Clean Energy Fuels Corp. Q3 FY2020 Earnings Call

Greetings, and welcome to the Clean Energy Fuels Third Quarter 2020 Earnings Conference Call. As a reminder, today's call is being recorded, Wednesday, November 5, 2020. Your presenters today are Mr. Bob Vreeland and Mr. Andrew Littlefair. And I would now like to turn the conference over to Mr. Bob Vreeland, Chief Financial Officer. Please go ahead, sir.

Thank you, operator. Earlier this afternoon, Clean Energy released financial results for the third quarter ending September 30, 2020. If you did not receive the release, it is available on the Investor Relations section of the company's website, 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 risks, 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, should, anticipate and similar variations identify forward-looking statements, but their absence does not mean that a statement is not forward-looking. Such forward-looking statements are not a guarantee of performance, and the company's actual results could differ materially from those contained in such statements. Several factors that could cause or contribute to such differences are described in detail in the Risk Factors section of Clean Energy's Form 10-Q filed today. These forward-looking statements speak only as the date of this release. 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 excludes 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, 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. With that, I will turn the call over to our President and Chief Executive Officer, Andrew Littlefair.

Thank you, Bob. Good afternoon, and thank you for joining us. As we close another quarter with the world still grappling with COVID-19, Clean Energy continues to successfully navigate through this period, sustaining much of our business and expanding with new opportunities. We believe that this positions us well for the future once the world gets a handle on the personal and economic difficulties that this pandemic has brought to so many. During these uncertain times, we continue to leverage our strong position as the leader in alternative fueling, working with our customers to support their operations, which are vital in keeping the country running smoothly. I want to thank the Clean Energy workforce for managing this demanding environment by focusing on keeping costs down and improving efficiencies while continuing to meet customer needs. We delivered almost 98 million gallons in the third quarter of this year versus 103 million in the same quarter of last year. Refuse continues to perform well, but transit and airport fleets remain challenged due to the economic slowdown and reduction in travel related to the virus. While our trucking business was flat in the third quarter, we remain optimistic about this segment, which is up 18% for the year. Our optimism stems from the progress we are seeing with our Zero Now program and Chevron Adopt-a-Port program as well as the pressure this industry is feeling to operate more sustainably. Overall, volumes declined 5% in the quarter, but by comparison, they were down 10% in the second quarter of this year, so we are seeing an improvement. Our revenue for the quarter was down a little less than 5% to just under $71 million compared to $74 million a year ago. In the second quarter of this year, our revenue was down 17%, so another indication that things are going in the right direction. Our EBITDA grew to $11 million versus $8.5 million in the third quarter of last year, an 18% improvement. Our balance sheet remained strong with a little over $92 million in cash and investments and only $35 million in debt, which is principally equipment financing at our NG Advantage subsidiary. You have heard me speak over the last several quarters about the acceptance and growth of our renewable fuel product, Redeem. It is truly a remarkable fuel that allows customers to easily achieve significant reductions in the amount of carbon they release into the atmosphere. With no inconvenience, they can switch their vehicle fleets from diesel, whether it's a shuttle van at an airport, refuse trucks, city buses, or heavy-duty trucks. Even if they are already operating on regular Blue CNG or LNG, we can switch them to Redeem without interrupting their operations, allowing them to reduce their carbon output more than before. Customers are responding. With the emphasis on ESG investing and pressure from regulators, politicians, investors, and their customers, companies are examining their entire supply chain to make reductions in their carbon footprints. Fortunately, Clean Energy offers an easy and cost-effective transportation fueling solution. We were the first to introduce RNG as a vehicle fuel in 2013, and our volumes have rapidly grown every year. Additionally, Redeem now constitutes an increasingly large percentage of our overall fuel mix, growing to over 60%. We're so optimistic about this ultra-clean fuel that one of our sustainability goals is to provide 100% Redeem to our entire fueling infrastructure by 2025. In short, RNG is the future of Clean Energy. Others have recognized the potential of RNG and entered the market with their own offerings, but no other company has the extensive fueling infrastructure across the country to deliver the volumes that we do. Importantly, no other company has secured the quantities of fuel from RNG producers like Clean Energy has. We recently signed additional supply deals with Chevron and DTE Biomass Energy to provide us with millions of gallons of negative carbon RNG. Some of this fuel is already flowing into our California stations, and much more will be coming online in the months ahead. The latest development in our transition to RNG is that an increasing amount will come from dairies and agricultural facilities. We call this negative carbon fuel because it is derived from methane, a potent greenhouse gas, but it is now displacing diesel and gasoline, allowing the California Air Resources Board to assign it a negative carbon rating, sometimes over minus 300. To provide context, gasoline has a carbon intensity of 137, and diesel has a carbon intensity of 97. Even vehicles powered by electric batteries have a carbon intensity of 46 according to the California Air Resources Board. So, a minus 300 carbon intensity rating is why it attracts attention from companies seeking to reduce their carbon footprints. For example, we are currently working with a new customer that has started to roll out a fleet of over 300 natural gas heavy-duty trucks, which will fuel at more than a dozen of our fueling stations across the country. They've requested as much negative-carbon Redeem as possible to support their ambitious sustainability goals, which could account for over 4 million gallons of negative carbon fuel in 2021 from just one customer. This new customer joins others like UPS, Kroger, Republic Services, Waste Management, and many transit authorities that have increased their use of RNG, realizing long-term environmental benefits while fulfilling their own objectives. Having a reliable supply of RNG is crucial, which is why we have been proactive in signing agreements with producers. Other transportation technologies may have been in the spotlight recently, but that’s about all they are doing -- simply gaining headlines. Some of these alternatives have seen issues, such as a large transit agency in Southern California that recently took all their electric buses out of service after multiple fire incidents. This follows similar decisions by transit systems in Indianapolis and Albuquerque, which decommissioned electric buses that turned out to be costly and unsafe. In contrast, the use of RNG as fuel is making significant progress in reducing greenhouse gas emissions in the transportation sector today. Electric and fuel cell heavy-duty vehicles will likely take many years to achieve similar results, driving increasing interest in RNG. As you know, we are now significant partners with three of the world's largest diversified energy companies—Total, BP, and Chevron—all of whom have committed to investing more heavily in clean alternatives. That’s why they choose to work with Clean Energy to expand the market for RNG. We continue to proactively engage in sales efforts, respond to RFPs, and collaborate with existing customers to successfully expand their fleets. We secured a major order through our Zero Now program with a 50-truck expansion by Estes Express Lines for their California fleet, increasing their natural gas truck fleet to 70 across several states. Other trucking companies recently adding new natural gas trucks include Alpha Lion, a USPS carrier; Food Express; Genace agriculture; and Agile Transportation, among others. Our extended Zero Now program with Chevron, targeting trucking companies operating out of the ports of LA and Long Beach, has started to yield results with firms contracting to purchase 46 new natural gas heavy-duty trucks to fuel with Chevron's RNG at Clean Energy stations, and nearly twice that number are in the contracting process. We have also made agreements with transit agencies like Jacksonville Transportation, WMATA serving the Washington, D.C. area, Santa Clarita Transit in California, and others. Additionally, we recently strengthened our relationship with LA County Metro by securing a contract to supply Redeem at three additional locations, representing approximately 9 million new RNG gallons a year for five years. Despite the overall economic slowdown affecting the country, our refuse business continues to grow. New agreements have been signed with Mesa Public Utilities, the cities of San Diego and Tucson, Athens Services, and more. As I mentioned earlier, we believe we have effectively addressed the immediate challenges posed by COVID. We have the right priorities and strategies in place to ensure long-term growth. The country and the world are increasingly recognizing the importance of conducting business in a sustainable manner. The transportation sector, in particular, has come under scrutiny, and Clean Energy offers sustainable clean fuel solutions that are making a real difference now. And with that, I'll turn the call over to Bob.

Thank you, Andrew. Our third quarter results were in line with our expectations, considering a more gradual recovery in our volumes due to the pandemic. And we ended the third quarter with sufficient cash and investments on hand relative to our outstanding debt. Andrew gave some highlights around our volume for the third quarter. The decline in volume from a year ago of 5% was principally in CNG in our transit and airport fleet services sectors, which experienced year-over-year declines between 16% and 37%, while our refuse sector volumes were up 8% and trucking, NG Advantage, and bulk delivery volumes were relatively flat for the third quarter compared to a year ago. Redeem volumes of 40.1 million gallons were up 7% in the third quarter compared to 2019. And while we have seen a gradual recovery in volumes in these past few months, we believe the effects of COVID-19 will continue into the beginning of 2021, which will prolong the recovery to normal volume levels. Our revenue for the third quarter of 2020 was $70.9 million compared to $74.4 million a year ago. Revenues were down by approximately $6.6 million due to a lower effective price per gallon. Our effective price per gallon on volumes delivered was $0.59 in the third quarter of 2020 compared to $0.65 per gallon in the second quarter of 2019. This $0.06 per gallon decline was primarily attributed to lower natural gas costs and the effect of the pandemic on our mix of gallons delivered. Revenues declined an additional $3.1 million due to the lower volumes in the third quarter of 2020 compared to 2019. We had a non-cash negative effect on revenue of $1.2 million from the year-over-year change in fair value of the Zero Now fuel hedge and related customer contracts. We had increases in revenue from our alternative fuel tax credit of $5 million and incremental station construction sales of $2.4 million, which brought our station construction sales to $8.8 million for the third quarter of 2020. Our overall gross profit margin in the third quarter of 2020 was $25.6 million compared to $24.5 million in 2019. Gross margin associated with the alternative fuel tax credit and incremental RINs and LCFS revenues more than offset pressures on margin from lower fuel volumes associated with the pandemic. The alternative fuel tax credit benefited the third quarter of 2020 gross margin by $5 million over last year. The incremental RINs in LCFS benefited the third quarter of 2020 gross margin by $3.7 million over last year. Our effective margin per gallon was $0.21 per gallon in the third quarter of 2020 compared to $0.22 per gallon in 2019. The decline in margin per gallon was primarily driven by fewer gallons in our airport fleet services sector, offset partially by margin from our incremental RINs and LCFS. The change in the fair value of the Zero Now fuel hedge and related customer contracts was a drag of $1.2 million on year-over-year quarterly gross margin. Lastly, our third quarter gross margin on station construction sales was higher by $500,000 compared to last year, largely due to the increase in station construction sales. Our SG&A in the third quarter of 2020 was $16.6 million, which was down $1 million or 6% from a year ago and consistent with the lower level of SG&A we saw in the second quarter of this year. We remain diligent in controlling our discretionary spending while maintaining spending on our employees' health and keeping our work environments safe. We expect to see similar levels of SG&A going forward until more normal business operations return. As I mentioned, our results for the third quarter of 2020 came in as expected. Notably, our GAAP net results and adjusted EBITDA were both improved over the third quarter of 2019. With that, operator, we will now open the call to questions.

Our first question comes from the line of Eric Stine with Craig-Hallum.

So it sounds like, obviously, fleets are realizing the benefits of RNG, and I've seen some recent studies, I think, specifically in refuse that point to that it is a superior fuel. But just curious, I mean, what kind of luck are you having with regulators? And I'm thinking specifically in California, who typically seem to fall in love with technologies that may be years away and more expensive. Any thoughts on that?

In California, the California Air Resources Board and the environmental community tend to focus on technology mandates, particularly around electrification. However, they do recognize renewable natural gas as a valid participant in the low carbon fuel standard. There are no issues on that front, as they acknowledge its cleanliness. For example, renewable natural gas is being mandated in the ports of Los Angeles and other locations. While it may not be the favorite among environmentalists and doesn't completely align with the narrative of the Air Resources Board, it remains a recognized clean alternative. Looking ahead, if former Vice President Biden wins the election, we might see elements of the Green New Deal, which primarily focuses on electricity-centric mandates. However, with the Senate likely remaining in Republican hands, those electric-specific initiatives may struggle to find funding. This situation potentially opens more opportunities for renewable natural gas. Sustainability will continue to be a key focus, and there will be heightened pressure moving forward. I believe that renewable natural gas represents a more economical and sustainable option, especially with the backing of low carbon fuel standards. The outcome of the election could signify that fracking and the fossil fuel industry's position won't be significantly undermined, which may be beneficial for renewable natural gas and companies like Clean Energy.

You read my mind with your second question. So I will add one more. You mentioned RNG, and this is the first call where I’ve heard you discuss dairy-derived RNG and its low carbon and CI scores in such detail. I'm curious about the current percentage of Redeem that comes from this source and how it affects your LCFS credits. What is the potential impact if it becomes a larger part of your portfolio?

I don't want to confuse anyone on the call, but Eric, the figures are significantly lower. It's nearly ten times the amount in terms of credit generation, which is impressive. We're currently securing deals to add millions of gallons moving forward, and we're also arranging for dairy gas, which has a negative carbon footprint, to come online in 2021, 2022, and 2023. We've even established agreements to increase our capacity over the next five years, including more for next year. Essentially, in terms of gallons, we're effectively increasing our output by six to seven times, potentially up to ten times, compared to our previous credit generation. This is tremendously beneficial for us, our customers, and the environment.

Yes, absolutely. That is something to monitor going forward, how quickly that comes on clearly, and I prefer to say you like that.

Yes. When you evaluate it on an MCF basis, this is really risky for the crop, but it's around $80 an MCF, which is quite robust. There are some associated costs, slightly higher than others, but that's the key point I mentioned earlier. When you compare a carbon score of 47 for electricity against minus 300 for alternatives, and considering it's cheaper and integrates into an already established nationwide network, it raises some questions. Additionally, the vehicle is significantly more affordable and meets the duty cycle expectations people have, making it challenging for others to compete.

Our next question comes from the line of Rob Brown with Lake Street Capital.

I wanted to ask for more information regarding the new RNG fleet customer for heavy-duty trucking that you mentioned. Will those trucks be refueling at your existing stations, and what is the potential for that customer? I believe you mentioned 300 trucks, but is there a chance that number could increase significantly, or is that the size of their fleet?

I'm going to be cautious about this, but we have a very large customer with significant growth potential. We're currently collaborating on the next phase, and the trucks are being deployed and delivered right now. There are approximately 12 stations in place, which is part of our infrastructure. Some of these stations are existing truck stops we built several years ago along American highways. This is positive news as it utilizes our current capacity, and we believe this customer has the potential to expand significantly beyond what we currently have. We're excited about this partnership because they are very focused on sourcing the lowest negative carbon fuel possible.

Okay, that's good to hear. In terms of the supply deals you mentioned, do they allow you to make commitments, or what are your commitment levels regarding supply? Will there be enough supply to meet some of your growth expectations, or will you need to develop additional supply?

We need to keep increasing our supply, and we've been actively working on that. We're collaborating with major energy companies and others. I've mentioned this before, but it's worth reiterating. We're fortunate because our downstream infrastructure allows us to evaluate nearly every opportunity. There's considerable capital available now, and those on the call should start paying attention to this trend. A significant amount of money is interested in developing renewable natural gas, which is quite exciting. This is a new area of opportunity, and it's not limited to California. While deploying it in California yields additional credits due to our dual low carbon fuel standard program, it can be generated throughout the United States. A lot of investment is going into these projects, and we have the chance to review many of these deals. As I mentioned earlier, we've secured several agreements this year, including a few just this past week. These are multiyear contracts. In terms of supply, they typically phase in, and some may take time to implement. For example, the customer we discussed could potentially double their requirements if everything goes well. So, we definitely need to continue adding a substantial amount of renewable natural gas supply, which is a positive development.

Okay. Great. And then last question just on the Zero Now program. I think you talked about some progress there. What does the pipeline look like there? And have customers faced any slowdowns because of COVID, or are they approaching the end of the process?

It did slow down with COVID, and I probably mentioned this in the last quarter. We observed a general slowdown around April, May, and June, but things started to improve as people learned more about the virus. There was definitely a slowdown, and I think everyone in America noticed this in terms of capital deployment and truck purchases, at least from our perspective. However, things began to pick up again around August, and we did see some movement. Rob, I can say that we’ve experienced significant growth in our pipeline. We have over 1,500 trucks in various stages, from proposals sent to some in contracting. We’re pleased with this progress and hope to see more results soon. We’re also making steady advancements on the Zero Now program. Additionally, we have expanded our Zero Now port program with Chevron. In just about 60 days, we have contracted 46 trucks in this program and have around 300 more trucks in different stages specifically in the ports of LA and Long Beach. We are working diligently to get more people into these trucks and utilizing natural gas fuel. I feel good about the performance of our sales program at this moment.

Our next question comes from the line of Pavel Molchanov with Raymond James.

You referenced the revival in miles traveled, transport activity after the first wave of COVID. Now of course, the United States is into its, I suppose, third wave and by some metrics, worse than the one in the spring. So if we're thinking about the last 4 to 6 weeks with lockdowns in parts of California, New York, Illinois, et cetera, can you just talk segment by segment, which you've noticed in kind of refuse, airports and transit?

Sure, Pavel. We’ve actually seen an improvement over the last couple of weeks in all of our markets. The hardest-hit areas by COVID, as I mentioned, are transit and airports. Airports had been down more than 40% at the peak of the pandemic, and while they have improved slightly, they are still down around 35% to 37%. Transit was also significantly impacted, with some areas declining below 30%, but they have now come back to about a 25% decline. We’re seeing gradual weekly improvements, though not substantial. Throughout this third wave, we haven’t observed any backsliding, and while we’ve seen some slight improvements in airports, they remain limited. Realistically, significant improvements in airports will likely depend on the availability of a vaccine or some easing of restrictions, even though air travel has increased somewhat. On a positive note, our other segments have performed well year-to-date; trucking is up 18% and refuse is up approximately 8% to 9%. We have a strong pipeline, including a recent big order from a customer for 300 trucks, which occurred over the past couple of months during the pandemic. The Chevron port activities also emerged during this time, showcasing the positive developments in trucking. Our refuse pipeline is looking robust, with about 15 stations contracted for 2021, which is the strongest we've seen in several years. Additionally, we have seven projects in the pipeline that have not yet been contracted. As of November, this is a solid number for us since we plan to build around 24 stations this year. However, substantial progress regarding a vaccine will be necessary before we see a turnaround in air travel, and I believe that will extend well into next year.

I have a follow-up about the tax credit. The year is wrapping up, and it's about to expire again. This year presents a challenging situation. There will be a transitional power, along with the implications of COVID and what Congress is dealing with. How do you see it unfolding? Are you expecting something soon, or will it take longer?

Reflecting on this year, I mentioned earlier that with a transition in the administration and the current makeup of Congress, it may lead to a return to more routine processes and a chance to catch up on funding programs like the extenders. If there had been a complete overhaul of Congress and the administration, we might have expected a significant COVID response, potentially alongside a tax program and increases that could delay progress. However, since that drastic change isn't likely, we can anticipate more traditional funding bills. Some believe that in the lame duck session, Congress might address the alternative fuel tax and the extenders, but the new incentive funding due to the pandemic complicates that picture, possibly pushing discussions into the new Congress. Despite this, we expect continued bipartisan support for the extenders. I have maintained that when action is taken again, they may aim for a phased reduction of the alternative fuel tax over five years. With everything evolving, it's tough to predict. We know there will be a lame duck session, and there’s about a 50% chance they will address the extenders, but it largely depends on timing.

And Mr. Vreeland, this is the operator. There are no further questions at this time. I'll turn the call back over to you for closing remarks.

Okay. Andrew?

Well, operator, thank you, and thank you, everyone, for being on the line today. We appreciate your attention, and we look forward to updating you on our progress in the next quarter. Stay safe. Thank you.

And that does conclude the call for today. We thank you for your participation and ask that you please disconnect your lines.