Clean Energy Fuels Corp.
Clean Energy Fuels Corp. (Form: 10-Q, Received: 08/07/2014 16:11:27)

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2014

 

Commission File Number: 001-33480

 

CLEAN ENERGY FUELS CORP.

(Exact name of registrant as specified in its charter)

 

Delaware

 

33-0968580

(State or other jurisdiction of incorporation)

 

(IRS Employer Identification No.)

 

4675 MacArthur Court, Suite 800, Newport Beach, CA 92660

(Address of principal executive offices, including zip code)

 

(949) 437-1000

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232,405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes  x No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  x

 

Accelerated filer  o

 

 

 

Non-accelerated filer  o
(Do not check if a smaller reporting company)

 

Smaller reporting company  o

 

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Act). Yes  o No  x

 

As of July 31, 2014, there were 89,884,250 shares of the registrant’s common stock, par value $0.0001 per share, issued and outstanding.

 

 

 



Table of Contents

 

CLEAN ENERGY FUELS CORP. AND SUBSIDIARIES

 

INDEX

 

Table of Contents

 

PART I.—FINANCIAL INFORMATION

 

Item 1.—Financial Statements (Unaudited)

3

Item 2.—Management’s Discussion and Analysis of Financial Condition and Results of Operations

23

Item 3.—Quantitative and Qualitative Disclosures about Market Risk

34

Item 4.—Controls and Procedures

35

PART II.—OTHER INFORMATION

 

Item 1.—Legal Proceedings

36

Item 1A.—Risk Factors

36

Item 2.—Unregistered Sales of Equity Securities and Use of Proceeds

47

Item 3.—Defaults upon Senior Securities

47

Item 4.—Mine Safety Disclosures

47

Item 5.—Other Information

47

Item 6.—Exhibits

48

 

2



Table of Contents

 

PART I.—FINANCIAL INFORMATION

 

Item 1.—Financial Statements (Unaudited)

 

Clean Energy Fuels Corp. and Subsidiaries

 

Condensed Consolidated Balance Sheets

 

December 31, 2013 and June 30, 2014

 

(Unaudited)

 

(In thousands, except share data)

 

 

 

December 31,
2013

 

June 30,
2014

 

Assets

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

240,033

 

$

124,700

 

Restricted cash

 

8,403

 

12,249

 

Short-term investments

 

138,240

 

152,113

 

Accounts receivable, net of allowance for doubtful accounts of $832 and $908 as of December 31, 2013 and June 30, 2014, respectively

 

53,473

 

70,245

 

Other receivables

 

26,285

 

17,876

 

Inventory, net

 

33,822

 

39,204

 

Prepaid expenses and other current assets

 

20,840

 

20,918

 

Total current assets

 

521,096

 

437,305

 

Land, property and equipment, net

 

487,854

 

532,574

 

Notes receivable and other long-term assets

 

73,697

 

71,260

 

Goodwill

 

88,548

 

88,406

 

Intangible assets, net

 

79,770

 

75,934

 

Total assets

 

$

1,250,965

 

$

1,205,479

 

Liabilities and Stockholders’ Equity

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current portion of long-term debt and capital lease obligations

 

$

23,401

 

$

17,724

 

Accounts payable

 

33,541

 

34,256

 

Accrued liabilities

 

46,745

 

48,348

 

Deferred revenue

 

16,419

 

15,997

 

Total current liabilities

 

120,106

 

116,325

 

Long-term debt and capital lease obligations, less current portion

 

532,017

 

543,416

 

Long-term debt, related party

 

65,000

 

65,000

 

Other long-term liabilities

 

15,304

 

13,093

 

Total liabilities

 

732,427

 

737,834

 

Commitments and contingencies

 

 

 

 

 

Stockholders’ equity:

 

 

 

 

 

Preferred stock, $0.0001 par value. Authorized 1,000,000 shares; issued and outstanding no shares

 

 

 

Common stock, $0.0001 par value. Authorized 224,000,000 shares; issued and outstanding 89,364,397 shares and 89,863,439 shares at December 31, 2013 and June 30, 2014, respectively

 

9

 

9

 

Additional paid-in capital

 

883,045

 

893,876

 

Accumulated deficit

 

(367,782

)

(428,681

)

Accumulated other comprehensive loss

 

(700

)

(1,188

)

Total Clean Energy Fuels Corp. stockholders’ equity

 

514,572

 

464,016

 

Noncontrolling interest in subsidiary

 

3,966

 

3,629

 

Total stockholders’ equity

 

518,538

 

467,645

 

Total liabilities and stockholders’ equity

 

$

1,250,965

 

$

1,205,479

 

 

See accompanying notes to condensed consolidated financial statements.

 

3



Table of Contents

 

Clean Energy Fuels Corp. and Subsidiaries

 

Condensed Consolidated Statements of Operations

 

For the Three Months and Six Months Ended June 30, 2013 and 2014

 

(Unaudited)

 

(In thousands, except share and per share data)

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2013

 

2014

 

2013

 

2014

 

Revenue:

 

 

 

 

 

 

 

 

 

Product revenues

 

$

78,375

 

$

86,473

 

$

161,858

 

$

172,262

 

Service revenues

 

9,741

 

11,660

 

19,301

 

21,146

 

Total revenues

 

88,116

 

98,133

 

181,159

 

193,408

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Cost of sales (exclusive of depreciation and amortization shown separately below):

 

 

 

 

 

 

 

 

 

Product cost of sales

 

58,925

 

69,175

 

105,739

 

137,042

 

Service cost of sales

 

3,016

 

4,080

 

6,943

 

7,844

 

Derivative (gains) losses:

 

 

 

 

 

 

 

 

 

Series I warrant valuation

 

39

 

2,286

 

505

 

(2,169

)

Selling, general and administrative

 

35,187

 

34,400

 

68,063

 

67,890

 

Depreciation and amortization

 

10,777

 

11,608

 

20,935

 

23,123

 

Total operating expenses

 

107,944

 

121,549

 

202,185

 

233,730

 

Operating loss

 

(19,828

)

(23,416

)

(21,026

)

(40,322

)

Interest expense, net

 

(6,282

)

(10,130

)

(11,353

)

(19,640

)

Other income (expense), net

 

(1,103

)

1,121

 

(1,493

)

(165

)

Loss from equity method investment

 

 

 

(76

)

 

Gain from sale of equity method investment

 

 

 

4,705

 

 

Gain from sale of subsidiary

 

15,498

 

 

15,498

 

 

Loss before income taxes

 

(11,715

)

(32,425

)

(13,745

)

(60,127

)

Income tax expense

 

(293

)

(147

)

(2,098

)

(1,109

)

Net loss

 

(12,008

)

(32,572

)

(15,843

)

(61,236

)

Loss of noncontrolling interest

 

65

 

266

 

29

 

337

 

Net loss attributable to Clean Energy Fuels Corp.

 

$

(11,943

)

$

(32,306

)

$

(15,814

)

$

(60,899

)

Loss per share attributable to Clean Energy Fuels Corp.:

 

 

 

 

 

 

 

 

 

Basic

 

$

(0.13

)

$

(0.34

)

$

(0.17

)

$

(0.64

)

Diluted

 

$

(0.13

)

$

(0.34

)

$

(0.17

)

$

(0.64

)

Weighted-average common shares outstanding:

 

 

 

 

 

 

 

 

 

Basic

 

93,985,438

 

94,859,587

 

93,561,302

 

94,768,462

 

Diluted

 

93,985,438

 

94,859,587

 

93,561,302

 

94,768,462

 

 

See accompanying notes to condensed consolidated financial statements.

 

4



Table of Contents

 

Clean Energy Fuels Corp. and Subsidiaries

 

Condensed Consolidated Statements of Comprehensive Loss

 

For the Three Months and Six Months Ended June 30, 2013 and 2014

 

(Unaudited)

 

(In thousands)

 

 

 

Clean Energy Fuels Corp.

 

Noncontrolling Interest

 

Total

 

 

 

Three Months Ended
June 30,

 

Three Months Ended
June 30,

 

Three Months Ended
June 30,

 

 

 

2013

 

2014

 

2013

 

2014

 

2013

 

2014

 

Net loss

 

$

(11,943

)

$

(32,306

)

$

(65

)

$

(266

)

$

(12,008

)

$

(32,572

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

(708

)

(442

)

 

 

(708

)

(442

)

Foreign currency adjustments on intra-entity long-term investments

 

(3,076

)

3,495

 

 

 

(3,076

)

3,495

 

Unrealized gains (losses) on available-for-sale securities

 

35

 

(81

)

 

 

35

 

(81

)

Unrecognized gains on derivatives

 

2

 

 

 

 

2

 

 

Total other comprehensive income (loss), net of tax

 

(3,747

)

2,972

 

 

 

(3,747

)

2,972

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss

 

$

(15,690

)

$

(29,334

)

$

(65

)

$

(266

)

$

(15,755

)

$

(29,600

)

 

 

 

Clean Energy Fuels Corp.

 

Noncontrolling Interest

 

Total

 

 

 

Six Months Ended
June 30,

 

Six Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2013

 

2014

 

2013

 

2014

 

2013

 

2014

 

Net loss

 

$

(15,814

)

$

(60,899

)

$

(29

)

$

(337

)

$

(15,843

)

$

(61,236

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other comprehensive income (loss), net of tax:

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustments

 

(1,363

)

(246

)

 

 

(1,363

)

(246

)

Foreign currency adjustments on intra-entity long-term investments

 

(4,894

)

157

 

 

 

(4,894

)

157

 

Unrealized losses on available-for-sale securities

 

(2

)

(399

)

 

 

(2

)

(399

)

Unrecognized gains on derivatives

 

108

 

 

 

 

108

 

 

Total other comprehensive loss, net of tax

 

(6,151

)

(488

)

 

 

(6,151

)

(488

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Comprehensive loss

 

$

(21,965

)

$

(61,387

)

$

(29

)

$

(337

)

$

(21,994

)

$

(61,724

)

 

See accompanying notes to condensed consolidated financial statements.

 

5



Table of Contents

 

Clean Energy Fuels Corp.

 

Condensed Consolidated Statements of Cash Flows

 

For the Six Months Ended June 30, 2013 and 2014

 

(Unaudited)

 

(In thousands)

 

 

 

Six Months Ended
June 30,

 

 

 

2013

 

2014

 

Cash flows from operating activities:

 

 

 

 

 

Net loss

 

$

(15,843

)

$

(61,236

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

Depreciation and amortization

 

20,935

 

23,123

 

Provision for doubtful accounts

 

77

 

112

 

Derivative loss (gain)

 

505

 

(2,169

)

Stock-based compensation expense

 

11,663

 

6,398

 

Amortization of debt issuance cost

 

510

 

1,527

 

Accretion of notes payable

 

609

 

138

 

Gain on sale of equity method investment

 

(4,705

)

 

Dividend received on equity method investment

 

1,091

 

 

Gain on sale of subsidiary

 

(15,498

)

 

(Gain) loss on contingent consideration for acquisition

 

(671

)

101

 

Changes in operating assets and liabilities, net of assets and liabilities acquired and disposed:

 

 

 

 

 

Accounts and other receivables

 

413

 

(7,209

)

Inventory

 

(2,765

)

(5,382

)

Prepaid expenses and other assets

 

188

 

1,891

 

Accounts payable

 

(17,260

)

(1,715

)

Accrued expenses and other

 

13,769

 

1,134

 

Net cash used in operating activities

 

(6,982

)

(43,287

)

Cash flows from investing activities:

 

 

 

 

 

Purchases of short-term investments

 

(36,259

)

(70,868

)

Maturities of short-term investments

 

35,856

 

55,144

 

Purchases of property and equipment

 

(40,274

)

(61,840

)

Loans made to customers

 

(698

)

(2,295

)

Payments on and proceeds from sales of loans receivable

 

2,895

 

2,240

 

Restricted cash

 

(20,293

)

(3,846

)

Acquisition, net of cash acquired

 

(9,000

)

 

Cash transferred with sale of subsidiary

 

(1,178

)

 

Proceeds from sale of equity method investment

 

6,119

 

 

Net cash used in investing activities

 

(62,832

)

(81,465

)

Cash flows from financing activities:

 

 

 

 

 

Proceeds from issuance of common stock and exercise of stock options

 

419

 

684

 

Proceeds from debt instruments

 

55,213

 

12,720

 

Proceeds from revolving line of credit

 

14,501

 

23,621

 

Repayment of borrowing under revolving line of credit

 

(15,027

)

(17,645

)

Repayment of capital lease obligations and debt instruments

 

(7,245

)

(9,338

)

Payments for debt issuance costs

 

 

(914

)

Net cash provided by financing activities

 

47,861

 

9,128

 

Effect of exchange rates on cash and cash equivalents

 

(549

)

291

 

Net decrease in cash

 

(22,502

)

(115,333

)

Cash, beginning of period

 

108,522

 

240,033

 

Cash, end of period

 

$

86,020

 

$

124,700

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

Income taxes paid

 

$

2,004

 

$

690

 

Interest paid, net of approximately $1,233 and $1,992 capitalized, respectively

 

9,884

 

18,668

 

 

See accompanying notes to condensed consolidated financial statements.

 

6



Table of Contents

 

Clean Energy Fuels Corp. and Subsidiaries

 

Notes to Condensed Consolidated Financial Statements

 

(Unaudited)

 

(In thousands, except share and per share data)

 

Note 1—General

 

Nature of Business:   Clean Energy Fuels Corp. (together with its majority and wholly owned subsidiaries, unless the context indicates or otherwise requires, the “Company”) is engaged in the business of selling natural gas fueling solutions to its customers, primarily in the United States and Canada.

 

The Company has a broad customer base in a variety of markets, including trucking, airports, taxis, refuse, ready mix and public transit. The Company owns, operates, maintains and/or supplies over 500 natural gas fueling stations within the United States and Canada. The Company generates revenue through selling compressed natural gas (“CNG”) and liquefied natural gas (“LNG”), providing operation and maintenance services (“O&M”) to customers, building and selling natural gas fueling stations to customers, manufacturing and servicing natural gas fueling compressors and other equipment for CNG and LNG fueling stations, offering assessment, design and modification solutions designed to provide operators with code-compliant service and maintenance facilities for natural gas vehicle fleets, processing and selling renewable natural gas (“RNG”), financing customers’ vehicle purchases and selling tradable credits the Company generates by selling natural gas and RNG as a vehicle fuel, including credits under the California low carbon fuel standard (“LCFS Credits”) and Renewable Identification Numbers (“RIN Credits”) under the federal Renewable Fuel Standard Phase 2. In addition, through June 28, 2013, the Company provided natural gas vehicle conversions and design and engineering services for natural gas engine systems.

 

Basis of Presentation:   The accompanying interim unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries, and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to state fairly the Company’s financial position, results of operations and cash flows as of and for the three and six months ended June 30, 2013 and 2014. All intercompany accounts and transactions have been eliminated in consolidation. The three or six month periods ended June 30, 2013 and 2014 are not necessarily indicative of the results to be expected for the year ending December 31, 2014 or for any other interim period or for any future year.

 

Certain information and disclosures normally included in the notes to the financial statements have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”), but the resultant disclosures contained herein are in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) as they apply to interim reporting. The condensed consolidated financial statements should be read in conjunction with the consolidated financial statements as of and for the year ended December 31, 2013 that are included in the Company’s Annual Report on Form 10-K filed with the SEC on February 27, 2014.

 

Use of Estimates:   The preparation of condensed consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and revenues and expenses recorded during the reporting period. Actual results could differ from those estimates.

 

Note 2— Acquisitions and Divestitures

 

BAF

 

On June 28, 2013, the Company, entered into and closed a stock purchase agreement (the “BAF Sale Agreement”) with Westport Innovations Inc. (“Westport”) and Westport Innovations (U.S.) Holdings Inc., a wholly owned subsidiary of Westport (together with Westport, the “Westport Parties”).  Under the terms of the BAF Sale Agreement, on June 28, 2013, the Westport Parties purchased all of the outstanding capital stock of BAF, including BAF’s 100% ownership interest of ServoTech Engineering, Inc., for 816,460 shares of Westport’s common stock.  Pursuant to the BAF Sale Agreement, the Company was issued 718,485 shares of Westport’s common stock on June 28, 2013 and 97,975 shares of Westport’s common stock (the “Holdback Shares”) were retained by Westport for one year as security for the Company’s indemnification obligations under the BAF Sale Agreement.  At the end of June 2014, the Company was issued 94,914 of the Holdback Shares, with the remaining 3,061 Holdback Shares remaining unissued as a result of, and in full satisfaction of, an indemnity claim under the BAF Sale Agreement. In July 2013, the Company sold the 718,485 shares it initially received for net proceeds of $23,722.  In July 2014, the Company sold all of the Holdback Shares it received for net proceeds of $1,727.  Further, during August 2013, the Westport Parties repaid $2,478 of certain intercompany indebtedness of BAF to the Company following the conclusion of applicable post-closing adjustment procedures contemplated in the BAF Sale Agreement.

 

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Table of Contents

 

The fair value of the 816,460 shares of Westport’s common stock on June 28, 2013 was $27,221, and the Company recognized an initial gain of $15,498 on June 28, 2013. In December 2013, the Company wrote down the value of the Holdback Shares by $1,383, which resulted in an adjusted gain of $14,115 on the transaction. For the six month period ended June 30, 2014, the Company wrote down the value of the Holdback Shares by $122, which resulted in an adjusted gain of $13,993 on the transaction. The value of the shares received has been excluded from the Company’s condensed consolidated statements of cash flows as it is a non-cash investing activity. The gain was recorded in the line item gain from sale of subsidiary in the Company’s condensed consolidated statements of operations.

 

In addition, pursuant to the BAF Sale Agreement, the Company, Westport Power Inc. and Westport Fuel Systems Inc. (Westport Power, Inc. and Westport Fuel Systems, Inc. are collectively referred to as the “Westport Affiliates”) entered into a marketing agreement, dated June 28, 2013, whereby the Westport Parties agreed to pay the Company $5,000 in cash, which was received on February 27, 2014. Under the marketing agreement, the Company and the Westport Affiliates agreed to collaborate during a two year period to encourage sales of all BAF products and certain vehicle products offered by the Westport Affiliates, and the Company agreed to provide 750,000 complimentary gasoline gallon equivalents of CNG to be used by the Westport Affiliates as marketing incentives.  Additionally, the marketing agreement provides for the Company’s appointment of a product line manager for BAF, and at least one member of a newly established operating committee formed to create sales and marketing strategies for BAF and assist in BAF’s performance of these strategies.

 

MGES

 

On May 6, 2013, the Company entered into and closed a stock purchase agreement with Mansfield Energy Corp. (“Mansfield”) and its wholly owned subsidiary Mansfield Gas Equipment Systems Corporation (“MGES”). MGES is primarily engaged in the business of providing CNG station design and construction and CNG equipment repair and maintenance services. Under the terms of the stock purchase agreement, the Company purchased from Mansfield all of the outstanding capital stock of MGES for $20,000, payable 50% in cash and 50% in shares of the Company’s common stock. Upon closing, the Company delivered $9,000 in cash and 761,545 shares of the Company’s common stock, and retained $1,000 as security for Mansfield’s indemnification obligations under the stock purchase agreement. On the first anniversary of the closing date, the Company delivered the retained amount of $1,000 to Mansfield. In addition, in August 2013, the Company paid Mansfield an additional $563 following the conclusion of applicable post-closing adjustment procedures contemplated by the stock purchase agreement. The fair value of the Company’s common stock delivered to Mansfield is excluded from the Company’s condensed consolidated statements of cash flows as it is a non-cash investing activity.

 

The Company accounted for this acquisition in accordance with Financial Accounting Standards Board’s (“FASB”) authoritative guidance for business combinations, which requires the Company to recognize the assets acquired and the liabilities assumed, measured at their fair values, as of the date of acquisition. The following table summarizes the allocation of the aggregate purchase price to the fair value of the assets acquired and liabilities assumed:

 

Current assets

 

$

4,475

 

Property, plant and equipment

 

1,369

 

Identifiable intangible assets

 

600

 

Goodwill

 

16,555

 

Total assets acquired

 

22,999

 

Current liabilities assumed

 

(1,984

)

Total purchase price

 

$

21,015

 

 

Management allocated approximately $600 of the purchase price to the identifiable intangible assets related to customer relationships and project backorders that were acquired with the acquisition. The fair value of the identifiable intangible assets will be amortized on a straight-line basis over the estimated useful lives of such assets ranging from one to six years. The excess of the purchase price over the fair value of net assets acquired was allocated to goodwill, which primarily represents additional market share available to the Company as a result of the acquisition, and is fully deductible for income tax purposes.

 

The results of operations of MGES have been included in the Company’s condensed consolidated financial statements since May 6, 2013. The historical results of MGES’s operations were not material to the Company’s financial position or historical results of operations.

 

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Table of Contents

 

Note 3—Cash and Cash Equivalents

 

The Company considers all highly liquid investments with maturities of three months or less on the date of acquisition to be cash equivalents.

 

Note 4—Restricted Cash

 

The Company classifies restricted cash as a current asset if the cash is expected to be used in operations within a year or to acquire a current asset. Otherwise, the restricted cash is classified as long-term. Restricted cash consisted of the following as of December 31, 2013 and June 30, 2014:

 

 

 

December 31,
2013

 

June 30,
2014

 

Short-term restricted cash

 

 

 

 

 

Standby letters of credit

 

$

1,822

 

$

1,822

 

DCEMB bonds — current operating costs

 

6,581

 

7,486

 

Canton bonds — current operating costs

 

 

2,941

 

Total short-term restricted cash

 

$

8,403

 

$

12,249

 

 

Note 5—Investments

 

Available-for-sale investments are carried at fair value, inclusive of unrealized gains and losses. Net unrealized gains and losses are included in other comprehensive income (loss) net of applicable income taxes. Gains or losses on sales of available-for-sale investments are recognized on the specific identification basis. All of the Company’s short-term investments are classified as available-for-sale securities.

 

The Company reviews available-for-sale investments for other-than-temporary declines in fair value below their cost basis each quarter, and whenever events or changes in circumstances indicate that the cost basis of an asset may not be recoverable. This evaluation is based on a number of factors, including the length of time and the extent to which the fair value has been below its cost basis and adverse conditions related specifically to the security, including any changes to the credit rating of the security. As of June 30, 2014, the Company believes its carrying values for its available-for-sale investments are properly recorded.

 

Short-term investments as of December 31, 2013 are summarized as follows:

 

 

 

Amortized Cost

 

Gross Unrealized
Losses

 

Estimated Fair
Value

 

Municipal bonds & notes

 

$

60,047

 

$

(252

)

$

59,795

 

Corporate bonds

 

43,166

 

(342

)

42,824

 

Certificate of deposits

 

35,630

 

(9

)

35,621

 

 

 

$

138,843

 

$

(603

)

$

138,240

 

 

Short-term investments as of June 30, 2014 are summarized as follows:

 

 

 

Amortized Cost

 

Gross Unrealized
Losses

 

Estimated Fair
Value

 

Municipal bonds & notes

 

$

59,496

 

$

(425

)

$

59,071

 

Corporate bonds

 

58,131

 

(572

)

57,559

 

Certificate of deposits

 

35,488

 

(5

)

35,483

 

 

 

$

153,115

 

$

(1,002

)

$

152,113

 

 

Note 6—Other Receivables

 

Other receivables at December 31, 2013 and June 30, 2014 consisted of the following:

 

 

 

December 31,
2013

 

June 30,
2014

 

Loans to customers to finance vehicle purchases

 

$

5,919

 

$

5,244

 

Accrued customer billings

 

6,327

 

6,040

 

Fuel tax and carbon credits

 

6,740

 

167

 

Other

 

7,299

 

6,425

 

 

 

$

26,285

 

$

17,876

 

 

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Note 7—Inventories

 

Inventories are stated at the lower of cost or market value on a first-in, first-out basis. Management’s estimate of market value includes a provision for slow-moving or obsolete inventory based upon inventory on hand and forecasted demand.

 

Inventories consisted of the following as of December 31, 2013 and June 30, 2014:

 

 

 

December 31,
2013

 

June 30,
2014

 

Raw materials and spare parts

 

$

30,521

 

$

34,105

 

Work in process

 

3,011

 

2,852

 

Finished goods

 

290

 

2,247

 

 

 

$

33,822

 

$

39,204

 

 

Note 8—Land, Property and Equipment

 

Land, property and equipment at December 31, 2013 and June 30, 2014 are summarized as follows:

 

 

 

December 31,
2013

 

June 30,
2014

 

Land

 

$

1,707

 

$

2,289

 

LNG liquefaction plants

 

93,685

 

93,810

 

RNG plants

 

47,932

 

73,909

 

Station equipment

 

194,240

 

220,541

 

LNG trailers

 

22,667

 

22,667

 

Other equipment

 

62,127

 

64,297

 

Construction in progress

 

204,548

 

211,343

 

 

 

626,906

 

688,856

 

Less: accumulated depreciation

 

(139,052

)

(156,282

)

 

 

$

487,854

 

$

532,574

 

 

Included in land, property and equipment are capitalized software costs of $18,214 and $18,930 as of December 31, 2013 and June 30, 2014, respectively. The accumulated amortization on the capitalized software costs is $7,747 and $9,358 as of December 31, 2013 and June 30, 2014, respectively. The Company recorded $690 and $843 of amortization expense related to the capitalized software costs during the three months ended June 30, 2013 and June 30, 2014, respectively. For the six month periods ended June 30, 2013 and 2014, the Company recorded $1,488 and $1,611 of amortization expense related to the capitalized software costs respectively.

 

As of December 31, 2013 and June 30, 2014, $13,930 and $16,360 are included in accounts payable balances, respectively, which are related to purchases of property and equipment. These amounts are excluded from the condensed consolidated statements of cash flows as they are non-cash investing activities.

 

Note 9—Investments in Other Entities

 

The Company had invested in Clean Energy del Peru (the “Peru JV”), a former joint venture of the Company in Lima, Peru that operates CNG stations. The Company accounted for its investment in the Peru JV under the equity method of accounting as the Company had the ability to exercise significant influence over Peru JV’s operations while the Company maintained its ownership interest in the joint venture. In March 2013, the Company completed the sale of its entire ownership interest in Peru JV for $6,119 after receiving a dividend distribution of $1,091, and recognized a gain of $4,705.

 

Note 10—Accrued Liabilities

 

Accrued liabilities at December 31, 2013 and June 30, 2014 consisted of the following:

 

 

 

December 31,
2013

 

June 30,
2014

 

Salaries and wages

 

$

6,768

 

$

8,020

 

Accrued gas and equipment purchases

 

8,035

 

14,511

 

Accrued property and other taxes

 

5,448

 

4,432

 

Accrued employee benefits

 

2,898

 

4,112

 

Accrued warranty liability

 

2,545

 

3,315

 

Accrued interest

 

4,216

 

3,890

 

Other

 

16,835

 

10,068

 

 

 

$

46,745

 

$

48,348

 

 

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Note 11—Warranty Liability

 

The Company records warranty liabilities at the time of sale for the estimated costs that may be incurred under its standard warranty. Changes in the warranty liability are presented in the following table:

 

 

 

June 30,
2013

 

June 30,
2014

 

Warranty liability at beginning of year

 

$

2,665

 

$

2,545

 

Acquired liabilities

 

71

 

 

Costs accrued for new warranty contracts and changes in estimates for pre-existing warranties

 

2,034

 

2,455

 

Service obligations honored

 

(1,833

)

(1,685

)

Sale of subsidiary

 

(582

)

 

Warranty liability at end of period

 

$

2,355

 

$

3,315

 

 

Note 12—Long-term Debt

 

DCEMB Bonds

 

In March 2011, the Company’s 70% owned subsidiary, Dallas Clean Energy McCommas Bluff, LLC, a Delaware limited liability company (“DCEMB”), completed a $40,200 tax-exempt bond issuance (the “Revenue Bonds”). The Revenue Bonds will be repaid from the revenue generated by DCEMB from the sale of RNG. The Revenue Bonds are secured by the revenue and assets of DCEMB and are non-recourse to DCEMB’s direct and indirect parent companies, including the Company. The bond repayments are amortized through December 2024 and the average coupon interest rate on the bonds is 6.6%. The bond proceeds were primarily used to finance further improvements and expansion of the landfill gas processing facility owned by DCEMB at the McCommas Bluff landfill outside of Dallas, Texas and to retire certain other indebtedness.

 

The Revenue Bonds were issued by the Mission Economic Development Corporation (the “Issuer”) and the proceeds of such issuance were loaned by the Issuer to DCEMB pursuant to a loan agreement dated January 1, 2011 (the “DCEMB Loan Agreement”).  The DCEMB Loan Agreement contains customary events of default, with customary cure periods, including without limitation failure to make required payments when due under the DCEMB Loan Agreement, failure to comply with certain covenants under the DCEMB Loan Agreement, certain events of bankruptcy and insolvency of DCEMB, and the existence of an event of default under the indenture governing the Revenue Bonds that was entered between the Issuer and The Bank of New York Mellon Trust Company, N.A., as trustee. The occurrence of an event of default under the DCEMB Loan Agreement will allow the Issuer or the trustee to accelerate all amounts due under the DCEMB Loan Agreement.  As of June 30, 2014, DCEMB was in compliance with all its debt covenants under the DCEMB Loan Agreement.

 

Purchase Notes

 

In connection with the closing of the Company’s acquisition of the business of IMW Industries, Ltd. (“IMW”) in 2010 from a seller (the “IMW Seller”), the Company agreed to make future payments consisting of four annual payments in the amount of $12,500, all of which have been paid as of February 2014 (each an “IMW Note” and collectively, the “IMW Notes”). Each payment under the IMW Notes consisted of Canadian dollars (“CAD”) $5,000 in cash and $7,500 in cash and/or shares of the Company’s common stock (the exact combination of cash and/or stock was determined by the Company in its discretion). In addition, pursuant to a security agreement executed at closing, the IMW Notes were secured by a subordinate security interest in IMW. In January 2011, the Company paid CAD$5,000 in cash and $7,500 in shares of its common stock. The Company paid CAD$5,000 in cash in January 2012 and $3,750 in shares of its common stock in each of August 2012 and October 2012. The Company paid CAD$5,000 in cash and $7,500 in shares of its common stock in February 2013. In February 2014, the Company paid the final payment of CAD$5,000 in cash, $3,750 in cash and $3,750 in shares of its common stock. The IMW Notes that were settled with shares of the Company’s common stock are not included in the condensed consolidated statements of cash flows as they are non-cash financing activities.

 

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In connection with the closing of the Company’s acquisition of Northstar in December 2010, the Company agreed to make future payments consisting of five annual payments in the amount of $700 each with the first payment due December 15, 2011. Each of the first three payments of $700 was paid in December 2011, 2012 and 2013, respectively.

 

In connection with the closing of the Company’s acquisition of the natural gas fuel infrastructure construction business of Weaver Electric, Inc. in October 2011, the Company paid $1,000 in cash and agreed to make four additional annual payments in the amount of $250 each with the first payment due October 3, 2012 (the “Weaver Notes”), subject to retention and/or offset by the Company for Weaver Electric’s indemnity obligations. In May 2012, the Company prepaid $125 of the October 2012 payment, and the remaining amount of such payment was paid in October 2012.  The Company has retained the payment otherwise due in October 2013 to offset an indemnity claim against the former owners of Weaver Electric.

 

The difference between the carrying amount and the face amount of these obligations is being accreted to interest expense over the remaining term of the obligations.

 

HSBC Lines of Credit

 

In connection with the closing of the Company’s acquisition of IMW, the Company entered into an Assumption Agreement (the “Assumption Agreement”) with HSBC Bank Canada (“HSBC”) pursuant to which the Company assumed the obligations and liabilities of IMW under the following arrangements with HSBC (collectively, the “IMW Lines of Credit”):

 

(i)                                      An operating line of credit with a limit of CAD$13,000 to assist in financing the day-to-day working capital needs of IMW. The interest on amounts outstanding is payable at IMW’s option at (a) HSBC’s Prime Rate plus 1.00% per annum, (b) HSBC’s U.S. Base Rate plus 1.00% per annum, or (c) LIBOR plus 2.25% per annum, subject to availability.

 

(ii)                                   A demand revolving line of credit with a limit of CAD$2,000 bearing interest at the same rate as that of the operating line of credit discussed above, to assist in financing IMW’s import requirements.

 

(iii)           A demand revolving bank guarantee and standby letter of credit line with a limit of CAD$1,115.

 

(iv)           A bank guarantee line with a limit of CAD$3,000, which allows IMW to provide guarantees and/or standby letters of credit to overseas suppliers or bid/performance deposits on contracts.

 

(v)                                  A forward exchange contract line with a limit of CAD$13,750 that allows IMW to enter into foreign exchange forward contracts up to the notional limit of CAD$13,750.

 

(vi)                               An operating line of credit with a limit of 5,000 Renminbi (“RMB”) (CAD$866) bearing interest at the 6 month People’s Bank of China rate plus 2.5% and a sub-limit bank guarantee line of 5,000 RMB. The aggregate of the balances in the lines cannot exceed 5,000 RMB.

 

(vii)          A 16,750 Bangladeshi Taka (CAD$226) operating line of credit bearing interest at 14%.

 

(viii)         A 170,000 Colombian Peso (CAD$102) operating line of credit bearing interest at the Colombia benchmark rate plus 7 to 12%.

 

The IMW Lines of Credit are secured by a general security agreement providing a first priority security interest in all present and after acquired personal property of IMW. The IMW Lines of Credit contain no fixed repayment terms or mandatory principal payments and are due on demand. Based on the relevant accounting guidance, the Company has classified this debt pursuant to the IMW Lines of Credit as short-term because it is due on demand.

 

The Assumption Agreement with HSBC sets forth certain financial covenants with which IMW must comply, including: 1) its ratio of debt to tangible net worth must be no greater than 3.0 to 1.0, 2) it must maintain a tangible net worth of at least CAD$9,100 and 3) its ratio of current assets to current liabilities may not be less than 1.25 to 1.0. IMW was in compliance with the financial covenants as of June 30, 2014.

 

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Chesapeake Notes (7.5% Notes)

 

On July 11, 2011, the Company entered into a Loan Agreement (the “CHK Agreement”) with Chesapeake NG Ventures Corporation (“Chesapeake”), an indirect wholly owned subsidiary of Chesapeake Energy Corporation, whereby Chesapeake agreed to purchase from the Company up to $150,000 of debt securities (the “CHK Financing”) pursuant to the issuance of three convertible promissory notes, each having a principal amount of $50,000 (each a “CHK Note” and collectively the “CHK Notes”). The first CHK Note was issued on July 11, 2011 and the second CHK Note was issued on July 10, 2012. The Company and Chesapeake also entered a registration rights agreement (the “CHK Registration Rights Agreement” and collectively with the CHK Notes and the CHK Agreement, the “CHK Loan Documents”) pursuant to which the Company agreed, subject to the terms and conditions of the CHK Registration Rights Agreement, to (i) file with the Securities and Exchange Commission one or more registration statements relating to the resale of shares of the Company’s common stock (“Shares”) issuable upon conversion of the CHK Notes and (ii) at the request of Chesapeake, participate in one or more underwritten offerings of Shares issuable upon conversion of the CHK Notes. Pursuant to the terms of the CHK Registration Rights Agreement, if the Company does not meet certain of its obligations thereunder with respect to the registration of the Shares issuable upon conversion of the CHK Notes, it will be required to pay monthly liquidated damages of 0.75% of the principal amount of the CHK Note represented by the Shares included (or to be included, as the case may be) in the applicable registration statement until the related obligation is met, not to exceed 4% of the aggregate principal amount of the CHK Notes per annum.

 

On June 14, 2013 (the “Transfer Date”), Chesapeake, Boone Pickens and Green Energy Investment Holdings, LLC, an affiliate of Leonard Green & Partners, L.P. (collectively, the “Buyers”), entered into a note purchase agreement (“Note Purchase Agreement”) pursuant to which Chesapeake sold the outstanding CHK Notes (the “Sale”) to the Buyers. Chesapeake assigned to the Buyers all of its right, title and interest under the CHK Loan Documents (the “Assignment”), and each Buyer severally assumed all of the obligations of Chesapeake under the CHK Loan Documents arising after the Sale and the Assignment including, without limitation, the obligation to advance an additional $50,000 to the Company in June 2013 (the “Assumption”). The Company also entered into the Note Purchase Agreement for the purpose of consenting to the Sale, the Assignment and the Assumption.

 

Contemporaneously with the execution of the Note Purchase Agreement, the Company entered into a loan agreement with each Buyer (collectively, the “Amended Agreements”). The Amended Agreements have the same terms as the CHK Agreement, other than changes to reflect the change in ownership of the CHK Notes. In addition, the Company and the Buyers entered a registration rights agreement (the “Amended Registration Rights Agreement”) with the same terms as the CHK Registration Rights Agreement, including the liquidated damages provisions therein, other than changes to reflect the change in ownership of the CHK Notes. Immediately following execution of the Amended Agreements, the Buyers delivered $50,000 to the Company in satisfaction of the funding requirement they had assumed from Chesapeake (the “June Advance”). In addition, the Company cancelled the existing CHK Notes and re-issued replacement notes, and the Company also issued notes to the Buyers in exchange for the June Advance (the re-issued replacement notes and the notes issued in exchange for the June Advance are referred to herein as the “7.5% Notes”).

 

The 7.5% Notes have the same terms as the original CHK Notes, other than the changes to reflect their different holders. They bear interest at the rate of 7.5% per annum and are convertible at the option of the holder into Shares at a conversion price of $15.80 per Share (the “7.5% Notes Conversion Price”). Upon written notice to the Company, the holders of the 7.5% Notes have the right to exchange all, or a portion of, the principal and accrued and unpaid interest under each such note for Shares at the 7.5% Notes Conversion Price. Additionally, subject to certain restrictions, the Company can force conversion of each 7.5% Note into Shares if, following the second anniversary of the issuance of a 7.5% Note, the Shares trade at a 40% premium to the 7.5% Notes Conversion Price for at least 20 trading days in any consecutive 30 trading day period. The entire principal balance of each 7.5% Note is due and payable seven years following its issuance, and the Company may repay each 7.5% Note in Shares or cash. The Amended Agreements restrict the use of the proceeds of the 7.5% Notes to financing the development, construction and operation of liquefied natural gas stations and payment of certain related expenses. The Amended Agreements also provide for customary events of default which, if any of them occurs, would permit or require the principal of, and accrued interest on, the 7.5% Notes to become, or to be declared, due and payable.

 

On August 27, 2013, Green Energy Investment Holdings, LLC transferred $5,000 in principal amount of the 7.5% Notes to certain third parties.

 

As a result of the foregoing transactions, (i) Mr. Pickens holds 7.5% Notes in the aggregate principal amount of $65,000, which 7.5% Notes are convertible into approximately 4,113,924 Shares, and (ii) Green Energy Investment Holdings, LLC holds 7.5% Notes in the aggregate principal amount of $80,000, which 7.5% Notes are convertible into approximately 5,063,291 Shares.

 

At June 30, 2014, none of the proceeds from the 7.5% Notes were included in restricted cash as the Company had used the funds primarily to build LNG fueling stations. As of June 30, 2014, the Company had met its obligations under the Amended Agreements and the Amended Registration Rights Agreement.

 

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Table of Contents

 

SLG Notes

 

On August 24, 2011, the Company entered into Convertible Note Purchase Agreements (each, an “SLG Agreement” and collectively the “SLG Agreements”) with each of Springleaf Investments Pte. Ltd., a wholly-owned subsidiary of Temasek Holdings Pte. Ltd., Lionfish Investments Pte. Ltd., an investment vehicle managed by Seatown Holdings International Pte. Ltd., and Greenwich Asset Holding Ltd., a wholly-owned subsidiary of RRJ Capital Master Fund I, L.P. (each, a “Purchaser” and collectively, the “Purchasers”), whereby the Purchasers agreed to purchase from the Company $150,000 of 7.5% convertible notes due in August 2016 (each a “SLG Note” and collectively the “SLG Notes”). The transaction closed and the SLG Notes were issued on August 30, 2011. On March 1, 2012, Springleaf Investments Pte. LTD transferred $24,000 principal amount of the SLG Notes to Baytree Investments (Mauritius) Pte Ltd.

 

The SLG Notes bear interest at the rate of 7.5% per annum (payable quarterly, in arrears, on March 31, June 30, September 30 and December 31 of each year) and are convertible at each Purchaser’s option into Shares at a conversion price of $15.00 per share (the “SLG Conversion Price”). Upon written notice to the Company, the holders of the SLG Notes have the right to exchange all or any portion of the principal and accrued and unpaid interest under each such note for Shares at the SLG Conversion Price. Additionally, subject to certain restrictions, the Company can force conversion of each SLG Note into Shares if, following the second anniversary of the issuance of the SLG Notes, the Company’s Shares trade at a 40% premium to the SLG Conversion Price for at least 20 trading days in any consecutive 30 trading day period. The entire principal balance of each SLG Note is due and payable five years following its issuance and the Company may repay the principal balance of each SLG Note in Shares or cash. The SLG Agreements also provide for customary events of default which, if any of them occurs, would permit or require the principal of, and accrued interest on, the SLG Notes to become, or to be declared, due and payable. In April 2012, $1,003 of principal and accrued interest under an SLG Note was converted by the holder thereof into 66,888 Shares. In January and February 2013, $4,030 of principal and accrued interest under an SLG Note was converted by the holder thereof into 268,664 Shares. Such conversions were not included in the condensed consolidated statements of cash flows as they are a non-cash financing activity.

 

In connection with the SLG Agreements, the Company also entered into a Registration Rights Agreement, dated August 30, 2011, with each of the Purchasers (the “SLG Registration Rights Agreements”) pursuant to which the Company agreed, subject to the terms and conditions of the SLG Registration Rights Agreements, to (i) file with the Securities and Exchange Commission one or more registration statements relating to the resale of the Shares issuable upon conversion of the SLG Notes, and (ii) at the request of the Purchasers, participate in one or more underwritten offerings of the Shares issuable upon conversion of the SLG Notes. If the Company does not meet certain of its obligations under the SLG Registration Rights Agreements with respect to the registration of the Shares issuable upon conversion of the SLG Notes, it will be required to pay monthly liquidated damages of 0.75% of the principal amount of the SLG Note represented by the Shares included (or to be included, as the case may be) in the applicable registration statement until the related obligation is met, not to exceed 4% of the aggregate principal amount of the SLG Notes per annum. As of June 30, 2014, the Company had met its obligations under the SLG Agreements and the SLG Registration Rights Agreement.

 

GE Loans

 

On November 7, 2012, the Company, through two wholly owned subsidiaries (the “Borrowers”), entered into a financing arrangement with General Electric Capital Corporation (“GE,” and the agreement governing such arrangement, the “GE Credit Agreement”). Pursuant to the GE Credit Agreement, GE agreed to loan to the Borrowers up to an aggregate of $200,000 to finance the development, construction and operation of two LNG production facilities (individually a “Project” and together the “Projects”), each with an expected production capacity of approximately 250,000 LNG gallons per day. The Company expects to sell the LNG produced by the Projects through America’s Natural Gas Highway (“ANGH”), a nationwide network of natural gas truck fueling stations.

 

The Borrowers’ ability to obtain loans under the GE Credit Agreement for the Projects (collectively, “Loans” and, with respect to each Project “Tranche A Loans” and “Tranche B Loans”) is subject to the satisfaction of certain conditions, including each of the (i) acquisition of title to, or leasehold interests in, the sites upon which the Projects will be constructed, (ii) receipt of all governmental approvals necessary in connection with the design, development, ownership, construction, installation, operation and maintenance of the Projects, (iii) commitment of all utility services necessary for the construction and operation of the Projects, and (iv) execution of an engineering, procurement and construction contract for each Project by the Company and GE Oil & Gas, Inc.

 

The GE Credit Agreement further provides that (i) if initial Loans are not made prior to December 31, 2014, the GE Credit Agreement will automatically terminate, (ii) each Project must be completed by the earlier of (a) the date thirty months after the funding of the initial Loans with respect to such Project and (b) December 31, 2016 (with respect to each Project, the “Date Certain”), (iii) the then existing Loans with respect to each Project must be converted into term loans with eight year amortization schedules (“Term Loans”) on or before the Date Certain with respect to such Project (the date of such conversion with respect to each Project, the “Conversion Date”), provided that if such Loans are not converted into Term Loans by the applicable Date Certain, such Loans must be repaid by the applicable Date Certain, (iv) each Term Loan will be due and payable on the eighth anniversary of the Conversion Date with respect to such Term Loan, and (v) at any time prior to the applicable Conversion Date, the Loans may be prepaid in whole, and at any time after the applicable Conversion Date, the Loans may be prepaid in whole or in part. The Company expects the Loans to bear interest at an annual rate equal to the then-current LIBOR rate plus 7%, provided that for purposes of the GE Credit Agreement, the then-current LIBOR rate will always be at least 1%. The GE Credit Agreement includes various customary

 

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Table of Contents

 

covenants, including debt service coverage ratios, a commitment fee on the unutilized loan amounts of 0.5% per annum, and also provides for customary events of default which, if such events occur, would permit or require the Loans to become or to be declared due and payable. As of June 30, 2014, the Company has not drawn any money under the GE Credit Agreement and was in compliance with the financial covenants. The commitment fee, which is charged to interest expense in the condensed consolidated statements of operation, was $253 for each of the three months ended June 30, 2013 and 2014. For the six month periods ended June 30, 2013 and 2014, the Company recorded $497 and $503 of interest expense related to the commitment fee respectively.

 

The Loans are secured by (i) a first priority security interest in all of the Borrowers’ assets, including the Projects, and (ii) a pledge of the Borrowers’ outstanding ownership interests. In addition, the Company has executed a guaranty in favor of GE (“Guaranty”), pursuant to which the Company has guaranteed all of the Borrowers’ obligations under the GE Credit Agreement, including repayment of all Loans.

 

The Company and GE also entered an equity contribution agreement (the “EC Agreement”) pursuant to which the Company agreed to pay at least 25% of the budgeted cost of the Projects and all additional costs that exceed such expected budgeted costs, in each case, in the form of equity contributions to the Borrowers (“Equity Contributions”). The EC Agreement also requires the Company to provide, concurrent with GE’s extension of the initial Loans under the GE Credit Agreement, letter(s) of credit in an amount equal to the Company’s then-current unfunded Equity Contributions.

 

Concurrently with the execution of the GE Credit Agreement, the Company issued to GE a warrant (“GE Warrant”) to purchase up to 5,000,000 shares of the Company’s common stock (see note 13), and entered into the GE Registration Rights Agreement.

 

Mavrix Note

 

On April 25, 2013, Mavrix, LLC (“Mavrix”), a newly-formed special purpose vehicle subsidiary of Clean Energy Renewable Fuels, LLC (“CERF”), a wholly owned subsidiary of the Company, entered into a note purchase agreement (“NPA”) with Massachusetts Mutual Life Insurance Company (the “Mavrix Note Purchaser”). Mavrix owns all of the equity interests in Canton Renewables, LLC (“Canton”) and 70% of the equity interests in Dallas Clean Energy, LLC, which owns all of the equity interests in DCEMB (together with Canton, the “Project Companies”). Canton owns a RNG extraction and processing project at the Sauk Trail Hills Landfill in Canton, Michigan and DCEMB owns the RNG extraction and processing project at the McCommas Bluff Landfill in Dallas, Texas.

 

Pursuant to the NPA, on April 25, 2013 (the “Mavrix Issuance Date”), the Mavrix Note Purchaser (i) purchased a secured multi-draw promissory note (the “Mavrix Note”) from Mavrix in the maximum aggregate principal amount of $30,000 (the “Maximum Principal Amount”), and (ii) funded an initial advance of $5,000. In addition, in September and December 2013, the Mavrix Note Purchaser funded an additional advance of $5,000 each, and therefore an aggregate of $15,249, which includes interest paid in kind, was outstanding under the Mavrix Note at June 30, 2014. Subject to Mavrix and the Project Companies satisfying certain conditions described in the NPA, the Mavrix Note Purchaser will make additional advances under the Mavrix Note, up to the Maximum Principal Amount. Mavrix has used, and will continue to use, the proceeds from the advances under the Mavrix Note to (x) pay any transaction costs and fees related to the NPA and the issuance of the Mavrix Note and (y) make distributions to its direct and indirect parent companies. Mavrix’s direct and indirect parent companies have used such distributions to date to finance construction of additional RNG extraction and processing projects and for working capital purposes.

 

The Mavrix Note matures 12 years from the Mavrix Issuance Date and bears cash interest at the rate of 12% per annum and paid in kind interest at the rate of 2.0% per annum. The principal amount of the Mavrix Note will be repaid in 28 quarterly installments commencing on June 30, 2018, provided that the NPA requires mandatory prepayment of such principal amount upon certain casualty or condemnation events, asset sales or extraordinary transactions. In addition, Mavrix may not voluntarily repay the Mavrix Note until January 25, 2017 and, subject to the foregoing restriction, Mavrix must pay a prepayment premium if it prepays the Mavrix Note prior to July 30, 2021.

 

The Mavrix Note is secured by (i) a first priority security interest in all of Mavrix’s assets and (ii) a pledge of Mavrix’s outstanding equity interests. In addition, the NPA includes various customary affirmative and negative covenants and also provides for customary events of default which, if such events occur, would permit or require the Mavrix Note to become, or to be declared, due and payable. The Mavrix Note is non-recourse to the Company.  As of June 30, 2014, the Company had met its obligations under the NPA.

 

5.25% Notes

 

In September 2013, the Company completed a private offering of 5.25% Convertible Senior Notes due 2018 (the “5.25% Notes”) and entered into an indenture governing the 5.25% Notes (the “Indenture”).

 

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The net proceeds from the sale of the 5.25% Notes after the payment of certain debt issuance costs of $7,805 were approximately $242,195. The Company has used, and intends to continue to use, the net proceeds from the sale of the 5.25% Notes to fund capital expenditures and for general corporate purposes.

 

The 5.25% Notes bear interest at a rate of 5.25% per annum, payable semi-annually in arrears on October 1 and April 1 of each year, beginning on April 1, 2014. The 5.25% Notes will mature on October 1, 2018, unless earlier purchased, redeemed or converted prior to such date in accordance with their terms and the terms of the Indenture.

 

Holders may convert their 5.25% Notes, at their option, at any time prior to the close of business on the business day immediately preceding the maturity date of the 5.25% Notes. Upon conversion, the Company will deliver a number of shares of its common stock, per $1 principal amount of 5.25% Notes, equal to the conversion rate then in effect (together with a cash payment in lieu of any fractional shares). The initial conversion rate for the 5.25% Notes is 64.1026 shares of the Company’s common stock per $1 principal amount of Notes (which is equivalent to an initial conversion price of approximately $15.60 per share of the Company’s common stock). The conversion rate is subject to adjustment upon the occurrence of certain specified events as described in the Indenture.

 

Upon the occurrence of certain corporate events prior to the maturity date of the 5.25% Notes, the Company will, in certain circumstances, in addition to delivering the number of shares of the Company’s common stock deliverable upon conversion of the 5.25% Notes based on the conversion rate then in effect (together with a cash payment in lieu of any fractional shares), pay holders that convert their 5.25% Notes a cash make-whole payment in an amount as described in the Indenture. The Company may, at its option, irrevocably elect to settle its obligation to pay any such make-whole payment in shares of its common stock instead of in cash. The amount of any make-whole payment, whether it is settled in cash or in shares of the Company’s common stock upon the Company’s election, will be determined based on the date on which the corporate event occurs or becomes effective and the stock price paid (or deemed to be paid) per share of the Company’s common stock in the corporate event, as described in the Indenture.

 

The Company may not redeem the 5.25% Notes prior to October 5, 2016. On or after October 5, 2016, the Company may, at its option, redeem for cash all or any portion of the 5.25% Notes if the closing sale price of the Company’s common stock for at least 20 trading days (whether or not consecutive) during any 30 consecutive trading day period ending on, and including, the trading day immediately preceding the date on which notice of redemption is provided, exceeds 160% of the conversion price on each applicable trading day. In the event of the Company’s redemption of the 5.25% Notes, the redemption price will equal 100% of the principal amount of the 5.25% Notes to be redeemed, plus accrued and unpaid interest to, but excluding, the redemption date. No sinking fund is provided for in the 5.25% Notes.

 

If the Company undergoes a fundamental change (as defined in the Indenture) prior to the maturity date of the 5.25% Notes, subject to certain conditions as described in the Indenture, holders may require the Company to purchase, for cash, all or any portion of their 5.25% Notes at a repurchase price equal to 100% of the principal amount of the 5.25% Notes to be repurchased, plus accrued and unpaid interest to, but excluding, the fundamental change purchase date.

 

The Indenture contains customary events of default with customary cure periods, including, without limitation, failure to make required payments or deliveries of shares of its common stock when due under the Indenture, failure to comply with certain covenants under the Indenture, failure to pay when due or acceleration of certain other indebtedness of the Company or certain of its subsidiaries, and certain events of bankruptcy and insolvency of the Company or certain of its subsidiaries. The occurrence of an event of default under the Indenture will allow either the trustee or the holders of at least 25% in principal amount of the then-outstanding 5.25% Notes to accelerate, or upon an event of default arising from certain events of bankruptcy or insolvency of the Company, will automatically cause the acceleration of, all amounts due under the 5.25% Notes. No events of default have occurred as of June 30, 2014.

 

The 5.25% Notes are senior unsecured obligations of the Company and rank senior in right of payment to the Company’s future indebtedness that is expressly subordinated in right of payment to the 5.25% Notes; equal in right of payment to the Company’s unsecured indebtedness that is not so subordinated; effectively junior to any of the Company’s secured indebtedness to the extent of the value of the assets securing such indebtedness; and structurally junior to all indebtedness (including trade payables) of the Company’s subsidiaries.

 

Canton Bonds

 

On March 19, 2014, Canton completed the issuance of Solid Waste Facility Limited Obligation Revenue Bonds (Canton Renewables, LLC — Sauk Trail Hills Project) Series 2014 in the aggregate principal amount of $12,400 (the “Bonds”).

 

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The Bonds were issued by the Michigan Strategic Fund (the “Issuer”) and the proceeds of such issuance were loaned by the Issuer to Canton pursuant to a loan agreement that became effective on March 19, 2014 (the “Loan Agreement”). The Bonds are expected to be repaid from revenue generated by Canton from the sale of RNG and are secured by the revenue and assets of Canton. The Bond repayments will be amortized through July 1, 2022, the average coupon interest rate on the Bonds is 6.6%, and all but $1,000 of the principal amount of the Bonds is non-recourse to Canton’s parent companies, including the Company.

 

Canton used the Bond proceeds primarily to (i) refinance the cost of constructing and equipping its RNG extraction and production project in Canton, Michigan and (ii) pay a portion of the costs associated with the issuance of the Bonds. The refinancing described in the prior sentence was accomplished through distributions to the Borrower’s direct and indirect parent companies who provided the financing for the RNG production facility, and such companies have used such distributions to finance construction of additional RNG extraction and processing projects and for working capital purposes.

 

The Loan Agreement contains customary events of default, with customary cure periods, including without limitation, failure to make required payments when due under the Loan Agreement, failure to comply with certain covenants under the Loan Agreement, certain events of bankruptcy and insolvency of Canton, and the existence of an event of default under the indenture governing the Bonds that was entered between the Issuer and The Bank of New York Mellon Trust Company, N.A., as trustee. The occurrence of an event of default under the Loan Agreement will allow the Issuer or the trustee to accelerate all amounts due under the Loan Agreement.  As of June 30, 2014, Canton had met its obligations under the Loan Agreement.

 

Long-term debt and capital lease obligations at December 31, 2013 and June 30, 2014 consisted of the following:

 

 

 

December 31,
2013

 

June 30,
2014

 

IMW Purchase Notes

 

$

12,121

 

$

 

Northstar future payments

 

1,274

 

1,318

 

DCEMB Notes

 

585

 

585

 

DCEMB Revenue Bonds (non-recourse to the Company)

 

36,500

 

36,500

 

7.5% Notes

 

150,000

 

150,000

 

SLG Notes

 

145,000

 

145,000

 

5.25% Notes

 

250,000

 

250,000

 

Weaver Notes

 

714

 

485

 

IMW Lines of Credit

 

6,036

 

12,084

 

Mavrix Note (non-recourse to the Company)

 

15,097

 

15,249

 

Canton Bonds ($11,400 non-recourse to the Company)

 

 

12,400

 

Capital lease obligations

 

3,091

 

2,519

 

Total debt and capital lease obligations

 

620,418

 

626,140

 

Less amounts due within one year and short-term borrowings

 

(23,401

)

(17,724

)

Total long-term debt and capital lease obligations

 

$

597,017

 

$

608,416

 

 

Note 13—Earnings Per Share

 

Basic earnings per share is based upon the weighted-average number of shares outstanding and shares issuable for little or no cash consideration during each period. Diluted earnings per share reflects the impact of assumed exercise of dilutive stock options and warrants. In the three and six months ended June 30, 2014, 5,000,000 shares of common stock related to the GE Warrant were included in the basic and dilutive earnings per share calculations. The information required to compute basic and diluted earnings per share is as follows:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2013

 

2014

 

2013

 

2014

 

Basic and diluted:

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding

 

93,985,438

 

94,859,587

 

93,561,302

 

94,768,462

 

 

Certain securities were excluded from the diluted earnings per share calculations for the three and six months ended June 30, 2013 and 2014, respectively, as the inclusion of the securities would be anti-dilutive to the calculation. The amounts outstanding as of June 30, 2013 and 2014 for these instruments are as follows:

 

 

 

June 30,

 

 

 

2013

 

2014

 

Options

 

11,679,877

 

11,858,681

 

Warrants

 

2,130,682

 

2,130,682

 

Convertible notes

 

19,160,338

 

35,185,979

 

Restricted Stock Units

 

1,545,000

 

2,080,336

 

 

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Note 14—Stock-Based Compensation

 

The following table summarizes the compensation expense and related income tax benefit related to the stock-based compensation expense recognized during the periods:

 

 

 

Three Months Ended
June 30,

 

Six Months Ended
June 30,

 

 

 

2013

 

2014

 

2013

 

2014

 

 

 

 

 

 

 

 

 

 

 

Stock-based compensation expense

 

$

5,451

 

$

2,978

 

$

11,663

 

$

6,398

 

Stock-based compensation expense, net of tax

 

$

5,451

 

$

2,978

 

$

11,663

 

$

6,398

 

 

Stock Options

 

The following table summarizes the Company’s stock option activity during the six months ended June 30, 2014:

 

 

 

Number of
Shares

 

Weighted
Average
Exercise
Price

 

Weighted
Average
Remaining
Contractual
Term (in years)

 

Aggregate
Intrinsic
Value

 

Outstanding, December 31, 2013

 

11,526,998

 

$

11.79

 

 

 

 

 

Options granted

 

702,000

 

11.83

 

 

 

 

 

Options exercised

 

(164,769

)

3.16

 

 

 

 

 

Options forfeited

 

(205,548

)

13.31

 

 

 

 

 

Outstanding, June 30, 2014

 

11,858,681

 

$

11.89

 

4.80

 

$

 

Exercisable, June 30, 2014

 

9,866,856

 

$

11.68

 

4.12

 

$

395

 

 

As of June 30, 2014, there was $10,754 of total unrecognized compensation cost related to non-vested shares. That cost is expected to be recognized over a weighted average period of one year. The total fair value of shares vested during the six months ended June 30, 2014 was $4,798.

 

The Company is obligated to issue shares of its common stock upon the exercise of stock options. The intrinsic value of all options exercised during the six months ended June 30, 2013 and 2014 was $622 and $1,419, respectively.

 

The fair value of each stock option is estimated as of the date of grant using the Black-Scholes option pricing model using the following weighted-average assumptions for grants in 2014:

 

 

 

Six Months Ended
June 30, 2014

 

Dividend yield

 

0.00%

 

Expected volatility

 

52.3% to 54.0%

 

Risk-free interest rate

 

1.1% to 1.8%

 

Expected life in years

 

6.0

 

 

The weighted-average grant date fair values of options granted during the six months ended June 30, 2013 and 2014 was $7.20 and $5.99, respectively. The volatility amounts used during these periods were estimated based on the Company’s historical volatility and the Company’s implied volatility of its traded options for such periods. The expected lives used during the periods were based on historical exercise periods and the Company’s anticipated exercise periods for its outstanding options. The risk free rates used during the periods were based on the U.S. Treasury yield curve for the expected life of the options at the time of grant. The Company recorded $7,253 and $3,819 of stock option expense during the six months ended June 30, 2013 and 2014, respectively. The Company has not recorded any tax benefit related to its stock option expense.

 

Market-Based Restricted Stock Units

 

The Company issued 1,545,000 and 489,500 market-based restricted stock units (“Market-Based RSUs”) to certain key employees during 2012 and for the six months ended June 30, 2014, respectively.  A holder of Market-Based RSUs will receive one share of the Company’s common stock for each Market-Based RSU held if (i) between two years and four years from the date of grant of the Market-Based RSU, the closing price of the Company’s common stock equals or exceeds, for twenty consecutive trading days, 135% of the closing price of the Company’s common stock on the Market-Based RSU grant date (the “Stock Price Condition”) and (ii) the holder is employed by the Company at the time the Stock Price Condition is satisfied. If the Stock Price Condition is not satisfied prior to four years from the date of grant, the Market-Based RSUs will be automatically forfeited. The Market-Based RSUs are subject to the terms and conditions of the Company’s Amended and Restated 2006 Equity Incentive Plan and a Notice of Grant of Restricted Stock Unit and Restricted Stock Unit Agreement.

 

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The following table summarizes the Company’s Market-Based RSU activity during the six months ended June 30, 2014:

 

 

 

Number of
Shares

 

Weighted
Average
Fair Value at Grant
Date

 

Weighted
Average
Remaining
Contractual
Term (in years)

 

Outstanding, December 31, 2013

 

1,545,000

 

$

11.42

 

 

 

RSUs granted

 

489,500

 

8.26

 

 

 

Outstanding and non-vested, June 30, 2014

 

2,034,500

 

$

10.66

 

2.08

 

 

As of June 30, 2014, there was $3,202 of total unrecognized compensation cost related to non-vested Market-Based RSUs. That cost is expected to be recognized over a weighted average period of 1.6 years.

 

The Company recorded $4,410 and $1,775 of expense during the six months ended June 30, 2013 and 2014, respectively, related to the Market-Based RSUs. The Company has not recorded any tax benefit related to its Market-Based RSU expense.

 

The fair value of the Market-Based RSUs granted during the six month period ended June 30, 2014 was estimated on the date of grant using the Monte Carlo Method with the following assumptions:

 

 

 

February 2, 2014

 

Dividend yield

 

0.00

%

Expected volatility

 

47.0

%

Risk-free interest rate

 

1.1

%

Expected life in years

 

2.0

 

 

Service-Based Restricted Stock Units

 

During September 2013, the Company issued service-based restricted stock units (“Service-Based RSUs”) to a key employee which vest annually over three years from the date of issuance at a rate of 34%, 33% and 33%, respectively, if the holder is then in service to the Company. The fair value of each Service-Based RSU is estimated using the closing stock price of the Company’s common stock on the date of grant.

 

The following table summarizes the Company’s Serviced-Based RSU activity during the six months ended June 30, 2014:

 

 

 

Number of
Shares

 

Weighted
Average
Fair Value at Grant
Date

 

Weighted
Average
Remaining
Contractual
Term (in years)

 

Nonvested at December 31, 2013

 

45,836

 

$

13.09

 

 

 

RSUs granted

 

 

 

 

 

Nonvested at June 30, 2014

 

45,836

 

$

13.09

 

2.2

 

 

As of June 30, 2014, there was $447 of total unrecognized compensation cost related to non-vested Service-Based RSUs. That cost is expected to be recognized evenly over a period of 2.2 years.

 

The Company recorded $153 of expense during the six months ended June 30, 2014 related to the Service-Based RSUs. The Company has not recorded any tax benefit related to its Service-Based RSU expense.

 

Employee Stock Purchase Plan

 

On May 7, 2013, the Company adopted an employee stock purchase plan (the “ESPP”), pursuant to which eligible employees may purchase shares of the Company’s common stock at 85% of the fair market value of the common stock on the last trading day of two consecutive, non-concurrent offering periods each year. The Company has reserved 2,500,000 shares of its common stock for issuance under the ESPP.

 

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The Company recorded $37 of expense during the six months ended June 30, 2014 related to the ESPP. The Company has not recorded any tax benefits related to its ESPP expense. At June 30, 2014, the Company had sold an aggregate of 14,934 shares pursuant to the ESPP.

 

Non-qualified Non-public Subsidiary Unit Options

 

In September 2013, the Company’s wholly owned subsidiary, CERF, adopted the Clean Energy Renewable Fuels, LLC 2013 Unit Option Plan (the “CERF Plan”). 150,000 Class B units representing membership interests in CERF were initially reserved for issuance under the CERF Plan.

 

The following table summarizes CERF’s unit option activity during the six months ended June 30, 2014:

 

 

 

Number of
Units

 

Weighted
Average
Exercise
Price

 

Weighted
Average
Remaining
Contractual
Term (in years)

 

Aggregate
Intrinsic
Value

 

Outstanding, December 31, 2013

 

115,000

 

$

40.80

 

 

 

 

 

Options granted

 

 

 

 

 

 

 

Outstanding and non-vested, June 30, 2014

 

115,000

 

$

40.80

 

9.22

 

$

0

 

 

As of June 30, 2014, there was $2,696 of total unrecognized compensation cost related to non-vested unit options issued pursuant to the CERF Plan. That cost is expected to be recognized over a weighted average period of 1.5 years.

 

CERF recorded $614 of unit option expense during the six months ended June 30, 2014. CERF has not recorded any tax benefit related to its unit option expense.

 

Note 15—Environmental Matters, Litigation, Claims, Commitments and Contingencies

 

The Company is subject to federal, state, local, and foreign environmental laws and regulations. The Company does not anticipate any expenditures to comply with such laws and regulations which would have a material impact on the Company’s condensed consolidated financial position, results of operations, or liquidity. The Company believes that its operations comply, in all material respects, with applicable federal, state, local and foreign environmental laws and regulations.

 

The Company may become party to various legal actions that arise in the ordinary course of its business. During the course of its operations, the Company is also subject to audit by tax authorities for varying periods in various federal, state, local and foreign tax jurisdictions. Disputes may arise during the course of such audits as to facts and matters of law. It is impossible to determine the ultimate liabilities that the Company may incur resulting from any such lawsuits, claims and proceedings, audits, commitments, contingencies and related matters or the timing of these liabilities, if any. If these matters were to be ultimately resolved unfavorably, an outcome not currently anticipated, it is possible that such outcome could have a material adverse effect upon the Company’s condensed consolidated financial position, results of operations or liquidity. However, the Company believes that the ultimate resolution of such actions will not have a material adverse effect on the Company’s condensed consolidated financial position, results of operations, or liquidity.

 

Note 16—Income Taxes

 

The Company’s income tax provision for the three months and six months ended June 30, 2014 was $147 and $1,109, respectively.  The tax expense for the three and six months ended June 30, 2013 was $293 and $2,098, respectively.  Tax expense for all periods was comprised of taxes due on the Company’s U.S. and foreign operations.  The decrease in the Company’s income tax provision for the six months ended June 30, 2014 as compared to the tax provision for the six months ended June 30, 2013 was primarily attributed to taxes paid on the sale of Clean Energy del Peru in the first six months of 2013.  The effective tax rate for the three months and six months ended June 30, 2013 and 2014 are different from the federal statutory tax rate primarily as a result of losses for which no tax benefit has been recognized.

 

The Company did not record a change in its liability for unrecognized tax benefits or penalties in the three months and six months ended June 30, 2013 or June 30, 2014, and the net interest incurred was immaterial for such periods.

 

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Note 17—Fair Value Measurements

 

The Company follows the authoritative guidance for fair value measurements with respect to assets and liabilities that are measured at fair value on a recurring basis and nonrecurring basis. Under the standard, fair value is defined as the exit price, or the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants, as of the measurement date. The standard also establishes a hierarchy for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes the use of unobservable inputs by requiring that the most observable inputs be used when available. Observable inputs are inputs market participants would use in valuing the asset or liability developed based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the factors market participants would use in valuing the asset or liability developed based upon the best information available in the circumstances. The hierarchy consists of the following three levels: Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities; Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs (other than quoted prices) that are observable for the asset or liability, either directly or indirectly; Level 3 inputs are unobservable inputs for the asset or liability. Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

 

During the six months ended June 30, 2014, the Company’s financial instruments consisted of available-for-sale securities, debt instruments, a contingent consideration obligation, and its Series I warrants. For securities available-for-sale, the fair value is determined by the most recent trading prices available for each security or for comparable securities, and thus represent Level 2 fair value measurements. The Company uses projected financial results for the respective entity, discounted to reflect the time value of money, to value its contingent consideration obligation, which is considered to be a Level 3 fair value measurement. The fair values of the Company’s debt instruments approximated their carrying values at December 31, 2013 and June 30, 2014. The Company uses the Black-Scholes model to value the Series I warrants. The Company believes the best method to approximate the market participant’s view of the volatility of its Series I warrants has been to use the implied volatilities of its short-term (i.e. 3 to 9 month) traded options and extrapolate the data over the remaining term of the Series I warrants, which was approximately 1.8 years as of June 30, 2014. This method has been utilized consistently in the periods presented. Given that the extrapolation beyond the term of the short term exchange traded options is not based on observable market inputs for a significant portion of the remaining term of the warrants, the Series I warrants have been classified as a Level 3 fair value measurement in the table below.

 

The following tables provide information by level for assets and liabilities that are measured at fair value on a recurring basis as of December 31, 2013 and June 30, 2014, respectively:

 

Description

 

Balance at
December 31, 2013

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Available-for-sale securities(1):

 

 

 

 

 

 

 

 

 

Certificate of deposits

 

$

35,621

 

$

 

$

35,621

 

$

 

Municipal bonds and notes

 

59,795

 

 

59,795

 

 

Corporate bonds

 

42,824

 

 

42,824

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Contingent consideration obligation(2)

 

384

 

 

 

384

 

Series I warrants(3)

 

7,164

 

 

 

7,164

 

 

Description

 

Balance at
June 30, 2014

 

Level 1

 

Level 2

 

Level 3

 

Assets:

 

 

 

 

 

 

 

 

 

Available-for-sale securities(1):

 

 

 

 

 

 

 

 

 

Certificate of deposits

 

$

35,483

 

$

 

$

35,483

 

$

 

Municipal bonds and notes

 

59,071

 

 

59,071

 

 

Corporate bonds

 

57,559

 

 

57,559

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

Contingent consideration obligation(2)

 

485

 

 

 

485

 

Series I warrants(3)

 

4,995

 

 

 

4,995

 

 


(1) Included in short-term investments in the condensed consolidated balance sheets. See note 5 for further information.

(2) Included in accrued liabilities in the condensed consolidated balance sheets.

(3) Included in other long-term liabilities in the condensed consolidated balance sheets.

 

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The following tables provide a reconciliation of the beginning and ending balances of items measured at fair value on a recurring basis in the table above that used significant unobservable inputs (Level 3).

 

Liabilities: Contingent Consideration

 

June 30,
2013

 

June 30,
2014

 

Beginning Balance

 

$

1,516

 

$

384

 

Total (gain) loss included in SG&A expense

 

(671

)

101

 

Payments

 

 

 

Ending Balance

 

$

845

 

$

485

 

 

Liabilities: Series I Warrants

 

June 30,
2013

 

June 30,
2014

 

Beginning Balance

 

$

8,102

 

$

7,164

 

Total (gain) loss included in earnings

 

505

 

(2,169

)

Ending Balance

 

$

8,607

 

$

4,995

 

 

Valuation processes for Level 3 fair value measurements and sensitivity to changes in significant unobservable inputs

 

Fair value measurements of liabilities, which fall within Level 3 of the fair value hierarchy, are determined by the Company’s accounting department, who report to the Company’s Chief Financial Officer. The fair value measurements are compared to those of the prior reporting periods to ensure that changes are consistent with expectations of management based upon the sensitivity and nature of the inputs.

 

Contingent Consideration

 

Pursuant to the terms of the Company’s asset purchase agreement with the IMW Seller, the Company may be obligated to pay the IMW Seller additional consideration if IMW achieves certain minimum gross profit targets in fiscal years 2011 through 2014. Therefore, the Company estimated the fair value of the contingent consideration using the gross profit projection of IMW in accordance to the terms of the asset purchase agreement.

 

Series I Warrant Liability

 

The Company estimated the fair value of its Series I warrant liability using the Black-Scholes Model based on the following inputs as of June 30, 2014:

 

Unobservable Input

 

Range or Weighted Average

 

Current market price of the Company’s common stock

 

$11.72

 

Exercise price of the warrant

 

$12.68

 

Dividend yield

 

0.00%

 

Remaining term of the warrant

 

1.83

 

Implied volatility of the Company’s common stock

 

43.99% - 46.12%

 

Assumed discount rate

 

Simple average of 0.46%

 

 

Significant changes in any of those inputs in isolation can result in a significant change in the fair value measurement. Generally, a positive change in the market price of the Company’s common stock, an increase in the volatility of the Company’s common stock, or an increase in the remaining term of the warrant would result in a directionally similar change in the estimated fair value of the Company’s Series I warrants and thus an increase in the associated liability. An increase in the assumed discount rate or a decrease in the positive differential between the warrant’s exercise price and the market price of the Company’s common stock would result in a decrease in the estimated fair value measurement of the Series I warrants and thus a decrease in the associated liability. The Company has not, nor plans to, declare dividends on its common stock, and thus, there is no directionally similar change in the estimated fair value of the warrants due to the dividend assumption.

 

Non-financial assets

 

No impairments of long-lived assets measured at fair value on a non-recurring basis have been incurred during the six months ended June 30, 2013 and 2014. The Company’s use of these nonfinancial assets does not differ from their highest and best use as determined from the perspective of a market participant.

 

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Note 18—Recently Adopted Accounting Changes and Recently Issued Accounting Standards

 

In May 2014, the FASB issued guidance on revenue from contracts with customers that will supersede most current revenue recognition guidance, including industry-specific guidance. The underlying principle is that an entity will recognize revenue to depict the transfer of goods or services to customers at an amount that the entity expects to be entitled to in exchange for those goods or services. The guidance provides a five-step analysis of transactions to determine when and how revenue is recognized. Other major provisions include capitalization of certain contract costs, consideration of time value of money in the transaction price, and allowing estimates of variable consideration to be recognized before contingencies are resolved in certain circumstances. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and cash flows arising from an entity’s contracts with customers. The guidance is effective for the interim and annual periods beginning on or after December 15, 2016 (early adoption is not permitted). The guidance permits the use of either a retrospective or cumulative effect transition method. The Company has not yet selected a transition method and is currently evaluating the impact of the amended guidance on its consolidated financial position, results of operations and related disclosures.

 

Note 19—Volumetric Excise Tax Credit (VETC)

 

From October 1, 2006 through December 31, 2011, the Company was eligible to receive a federal fuel tax credit (“VETC”) of $0.50 per gasoline gallon equivalent of CNG and $0.50 per liquid gallon of LNG that it sold as vehicle fuel. Based on the service relationship with its customers, either the Company or its customers claimed the credit. The Company recorded its VETC credits as revenue in its condensed consolidated statements of operations as the credits are fully refundable and do not need to offset income tax liabilities to be received. The American Taxpayer Relief Act, signed into law on January 2, 2013, reinstated VETC for calendar year 2013 and also made it retroactive to January 1, 2012. VETC revenues recognized during the three and six month periods ended June 30, 2013 were $5,956 and $32,153, respectively. The VETC revenues recognized during the six months ended June 30, 2013 includes $20,800 for the 2012 VETC credits.  The program under which the Company received VETC expired on December 31, 2013, and as such, the Company has not recognized any VETC revenue in 2014.

 

Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (this “MD&A”) should be read together with the unaudited condensed consolidated financial statements and the related notes included in this report. For additional context with which to understand our financial condition and results of operations, refer to the MD&A for the fiscal year ended December 31, 2013 contained in our 2013 Annual Report on Form 10-K, which was filed with the Securities and Exchange Commission (“SEC”) on February 27, 2014, as well as the consolidated financial statements and notes contained therein (collectively, the “2013 10-K”). Unless the context indicates otherwise, all references to “Clean Energy,” the “Company,” “we,” “us,” or “our” in this MD&A and elsewhere in this report refer to Clean Energy Fuels Corp. together with its majority and wholly owned subsidiaries.

 

Cautionary Statement Regarding Forward Looking Statements

 

This MD&A and other sections of this report contain forward looking statements, as defined by the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, and in some cases, you can identify these statements by forward-looking words such as “if,” “shall,” “may,” “might,” “could,” “will likely,“ “should,” “expect,” “plan,” “anticipate,” “believe,” “estimate,” “project,” “intend,” “goal,” “objective,” “predict,” “potential” or “continue,” or the negative of these terms and other comparable terminology. These forward-looking statements, which are based on various underlying assumptions and expectations and are subject to risks, uncertainties and other unknown factors, may include projections of our future financial performance based on our growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations, assumptions and projections about future events that we believe to be reasonable. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from our historical or future results, level of activity, performance or achievements expressed or implied by such forward-looking statements. These factors include, but are not limited to, those discussed under the caption “Risk Factors” in this report and in our 2013 10-K. In preparing this MD&A, we presume that readers have access to and have read the MD&A in our 2013 10-K pursuant to Instruction 2 to paragraph (b) of Item 303 of Regulation S-K. We undertake no duty to update any of these forward-looking statements after the date we file this report to conform such forward-looking statements to actual results or revised expectations, except as otherwise required by law.

 

We are the leading provider of natural gas as an alternative fuel for vehicle fleets in the United States and Canada, based on the number of stations operated and the amount of gasoline gallon equivalents of compressed natural gas (“CNG”) and liquefied natural gas (“LNG”) delivered. We design, build, operate and maintain fueling stations and supply our customers with CNG fuel for light, medium and heavy-duty vehicles and LNG fuel for medium and heavy-duty vehicles. We also sell non-lubricated natural gas compressors and other equipment used in CNG stations and LNG stations, provide operation and maintenance services (“O&M”) to customers, offer assessment, design and modification solutions designed to provide operators with code-compliant service and maintenance facilities for their natural gas vehicle fleets, produce and sell renewable natural gas (“RNG”), which can be used as

 

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vehicle fuel or sold for renewable power generation, and sell tradable credits we generate by selling natural gas and RNG as a vehicle fuel, including credits we generate under the California Low Carbon Fuel Standard (“LCFS Credits”) and Renewable Identification Numbers (“RIN Credits” or “RINs”) we generate under the federal Renewable Fuel Standard (“RFS”) Phase 2. In addition, we help our customers acquire and finance natural gas vehicles and obtain local, state and federal grants and incentives. We previously owned BAF Technologies, Inc. and its wholly owned subsidiary, ServoTech Engineering, Inc. (BAF Technologies, Inc. and ServoTech Engineering Inc. are collectively referred to as “BAF”). BAF converted light and medium duty vehicles to run on natural gas and provided design and engineering services for natural gas engine systems. On June 28, 2013, we sold BAF to Westport Innovations (U.S.) Holdings Inc., a wholly owned subsidiary of Westport Innovations Inc. (collectively, “Westport”).

 

Overview

 

This overview discusses matters on which our management primarily focuses in evaluating our financial condition and operating performance and results.

 

Sources of revenue.   We generate revenues by selling CNG and LNG, providing O&M services to our vehicle fleet customers, designing and constructing fueling stations and selling those stations to our customers, selling RNG, selling non-lubricated natural gas fueling compressors and other equipment for CNG and LNG fueling stations, providing maintenance services, offering solutions designed to provide operators with code-compliant maintenance facilities to service their natural gas vehicle fleets, providing financing for our customers’ natural gas vehicle purchases and selling tradable credits, including LCFS Credits and RIN Credits. In addition, through June 28, 2013, we generated revenues, through BAF, by selling converted natural gas vehicles and providing design and engineering services for natural gas engine systems.

 

Key operating data.   In evaluating our operating performance, our management focuses primarily on: (1) the amount of CNG and LNG gasoline gallon equivalents delivered (which we define as (i) the volume of gasoline gallon equivalents we sell to our customers, plus (ii) the volume of gasoline gallon equivalents dispensed to our customers at stations where we provide O&M services, but do not sell the CNG or LNG, plus (iii) our proportionate share of the gasoline gallon equivalents sold as CNG by our joint venture in Peru (through March 2013 when we sold our interest in the joint venture in Peru), plus (iv) our proportionate share of the gasoline gallon equivalents of RNG produced and sold as pipeline quality natural gas by our RNG production facilities, (2) our gross margin (which we define as revenue minus cost of sales), and (3) net income (loss) attributable to us. The following table, which you should read in conjunction with our condensed consolidated financial statements and notes contained elsewhere in this quarterly report on Form 10-Q and our consolidated financial statements and notes contained in our 2013 10-K, presents our key operating data for the years ended December 31, 2011, 2012, and 2013 and for the three and six months ended June 30, 2013 and 2014:

 

Gasoline gallon equivalents
delivered (in millions)

 

Year Ended
December 31,
2011

 

Year Ended
December 31,
2012

 

Year Ended
December 31,
2013

 

Three Months
Ended
June 30,
2013

 

Three Months
Ended
June 30,
2014

 

Six Months
Ended
June 30,
2013

 

Six Months
Ended
June 30,
2014

 

CNG

 

101.8

 

130.5

 

143.9

 

35.6

 

43.5

 

69.6

 

82.9

 

RNG

 

6.7

 

8.9

 

10.5

 

2.2

 

3.0

 

4.4

 

6.2

 

LNG

 

47.1

 

55.5

 

60

 

14.8

 

18.3

 

28.5

 

35.0

 

Total

 

155.6

 

194.9

 

214.4

 

52.6

 

64.8

 

102.5

 

124.1

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating data

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross margin

 

$

76,033

(1)

$

80,324

 

$

127,713

(1)

$

26,175

(1)

$

24,878

 

$

68,477

(1)

$

48,522

 

Net loss attributable to Clean Energy Fuels. Corp

 

(47,633

)(1)

(101,255

)

(66,968

)(1)

(11,943

)(1)

(32,306

)

(15,814

)(1)

(60,899

)

 


(1)   Includes $6.0 million, $32.2 million, $45.4 million and $17.9 million of revenue for federal fuel tax credits (“VETC”) for the three months ended June 30, 2013, the six months ended June 30, 2013, the year ended December 31, 2013, and the year ended December 31, 2011, respectively.  See the discussion under “Operations — Federal Tax Credits” below.

 

Key trends.   According to the U.S. Department of Energy, Energy Information Administration (“EIA”), demand for natural gas fuels in the United States increased by approximately 38% during the period January 1, 2011 through December 31, 2013. We believe this growth in demand was attributable primarily to the rising prices of gasoline and diesel relative to CNG and LNG during this period, as well as increasingly stringent environmental regulations affecting vehicle fleets and increased availability of natural gas.

 

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The number of fueling stations we owned, operated, maintained and/or supplied grew from 224 at January 1, 2011 to 516 at June 30, 2014 (a 130.4% increase). Included in this number are all of the CNG and LNG fueling stations we own, operate, maintain or with which we have a fueling supply contract. The amount of CNG, RNG, and LNG gasoline gallon equivalents we delivered from 2011 to 2013 increased by 37.8%. The increase in gasoline gallon equivalents delivered was the primary contributor to increased revenues during 2011, 2012, 2013 and the first six months of 2014. In addition, in 2012, we sold four large transit stations for $40.3 million, which contributed to our revenue amount during the year. Also, in 2013, revenues included $20.8 million in federal fuel tax credits (“VETC”) related to 2012 due to the reinstatement of such credits in January 2013. This increase was partially offset by a reduction in revenues in 2013 due to our sale of BAF on June 28, 2013. Our revenue can vary between periods for various reasons, including the timing of equipment sales, station construction and natural gas sale activity.

 

Our fuel cost of sales also increased during these periods, which was attributable primarily to increased costs related to delivering more CNG, RNG and LNG to our customers in 2011 through 2013 and the first six months of 2014. The increase was partially offset in 2013 by a reduction in cost of sales due to our sale of BAF on June 28, 2013. Our cost of sales can vary between periods for various reasons, including the timing of equipment sales, station construction and natural gas sale activity.

 

During 2013 and the first six months in 2014, prices for oil, gasoline, and diesel fuel were generally substantially higher than the price for natural gas. Oil hit a high of $107.65 per barrel, or $19.39 per one million Btus (“MMbtu”), in August 2013 and was $105.37 per barrel, or $18.98 per MMbtu, on June 30, 2014. In California, the average retail price for gasoline was $3.89 per gallon in 2013 and was $4.18 per gallon at June 30, 2014. Average retail prices for diesel fuel in California were $4.13 per diesel gallon in 2013 and was $4.14 per diesel gallon at June 30, 2014. Higher gasoline and diesel prices improve our margins on fuel sales to the extent we price our fuel at a relatively consistent discount to gasoline or diesel and natural gas prices do not increase by a corresponding amount. During this time period, the price for natural gas increased slightly. The NYMEX price for natural gas ranged from $3.35 per MMbtu in January 2013 to $4.63 per MMbtu in June 2014. The average retail sales price of our CNG fuel sold in the Los Angeles metropolitan area ranged from $2.75 per gallon during January 2013 to $2.90 per gallon for the month of June 2014. The average retail sales price of our LNG fuel sold in the Los Angeles metropolitan area ranged from $2.70 per gallon during January 2013 to $2.61 per gallon for the month of June 2014.

 

Anticipated future trends.   We anticipate that, over the long term, the prices for gasoline and diesel will continue to be higher than the price of natural gas as a vehicle fuel, which will continue to make natural gas vehicle fuel an attractive alternative to gasoline and diesel. Our belief that natural gas will continue, over the long term, to be a cheaper vehicle fuel than gasoline or diesel is based in large part on the growth in United States natural gas production in recent years.

 

We believe there will be significant growth in the consumption of natural gas as a vehicle fuel among vehicle fleets, and our goal is to capitalize on this trend and enhance our leadership position as this market expands. With our acquisitions in 2010 of the natural gas compressor development and manufacturing business of IMW Industries, Ltd. (“IMW”) and of Wyoming Northstar Incorporated (“Northstar”), a leading provider of LNG station design, construction, operation and maintenance services, we are a fully integrated provider of advanced compression technology, CNG and LNG station design and construction, and CNG and LNG fueling. We anticipate expanding our sales of CNG and LNG in each of the markets in which we operate, including trucking, refuse, airports, ready mix taxis and public transit, and plan to enter additional markets, including marine and rail. Consistent with the anticipated growth of our business, we also expect that our operating costs and capital expenditures will increase, primarily from the anticipated expansion of our station network and LNG production capacity, as well as the logistics of delivering more CNG and LNG to our customers. We also anticipate that we will continue to seek to acquire assets and/or businesses that are in the natural gas fueling infrastructure or RNG production business that may require us to raise and expend additional capital. Additionally, we have increased, and will continue to increase, our sales and marketing team and other necessary personnel as we seek to expand our existing markets and enter new markets, which will also result in increased costs.

 

We anticipate that the continued commercial roll-out of natural gas engines that are well-suited for the U.S. heavy-duty truck market, together with the economic and environmental benefits of natural gas fuel, will result in increased adoption of natural gas fueled trucks by the U.S. trucking industry. We estimate that there are approximately three million heavy-duty trucks on the road in the U.S., and that such trucks collectively consume approximately 25 billion gallons of fuel each year. As a result, we believe this market has the potential to become our largest. We have made a significant commitment of capital and other resources to build a nationwide network of natural gas truck fueling stations, which we refer to as “America’s Natural Gas Highway” or “ANGH.” Our objective in building America’s Natural Gas Highway is to enable natural gas fueled freight trucking coast to coast and border to border along key transportation corridors. Our ANGH stations have primarily been initially built to provide LNG. However, we believe operators will adopt heavy-duty trucks that run on both LNG and CNG, so to meet the needs of our customers, we have designed our ANGH stations to be capable of dispensing both fuels. We will need to invest additional capital in our ANGH stations to the extent we decide to add CNG fueling capability to our ANGH stations.

 

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Some ANGH stations are located at Pilot Flying J Travel Centers, one of the largest truck fueling operators in the U.S. Under our agreement with Pilot, we own the ANGH stations we build at Pilot locations and pay rent to Pilot for the use of its property. In addition, we are entitled to recoup all of our capital investments in ANGH stations we build at Pilot locations plus a defined return, after which we share a portion of the station profits with Pilot.

 

Sources of liquidity and anticipated capital expenditures.   Liquidity is the ability to meet present and future financial obligations either through operating cash flows, the sale or maturity of existing assets, or by the acquisition of additional funds through capital management. Historically, our principal source of liquidity has consisted of cash provided by financing activities.

 

Our business plan calls for approximately $24.5 million in capital expenditures from July 1, 2014 through the end of 2014, primarily related to construction of CNG and LNG fueling stations. We may also elect to invest additional amounts in companies or assets in the natural gas fueling infrastructure, services and production industries, including RNG production, to make capital expenditures to build additional LNG production facilities or to otherwise secure future LNG supply, and for other activities or pursuits. We will need to raise additional capital as necessary to fund any capital expenditures or investments that we cannot fund through available cash or cash generated by operations. The timing and necessity of any future capital raise may depend on various factors, including our rate of new station construction and any potential merger or acquisition activity, and other factors described under “Liquidity” below. We may seek to raise additional capital we need through one or more sources, including, without limitation, selling assets, obtaining new or restructuring existing debt, or obtaining additional equity capital, or any combination of these or other available sources of capital. We may not be able to raise capital, when needed, on terms that are favorable to us or existing stockholders, or at all. Any inability to raise capital may impair our ability to invest in new stations, develop natural gas fueling infrastructure and invest in strategic transactions or acquisitions and may reduce our ability to grow our business and generate sustained or increased revenues.

 

Business risks and uncertainties.   Our business and prospects are exposed to numerous risks and uncertainties. For more information, see “Risk Factors” in Part II, Item 1A of this report.

 

Operations

 

We generate revenues principally by selling CNG, LNG and RNG, and providing O&M services to our vehicle fleet customers. For the six month period ended June 30, 2014, CNG and RNG (together) represented 72% and LNG represented 28% of our natural gas sales (on a gasoline gallon equivalent basis). To a lesser extent, we generate revenues by designing and constructing fueling stations and selling or leasing those stations to our customers. We also generate revenues through sales of advanced natural gas fueling compressors and other natural gas fueling station equipment, providing assessment, design and modification services designed to provide vehicle fleet operators with code-compliant service and maintenance facilities, providing financing for our customers’ natural gas vehicle purchases, and selling RIN and LCFS Credits.

 

CNG Sales

 

We sell CNG through fueling stations located on our customers’ properties and through our network of public access fueling stations. At these CNG fueling stations, we procure natural gas from local utilities or brokers under standard, floating-rate arrangements and then compress and dispense it into our customers’ vehicles. Our CNG sales are made primarily through contracts with our fleet customers. Under these contracts, pricing is principally determined on an index-plus basis, which is calculated by adding a margin to the local index or utility price for natural gas. CNG sales revenues based on an index-plus methodology increase or decrease as a result of an increase or decrease in the price of natural gas. Our fleet customers typically are billed monthly based on the volume of CNG sold at a station. The remainder of our CNG sales are on a per fill-up basis at prices we set at our public access stations based on prevailing market conditions.  We recognize revenue from the sale of CNG as the fuel is delivered.

 

LNG Production and Sales

 

We obtain LNG from our own plants as well as through relationships with suppliers. We own and operate LNG liquefaction plants near Houston, Texas and Boron, California, and we plan to build two new LNG plants in connection with our strategic collaboration with General Electric Capital Corporation (“GE”) (see note 12 to our condensed consolidated financial statements). We expect that these additional plants, as well as our planned expansion of our Boron, California plant, and other plants to be built by us or third parties in the future, will be necessary to secure sufficient sources of LNG in the future.

 

We sell LNG on a bulk basis to fleet customers, who often own and operate their fueling stations, and we also sell LNG to fleet and other customers at our public-access LNG stations. During 2012, 2013, and the first six months of 2014, we procured 44%, 33% and 42%, respectively, of our LNG from third-party producers, and we produced the remainder of the LNG at our liquefaction plants in Texas and California. We expect to enter additional purchase contracts with third party LNG producers in the future. For LNG that we purchase from third parties, we have entered into, and may enter into additional “take or pay” contracts that require us to purchase minimum volumes of LNG at index-based rates. We deliver LNG via our fleet of 88 tanker trailers to fueling stations, where it is stored and dispensed in liquid form into vehicles. For LNG customers who own and operate their fueling stations, we sell LNG through supply contracts that are priced on an index-plus basis. LNG sales revenues based on an index-plus methodology increase or

 

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decrease as a result of an increase or decrease in the price of natural gas. Our LNG contracts provide that we charge our customers periodically based on the volume of LNG supplied. We also sell LNG on a per fill-up basis at prices we set at our public access stations based on prevailing market conditions. We recognize revenue from the sale of LNG as the fuel is delivered.  LNG generally costs more than CNG as LNG must be liquefied and transported, and the U.S. government imposes higher fuel taxes on LNG.

 

Government Incentives

 

From October 1, 2006 through December 31, 2011, we were eligible to receive a federal fuel tax credit (“VETC”) of $0.50 per gasoline gallon equivalent of CNG and $0.50 per liquid gallon of LNG that we sold as vehicle fuel. Based on the service relationship with our customers, either we or our customers claimed the credit. We recorded these tax credits as revenues in our condensed consolidated statements of operations as the credits are fully refundable and do not need to offset tax liabilities to be received. As such, the credits are not deemed income tax credits under the accounting guidance applicable to income taxes. In addition, we believe the credits are properly recorded as revenue because we often incorporate the tax credits into our pricing with our customers, thereby lowering the actual price per gallon we charge them.

 

The American Taxpayer Relief Act, signed into law on January 2, 2013, reinstated VETC for calendar year 2013 and also made it retroactive to January 1, 2012. VETC revenues recognized during the three and six month periods ended June 30, 2013 were $6.0 million and $32.2 million, respectively, which includes $20.8 million for CNG and LNG we sold in 2012 that we recognized in January 2013.

 

Operation and Maintenance

 

We generate a portion of our revenue from our performance of O&M for CNG and LNG fueling stations where we do not supply the fuel. At these fueling stations the customer contracts directly with a local broker or utility to purchase natural gas. For O&M services, we do not sell the fuel itself, but generally charge a per-gallon fee based on the volume of fuel dispensed at the station. We include the volume of fuel dispensed at the stations at which we provide O&M services in our calculation of aggregate gasoline gallon equivalents delivered.

 

Station Construction

 

We generate a portion of our revenue from designing and constructing fueling stations and selling or leasing the stations to our customers. For these projects, we act as general contractor or supervise qualified third-party contractors. We charge construction fees or lease rates based on the size and complexity of the project.

 

Vehicle Acquisition and Finance

 

We offer vehicle finance services for some of our customers’ purchases of natural gas vehicles. We loan to certain qualifying customers a portion of, and on occasion up to 100% of, the purchase price of their natural gas vehicles. We may also lease natural gas vehicles to certain of our customers in the future. Where appropriate, we apply for and receive state and federal incentives associated with natural gas vehicle purchases and pass these benefits through to our customers. We may also secure vehicles to place with customers, or pay deposits with respect to such vehicles, prior to receiving a firm order from our customers, which we may be required to purchase if our customer fails to purchase the vehicle as anticipated. To help accelerate the conversion of heavy-duty truck fleets to natural gas, in 2013, we entered a strategic alliance with GE’s Transportation Finance business. Fleet operators are eligible for loans and leases, including fair market value leases, from GE to acquire trucks from OEMs. In exchange for committing to purchase specified amounts of natural gas fuel from our stations, we then help offset the monthly cost of the vehicles to make it consistent with the cost of a diesel truck. Our goal is to work with fleet operators to achieve a one to two-year payback on the incremental cost of natural gas heavy-duty trucks, and we consider our alliance with GE to be an important tool in achieving this goal. Through June 30, 2014, we have not generated significant income from vehicle financing activities.

 

RNG

 

We own a 70% interest in a RNG production facility at the McCommas Bluff landfill located in Dallas, Texas. We sell specified levels of RNG produced at the facility to Shell Energy North America (US) L.P. under a gas sale agreement and, depending upon RNG production volumes, we have the ability to sell RNG produced by that facility as a vehicle fuel. We own a second RNG production facility located at a Republic Services landfill in Canton, Michigan. This facility was completed in 2012, and we have entered into a ten-year fixed-price sale contract for the majority of the RNG that we expect the facility to produce. We completed our third RNG facility at a Republic Services landfill in North Shelby, Tennessee, during the last week of March 2014. We are seeking to expand our RNG business by pursuing additional RNG production projects. We sell some of the RNG we currently produce, and expect to sell a significant amount of the RNG we produce at the facilities we plan to build, through our natural gas fueling infrastructure for use as a vehicle fuel. In addition, we purchase RNG from third party producers, and sell that RNG for vehicle use through our fueling infrastructure. The RNG we sell for vehicle fuel use is distributed under the name Redeem .

 

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Vehicle Conversions

 

Prior to June 28, 2013, we owned BAF, a provider of natural gas vehicle conversions, alternative fuel systems, application engineering, service and warranty support and research and development. BAF’s vehicle conversions included taxis, vans, pick-up trucks and shuttle buses. BAF owned ServoTech Engineering, Inc. (“ServoTech”), which provided, among other services, design and engineering services for natural gas engine systems. We generated revenues through the sale of natural gas vehicles that had been converted to run on natural gas by BAF, and design and engineering services for natural gas engine systems by ServoTech. For the three months and six months ended June 30, 2013, BAF and ServoTech combined contributed approximately $2.8 million and $7.0 million, respectively, to our revenue. On June 28, 2013, we sold our ownership interest in BAF and ServoTech for approximately $27.2 million.

 

Natural Gas Fueling Compressors

 

Our subsidiary, IMW, manufactures and services non-lubricated natural gas fueling compressors and related equipment for the global natural gas fueling market. IMW is headquartered near Vancouver, British Columbia, has other manufacturing facilities near Shanghai, China, and in Ferndale, Washington, and has sales and service offices in Bangladesh, Colombia, Peru and the U.S. For the three months ended June 30, 2013 and 2014, IMW contributed approximately $19.2 million and $21.7 million, respectively, to our revenue.  For the six months ended June 30, 2013 and 2014, IMW contributed approximately $36.8 million and $44.0 million, respectively, to our revenue.

 

Sales of RIN and LCFS Credits

 

We generate LCFS Credits when we sell RNG and conventional natural gas for use as a vehicle fuel in California, and we generate RIN Credits when we sell RNG for use as a vehicle fuel. We can sell these credits to third parties who need the RIN and LCFS Credits to comply with federal and state requirements. During the three and six month periods ended June 30, 2013, we realized $1.0 million and $1.7 million, respectively, in revenue through the sale of LCFS Credits.  During the three month and six month periods ended June 30, 2014, we realized $1.2 million and $1.9 million, respectively, in revenue through the sale of LCFS Credits.  During the three and six month periods ended June 30, 2013, we realized $1.0 million and $1.2 million, respectively, in revenue through the sale of RIN Credits. During the three and six month periods ended June 30, 2014, we realized $0.4 million and $0.8 million, respectively, in revenue through the sale of RIN Credits. We anticipate that we will generate and sell increasing numbers of RIN and LCFS Credits as we grow our business and sell increasing amounts of CNG, LNG and RNG for use as a vehicle fuel. The market for RIN Credits and LCFS Credits is volatile, and the prices for such credits may be subject to significant fluctuations. Further, the value of RIN Credits and LCFS Credits will be adversely affected by any changes to the state and federal programs under which such credits are generated and sold.

 

Volatility of Earnings and Cash Flows

 

During 2013 our futures contracts qualified for hedge accounting, so we had no derivative gains or losses recognized in our consolidated statements of operations for that period. We did not have any futures contracts in place during the first six months of 2014.  In accordance with our natural gas hedging policy, we plan to structure all futures contracts as cash flow hedges under the applicable derivative accounting guidance, but we cannot be certain that they will qualify. See “Risk Management Activities” below. If any of our futures contracts do not qualify for hedge accounting, we could incur significant increases or decreases in our earnings based on fluctuations in the market value of the contracts from period to period.

 

Additionally, we are required to maintain a margin account to cover losses related to our natural gas futures contracts. Futures contracts are valued daily, and if our contracts are in loss positions at the end of a trading day, our broker will transfer the amount of the losses from our margin account to a clearinghouse. If at any time the funds in our margin account drop below a specified maintenance level, our broker will issue a margin call that requires us to restore the balance. Consequently, these payments could significantly impact our cash balances. At June 30, 2014, we had no margin deposits or futures contracts in place.

 

Volatility of Earnings Related to Series I Warrants

 

Under Financial Accounting Standards Board (“FASB”) authoritative guidance, we are required to record the change in the fair market value of our Series I warrants in our consolidated financial statements. We have recognized a loss of $0.5 million and a gain of $2.2 million, respectively, related to recording the estimated fair value changes of our Series I warrants in the six months ended June 30, 2013 and 2014. See note 17 to our condensed consolidated financial statements contained elsewhere herein. Our earnings or loss per share may be materially affected by future gains or losses we are required to recognize as a result of valuing our Series I warrants. As of June 30, 2014, 2,130,682 of the Series I warrants remained outstanding.

 

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Debt Compliance

 

In connection with our acquisition of IMW, we entered into a credit agreement with HSBC Bank Canada that requires IMW to comply with certain financial covenants (see note 12 to our condensed consolidated financial statements). If we were to violate a covenant, we would seek a waiver from the bank, which the bank is not obligated to grant. If the bank does not grant a waiver, all of the obligations under the credit agreement would be due and payable. IMW was in compliance with these covenants as of June 30, 2014.

 

The loan agreement entered into by Dallas Clean Energy McCommas Bluff, LLC (“DCEMB”), our 70% owned subsidiary, as part of issuing its Revenue Bonds, as defined and disclosed in note 12 to our condensed consolidated financial statements, has certain non-financial debt covenants with which DCEMB must comply. As of June 30, 2014, we were in compliance with these debt covenants.

 

The loan agreements relating to the 7.5% Notes, as discussed in note 12 to our condensed consolidated financial statements, have certain non-financial debt covenants with which we must comply. As of June 30, 2014, we were in compliance with these debt covenants.

 

The convertible note purchase agreements relating to the SLG Notes, as discussed in note 12 to our condensed consolidated financial statements, have certain non-financial debt covenants with which we must comply. As of June 30, 2014, we were in compliance with these covenants.

 

The GE Credit Agreement, as discussed in note 12 to our condensed consolidated financial statements, contains certain covenants with which we must comply. As of June 30, 2014, we were in compliance with these covenants.

 

The Mavrix Note, as discussed in note 12 to our condensed consolidated financial statements, contains certain debt covenants with which we must comply. As of June 30, 2014, we were in compliance with these covenants.

 

The indenture relating to the 5.25% Notes, as discussed in note 12 to our condensed consolidated financial statements, has certain non-financial debt covenants with which we must comply. As of June 30, 2014, we were in compliance with these debt covenants.

 

The Canton Bonds, as discussed in note 12 to our condensed consolidated financial statements, contain certain debt covenants with which we must comply. As of June 30, 2014, we were in compliance with these covenants.

 

Risk Management Activities

 

Our risk management activities are discussed in Part II, Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) of our 2013 10-K. For the quarter ended June 30, 2014, there were no material changes to our risk management activities.

 

Critical Accounting Policies

 

For the six months ended June 30, 2014, there were no material changes to the “Critical Accounting Policies” discussed in Part II, Item 7 (Management’s Discussion and Analysis of Financial Condition and Results of Operations) of our 2013 10-K.

 

Recently Issued Accounting Pronouncements

 

For a description of recently issued accounting pronouncements, see note 18 to our condensed consolidated financial statements contained elsewhere herein.

 

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Results of Operations

 

The following is a more detailed discussion of our financial condition and results of operations for the periods presented:

 

 

 

Three Months
Ended
June 30,

 

Six Months
Ended
June 30,

 

 

 

2013

 

2014

 

2013

 

2014

 

Statement of Operations Data:

 

 

 

 

 

 

 

 

 

Revenue:

 

 

 

 

 

 

 

 

 

Product revenues

 

88.9

%

88.1

%

89.3

%

89.1

%

Service revenues

 

11.1

 

11.9

 

10.7

 

10.9

 

Total revenues

 

100.0

 

100.0

 

100.0

 

100.0

 

Operating expenses:

 

 

 

 

 

 

 

 

 

Cost of sales:

 

 

 

 

 

 

 

 

 

Product cost of sales

 

66.9

 

70.5

 

58.4

 

70.9

 

Service cost of sales

 

3.4

 

4.2

 

3.8

 

4.1

 

Derivative (gains) losses on Series I warrant valuation

 

 

2.3

 

0.3

 

(1.1

)

Selling, general and administrative

 

39.9

 

35.1

 

37.6

 

35.1

 

Depreciation and amortization

 

12.2

 

11.8

 

11.6

 

12.0

 

Total operating expenses

 

122.4

 

123.9

 

111.7

 

121.0

 

Operating loss

 

(22.4

)

(23.9

)

(11.7

)

(21.0

)

Interest expense, net

 

(7.1

)

(10.3

)

(6.3

)

(10.2

)

Other income (expense), net

 

(1.3

)

1.1

 

(0.8

)

(0.1

)

Loss from equity method investment

 

 

 

(0.0

)

 

Gain from sale of equity method investment

 

 

 

2.6

 

 

Gain from sale of subsidiary

 

17.6

 

 

8.6

 

 

Loss before income taxes

 

(13.2

)

(33.1

)

(7.6

)

(31.3

)

Income tax expense

 

(0.3

)

(0.1

)

(1.2

)

(0.6

)

Net loss

 

(13.5

)

(33.2

)

(8.8

)

(31.9

)

Loss of noncontrolling interest

 

0.1

 

0.3

 

 

0.2

 

Net loss attributable to Clean Energy Fuels Corp.

 

(13.4

)

(32.9

)

(8.8

)

(31.7

)

 

Three Months Ended June 30, 2013 Compared to Three Months Ended June 30, 2014

 

Revenue.   Revenue increased by $10.0 million to $98.1 million in the three months ended June 30, 2014, from $88.1 million in the three months ended June 30, 2013. A portion of this increase was the result of an increase in the number of gallons delivered between periods from 52.6 million gasoline gallon equivalents to 64.8 million gasoline gallon equivalents. This increase in volume was primarily from an increase in CNG sales of 7.9 million gallons. Our net increase in CNG volume was primarily from 21 new refuse customers, eight new transit customers and five new trucking customers, which together accounted for 5.4 million gallons of the CNG volume increase between periods. We also experienced an increase of 3.5 million gallons in CNG volume between periods from our existing refuse, airport, trucking and transit customers. These CNG gallon increases were offset by a decline of 1.0 million gallons related to the loss of three CNG O&M stations for one transit customer. Further, we experienced an increase of 3.5 million gallons in LNG volume between periods, which was primarily due to the addition of 2.4 million gallons from seven new trucking customers, one new industrial customer, and one new airport customer. We also experienced an increase of 1.1 million gallons in LNG volume between periods from our existing industrial, transit and trucking customers. We experienced a 0.8 million gallon increase between periods from increased RNG sales, primarily due to increased RNG production at our DCEMB and Canton facilities. Our effective price per gallon charged was $0.93 in the three months ended June 30, 2014, which represents a $0.04 per gallon increase from $0.89 per gallon in the three months ended June 30, 2013. We experienced a $2.6 million increase in station construction revenues between periods, primarily due to the completion of two new CNG stations for new transit customers. Revenue attributable to IMW increased between periods by $2.6 million. These increases were offset by a $6.0 million decrease in VETC revenue between periods as the fuel tax credit expired December 31, 2013, and we recorded $6.0 million of VETC revenue in the second quarter of 2013. Revenue also decreased by $2.8 million between periods due to decreased sales of natural gas vehicle equipment and emission control services by BAF (we sold BAF in June 2013).

 

Cost of sales.   Cost of sales increased by $11.4 million to $73.3 million in the three months ended June 30, 2014, from $61.9 million in the three months ended June 30, 2013. Our cost of sales primarily increased between periods as a result of delivering more volume to our customers. Our effective cost per gallon increased by $0.05 per gallon, from $0.59 per gallon to $0.64 per gallon, in the three months ended June 30, 2014. We experienced a $2.6 million increase in station construction costs between periods due to increased activity. Cost of sales that IMW incurred increased between periods by $1.6 million due to increased sales between periods. These increases were offset by a $3.2 million decrease in costs related to BAF’s vehicle equipment sales and emission control services between periods as we sold BAF in June 2013.

 

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Derivative (gain) loss on Series I warrant valuation.   Derivative loss increased by $2.3 million to $2.3 million in the three months ended June 30, 2014, from a $0.0 million in the three months ended June 30, 2013. The amounts represent the non-cash impact with respect to valuing our outstanding Series I warrants based on our mark-to-market accounting for the warrants during the periods (see note 17 to our condensed consolidated financial statements contained elsewhere in this report).

 

Selling, general and administrative.   Selling, general and administrative expenses decreased by $0.8 million to $34.4 million in the three months ended June 30, 2014, from $35.2 million in the three months ended June 30, 2013. This decrease was driven by a $2.5 million decrease in our stock based compensation expense and a $0.7 million decrease in our travel and entertainment expenses between periods. These decreases were offset by a $2.6 million increase in salaries and employee benefits between periods, primarily due to higher average salaries and benefits per employee during the second quarter of 2014 compared to 2013.

 

Depreciation and amortization.   Depreciation and amortization increased by $0.8 million to $11.6 million in the three months ended June 30, 2014, from $10.8 million in the three months ended June 30, 2013. This increase was primarily due to additional depreciation expense in the three months ended June 30, 2014 related to increased property and equipment balances between periods, which primarily resulted from our expanded station network, including America’s Natural Gas Highway.

 

Interest expense, net.   Interest expense, net, increased by $3.8 million to $10.1 million for the three months ended June 30, 2014, from $6.3 million for the three months ended June 30, 2013. This increase was primarily the result of an increase in interest expense related to the $50.0 million of convertible notes we issued in July 2013, the additional $10.0 million advanced under the Mavrix Note in September and December 2013, and the $250.0 million of convertible notes we issued in September 2013 (see note 12 to our condensed consolidated financial statements for a description of our outstanding debt).

 

Other income (expense), net.   Other income (expense), net, increased by $2.2 million to $1.1 million of income for the three months ended June 30, 2014, compared to $1.1 million of expense for the three months ended June 30, 2013. This increase was primarily due to a $0.3 million write up of the value of the remaining shares we were issued at the end of June 2014 from Westport in connection with the sale of BAF and $1.9 million of foreign currency exchange rate changes between periods related to IMW.

 

Gain from sale of subsidiary.   During the three months ended June 30, 2013, we recorded a $15.5 million gain from the sale of BAF.

 

Loss (income) of noncontrolling interest.   During the three months ended June 30, 2014 and 2013, we recorded a loss of $0.3 million and $0.1 million, respectively, for the noncontrolling interest in the net loss of DCEMB. The noncontrolling interest represents the 30% interest of our joint venture partner.

 

Six Months Ended June 30, 2013 Compared to Six Months Ended June 30, 2014

 

Revenue.   Revenue increased by $12.2 million to $193.4 million in the six months ended June 30, 2014, from $181.2 million in the six months ended June 30, 2013. A portion of this increase was the result of an increase in the number of gallons delivered between periods from 102.5 million gasoline gallon equivalents to 124.1 million gasoline gallon equivalents. This increase in volume was primarily from an increase in CNG sales of 13.3 million gallons. Our net increase in CNG volume was primarily from 26 new refuse customers, 10 new transit customers, five new trucking customers, and two new airport customers, which together accounted for 9.8 million gallons of the CNG volume increase between periods. We also experienced an increase of 7.7 million gallons in CNG volume between periods from our existing refuse, airport, transit and trucking customers. These CNG gallon increases were offset by a decline of 2.2 million gallons associated with the sale of our 49% interest in our Peruvian joint venture in March 2013 and 2.0 million gallons related to the loss of three CNG O&M stations for one transit customer. Further, we experienced an increase of 6.5 million gallons in LNG volume between periods, which was primarily due to a combination of 3.6 million gallons from seven new trucking customers, three new industrial customers, and one new transit customer.  We also experienced an increase of 2.9 million gallons from existing industrial, trucking and transit LNG customers. We experienced a 1.8 million gallon increase between periods from increased RNG sales, primarily due to increased RNG production at our DCEMB and Canton facilities. Our effective price per gallon charged was $0.94 in the six months ended June 30, 2014, which represents a $0.08 per gallon increase from $0.86 per gallon in the six months ended June 30, 2013. We experienced a $16.0 million increase in station construction revenues between periods, primarily due to the completion of three new CNG stations for new transit customers, three new CNG stations for new refuse customers, one new CNG station for a new airport customer, one new CNG station for a new industrial customer, and 10 upgrades for CNG stations for existing refuse customers. Revenue attributable to IMW increased between periods by $7.2 million. These increases were offset by a $32.2 million decrease in VETC revenue between periods as the fuel tax credit expired December 31, 2013, and we recorded $32.2 million of VETC revenue in the six months ended June 30, 2013, including $20.8 million related to recording all the 2012 VETC revenue in the first quarter of 2013. Revenue also decreased by $7.0 million between periods due to decreased sales of natural gas vehicle equipment and emission control services by BAF (we sold BAF in June 2013).

 

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Cost of sales.   Cost of sales increased by $32.2 million to $144.9 million in the six months ended June 30, 2014, from $112.7 million in the six months ended June 30, 2013. Our cost of sales primarily increased between periods as a result of delivering more volume to our customers. Our effective cost per gallon increased by $0.08 per gallon between periods, from $0.58 per gallon to $0.66 per gallon, in the six months ended June 30, 2014. We experienced a $13.3 million increase in station construction costs between periods due to increased activity. Cost of sales that IMW incurred increased between periods by $3.6 million due to increased sales between periods. These increases were offset by a $6.8 million decrease in costs related to BAF’s vehicle equipment sales and emission control services between periods as we sold BAF in June 2013.

 

Derivative (gain) loss on Series I warrant valuation.   Derivative (gain) losses increased by $2.7 million to a gain of $2.2 million in the six months ended June 30, 2014, from a $0.5 million loss in the six months ended June 30, 2013. The amounts represent the non-cash impact with respect to valuing our outstanding Series I warrants based on our mark-to-market accounting for the warrants during the periods. (See note 17 to our condensed consolidated financial statements contained elsewhere herein).

 

Selling, general and administrative.   Selling, general and administrative expenses decreased by $0.2 million to $67.9 million in the six months ended June 30, 2014, from $68.1 million in the six months ended June 30, 2013. This decrease was driven by a $5.3 million decrease in our stock based compensation expense, a $1.2 million reduction in our sales and marketing expenses, and a $0.6 million decrease in our travel and entertainment expenses between periods. We also experienced a $0.5 million decrease between periods related to the move of our corporate office to Newport Beach, California during the second quarter of 2013. These decreases were offset by a $4.5 million increase in salaries and employee benefits between periods, primarily due to higher average salaries and benefits per employee during the first six months of 2014 compared to 2013, and we also experienced a $1.9 million increase in business insurance, research and development, and bad debt expenses between periods. Further contributing to the increase between periods was the effect of recording $0.8 million of lower gains on the IMW contingent consideration in the six months ended June 30, 2014.

 

Depreciation and amortization.   Depreciation and amortization increased by $2.2 million to $23.1 million in the six months ended June 30, 2014, from $20.9 million in the six months ended June 30, 2013. This increase was primarily due to additional depreciation expense in the six months ended June 30, 2014 related to increased property and equipment balances between periods, which primarily resulted from our expanded station network, including America’s Natural Gas Highway.

 

Interest expense, net.   Interest expense, net, increased by $8.2 million to $19.6 million for the six months ended June 30, 2014, from $11.4 million for the six months ended June 30, 2013. This increase was primarily the result of an increase in interest expense related to the $50.0 million of convertible notes we issued in June 2013, the aggregate $15.0 million advanced under the Mavrix Note in April, September and December 2013, and the $250.0 million of convertible notes we issued in September 2013 (see note 12 to our condensed consolidated financial statements for a description of our outstanding debt).

 

Other expense, net.   Other expense, net, decreased by $1.3 million to $0.2 million for the six months ended June 30, 2014, compared to $1.5 million for the six months ended June 30, 2013. This decrease was primarily due to $1.3 million of foreign currency exchange rate changes between periods related to IMW.

 

Loss from equity method investment.   During the six months ended June 30, 2013, we recorded $0.1 million of equity in the loss of our 49% interest in our Peruvian joint venture.  We sold our interest in our Peruvian joint venture in March 2013.

 

Gain from sale of equity method investment.   During the six months ended June 30, 2013, we recorded a $4.7 million gain from the sale of our 49% interest in our Peruvian joint venture.

 

Gain from sale of subsidiary.   During the six months ended June 30, 2013, we recorded a $15.5 million gain from the sale of BAF.

 

Loss of noncontrolling interest.   During the six months ended June 30, 2014 and 2013, we recorded $0.3 million and $0.0 million, respectively, for the noncontrolling interest in the net loss of DCEMB. The noncontrolling interest represents the 30% interest of our joint venture partner.

 

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Seasonality and Inflation

 

To some extent, we experience seasonality in our results of operations. Natural gas vehicle fuel amounts consumed by some of our customers tends to be higher in summer months when buses and other fleet vehicles use more fuel to power their air conditioning systems. Natural gas commodity prices tend to be higher in the fall and winter months due to increased overall demand for natural gas for heating during these periods.

 

Since our inception, inflation has not significantly affected our operating results. However, costs for construction, repairs, maintenance, electricity and insurance are all subject to inflationary pressures and could affect our ability to maintain our stations adequately, build new stations, build new LNG plants or expand our existing facilities, or materially increase our operating costs.

 

Liquidity and Capital Resources

 

We require cash to fund our capital expenditures, operating expenses and working capital requirements, including outlays for the construction of new fueling stations, construction of LNG production facilities, the purchase of new LNG tanker trailers, investment in RNG production, mergers and acquisitions, the financing of natural gas vehicles for our customers and general corporate purposes, including making deposits to support our derivative activities, geographic expansion (domestically and internationally), expanding our sales and marketing activities, support of legislative and regulatory initiatives and for working capital for our expansion. Our principal sources of liquidity are cash on hand and cash provided by financing activities.

 

Liquidity

 

Cash used in operating activities was $43.3 million for the six months ended June 30, 2014, compared to $7.0 million for the six months ended June 30, 2013. Operating cash flows decreased between periods primarily due to the reduced collection of VETC revenues during the first six months of 2014 as compared to 2013 as the credit expired on December 31, 2013. We recognized $32.2 million of VETC revenue in the six months ended June 30, 2013, and we did not recognize any VETC revenue in the six months ended June 30, 2014. Interest expense also increased in the first six months of 2014 as we had higher debt balances outstanding during the period. We also experienced other working capital changes between periods due to timing differences related to various cash flows.

 

Cash used in investing activities was $81.5 million for the six months ended June 30, 2014, compared to $62.8 million for the six months ended June 30, 2013. We purchased property and equipment for $61.8 million in the six months ended June 30, 2014, which is an increase of $21.5 million from $40.3 million paid to purchase property and equipment in the six months ended June 30, 2013. This increase is primarily related to capital expenditures for CNG and LNG station equipment, which includes $18.4 million for the purchase of 67 CNG-In-A-Box units, which consist of relatively small, turnkey, self-contained CNG stations, from Peake Fuel Solutions, LLC.  Additionally, we had purchases of $15.7 million, net of maturities of short term investments, during the six months ended June 30, 2014, which is an increase of $15.3 million from our $0.4 million of purchases, net of maturities of short term investments, in the six months ended June 30, 2013. These increases were offset by the lower increase in restricted cash during the six months ended June 30, 2014 of $3.8 million, as compared to the increase in restricted cash during the six months ended June 30, 2013 of $20.3 million. During the six months ended June 30, 2013, we received $6.1 million related to the sale of our Peruvian joint venture, paid $9.0 million related to the purchase of MGES, and transferred BAF’s cash balance of $1.2 million to the buyer in connection with the sale of that entity. The loans we made to our customers to assist them in purchasing natural gas vehicles increased to $2.3 million in the six months ended June 30, 2014, from $0.7 million in the six months ended June 30, 2013. During the six months ended June 30, 2014 and 2013, we also collected on and sold $2.2 million and $2.9 million, respectively, of loans previously made to our customers.

 

Cash provided by financing activities for the six months ended June 30, 2014 was $9.1 million, compared to $47.9 million for the six months ended June 30, 2013. The decrease is primarily attributed to reduced borrowings of $33.4 million between periods and an increase in repayments of $4.7 million between periods.

 

Our financial position and liquidity are, and will be, influenced by a variety of factors, including our ability to generate cash flows from operations, the level of any outstanding indebtedness and the interest we are obligated to pay on this indebtedness, our capital expenditure requirements (which consist primarily of station construction costs, LNG plant construction costs, RNG plant construction costs and the purchase of LNG tanker trailers and equipment) and any merger or acquisition activity.

 

Sources of Cash

 

Historically, our principal sources of liquidity have consisted of cash provided by financing activities. At June 30, 2014, we had total cash and cash equivalents and short term investments of $276.8 million, compared to $378.3 million at December 31, 2013.

 

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On November 7, 2012, we, through two wholly owned subsidiaries (the “Borrowers”), entered into a credit agreement with GE. Pursuant to that agreement, GE agreed to loan to the Borrowers up to an aggregate of $200.0 million to finance the development, construction and operation of two LNG production facilities, each with an expected production capacity of approximately 250,000 LNG gallons per day. At June 30, 2014, the Borrowers had not drawn any amounts under the agreement.

 

Capital Expenditures

 

Our business plan calls for approximately $24.5 million in capital expenditures from July 1, 2014 through end of 2014, primarily related to construction of CNG and LNG fueling stations. We may also elect to invest additional amounts in companies or assets in the natural gas fueling infrastructure, services and production industries, including RNG production, to make capital expenditures to build additional LNG production facilities or to otherwise secure future LNG supply, and for other activities or pursuits. We will need to raise additional capital as necessary to fund any capital expenditures or investments that we cannot fund through available cash or cash generated by operations. The timing and necessity of any future capital raise may depend on various factors, including our rate of new station construction and any potential merger or acquisition activity, and other factors described under “Liquidity” above.  We may seek to raise additional capital we need through one or more sources, including, without limitation, selling assets, obtaining new or restructuring existing debt, or obtaining additional equity capital, or any combination of these or other available sources of capital.  We may not be able to raise capital, when needed, on terms that are favorable to us or existing stockholders, or at all. Any inability to raise capital may impair our ability to invest in new stations, develop natural gas fueling infrastructure and invest in strategic transactions or acquisitions and may reduce our ability to grow our business and generate sustained or increased revenues.

 

Off-Balance Sheet Arrangements

 

At June 30, 2014, we had the following off-balance sheet arrangements that had, or are reasonably likely to have, a material effect on our financial condition:

 

·                   outstanding surety bonds for construction contracts and general corporate purposes totaling $33.7 million,

 

·                   five take-or-pay contracts for the purchase of LNG, and

 

·                   operating leases where we are the lessee.

 

We provide surety bonds primarily for construction contracts in the ordinary course of business, as a form of guarantee. No liability has been recorded in connection with our surety bonds as we do not believe, based on historical experience and information currently available, that it is probable that any amounts will be required to be paid under these arrangements for which we will not be reimbursed.

 

We have five contracts that require us to purchase minimum volumes of LNG at index based prices. One contract expires in June 2015, two contracts expire in December 2015 and two contracts expire in October 2017.

 

We have entered into operating lease arrangements for certain equipment and for our office and field operating locations in the ordinary course of business. The terms of our leases expire at various dates through 2021. Additionally, in November 2006, we entered into a ground lease for 36 acres in California on which we built our California LNG liquefaction plant. The lease is for an initial term of thirty years and requires payments of $0.2 million per year, plus up to $0.1 million per year for each 30 million gallons of production capacity utilized, subject to future adjustment based on consumer price index changes. We must also pay a royalty to the landlord for each gallon of LNG produced at the facility, as well as a fee for certain other services that the landlord provides.

 

Item 3.—Quantitative and Qualitative Disclosures about Market Risk

 

In the ordinary course of business, we are exposed to various market risk factors, including changes in general economic conditions, domestic and foreign competition, commodity price risk and foreign currency exchange rates.

 

Commodity Risk.   We are subject to market risk with respect to our sales of natural gas, which has historically been subject to volatile market conditions. Our exposure to market risk is heightened when we have a fixed price sales contract with a customer that is not covered by a futures contract, or when we are otherwise unable to pass through natural gas price increases to customers. Natural gas prices and availability are affected by many factors, including weather conditions, overall economic conditions and foreign and domestic governmental regulation and relations.

 

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Natural gas costs represented 25% (or 31% excluding BAF, IMW and Northstar) of our cost of sales for 2013 and 28% (or 33%, excluding IMW and Northstar) for the six months ended June 30, 2014.

 

To reduce price risk caused by market fluctuations in natural gas, we may enter into exchange traded natural gas futures contracts. These arrangements also expose us to the risk of financial loss in situations where the other party to the contract defaults on its contract or there is a change in the expected differential between the underlying price in the contract and the actual price of natural gas we pay at the delivery point.

 

We account for these futures contracts in accordance with FASB authoritative guidance on derivatives. The accounting under this guidance for changes in the fair value of a derivative depends upon whether it has been specified in a hedging relationship and, further, on the type of hedging relationship. To qualify for designation in a hedging relationship, specific criteria must be met and appropriate documentation maintained.

 

The fair value of the futures contracts we may use is based on quoted prices in active exchange traded or over the counter markets, which are then discounted to reflect the time value of money for contracts applicable to future periods. The fair value of these futures contracts is continually subject to change due to market conditions. In an effort to mitigate the volatility in our earnings related to futures activities, our board of directors adopted a natural gas hedging policy which restricts our ability to purchase natural gas futures contracts and to offer fixed price sales contracts to our customers. We plan to structure prospective futures contracts so that they will be accounted for as cash flow hedges under the FASB guidance, but we cannot be certain they will qualify. For more information, please refer to our 2013 10-K under “Risk Management Activities”.

 

In prior years, we have prepared a sensitivity analysis to estimate our exposure to market risk with respect to the futures contracts we held as of the end of our latest fiscal year to hedge the fixed price component of our supply contracts. That sensitivity analysis generally reflected the expected fluctuation in the value of any such contracts if the price of natural gas were to fluctuate (increase or decrease) by a specified percentage from the price quoted on NYMEX as of the end of our latest fiscal year. We did not perform such a sensitivity analysis as of June 30, 2014 because we did not have any futures contract outstanding at June 30, 2014.

 

Foreign exchange rate risk.   Because we have foreign operations, we are exposed to foreign currency exchange gains and losses. Since the functional currency of our foreign operations is in their local currency, the currency effects of translating the financial statements of those foreign subsidiaries, which operate in local currency environments, are included in the accumulated other comprehensive income (loss) component of consolidated equity in our financial statements and do not impact earnings. However, foreign currency transaction gains and losses not in our subsidiaries’ functional currency do impact earnings and resulted in approximately $0.2 million of loss for the six months ended June 30, 2014. During the six months ended June 30, 2014, our primary exposure to foreign currency rates related to our Canadian operations that had certain working capital balances denominated in the U.S. dollar which were not hedged.

 

We have prepared a sensitivity analysis to estimate our exposure to market risk with respect to our monetary transactions denominated in a foreign currency. If the exchange rate on these assets and liabilities were to fluctuate by 10% from the rate as of June 30, 2014, we would expect a corresponding fluctuation in the value of the assets and liabilities of approximately $0.8 million.

 

Item 4.—Controls and Procedures

 

Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. We carried out an evaluation, under the supervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report.

 

Changes in Internal Control over Financial Reporting

 

We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes.

 

There were no changes in our internal control over financial reporting that occurred during the period covered by this quarterly report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II.—OTHER INFORMATION

 

Item 1.—Legal Proceedings

 

We are party to various legal actions that have arisen in the ordinary course of our business. During the course of our operations, we are also subject to audit by tax authorities for varying periods in various federal, state, local, and foreign tax jurisdictions. Disputes have arisen, and may continue to arise, during the course of such audits as to facts and matters of law. It is impossible to determine the ultimate liabilities that we may incur resulting from any such lawsuits, claims and proceedings, audits, commitments, contingencies and related matters or the timing of these liabilities, if any. If these matters were to be ultimately resolved unfavorably, an outcome not currently anticipated, it is possible that such outcome could have a material adverse effect upon our financial position, results of operations or liquidity. However, we believe that the ultimate resolution of such actions will not have a material adverse effect on our consolidated financial position, results of operations, or liquidity.

 

Item 1A.—Risk Factors

 

An investment in our Company involves a high degree of risk of loss. You should carefully consider the risk factors discussed below and all of the other information included in this quarterly report on Form 10-Q before you decide to purchase shares of our common stock. We believe the risks and uncertainties described below are the most significant we face. The occurrence of any of the following risks could harm our business. In that case, the trading price of our common stock could decline. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our operations.

 

We have a history of losses and may incur additional losses in the future.

 

For the six months ended June 30, 2014, we incurred pre-tax losses of $60.1 million, which included a derivative gain of $2.2 million related to marking to market the value of our Series I warrants. In 2011, 2012 and 2013, we incurred pre-tax losses of $48.2 million, $99.6 million and $63.2 million, respectively. Our losses for 2011, 2012 and 2013 included derivative gains of $2.7 million, $3.4 million and $0.9 million, respectively, relating to marking to market the value of our Series I warrants (see note 17 to our consolidated financial statements in our 2013 10-K). During 2011 and 2013, our losses were substantially decreased by approximately $17.9 million and $45.4 million of revenue, respectively, from federal fuel tax credits. The program under which we received such credits expired on December 31, 2013. We may never achieve or maintain profitability and our failure to do so woul