Natural gas transportation fuels leader Clean Energy Fuels (CLNE 4.53%) has finally turned the corner.
Or, it's about to.
Er, all the pieces are in place for it to do so.
Let's just say that recent moves to reduce operating expenses and focus on strategic parts of the business could allow investors to finally gain from the long-term vision laid out by the company over a decade ago.
That means the next several quarters will be absolutely critical for the company and its shareholders. Why? They will provide a clear view of a full year of operations without ownership of the renewable natural gas (RNG) business, which was sold to BP earlier in 2017. While the deal allowed the natural gas fuels leader to pay off debt and reduce operating expenses going forward, the loss of renewable fuel tax credits may more than offset those gains.
That begs the question: Where will Clean Energy Fuels be in one year?
Image source: Getty Images.
The road ahead
Just to review, Clean Energy Fuels sold its RNG business and interests to BP for $155 million in cash and up to $25 million in additional performance milestones achieved by 2022. Most of the cash, which has already been received, went to cleaning up the balance sheet -- a longtime sore spot for investors. Meanwhile, the combination of debt reduction and reduced operating expenses is expected to save $11 million per year in interest and operating expenses.
That's great news for investors, especially when combined with cost reduction measures that have already been implemented. Unfortunately, it appears that Clean Energy Fuels will lose more than $11 million in annual operating income from reduced per-gallon tax credits previously garnered by the RNG business.
Consider the three types of renewable and low-carbon tax credits Clean Energy Fuels has historically received from fuel sales:
|
Tax Credit |
Description |
Income Category |
|---|---|---|
|
VETC (federal alternative fuels credit) |
Federal-level subsidy paid $0.50 per diesel equivalent gallon of compressed natural gas (CNG) and liquefied natural gas (LNG). |
Recorded as separate revenue line item. |
|
RINs (renewable identification numbers) |
Federal-level subsidy paid per gasoline equivalent gallon of RNG. |
Included in fuel sales, thereby increasing per-gallon selling prices. |
|
LCFS (low-carbon fuel standard) |
State-level subsidy paid per gasoline equivalent gallon of CNG, LNG, and RNG. |
Included in fuel sales, thereby increasing per-gallon selling prices. |
Dats source: SEC filings.
The VETC expired on the last day of 2016, which means the company has not received a penny from the federal program in 2017. Management is hopeful that it will be retroactively reinstated in the future, and since that's become standard procedure for alternative fuel credits in the last decade, it's not too presumptuous for investors to expect the same.
That said, it's the loss of RNG-related RINs and LCFS that should really concern investors. The results from the second quarter of 2017 -- the first full quarter without the RNG business -- demonstrate that much.
|
Tax Credit |
Q2 2017 |
Q2 2016 |
Change |
|---|---|---|---|
|
RINs |
$3.7 million |
$7.5 million |
($3.8 million) |
|
LCFS |
$0.4 million |
$5.5 million |
($5.1 million) |
|
Total |
$4.1 million |
$13.0 million |
($8.9 million) |
Data source: SEC filings.
Clean Energy Fuels saw a reduction of $8.9 million in RIN and LCFS credits in just the first three months without the RNG business. That works out to $35.6 million in lost sales on an annualized basis -- and the company itself states that this is the new reality. Worse, since the credits are cost-free revenue, they're the same as income. In other words, it looks as if this will more than offset any cost savings from reduced interest and operating expenses.
While the natural gas transportation fuels leader expects to continue growing volumes of fuel sold for the foreseeable future, the expected growth won't offset the loss from the asset sale. Losing an estimated $35.6 million per year in cost-free revenue will be difficult to replace, especially in one year's time, even with double-digit growth in volume sales. Indeed, the company's volume-related revenue -- where revenue from RINs and LCFS credits is included -- dropped 12% in the second quarter of 2017 compared to the year-ago period despite increasing volume sold by 6.6%.
Whether or not Clean Energy Fuels can close the gap with compressor sales and its station construction business -- both of which have a choppy history remains to be seen. It certainly won't happen in the next year, and is unlikely to occur in the next few years. After all, the company only recorded $64.9 million in station construction revenue in all of 2016, while compressor sales have slid each year since 2014.
What does it mean for investors?
Strategic expansion will be the name of the game for Clean Energy Fuels in the next year. But while shareholders are rightfully excited about a cleaner balance sheet and more focused operations, I think the lost business from RIN and LCFS credits has been mostly overlooked. For better or for worse, the next year of operations will bring the impacts to light. But this preview sure doesn't look good.
