, anticipate, and similar variations identify forward-looking statements, but their absence does not mean that the 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 detail in the risk factor section of Clean Energy's Form 10-Q filed today. These forward-looking statements speak only as of the date of this release, and the Company undertakes no obligation to publicly update any forward-looking statements or supply new information regarding the circumstances after the date of this release.

The Company's non-GAAP EPS and adjusted EBITDA will be reviewed on this call, and exclude certain expenses that the Company's Management does not believe are indicative of the Company's core business operating results. Non-GAAP financial measures should be considered in addition to results prepared in accordance with GAAP, and should not be considered as a substitute for or superior to GAAP results.

The directly comparable GAAP information, reasons why Management uses non-GAAP information, a definition of non-GAAP EPS and adjusted EBITDA, and a reconciliation between these non-GAAP and GAAP figures is provided in the Company's press release, which has been furnished to the SEC on form 10-Q today.

Participating on today's call from the Company is President and Chief Executive Officer Andrew Littlefair and Chief Financial Officer Rick Wheeler. With that, I'll turn the call over to Andrew.

Thanks, Tony, and good afternoon everyone, and thank you for joining us. Today we reported revenue of $69.8 million for the second quarter, compared to $69.1 million for the second quarter a year ago. Please note that the second quarter of 2011 included about $4.7 million of VETC revenue that is in not in the 2012 amount. In addition, revenues from our vehicle conversion business, BAF, were a little softer than we projected, largely due to the expiration of the vehicle incentive credit. We delivered 48.6 million gallons, up 24% from 39.2 million in the second quarter of 2011, which I am pleased with.

During the second quarter, we remained focus in executing the roll-out of our America's Natural Gas Highway stations and growing our traditional core market segments, which I will highlight in a moment. Those of you that have been following Clean Energy and the natural gas vehicle sector as a whole know that one of our major focuses is building the infrastructure that will enable natural gas to become a viable transportation fuel for America's long-haul and regional truck market.

As we are solving the station infrastructure issue, we are also working closely with several engine manufacturers to deliver the desired engines for the heavy-duty truck market, which are really the 12- and 13-liter engines. The 11.9-liter Cummings Westport engine is expected to become available in the first quarter of next year, and the 13-liter NaviStar and Volvo engines are expected to follow in late 2013 and early 2014. Once these engines are widely available and the initial phase of the highway is complete, we believe the heavy-duty Class 8 truck market will begin to make the switch.

This adoption should be similar to what we've seen in the refuse market over the last five years once that market had the right engine. In 2008, when the 8.9-liter Cummings Westport engine first became available, the adoption rate of natural gas engines in the refuse market went from 3% that year to close to 50% of new purchases this year. As an aside, we see that the adoption rate -- that adoption rate continuing to increase because of the enormous fuel savings refuse operations were experiencing compared to diesel.

To date, we have completed construction of 22 of our highway stations and an additional 24 are under construction, and 32 more are in various stages of entitlement, design, and permitting. We are still targeting to complete construction of about 70 natural gas struck stop stations by year-end, and many of the station completions will occur at the very end of the year. The opening of these stations coincides nicely with the market availability of the 12- and 13-liter truck engines, which I mentioned earlier. Most of the stations are located at truck stops with our partner Pilot-Flying J.

As we anticipated, the competitive landscape of the natural gas vehicle fueling market has begun to evolve. We believe the emergence of others in this space is a positive validation of our efforts. It will help expedite truck adoption, and alleviate initial concerns among the fleet operators about fueling infrastructure.

The confidence in our market-leading position is based on several factors. First, our strategic partnership with Pilot-Flying J, and our ability to leverage their existing station network is a tremendous advantage for us. Pilot is the largest truck stop operator in North America, with approximately 550 locations, roughly two times as many as the second-largest competitor. Our years of experience have allowed us to accumulate knowledge and expertise in regards to station operations, engineering, design, and construction, as well as a national sales team who has been able to cultivate strong relationships with customers all over the country.

The ability to secure LNG supply is going to be another differentiator for us in the years ahead. We own and operate two LNG production facilities, own a fleet of 58 cryogenic tankers, have supply contracts with seven LNG producers, and source from six others across the country. We also have our own LNG design, fabrication, and manufacturing company, which is a huge advantage. Now remember, I've mentioned this before that NorthStar, our LNG fabrication company, built ten stations last year and this year they're on pace to complete two a week.

Between our own production and a number of agreements that we have in place and in the pipeline, we believe we have the LNG supply to meet the market demand in the coming years. For example, we recently signed an agreement with the metropolitan utilities district of Omaha, Nebraska, where we will have access to 70,000 LNG gallons per day. In addition to providing LNG supply in our own fueling stations, Clean Energy is selling additional capacity to other customers as well. We recently executed LNG supply agreements with Shell and PG&E.

We just co-hosted a summit along with Pilot-Flying J and we invited representatives from the largest for-hire carrier fleets in the country, which represented over 200,000 trucks. The purpose of the summit was to continue to educate the trucking companies on our station roll-out with Pilot, as well as the deployment of natural gas engines and OEM offerings. It was an important and positive meeting for both us and the fleet operators that should help continue the momentum of the conversion to natural gas.

An example of this continued development can be seen just last week during the Cummings earnings call, where their CEO stated that sales volumes of their natural gas truck engines had doubled since the second quarter of last year and he didn't expect that to slow down any time soon.

Turning now to the sales and marketing. Our national trucking team has continued their pursuit of lining up shippers and private fleets all over the country. At the end of June, we announced agreements to fuel five additional trucking fleets, which haul for some of the country's largest and most well-known brands, including Office Depot, Ocean Spray, Publix, Sam's Club, and Quaker.

Saddle Creek Logistics Services, based out in Lakeland, Florida, has expanded its contract with Clean Energy to build additional private natural gas fueling stations to support their fleet of 60 Freightliner CNG trucks in order to serve their Florida customers. We also began fueling new fleets for premiere transportation in Atlanta, Lily Transportation for their Los Angeles-area operations, Lancaster Foods in the mid-Atlantic, and Land O'Lakes for their dairy operations in California central valley. These fleets will all fuel at existing Clean Energy public access stations.

Many of these trucking companies are using their new cleaner burning fleets as a marketing tool to attract new customers that have aggressive sustainability goals. On the capital side, we recently received the second $50 million installment from Chesapeake that will be allocated to the build-out of the highway. We of course appreciate their continued support.

Let's move now to our core markets. We are seeing impressive year-over-year same-store sales growth at existing stations in our taxi airport shuttle market around the country, as well as growth in our other core markets. In Seattle, natural gas taxi volume was 200% higher than it was last year. In San Francisco and Oakland, we've seen a 30% increase in fuel volume over the first half of the year compared to last year.

In our Las Vegas market, fuel volumes have doubled year-over-year, and we just confirmed orders of an additional 90 natural gas taxicabs, which is about 450,000 gallons annually, late in the second quarter. In Chicago, within one year of opening our first station, there are now over 375 natural gas taxis in use, with more being added monthly. These taxis represent over a million gallons annually. Additionally, natural gas taxis were granted front-of-the-line privileges at O'Hare Airport, which allows the cab operator to make more trips per day and make more money.

We also opened up new stations in Hartford, Tampa, and New Orleans airports, where the first vehicles were delivered. We have two more airport stations being completed right now. As we have previously mentioned, these public access airport stations provide an excellent base as we move into new geographic areas. We now have 35 stations in airports across the country.

As many of you may have heard, the governors of 21 states came together to encourage Detroit's big three auto manufacturers to produce more CNG vehicles, as many of them already do around the world. These states have issued a joint request for proposal, RFP, to the big three, as they have recognized the advantages of reducing their dependency on foreign oil, and have reduced the emissions for the operation of their state-owned vehicles.

This could prove to be a model of how a state can leverage the valuable resources and expertise available through companies like Clean Energy to replace the existing state-owned gas and diesel vehicles to run on natural gas and other alternative fuels. This will also support the expansion of the private sector business and stimulate job creation.

In our refuse sector, we are contracted with 72 companies in 158 locations, and opened 12 new refuse stations in the second quarter. We've seen a 65% increase in our refuse volumes this year over last. A few highlights from our refuse business in the second quarter include -- in Chesapeake, Virginia, we were awarded the station contract to construct and operate a time-fill stations for Tidewater Fibers.

In Dallas, we just added more CNG refuse trucks to complement their already sizeable fleet of natural gas vehicles. Out here in California, in neighboring Long Beach, we secured an LNG supply contract with the City of Long Beach to deliver over 600,000 LNG gallons per year for their city refuse.

On Long Island, the extension of CNG refuse trucks continues, as the town of Babylon just signed a ten-year contract to use 22 CNG refuse trucks. As you may recall, the first 25 CNG trucks were deployed almost six years ago in Smithtown, and now there are over 250 trucks operating in the Long Island area. We think it's important to note that the majority of these CNG refuse trucks are owned by smaller local companies and cities. The dramatic increase in the solid waste sector that we're seeing is coming from companies of all sizes, big and small.

In our transit market, we began fueling 36 new CNG gas buses for the city of LA, Department of Transportation at our public network this spring, which represents nearly 400,000 gallons annually. That fleet is expected to grow to about 100 buses. We have also seen additional full-sized buses being added to transit fleets this quarter. Santa Monica added 58, Santa Clarita added 12, and Las Vegas RTC has ordered 30 CNG buses for delivery next summer. These buses all replace diesel units.

We also successfully renewed a number of large transit accounts. We extended our LNG supply contract with the City of Phoenix, Arizona, for one year and this provides fuel for over 300 LNG buses. We signed a new three-year LNG supply deal with Tempe, Arizona, to provide fuel for their 89 LNG buses. We also negotiated a four-year extension for the operation and maintenance on their LCNG station, and they have plans to replace 40 gasoline shuttle buses with CNG shuttle buses in order to balance the budget.

We renewed a five-year, $1.5-million contract with Omnitrans for the operation and maintenance of two LCNG stations, and we won their LNG supply here earlier this year, so we're already providing their fuel. They operate over 160 transit buses throughout San Bernardino County, California.

Now let me turn to the construction cart. In our refuse, airport, and transit markets we have completed 26 new projects to date, with 17 projects in construction, and 15 projects in design and permit. Between our highway stations and our core market projects, we've completed construction of about 48 stations so far this year, which compares to 21 stations we had completed at this time last year. This represents 125% growth over last year.

Currently, we have 677 deals in our budget pipeline in various stages of validation, qualification, and negotiation. We are very happy with our year-over-year pipeline numbers. Closed deals increased 91% from 70 to 134 deals in negotiation and validation, and deals in negotiation and validation nearly doubled. Deals in the qualified prospect increased 25%. These deals do not include America's Natural Gas Highway projects.

Our biomethane operations continued to make progress during the second quarter. Our McCommas Bluff landfill project set a new record for production in June, producing close to 1.2 million gasoline gallons for the month and we are slated to complete the expansion of the McCommas processing plant by the end of September.

Our biomethane plant in Michigan is almost finished, and we anticipate that we will commence production of biomethane this month. As you know, we have been hard at work on this project since late 2010, and it is the first biomethane production facility we have built from the ground up. We are very excited to bring this facility online and expand our ability to offer our fleet fueling customers fully sustainable biomethane vehicle fuel.

In June, we reached an agreement to develop a new biomethane production facility at a landfill outside of Memphis, Tennessee. Our team is hard at work on this project, and we anticipate that we will be able to bring our third biomethane production plant online in late 2013. The facility's anticipating to produce about 4.5 million GGEs in its first full year of production. With that, I will turn the call over to Rick.

Thanks, Andrew. Before I review our financial results, I'd like to point out that all my references to our results will be comparing the second quarter of 2012 to the second quarter of 2011, and the first six months of 2012 to the first six months of 2011, unless otherwise noted. Volumes rose 48.6 million gallons during the quarter, up from 39.2 million gallons a year ago. The first six months of 2012, volumes increased to 92.3 million gallons, up from 74.7 million gallons.

For the quarter, revenues increased to $69.8 million, up from $69.1 million. For the first six months of 2012, revenues increased to $143.5 million, up from $134.5 million a year ago. One thing to keep in mind when comparing our numbers between periods is the first two quarters of 2012 did not include any volumetric excise tax credits or VETC revenue, as VETC expired on December 31, 2011. VETC revenue was $4.7 million and $8.9 million, respectively, in the second quarter and first six months of 2011.

Also during the second quarter of 2012, we recorded approximately $2.1 million related to low-carbon fuel standard credits when the credit program was reinstated due to the lifting of a federal court injunction that had previously prohibited enforcement of the California low-carb and fuel standard. The $2.1 million represents the value of the credits we have generated since the program began in January 2011.

On a non-GAAP basis for the second quarter, we reported a loss of $0.16 per share. This compares with a non-GAAP loss of $0.10 per share in the second quarter of 2011. For the first six months of 2012, our non-GAAP loss per share was $0.33 per share, and it was $0.15 per share in the prior period.

Adjusted EBITDA in the second quarter of 2012 was minus $1.6 million, which compares to adjusted EBITDA of $0.9 million in 2011. For the first six months of 2012, adjusted EBITDA was minus $3.6 million, compared to $4.8 million last year. Again, please remember the second quarter and first six months of 2011 included $4.7 million and $8.9 million, respectively, of VETC revenue.

Adjusted EBITDA and non-GAAP EPS are financial measures we developed to highlight our operating results, excluding certain large, non-cash, or non-recurring charges which are not core to our business, including the amounts we are incurring for the Series 1 warrant valuation, our stock-based compensation charges, and the foreign currency gains and losses related to our IMW purchase notes.

Adjusted EBITDA and non-GAAP EPS are described in more detail in the press release we issued earlier today. Our net loss on a GAAP basis for the second quarter was $11.3 million, or $0.13 per share, which included a non-cash gain of $8.9 million related to valuing our Series 1 warrant, non-cash, stock-based compensation charges of $5.8 million, and $0.5 million foreign currency loss related to the notes we issued to purchase IMW.

This compares with a net loss of $5.6 million or $0.08 per share in 2011, which included a non-cash gain of $4.8 million related to valuing our Series 1 warrant; non-cash, stock-based compensation charges of $3.6 million; and foreign currency gains of $100,000 on our IMW purchase notes.

For the first six months of 2012, our net loss on a GAAP basis was $43.2 million, or $0.50 per share, and included a non-cash charge of $4.6 million related to valuing the Series 1 warrant; non-cash, stock-based compensation charges of $10.4 million; and $100,000 foreign currency loss related to the notes we issued to purchase IMW.

For the first six months of 2011, our net loss on a GAAP basis was $15.4 million, or $0.22 per share, and included a non-cash gain of $1.5 million related to valuing the warrant; non-cash, stock-based compensation charges of $6.9 million; and a foreign currency loss of $0.5 million on our IMW notes. Our SG&A charges are higher between periods, primarily as a result of hiring people as we ramp up to support our construction of America's Natural Gas Highway, and our anticipated growth once it comes online.

Our interest expense is also up between periods, due to the interest charges we are incurring on our $200 million of convertible notes we issued in the last half of last year. During second quarter and first six months of 2012, we recorded a reduction of $1.6 million and $4.3 million, respectively, related to the amount we estimate we will ultimately pay in connection with the contingent consideration on the IMW acquisition.

Our gross margin this quarter was $21.3 million, which compares to $18.7 million in 2011. For the first six months of 2012, our gross margin was $39.1 million, compared to $37 million. Excluding the low-carbon and fuel standard credit recognition and settlement with one of our LNG customers related to some prior cost over-runs related to servicing the contract, our margin per gallon on our fuel sales this quarter was up $0.01 from last quarter to $0.29 per gallon.

With that, operator, please open the call to questions.

Ladies and gentlemen, we will now be conducting a question-and-answer.

(Operator Instructions)

Rob Brown, [League Street]

Could you give us a little color of how the gallon ramp is expected from the Natural Gas Highway stations? I know you have several open now and would suspect that a lot of gallon volume is in the number you had. How do you see that ramping up through the rest of the year and into next year?

Let me cover that generally. First off, remember a lot of those stations won't be completed until the very end of the year, right? As I think, Rob, you and I have discussed before, and I have shared with many of you on the line, that our job -- job number one for our national trucking team -- is to make sure that as we get these stations open we do our dead-level best to get 20, 25, 30, 35 trucks loaded on those stations.

Of course, that doesn't always happen perfectly. We have some stations that have just been finished here in the last few weeks that don't have trucks there yet, but they're coming. This is something we tried to correlate as best we can. In fact, we can actually delay the opening of a particular station a little bit as we see it.

Our trucking customers are -- many of them -- are really waiting for this 11.9 engine. We call that the 12-liter -- of course, it's the Cummings Westport engine. That's the size, the 12- and 13-liter engines really are the preferred size for the trucking market. In one way, Rob, it's good that a lot of our stations are coming on line at the end of the year, because that'll be closer to when the arrival of the commercial launch of those engines in the first quarter, late first quarter of the 12 and 13 liters.

When do we see that happening, to get specific about yours, is as these stations open in the latter part of this year, we're doing our best right now to get trucks introduced into these fleets. We are making very good headway, Jim [Hargers] and his team, of the 9-liter Cummins Westport and the 15-liter HDDI from Westport. We're having some success working closely with Westport to load (inaudible - technical difficulty), but you're going to see them -- keep in mind that truck -- we kind of use, Rob, 20,000 gallons a year per truck, right, annual use.

We anticipate by the time these stations get opened, and it's not always perfect, but after a month or two, that they should have 20 or 30 trucks on each of those stations. They start out with an annual load of 600,000 gallons a year, 400,000 to 600,000. Then our job is to load them up to their capacity, which I would imagine will take most of 2013 and into 2014 to where they can get up to do the 2 million gallons to 2.5 million gallons a year.

That's our plan; but you don't need thousands of trucks per station in order to make that happen. You really need 100 using 20,000 gallons, right? That gets you to 2 million. You will see them start toward the latter part of this year with 20 trucks, which is an annual run rate of 400,000 gallons, ramping up from there.

Okay, great. If you -- maybe you could give us some color on your project pipeline. Is that refuse driven? Is it all of your customers? Maybe just some color on that--?

It's really kind of exciting. If you remember from last time, I think we were at 540. I get a lot of questions on this pipeline, even internally. Our guys think sometimes we don't explain it as well. When we add up those deals, it really comes from three different areas. It's us validating whether or not a customer makes sense -- it makes sense for a customer, right? That's a whole class. Then we qualify the customer. Then we negotiate a deal with the customer.

We've gone from having -- last time we talked 540 deals in those three classes to about 675 or so now, so that's a nice move up. Then we have deals, all right, closed deals. That's gone from about 70 -- it's almost doubled. I think here we're saying 91% or 92%, which is a nice move quarter to quarter.

That -- keep in mind, that is not just stations for us. That could be a fleet fueling agreement. That could be fueling a new fleet. It could be building a new station. It's two or three different kinds of deals, fueling deals, station deals, that we have with our customers. That's how we measure that. I keep an eye on this, the pipeline, because we have a lot of salesmen out there right now working. We've got to see substantial increased movement in that pipeline, and I'm glad we are.

All right, good. Thank you.

Steve Dyer, Craig-Hallum.

You touched a little bit on same-store sales, but I'm not sure that I necessarily heard a number. Is there any way you could you give us a little color on the utilization, within existing stations and the organic growth in those stations?

I don't know that I have a top-line number to give you right now. Let's put it this way. All of our stations have -- almost all of our stations have capacity remaining. Certainly all of the highway stations do, because some of those are just coming on. Even a few of our new highway stations, where we're pretty proud of the fact, like in Las Vegas where we already have 60 or 70 trucks was putting in a 1.5-million-gallon ramp here right out of the shoot after the first three or four months. That's only at 50% capacity, or a little greater than that.

Our CNG stations at our airports all have capacity. Our LAX station, I would say, runs at about 75% to 80% capacity, but it's been -- it's served us quite a while. All of our new stations have capacity. I would really just be guessing, Steve, but I would say that many of them would finds themselves to be more 25% to 30%. There's a great deal of growth that can happen at our stations just by increasing same-store sales.

That's helpful, thanks. In your station pipeline, as you look out, could you give us a little color, maybe the mix between the supply agreements and then the OEM agreements in the pipeline?

Steve, I'm sorry. Say that -- ask me that again, okay?

Just the mix between the fuel, supplying the fuel and the O&M agreements in the pipeline in your station pipeline right now?

Oh, okay. Well, a lot of our refuse -- and we do a lot for our friends at Waste Management and at Republic. Those stations, those have O&M agreements. I would guess right now we finished 12 in the last quarter, but I think on the horizon we see 36, 40 refuse deals. Those are all O&M agreements. This year, you're going to complete -- don't hold me to the exact number -- but you're going to be in the ball park between 120 and 130 stations. That will break down 40%, wouldn't you say, Rick? 40% some-odd of those will be in O&M, and because of the highway, 60% of those will be--?

Yes, all the highway will be in the fueling supply business, obviously. The transit and refuse typically are highly slanted towards the O&M world. The taxi, shuttle, van stuff --

Airport stuff.

Airport, retail fuel sale world. I don't know if we have an exact breakdown while we're semi-pausing a little bit here, but obviously with the trucking market being such a big chunk of our business going forward, we anticipate a lot of that -- our future volume -- is going to be in the retail fuel supply world, which is where we want it to be.

Great. Last question for me. BAF, if you could talk a little bit about the pipeline there. I know it's been very tied to AT&T and Verizon in the past. How do you sort of see those volumes playing out throughout the balance of the year, and maybe how many different fleet customers versus in the past?

Well Steve, it's -- we're softer at BAF right now, and it's because we haven't had, candidly, some big fleet orders from AT&T and Verizon. That would -- If you have any input over there, that would help right about now. On the positive side with them, they have expanded their customer base. We're dealing with a lot more fleets and cities and E&P companies.

I think our Management team there's done a relatively good job. We're down -- we are a little bit softer than we'd like for the quarter. We could -- we are still hopeful that because of the full Ford lineup we have, that we'll catch up, but nothing like having a couple of really big fleet customers right about now that would help.

Great, thank you.

Graham Mattison, Lazard Capital.

Hi. Good afternoon, everyone. Just to follow up on Steve's questions on the split between O&M and retail. Can you give us a sense of the volumes that you added over the last year of those incremental volumes? What was the split between O&M contracts versus retail?

I'd say over the last year it's been heavily slanted towards the O&M world, simply because the LAMTA deal that we brought on over the last year; such large contracts, they fall into the OEM bucket. That, coupled with, as Andrew alluded to, the Republic and Waste Management guys in the refuse world are kind of in that model, which obviously has been a pretty good chunk of our growth over the last year as well.

Those two things together probably add up to the majority, or maybe even vast majority of the business into that bucket. The other stuff would be in the retail world, obviously; primarily the airport taxi shuttle stuff, as well as some of the smaller refuse haulers and some others, as well as the trucking company stuff we've done, Saddle Creek, et cetera, would be in the retail fuel bucket.

Graham, going forward, as much as -- because of the weighting of the transit, we were O&M; we really see the commercial retail in this regional trucking market eventually dwarfing the O&M piece of this. O&M accounted for a lot of it here. We hope going forward, we begin -- we believe it will begin to change.

One thing that gives us comfort in that is if you look at our last couple of quarters, our margin per gallon has been ticking up a little bit, which is indicative of hopefully we're bringing in more of our business into the retail world to start to pull up the margin per gallon number, which is basically offsetting, making the O&M piece a little smaller as part of our overall business picture.

Okay. A question about available LNG equipment for the stations. Recently, on the Chart Industries call they talked about very strong demand for the fueling equipment from multiple companies out there. Are you seeing any delays or tightness in the channel? Has there been any change over the past year in terms of the pricing you're paying for equipment from them or others?

Well, I think we -- because of what we've dawn with America's Natural Gas Highway, we created a little bit of that tightness, because we put in some very big orders with them. I imagine they mentioned that some. We actually have seen equipment loosen up some. There's been more capacity brought to the market through our friends at Chart and others. While we were tight six months ago, that's, I think, loosened up. I think we feel good about the pricing that we've seen currently versus where we were six, eight months ago.

We'll also try to do some things on the purchasing side now that we're starting to buy our bigger lots and be a bigger customer, and watch our supply chain a little closer. We're doing some of those things, too, that should help as we go forward.

Great, and last question for Rick. The $27 million in SG&A in the quarter, I know you mentioned part of this, but I think I missed it. Were there any one-time items in that? How do you see that playing out over the course of the year and into next year?

Just the IMW contingent consideration gain, if you will, that was in there -- that's a one-timer. The other stuff -- the biggest chunk has just been our salaries increase, as we brought on more people. We went from 829 people in the second quarter last year to 1,110 people second quarter this year. That, coupled with the associated bonus commission, stock-based comp expenses, et cetera, is the biggest chunk of the increase.

As far as where it goes, I would see it probably ticking up a little bit maybe rest of the year, just from the perspective of we're continuing to add people and grow. Albeit, I guess on the SG&A thing, we were talking with an investor guy this morning. We get that a lot as we go around and talk about people -- I mean, we just want people to understand, we're not, don't think out there spending willy-nilly or overly aggressively. We think we're making good solid investments in the future that are going to pay off.

A good example of that is we've got 30 to 40 salesmen out there working on the trucking business trying to get deals locked up. Once these engines show up, once we get our stations up and running, well their salaries are hitting our P&L right now, and they're really not generating any revenue. We hope, obviously, that's going to change in the coming years, and all of a sudden they will be covered up with the revenue they're generating with the fuel sales.

It's just a lot of stuff like that in there that we think makes the number look a little worse than it is. I see that continuing. We see a big groundswell coming, and we want to make sure we're out in front of it, and in position to capitalize on it, and build the infrastructure and the people and the resources to capitalize on it. It will probably tick along kind of where it's been at, maybe up a little bit.

Think of it as an absolute number as opposed to percentage of revenues?

I would for now, because our revenue number kind of moves up and down depending on some of the lumpy pieces of the business, i.e., compressor sales, vehicle sales, station sales -- might be a better way to look at it.

Great, I'll jump back in queue. Thank you.

Brian Gamble, Simmons and Company.

I wanted to talk about natural gas specifically. I know you know and everyone on the call knows that

We're all for it, by the way.

All for it. Yes, agreed. We all know that the price moved from $2.25 to $3.25 doesn't mean anything. Are you still having to educate any of your customers or any of your potential new customers when gas makes those sorts of moves as to the economics of the continued viability at $3.25 and even well, obviously, north of that?

A little bit, but less today than we have. Occasionally, you will hear people say well, natural gas is so volatile and then we have to remind them you divide by eight, and it's not very volatile. You know that, Brian. Occasionally. We were with a group, the trucking group the other day, as I mentioned, at the summit. It came up. I would say that a lot of our customers now understand that.

I'll tell you what. They are more convinced that oil is going to go up and diesel is going to be expensive than they are worried about the natural gas right now. It doesn't -- the volatility and the prices of natural gas doesn't appear to be as sensitive as it once was, I don't think.

Fair enough. You mentioned you'd love to have some fleet orders. While I can't help you there, what do you think can help you get some additional orders like that?

We've done pretty well. We're just lacking in -- and I wish -- I'm sorry, I don't have it right in front of me. I know that we've really -- we've got dozens more fleet customers this year than we did last year. We're just a little lacking -- I mean, in order to really knock it out of the park, we haven't had the big 500-, 1,000-vehicle type orders we've enjoyed before from AT&T.

Now look, we're working on one; so are my competitors, I'm sure. We believe there's other big orders out there from some significant fleets, and we hope to get our fair share of it. That would end up making the year. I think they've done a nice job -- we've trained now, I think we have 50 or 60 Ford dealers.

We're seeing orders from all over the country. Guys are flooring taxicabs out here in California, and in New York City that we convert. Shuttle buses are going to really all over the country. We're shy that couple of big customer fleets that would really make it a banner year, and I'm hoping we'll get those. You just never know. We just have to keep working at it. We'll probably get one.

You mentioned those state RFPs for vehicles from the big three. Have there been any indications that they are going to respond to those, or is that just the states trying to get in front of things?

Well, I think it's a pretty interesting turn of events that you get all these governors, Republican and Democrat, come together in a non-partisan way to push this for the big three. I think it's been impactful up there in Detroit, because now they're talking about real orders. I don't know that we've really seen any orders hit yet, because this is just fairly current.

What's also interesting is you're seeing some other states beginning to put into motion purchasing plans for their own fleets where it will just be natural gas vehicles, so states in there on that. That's going to be the fallout of this. That's kind of the companion piece to this RFP with the big three, states saying hey guys, we want these vehicles. Then they're going to internally, under state bids, begin to require their agencies to buy natural gas vehicles. That's next, and we're busy working with a bunch of these states on that very thing.

Great. Last thing for me. You mentioned back-end loading of the stations, and that makes sense; 22 complete year-to-date, goal is 70. Are we talking another ten this quarter and 40 being back-end loaded in Q4? Is that about the right mix to think about?

It's a little bit less than that. I will say I thought we'd have a few more done right now. I think I told you last time that we'd be closer to 30 right now than we are at 22. We have a whole bunch that are getting ready to be finished. We're giving you real numbers here. We've run into some -- we had a bad week a few weeks ago where two separate fire marshals wanted fire hydrants, which is kind of unheard of, and so that delayed us a couple weeks in each of the locations. Things like that come up. I think in the last quarter, though, it's closer to 20 some-odd.

We are trying to bring those forward into the year so that we can get them all done. You'll have a bunch done in November/December. Some will inevitably spill into January. I tell you, the bigger story, though, is the next 100 you're going to build next year, and we're working on that now. We're not done at 70.

We see and have customers that want stations at specific locations, either at distribution centers, or at plants. That will be the next phase of this next year that we're working on now. We need -- when we talk to you later this year, you're going to want to hear that we have 50 or 60 or 70 of the locations that are in the bullpen for next year in order to get another 100 stations.

That would be good. Appreciate it.

Shawn Seaverson, JMP

Thank you, good afternoon. I was wondering if you could talk a little bit about kind of the fixed cost we should expect as these stations roll out. I mean, obviously, I know it's going to be a lot of variable costs, but when we're looking at, margins and costs and heavy and rapid ramp, how should we think about fixed costs?

Actually, the good news -- the bulk of the fixed costs are included in our margin number per gallon, just from the perspective of we really put a direct -- well, we basically use a direct-costing method. You're right, all the property taxes, the guys -- rent, the guys to maintain the station, the property to run the station, all that stuff's up in our margin line.

The good news is once you get past the margin line, there's really not a lot left from a fixed-cost perspective. Obviously, it's just your basic G&A stuff, which should be pretty minuscule on a per-gallon basis once these stations get up and ramped. We don't really get into fixed-variable kind of costing. We look at them more from a margin per gallon and an EBITDA basis, but that gives you some flavor on -- I guess some thoughts if you want to slice it and dice it that way.

Absolutely, thank you. Secondly, just trying to figure out what the environment is for renewing contracts, especially for your typical fleet vehicles. Are you seeing more companies come in to try to work through your customer base, or are you still kind of working with, without a lot of pressure, I guess, from competition?

Well, there's more pressure than there was before. I know our Chairman, as he works across -- occasionally, we try to have something to say about policy related to the utilities getting in the business, or wanting to use rate-bearer money, so we keep track. Our argument is that the private sector is now -- has got a lot of -- there's a lot of people in this business. You don't need to have de-regulated utilities be in the business. I think we keep track. I think we're up to 45 small companies like ours.

Now we're bigger, and some have CNG, some are LNG, some are construction-oriented, but there are a lot of players in the business. Many of them have only done one station or are in one state, but we do see competition. We do have customers come in and try to bid against us, and I think that's good. I think that keeps us sharper. We see it in the refuse business all the time. We certainly see it at RFPs in municipalities.

When we go build a station for a customer and use our own capital, we often have very long-term contract rights. In those instances, it's pretty tough for a competitor to come in and displace us. I mentioned this before or the other day, I don't think on our last call, but it is interesting, because we thought we'd hear a lot about competition all the time. We're at 35 airports, soon to be 37 airports. Several of them, we have several stations. We don't have any competition.

I don't know if it's just that the business isn't worth a darn, no one wants to compete, or it's too hard or what. A lot of people are concerned about the competition just looming around the corner and knocking us off; well, we've been in this airport segment for ten years, and we don't have much competition. I think we have one station or one or two competitors out of those 40 some-odd stations that we have at 35 airports. But yes, we're seeing more competition all the time.

Do you have a rough estimate of how much of your business is kind of locked up in longer-term contracts versus those that might turn over every couple months, or every six months, or something like that? I'm just trying to understand the scope?

Let me come at it this way, and then Rick is listening, so he can -- if I botch it he can help. We have about 600 or 700 fleet customers. Now, these would be Waste Management and Republic and UPS and FedEx and household names, and we're proud of that. Many of them we've done business with for years -- Super Shuttle -- I mean for 10 years, 15 years.

We have a pretty good track record of retaining that business. Many of those contracts are five-year deals and some of them are ten-year deals and some are ten-year deals with two five extensions. We have about 600 or 700 contracts that would fit in that category. Of course I just went through and talked about our airport stations. Rick and I call that our commercial retail business, right.

There we're pricing up against gasoline and diesel, but we're serving taxi cabs, and we don't have any contracts with a lot of those taxicabs. We have some larger taxicab companies, but we have a lot of taxicabs that come and they're just cash-and-carry on a daily basis. At a lot of those airport stations, though, we have long-term contracts in order to get that land from the airport authority, and we have 5- and 10- and 15-year deals with the airport.

Now with our refuse customers, we have where our use our capital, we typically have 10- and 15-year deals. On our big transit properties, I would say typically, wouldn't you Rick, that most -- many of those transit agencies can't contract much over five years. So most of those are five years, and then they roll off. They're over there -- it's kind of a current deal where you may have a year to go on one of them, and they re-up for two or three, sometimes five years.

I don't have a number for you, but as we talk about our -- if transit makes up 50% or 60% of our volume today, most of that's under contract. I would say the average length of those contracts is what -- three years running on them?

That's exactly what I was thinking. If you pull the transit piece out, all of those contracts are basically three to five years, you go through the RFP process and that's kind of how those works. The piece of the business that's left, all our other core markets in the trucking world, I would just say the majority of our customers are probably on a contract basis, as well as coupled with comments that, as we go forward, it's probably going to be less and less as we build out these highway stations and do deals with truckers similar to we do with the taxicabs now, whereby we're just basically selling fuel, and they pull into our station.

But we will offer volume discounts for contracted volumes. You kind of do a little of each.

Great, thank you.

Matthew Blair, Macquarie.

Thanks. Good afternoon. Could you help us understand the lag time between when construction is done on a station, and when that station actually opens and is supplying volumes? Maybe a good example here would just be with your 22 America's Natural Gas Highway stations that you've completed, how many of those are up and running today?

That's a good question. If I could just take one step back on the core market business, okay? So for those -- we'll finish something closer to 60 of those stations this year in transit, airport, and refuse. Those stations opened, and they have vehicles on them on day one, for sure; because typically, we've contracted with that customer to put that station there. Occasionally, there's a week lag time while they're putting decals on a taxicab or a new meter in, or something, but it's pretty seamless.

Now the American Natural Gas Highway, we're trying to make it as seamless as possible. We have 22 stations completed, and I think we have about eight or ten of those that probably have been finished here in the last three weeks or so and are not open yet, are awaiting the arrival of trucks.

There's no reason for us to have LNG sitting in a tank vaporizing and going into the atmosphere until we have those trucks there. Half of them are opened and fueling, and half of them are waiting for the first 20 some-odd trucks. That's kind of the way it's working right now, and of course, we are doing everything we can to make sure it's as tight as possible on that.

We're really -- we're a little bit ahead of ourselves here for the next bit, because we don't have all the engines -- the delivery of the 11.9 that we want, but they'll be here. When we get the majority of those stations opened late in the year, I'd say that you'll have trucks fueling at those in the first 30 days, typically.

Okay, thanks. That's really helpful.

In some cases, the trucks are already there, they're waiting for us to finish. It just kind of depends.

Okay. In terms of funding for future growth and 2013 and 2014, could you talk about the options on the table here, in terms of equity or debt or possibly asset sales? What are you looking at here?

It's a good question. As you know, that if you start totaling up the stations that I'm talking about, you'll see that in late 2013 to 2014 we believe, just because of the way the business is growing, you're going to need more capital. We are trying to be very mindful of the fact that we don't want to dilute all of our shareholders. We're trying to look at other ways to have the capital that we need, so we're trying to do it in a friendly matter. We're looking at different debt ideas. We're actually looking at a couple MLP ideas with some of our existing assets, so we're trying to explore all our options.

We have a bunch of assets, station assets that don't have any debt on them today. We're looking and weighing all of those different things now. I think we're pretty -- in pretty good shape through the first half of 2013, and even a little bit later than that. Then we'll need to begin to figure out how we create a little capital. Rick, you may want to --?

No, I think that's exactly right. We have about $235 million of cash and short-term investments at June 30. I think we, this close to the Q, we anticipate spending $128 million over the rest of the year. You kind of do the math; that puts us in good stead heading into 2013.

I guess I would agree with Andrew. I mean, we want to make sure we have enough money to capture the opportunity. We're just going to go with equity light as possible as we can as we go out and search for -- figure out how to fund that next round of stations that we're going to need build and fill and make sure the network is adequate, we've got stations in the right places for our customers, and all those types of things.

Okay. Great, thanks.

Pavel Molchanov, Raymond James.

Thanks guys for taking my question, kind of a big-picture one, if I may. Obviously, the nat gas act didn't work out back in the spring. Is there anything that you're looking at in Washington, either before or after the election in the lame-duck session, that would be relevant for the industry or you guys specifically?

Well, the other day -- and we don't talk -- we're very pleased that the economics are as strong as they are, right? That is that the industry -- the good news is we can sit on our own bottom, I think, with strong economics. However, there are still those in Congress and still those who want to provide incentives to move this ball faster.

Just last week, right, you followed that the Senate Finance Committee went ahead and passed 19-5 the VTEC extension in that extenders bill, which is the $0.50 a gallon tax credit for our fuel. Now, that's not done yet, right? That's got to get passed on the floor by the Senate, and then it's got to go over to the House. We're told that that wouldn't happen until probably after the election. I do think they'll take up a tax extension bill after the election.

That's one piece that's out there. That obviously helps companies like ours. It helps bring -- it helps make fueling stations a little bit more economic, because it tends to help on the economics of stations that maybe aren't as heavily loaded as they should be in the beginning of this new industry. That's one piece.

There are those still talking about incentive-type legislation, albeit probably different than the original nat gas act in the House. There was some hearings last month or so talking about different barriers to entry for natural gas and what could be done to expedite the business. I guess I feel like we don't have to have that legislation, and we don't spend a huge amount of time on it. I think you'll continue to see some efforts in the Congress to push this along.

Meanwhile, in the states, you have this effort ahead of the states. They're talking about tax holidays in different states. They're talking about different tax incentives on sales tax in the states. You have these 21 governors that are doing what they are doing. You have 14 other states that are talking about doing -- you have a lot of different local initiatives.

As I mentioned in my remarks, Chicago O'Hare, when they give somebody a front-of-the-line privilege, there's probably nothing more effective than driving natural gas taxis than that. There's a lot happening. I'm not sure our friends in the federal government are always going to get there first.

Yes, I hear you. Follow-up on actually your internal workings, if I can ask about this. You've historically stayed away from providing guidance, particularly on top line. I'm curious if you're, obviously given the disconnect between where the numbers came in and where the street was this quarter, if you may be re-thinking that going forward?

No. In fact, we're thinking about talking to our analysts as we go forward. (laughter) Frankly, we're not sure how you guys are getting those numbers. I mean, our whole theory on revenue is basically -- you know where we started last quarter. We've given you flavor on what's common -- i.e., vehicle sales are up, IMW sales are up, (inaudible) based on us going through.

We're talking about the highway project, the timing. You should get a good feel on kind of where that number is going to be. We're somewhat perplexed on why people continue to miss that number on the upside by such a large amount, when for us, from our perspective, it's not that hard to get your hands around. We're scratching our head a little on that.

We hear you, and, obviously, we'd -- we're doing an okay job on, I guess, on the margins per gallon, and on the earnings number. We're not -- apparently we're not doing a very good making sure you understand all the various pieces of the business. We're going to have to do better than that going forward. I hear the question, and we're going to be talking with a lot of our folks to make sure they understand what we've got happening.

Appreciate it, guys.

Thank you. We have no further questions in queue at this time. I would like to turn the floor back over to Management for closing remarks.

Thank you, operator. I am pleased with our progress that we are making in growing our core markets and building out our station network. We more than doubled our station completions and are on track to reach close to 400 stations by the year end. That, ultimately, is going to be what you're going to have to see in order to drive the volume that we think will come.

However, I'd like to re-emphasize what I said at the end of last quarter. 2012 is about execution of our station build-out and making sure we continue to collaborate with the engine manufacturers and the fleet customers. As the availability of new engine offerings becomes more widespread, and our station network continues to develop, we believe we are poised for a significant volume growth in 2013 and beyond. Thank you for your continued support. I look forward to reporting to you on our progress next quarter.

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