Clean Energy Fuels Corp (CLNE) 2013 Q2 法說會逐字稿

Greetings, and welcome to the Clean Energy Fuels second quarter 2013 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, Tony Kritzer, Director of Investor Relations. Thank you, Mr. Kritzer. You may begin.

Thank you, operator. Good afternoon, everyone. Earlier this afternoon, Clean Energy released financial results for the second quarter ended June 30, 2013. 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 contains forward-looking statements that involve risk, uncertainties and assumptions that are difficult to predict. Words of expression reflecting optimism, satisfaction with 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 statement 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 factors section of Clean Energy's Form 10-Q filed August 8, 2013. 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 8-K 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.

Thank you, Tony. Afternoon, everyone and thank you for joining us. I'm pleased to review our second quarter 2013 operating results. During the quarter we generated $88.1 million of revenue, up 26% from $69.8 million a year ago. We reported gallons of 52.6 million, up from 48.6 million. Gallons delivered were up 13% for the quarter -- second quarter of 2013, when excluding the 2.1 million gallons delivered in the second quarter of 2012 by our Peruvian joint venture which we sold in March 2013.

I would like to start today by discussing the heavy-duty truck deployment. Last week Westport reported they delivered over 2,700 CWI natural gas engine units in the second quarter. Of course, this number also includes the 9-liter engines going into refuse trucks and transit buses. Westport pointed to the launch of the new 12-liter engine as a major reason for the growth in their trucking segment. Our national trucking team has been working closely with Cummins Westport, the OEMs, shippers, dealers and carriers and we have received positive feedback from customer fleets that are deploying the new 12-liter engine. Many of these early 12-liter commitments are for CNG trucks because the first engines were 350-horsepower and well-suited for local trucking applications. But we are pleased that the 400-horsepower version of the 12-liter began production on August 1. We are seeing a healthy portion of these being ordered as LNG.

Clean Energy is already capturing market share in both CNG, which we have years of experience in, and in the new LNG market. In fact, as we break down customer information, we believe there are over 900 12-liter orders -- firm orders -- and another 700 pending orders already for 2013. Of course, this is very fluid, but the trend is stronger than we expected at this point in the year. The numbers I just mentioned do not include the 985 LNG trucks that UPS has announced they will be ordering between this year and next. And furthermore, UPS has said they will not be buying any diesel tractors in 2014. I think that is strong. In addition to the strong commitments from companies like UPS, Procter & Gamble, Ryder and Penske, we are very pleased with recent announcements from additional companies including Safeway, Trader Joe's and DHL Worldwide Express that either they, or their contracted carriers such as Warner, Swift, J. B. Hunt, Knight or C.R. England, just to name a few, will soon be deploying natural gas trucks as part of their daily operations.

The construction of America's natural gas highway stations is progressing well. We currently have 76 stations built, 24 truck stop stations in various stages of construction, with 30 others in the contracting and proposal stage. We have six LNG truck stops ready to open in the coming weeks. Our core fleet segments continue to be very healthy. This was recently demonstrated with Tuesday's LA Metro announcement. Already a longtime Clean Energy customer, we signed a new 10-year contract with the country's largest CNG bus fleet. This is very important on a number of levels. LA Metro is showing a high level of confidence in us by expanding their relationship with Clean Energy, the deal represents very large volume -- about $150 million gallons over the life of the contract, and most importantly we were able to significantly increase our margins in recognition of the premium service we provide.

Other transit deals signed over the last quarter include an extension of Orange County Transportation Authority's contract, representing approximately 1.7 million gallons annually, a five-year contract extension for LNG with Phoenix Public Transit for about 6.5 million gallons annually. 15 additional CNG buses were ordered by our customer, Las Vegas Regional Transportation that will consume about 240,000 gallons each year and I'm pleased to say we added our first transit customer in Canada. We were awarded a contract by British Columbia Transit to build a CNG station for 50 buses or approximately 800,000 gallons per year.

Our refuse market continues to expand with new customers, additional geographies and deeper relationships with existing customers. I'd like to remind you that five years ago, we had less than 10 refuse customers. Today we work with 126 different refuse companies including the largest four public waste companies in the country. We have a 75% market share in the space our refuse gallons delivered are up 37% year-over-year. This year we have completed 14 refuse stations. We have eight stations currently in construction and an additional 53 stations where the customer has paid us a fee to get into our construction queue.

More and more airports are requiring service vehicles to switch to natural gas and Clean Energy continues to dominate the space with our presence at 39 airports across the country. San Francisco International recently extended our relationship with a 10-year contract for its growing fleet of CNG vehicles and taxis. For those of you on the East Coast, we are finishing construction at new stations at the JFK Airport in New York and Dulles airport outside of Washington DC. Both stations are scheduled to open in about 30 days. In Las Vegas, an additional 90 new CNG taxis representing approximately 450,000 annual gallons were added that will fuel at our airport station. A longtime customer, Super Shuttle, is adding 40 new CNG vans here in Southern California as well as 75 more in other markets like Austin and San Francisco -- approximately 1.1 million gallons a year.

It is very important to remember that while we are extremely excited about the tremendous opportunity that the new heavy-duty trucking market is providing Clean Energy, we have the nation's largest network of CNG fueling stations and have completed 37 projects so far this year and have 41 more in construction. Remember, we have 54 projects in the construction queue.

Let me turn our biomethane business. In a demonstration of our ongoing commitment to producing the most environmentally friendly fuel for fleets in North America, we broke ground this month on our third biomethane production facility located outside of Memphis, Tennessee. This new project is slated to start up operations in the first half of 2014 and it will produce fuel that will be derived entirely from landfill gas. I think it's worth repeating that this biomethane, when used in transportation, can reduce greenhouse gases by 90% as compared to petroleum fuels. I am confident that there is no other commercially available alternative fuel on the market that can meet 100% of the fueling requirements of an 18-wheeler and provide this level of an environmental benefit. To that end, we will be announcing our plans in the coming months that we will be rolling out a renewable natural gas fuel that will enable our customers to dramatically reduce the greenhouse gas emissions from their fleet operations and affordably achieve their sustainability goals.

Finally, I would like to discuss some of the noteworthy achievements -- noteworthy items of business that took place in the second quarter. At the end of June, we announced the sale of our vehicle conversion subsidiary BAF to Westport Innovations. The natural gas vehicle conversion business has matured since we purchased the BAF in 2009. At the time of the purchase, BAF was one of the only vehicle conversion companies and the owner was struggling through the financial crisis. We wanted to ensure that our customers had light and medium duty vehicles available to fuel at our stations so we acquired BAF. We are proud of what BAF achieved under our ownership, both as their expanded product lineup as well as their record level of sales.

However, as the industry has grown and more options are available to our customers, Clean Energy no longer needs to be in the conversion business. For other companies like Westport, this is their core business. We have the largest network of public access CNG stations in the country and will continue to fuel BAF light and medium duty vehicles, as well as all the new natural gas vehicle offerings that are becoming available such as the recently announced Ford F-150. We will work shoulder to shoulder with Westport and BAF as we have a two-year marketing arrangement to assist them with their sales.

Also during June, Boone Pickens, our founder, board member and largest shareholder, increased his stake in the company by partnering with Leonard Green & Partners, an LA based private equity firm to purchase the $100 million of convertible notes that we had issued to Chesapeake. Boone and Leonard Green made the final $50 million investment that Chesapeake was obligated to fund. A little background may be necessary. Aubrey McClendon at Chesapeake shared our vision to grow the market for natural gas as a transportation fuel and in 2011 agreed to provide us capital to help build out America's Natural Gas Highway. With the progress that we made on our highway network, Chesapeake felt they had accomplished their objective. Consequently, with our consent, Chesapeake sold their position to Boone and Leonard Green Partners. We are thrilled by this vote of confidence from Boone and are excited by Leonard Green's involvement. Not only is Leonard Green a well respected firm, but it brings a wealth of relationships among retailers and other shippers, as well as contract carriers.

I would like to reiterate our gratitude to Chesapeake, as well as our other capital partners Temasek and RRJ Capital for their support in helping develop America's Natural Gas Highway and we look forward to working with them in collaborative ways to help grow the natural gas transportation market in America. With that, I'll turn the call over to Rick.

Thanks, Andrew. Before I review our financial results I would like to point out that all my references to our results will be comparing the second quarter 2013 with the second quarter of 2012 and the first six months of 2013 with the first six months of 2012 unless otherwise noted. For the quarter, revenue increased to $88.1 million, up from $69.8 million. For the first six months of 2013, revenues increased to $181.2 million, up from $143.5 million a year ago. When comparing our numbers between periods, please note that the quarter ended June 30, 2013 includes $6 million of volumetric excise tax credit or VETC revenue and the first month of 2013 includes $32.2 million of VETC revenue, of which $20.8 million related to the full year of 2012. We did not record any VETC revenue in 2012, as the law was not in effect at that time and was reinstated in January 2013 and made retroactive to 2012 at that time.

Volumes rose to 52.6 million gallons during the quarter, up from 48.6 million gallons a year ago. Please note the prior-year amount included 2.1 million gallons associated with our Peruvian joint venture which we sold in March 2013. For the quarter, our CNG volumes were 35.6 million gallons, our RNG volumes were 2.2 million gallons and our LNG volumes were 14.8 million gallons. For the six months of 2013, volumes increased to 102.5 million gallons, up from 92.3 million gallons.

On a non-GAAP basis for the second quarter, we reported a loss of $0.07 per share. This compares with a non-GAAP loss of $0.16 per share in the second quarter of 2012. For the first six months of 2013, our non-GAAP loss per share was $0.03 per share and it was $0.33 per share in the prior period.

Adjusted EBITDA in the second quarter of 2013 was $11.1 million, which compares to adjusted EBITDA of minus $1.6 million in 2012. For the first six months of 2013, adjusted EBITDA was $31.2 million compared to minus $3.6 million last year. Again, please remember the second quarter and first six months of 2013 included $6 million and $32.2 million, respectively, of VETC revenue. The second quarter of 2013 also included a $15.5 million gain on the sale of our vehicle conversion subsidiary, BAF.

Adjusted EBITDA and non-GAAP EPS are financial measures we develop to highlight our operating results, excluding certain large non-cash or non-recurring charges or gains which are not core to our business. These items include the amounts we are incurring for the Series 1 warrant valuation, our stock-based compensation charges and 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 $11.9 million or $0.13 per share, which included a non-cash loss of $40,000 related to valuing our Series 1 warrants, non-cash stock-based compensation charges of $5.5 million and a $0.2 million foreign currency loss related to our IMW purchase notes. This compares with a net loss of $11.3 million or $0.13 per share in 2012, which included a non-cash gain of $8.9 million related to valuing our Series 1 warrants, non-cash stock-based compensation charges of $5.8 million and foreign currency losses of $0.5 million on our IMW purchase notes. For the first six months of 2013, our net loss on a GAAP basis was $15.8 million or $0.17 per share and included a non-cash charge of $0.5 million related to valuing the Series 1 warrants, non-cash stock-based compensation charges of $11.7 million and a $0.4 million foreign currency loss 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 warrants, non-cash stock-based compensation charges of $10.4 million and a foreign currency loss of $0.1 million on our IMW purchase notes. Our SG&A charges are higher between periods, primarily as a result of continued business growth and costs incurred to support our construction and sales efforts to develop and launch America's Natural Gas Highway.

Also in the second quarter of 2013, we incurred a $1.1 million charge related to vacating our former office lease an approximately $750,000 of moving and IT related costs in connection with moving our headquarters from Seal Beach, California to Newport Beach, California. We anticipate these costs will be offset in the future with reduced rental rates at our new location. Our interest expense is also up between periods, principally due to the interest charges we're incurring on our convertible notes we issued in June 2012 and 2013, coupled with the fact we capitalized less interest in the second quarter of 2013 related to our construction activities.

Our gross margin this quarter was $26.2 million which compares to $21.3 million in 2012. For the first six months of 2013, our gross margin was $68.5 million, compared to $39.1 million. The gross margin for the second quarter and first six months of 2013 includes $6 million and $32.2 million of VETC revenues, respectively. Our margin per gallon on our fuel sales this quarter was up $0.02 from last quarter to $0.30 per gallon. Our cash balance plus our restricted cash, plus our short-term investments totaled $190.2 million at June 30, 2013, which we have available to fund our future cash needs. With that, operator, please open the call to questions.

Certainly. We will now be conducting the question-and-answer session.

(Operator Instructions).

Our first question comes from the line of Laurence Alexander with Jefferies. Please proceed.

Good afternoon. Just a quick couple of questions. First, on the joint marketing agreement, can you flesh out a little bit the cadence of the commitments on your part in any capital outlays you'll need to do? And secondly, can you give an update on how you are thinking -- with the funding that you have received, any changes in the number of stations you want to build over the next 24 months or so?

Sure. Good. Thank you. You are speaking of the Westport marketing?

Yes.

We have a couple in the works right now. The Westport one is -- we take that very seriously. Because as you know, we view -- we've always viewed all of the conversions coming out of Westport to be gallons. Since we are the largest owner of a -- of CNG network, public access network, that's very important to us. That's one reason we got into the business in the first place.

Our sales team for airports and such where this would really apply, led by Peter Grace, here, is going to be fully integrated to be able to continue to help sell BAF product. Over the last year and a half, two years, we've really cross trained our salesmen to understand the vehicle offerings that we developed. We will continue with that as the product -- Westport brings other product. We will have quarterly meetings. It will not be uncommon to see our Westport -- Westport sales folks go on joint customer calls with Clean Energy. We'll work hand in glove with them over the next two years. My guess is that will be a fruitful relationship for both of us. We'll probably even continue it beyond that. It wouldn't surprise me.

The second part of the question was?

Stations.

Stations. You'll notice that we've talked about this before and I think we talked about it on the last call. We have been mindful of the fact that as we want to gauge the development of the station network -- the network stations with the delivery of the trucks. We are very pleased that the trucks are beginning to be deployed. We're beginning to see those 12-liters show up at our stations. As we have said before, it doesn't do us a whole lot of good to have 150 stations out there and closed. The nice thing about this business is we can gauge it and slow it down and speed it up as necessary. We pulled back in a little bit this year and slowed down the development of the stations to better coincide with how we saw the truck deployment going.

We are pleased with how it is going but we have enough stations there currently and as you know, many of them are not open. We trimmed it back some. We are in a very nice position to be able to fund our remaining CapEx requirement for this year and frankly, well into next year, if not the entire year. We still see the business requiring, from our end, 200 to 300 more stations here in the next few years and we'll be on track to handle that.

And then just one clarification -- I think as part of your answer you hinted that there might be other joint marketing agreements either in the near-term or as other OEMs launch vehicles. Could you flesh that out a little bit?

I'm not going to give you all of the secrets there, but, yes, for instance, we have one with Navistar, currently. Navistar kind of pulled back on their product but we had a joint marketing agreement with Navistar and their dealer franchise.

We are talking with the other leaders in the business for other joint marketing arrangements. We like that because every time we get more product, we sell more fuel. We like to think that our sales force is very well trained. We have about 55 salesmen who do nothing but call on heavy-duty trucking shippers, those people that hire truckers and truckers themselves. We have a like number, if not more, in transit, airport and refuse. They are very well-trained. So when we get a chance to work with other people producing product -- product that buys fuel, we like to have that relationship.

Thank you.

Thank you. Our next question comes from the line of Rob Brown with Lake Street Capital Markets. Please proceed with your question.

Good afternoon.

Hi, Rob.

Could you give us a sense of the -- I think you said there were 54 projects in queue. Can you give us a sense of what markets those projects are for? Is trucking a big part of those or is that still waiting for the 12-liter?

It is kind of funny. It's a good question because we slice and dice this stuff kind of differently. A preponderance of those 53 or 54 stations in the, kind of construction queue -- a big majority of that is refuse. Now, we have another 30, probably 70 stations that I don't have in that queue, that really need to be -- that are in sort of a separate bucket that we know will be kind of in the queue for the heavy-duty trucking for the latter part of this year and early next year. I think, right now, 47 or 43 of that 53 are in refuse in that one group. There is a whole another group that I don't count a similar way because somebody hasn't necessarily given us money to do it. Maybe there are stations, right Rob? We know of 125 to 140 stations that are in the planning process to be built.

Okay. Great. And then on the 12-liter roll-out, you gave some numbers about this year. What are you viewing next year in terms of the engine demand and can you give us a sense of how this roll-out starts to load your stations?

Sure. Yes. Sure. This is -- can probably call almost everybody in the business and get a different number, all right? A lot of this is based on the same people, Rob, that you're talking to. It's the people I mentioned in my remarks. It's dealers, it's people that have bought trucks. It's the producers. You can kind of slice and dice these numbers.

We think we've seen, and this would take into account 9-liter, 12-liter, which of course, I'm highly focused on, and even some 15-liter. If you look at -- what we believe from our customers, our sources of confirmed orders and pending orders as we sit here right here today, it's 2,700 plus. It jives very nicely with what Westport's said. Of course, remember, we're sitting here -- the 400-horsepower just got released. I feel very good about having that many engines already spoken for, here as we sit here in August. We have great hopes for the latter part of the year.

When we look out to 2014, we see another 1,760 pending orders that we believe are out there. That's not supersoft, Rob, because about 900 and some odd of those are UPS LNG orders. I think, if you kind of roll that together, some of those will fall into '13 and some of them into '14. We have a few thousand engines, so we're a couple of thousand ahead of where I thought we would be right now. We are just getting started. I feel good.

I have told people all along, let's look at the order bank by month in the fourth quarter and see what we look like. And if that number gets to be 500 and 600, 700 a month, you're on track to do 10,000 units next year, which for our company is significant. It is significant for Westport and others as well. It begins to track. It is what we've said before, it begins to track what we have seen in the refuse sector.

Remember, you look at the refuse sector and we started out when we had the new engine. 3% of the new purchases were natural gas in the year that, that new engine came out. We are in that same place now with this 12-liter engine. If you just begin to do something, half of what we've done in the refuse sector, you will see 10,000 or more engines next year. After that, it ramps up significantly.

Okay. Great. Thanks for the overview. I will turn it over.

Okay.

Our next question comes from the line of Steve Dyer with Craig-Hallum. Please proceed with your question.

Hi. This is actually Greg Palm on for Steve. Thanks for taking our questions. I -- sorry if I missed this, but Rick, can you provide the revenue and margin by segment, please?

Which segments would you like?

The BAF, IMW station, all of those if you can.

BAF was 2.8 of revenue.

Yes.

IMW, $19.2 million of revenue. Station, 12.1. Margin BAF was actually $400,000 loss, IMW was $1.7 million and Station was $2.3 million of margin.

Okay. Thanks a lot. Just piggy-backing off a couple earlier questions with the launch of the 12-liter earlier this year, can you give more of an update on the process with some of those anchor fleets to open some of those stations that are already out there?

Right. Sure. We are working very closely with these folks that are ordering trucks. All these fleets are a little different. They are all in kind of a testing mode. Some of them are more so than others, some of them are further along in the testing cycle. You are having these fleets purchase -- order 20 trucks or 12 trucks or 15 trucks.

Some, obviously, UPS has shown tremendous leadership by ordering hundreds and hundreds of trucks. They have had, arguably, more experience than some of these others because they've operated natural gas vehicles now for 15 years. Our national trucking team led by Jim Harger are working very closely with the shippers and the contracting carriers. Kind of what you are seeing is you're focusing -- we're taking the lane data that we have from certain of these shippers, we're working with them and their interests to bring their carriers along to go to natural gas, and we're overlaying that on top of our networks. That may be just say one route for trucks that operate every day between point A and point B. You'll see that in our network from we'll say, Dallas to San Antonio.

We worked very hard to gather up 20 trucks that basically call one station home. When you get that, then you can open a station. It is very important to us, when we see the UPS, for instance, announcement. UPS announcement alone over the next eight months opens up 19 stations. The nice thing is, I don't need 40,000 trucks here to open up 70 stations. You need 20. That gets that station to open up and makes that station perform nicely. We are not done at that point, of course. It can open with 20.

Our team needs to move it to 100. Remember, an average truck uses about 20,000 gallons of fuel a year. You have 100 trucks operating a station, you are almost at capacity for that $1.8 million investment. If you are lucky enough, Greg, to get 100 trucks on day one, which is not going to be the normal case, you have about 1 year payback on that station. They play here is, work with the fleets to open these stations as they begin to take the 20 trucks. That's how they group these anyway, and we'll begin to open these stations. You will see over the course of the next six months, certainly with UPS' help, we have about nine that are in process right now. Then you have these other 19 behind it. By this time next year, you will have -- a lot of those stations will be open, if not all.

Okay. Great. Thanks for the color. Last one for us and I will hop back in the queue. Given what's been going on over at Pilot Flying J, I was just curious if there's been any change to the agreement you guys have with them -- any potential effects as a result?

No, you know we continue to be big fans of the management at Pilot Flying J. The relationship is strong. We have station under construction right now. As you know, we have a whole bunch of them built. I'm sure they'd like to see more volume come through there, as we would. They continue to be a very strong partner. We have about 18 more Pilot Flying J's in the queue, I believe, right now. No ramifications as it's related to us. We have very good relations with their top management.

Great. Thanks a lot.

Thank you.

Your next question comes from the line of Carter Driscoll with Ascendiant. Please proceed with your question.

Good afternoon. Getting back to the discussion about agreements, could you talk about anything that transpired with your recent signing with Mansfield and how you've been able to approach their customer base or try to convert them over to CNG? And then I have a follow-up.

Right, Carter, it's a good question. We like what we have done with Mansfield. Just to remind everybody, we're proud of our relationship with Pilot Flying J and we have a couple other Pilot -- like Flying J relationships with Quarles, Lee Hi petroleum, for almost another 1000 stations. You're working with the largest public truck stop owner with Pilot Flying J. Mansfield is the largest behind-the-gate fuel provider. What they're doing now -- they've recently made an acquisition in Chicago -- 3.5 billion gallons behind the gate. We feel very strongly that we have these two really important relationships. If you think with me, that there's 25 billion gallons of fuel in this market, our two exclusive partners have 11.5 billion gallons of it every day -- annually.

We have assimilated the 20 some odd stations -- all of the Mansfield stations and we are building out 20 others that were kind of in process when we acquired it. Our sales teams are now going on joint sales calls. We like that. We will soon announce a few of the first Mansfield deals, if you will, where one of their customers wanted to move forward with natural gas. They have sleeved us as the product expert to bring us into the play. Our sales people are making these joint calls and we have the first of those are beginning to come to fruition. We like it, we see -- I'm in contact with Michael Mansfield and we like the relationship. We hope that going forward it will be very important for both of us.

Okay. Shifting gears a little bit, can you talk about -- you just said you broke ground for the new renewable plant outside of Memphis. Can you talk about the learning curve, what you've learned building your first two and how to apply that in maybe potentially speeding up the construction time or improving the throughput? I know there was a bit of a hiccup at the Michigan plant last year. Maybe you could just talk to the evolution of what you have learned?

Carter, it's a good question. We have learned a lot. The beauty of the biomethane business is you have a really phenomenal product. You are rewarded for it because of its clean nature -- 90% cleaner. Of course, as you know, getting into transportation, it brings with it some substantial margin enhancements. Having said that, it is not that easy. These are expensive projects to place on landfills. There's wells that need to be drilled, landfilled, manage methane there. These are anywhere between $25 million and $40 million clean-up facilities -- very large, big-time compression.

We've learned a lot and we've improved. Our first, actually our first two, McCommas, as you know, we're in the process of doubling it. We've had quite a bit of problem bringing on the whole completion of the second, if you will, the second compressor train of it. We have already increased that thing from about 3 million a day to now we are kicking up around 5.2 million a day. We are not comfortable until we get it up to where the design capacity is around 6 million a day -- 6.2. We are on our way. There's more to be done there.

Our second project in Michigan, we've had problems with that, as well. Things weren't sized correctly. We've learned a lot from building these. I think we see the light at the end of the tunnel on that as well. I guess all I could tell you is that we have learned a lot on the construction side of this, on the equipment side, we are getting better, we are getting faster.

We still like it. Our customers like the product. It's not for the faint of heart, let's put it that way. We have though, probably three more like this one that I just mentioned in the pipeline. You will see more of these. I think we will get better in each one.

I appreciate that. Thanks. I'll get back in the queue.

Our next question comes from the line of Andrea James with Dougherty & Company. Please proceed with your question.

Hi. Thanks for taking my questions. Quickly, Andrew, you were going over -- you have 100 trucks at the station, it's a one-year payback on your investment. I was wondering what margin rate are you assuming on those trucks per gallon?

Now you wouldn't think much of me if I just spilled the beans and told you all that, right? You're going to have to back into that. Remember, this may be a good place -- remember Andrea, the way to think about this is today you have natural gas at just under $3.40, $3.30 some odd per Mcf. You get 7 gallons, it's 7.2 gallons of diesel. So your commodity per gallon is about $0.47 as we sit here today.

Now, you've got to liquefy the gas, and haul it and transport it and do O&M and insurance and so I've always told everybody, add about $1, $1.10. You can see, with that as your cost -- the $0.47 plus the $1.10, you're up to nozzle tip at $1.50 or $1.60 and you're competing with diesel at $4 or $4.20. There's a lot of room in there, there's a lot of room for me to share with our customer and there's some room in there for us. You just have to do the math.

Well, I did the math. It comes out to $0.90. If you look at -- there's just a wide range of estimates out there on margin per gallon. Everywhere from $0.25, $0.60, $0.90, $1. I was wondering if you could bracket it a little bit. It seems to be a wide range.

Is it bigger than a breadbox? I just sort of took you through it. There are profit splits in there and such. There are other things. It's not $0.25. Now, you may be thinking of liquefaction cost or something.

Or an O&M type [shell] or something like that. There's different types of sales models.

But if you're building a station and risking your capital and retailing fuel that you have some control over at a station, the margin's a healthy margin.

Okay. Thank you.

And you know, one thing, Andrea, that I think is important on that. I get this a lot. I understand people who say there's margin compression and all. Remember, we're competing with this other fuel that's $2.50 more than we are. There will be other people come to the party and compete with us. We are competing with a fuel that is substantially more expensive. There is going to be some good margins here. And people in our business for the foreseeable future.

Fair enough. Thanks. When Ford said they're going to do a CNG pickup in 2014. Does that move the needle for you guys at all?

Of course, we love it. We love the fact that today every major OEM in the heavy-duty sector, every single one of them in the world either making trucks or building trucks or engines has announced product. That's good for us because we sell fuel. We like it when Chrysler made their announcement doing the Dodge pickup, which we saw yesterday and Range Resources bought 150 Dodge pickups. That's great. Well get a crack at fueling some of those. The F-150 had never been in our sweet spot, at the time, for fleets. A lot of fleets don't use the F-150, but some do. Gas utilities do, water districts do, some school districts do.

Heavier, bigger fleets often didn't use the 150. Of course the motoring public does. I've already had a call from a very aggressive gasoline retailer in Texas that believes that the F-150 will -- the F-150 is kind of like a Suburban down there -- is a Texas mainstay and believes it's time to begin to put natural gas into his gasoline retail travel centers because he can make -- his customers drive the F-150. All of it helps. You'll discover that the F-150 doesn't drive as much in many cases as some of our other fleets and maybe doesn't burn as much fuel because the duty cycle is a little different. But yes, we love it. We love having that product come to market. We've been trying to get Ford to make gas prep engines available for many of their lines.

I think this is a good step that they have come with the F-150. And you know, we'll be a beneficiary. Southern California -- people buy a lot of F-150s. We have 60 public stations in Los Angeles. To the extent that those are sold at Ford dealers, we'll be fueling them.

Thank you.

Our next question comes from the line of Caleb Dorfman with Simmons & Company. Please proceed with your question.

Good afternoon, gentlemen. First, it was interesting to see the agreement announced on Tuesday with NG Advantage. Can you walk us through that deal? How the economics split to the actual off-taker versus to Clean versus to NG Advantage? Is that a one-off deal or do you view that as a segment which can generate a lot of growth for you going forward?

Well, natural gas is cheap. You'll find markets. We have done this before. Years ago we used to sell LNG to dry lumber in Canada and the Northwest. You will find these uses where stationary sources of natural gas make a lot of sense. We saw it in the northern border towns in the MaQuilladores of Texas years ago. Here, you're able to compete very favorably with fuel oil in the Northeast and propane. We can sell at a nice margin. It's not quite that margin we talked about a minute ago, but it's a very nice -- one that we're very comfortable with.

Deliver the fuel in fairly large quantities, which we like. The customer -- the deal with NG Advantage -- you're going to have to ask them on what they charge those stationary customers. There's plenty for it to make sense for them to deliver the fuel and in effect, retail it to their customer who otherwise would be buying number 2 fuel oil or propane in these remote areas where it's expensive. We like it because we've got capacity and the relationships. We have the tanker fleet. This is the first of several you're going to see. We're talking with asphalt guys and others where this makes a lot of sense.

How big do you think this market segment could be over the next three to five years?

I'd love to give you a real big number, Caleb but I just don't have that off the top of my head. We've got a dedicated group now working on it. This is a big customer.

The nice thing is, they're typically high-volume applications which is nice. How many and how many are out there, I don't know if we have a really good feel right now. It's kind of just starting.

Okay. It will be interesting to see. I guess the President's really making climate change a central part of his strategy for his second term. Obviously, he's talked about liking the use of natural gas in heavy-duty vehicles before. Do you think something gets done on the legislative side this time around? Or is it still something where the timeline keeps on getting pushed to the right?

Well, you know, there's a difference between legislative -- legislation on this and the President talking about climate change. Those are two different things. I think to the extent that the administration and the President talk about climate change and there's pressure on greenhouse gas and rules promulgate at the EPA, we're a winner in that, right. Natural gas is very low carbon fuel compared to the others. Every time somebody comes up with something like that, we tend to do very well. I wouldn't say you should translate that in that were going to have a piece of tax incentive legislation come through this Congress anytime soon.

There are some specific -- like what we used to talk about, Caleb, was the nat gas. l will say this, we have a lot of support in Congress. We don't have to sell like we once did. People get it. People get that this is good for the country. It's also happening kind of without them, which is probably not a bad thing. The market is taking the bull by the horns here and not waiting around for the federal government, which I think is a good thing.

Are there some things they should do, yes. They should fix the LNG tax. We pay more on LNG per gallon than diesel does. If you are in the Middle East and you sell us oil and we make diesel out of it, imported diesel, it has a lower tax rate than LNG produced in America, which is crazy at $0.18 a gallon. That ought to get fixed. I think that, that might. There are some targeted things like that, that could happen.

I think the business is happening without federal -- it is going to happen without federal legislation. I'm not sure it's required. If the country wanted to move it along faster, then they should do it. And it would -- it would help. If you just today -- even if we took the old nat gas act, which was different and you just provided someone buying a truck a $10,000 tax credit, that would make this a six, seven month payback and I think it would expedite the business. Caleb, I would not count on it.

Thank you, Rick.

Okay.

Our next question comes from the line of William Blair with Macquarie. Please proceed with your question.

Hi. Thanks. It's actually Matthew Blair with Macquarie.

I was going to say, I think we might have got that a little switched, but we'll go with it. We know who you are.

Great. Great. I was curious if there was any update on the micro liquefaction projects through GE. Have you set either of the two locations? Should we still expect the spending to ramp-up starting in Q1 2014?

Yes. We are working hard on it. We have guys working on it. We haven't announced locations but we've set the locations. We haven't quite -- ready to announce them. We've made -- (multiple speakers). We've narrowed it down. We have made real estate activities underway to do that. We feel pretty good about it. We've worked very closely with GE and others on the design. We've done a lot of work over the last six months.

Before the end of the year, which is what we wanted to do, we will have those locations public. I think you are right, the spending for us will begin, I don't know if it will be in the first quarter -- it'll be later than that

I think that's a little early. I'm sorry. Just from the perspective of once we pull the trigger on the locations, there's a lot of permitting and those types of things that has to go on that kind of typically will delay your big expenditures. We'll certainly start to put deposits down or look at long lead time type items. That may start to creep in middle-ish part of next year or so. The first part of the year I would think is probably a little early.

You'll spend $200,000 on permitting and people to help you do that, but it's not significant until later.

Sounds good. Thanks. Rick, on the up-tick in the fueling margin, could you break this out? How much was due to increases or decreases in commodity prices and how much was due to your own efficiencies, reducing costs, things like that?

Most of it was -- I don't think a healthy chunk of it was related to the commodity change. That typically goes up and down with our price and typically corresponds with increases and decreases in oil and natural gas, et cetera. The things that, I think, helped us were just some of the things that hurt us last quarter. The transit industry picked back up so we had some more volume at different locations. Some of the other things that hit us in the first quarter this year got fixed. Again, this quarter, cost wise, we picked up some -- one thing that helped us this quarter that had hurt us in previous quarters is our Pickens plant was down in the last half of last year, which caused us to incur a lot of extra cost from a transportation perspective.

There were some basis differences in some of the commodities when we had to go get product from different locations. We were enduring all of those extra costs at the last half of last year. We kind of settled up on our business insurance policy and got some money in this quarter, which helped. I would say it was mostly one iffy type things that got fixed. I don't think there was a lot of the commodities stuff. $0.30 is kind of the normalized number that I think we got back to just the way things -- certain things timed up this quarter.

Okay. Sounds good. Thanks.

Since we have no further questions at this time I'd like to turn the floor back over for any closing comments.

Good. Thank you, operator. Significant progress has taken place over the first half of the year in long-haul trucking transition to natural gas. The new 12-liter natural gas engines are being delivered to the truck manufacturers, shippers are starting to request that their contract carriers make the switch to natural gas.

Some of the biggest companies in the business like UPS and Procter & Gamble are announcing their commitment to natural gas trucks. With our highway in place, our fueling experience in the established refuse and transit fueling markets and our superior capabilities in station construction and operation, we believe we're well-positioned to take advantage of this historical shift. We thank you for your continued support and I look forward to reporting to you on our progress next quarter. Thank you.

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