This station (Pembroke) has doubled fuel volume to accommodate industrial customer growth. Source: Clean Energy.
Natural gas refueling leader Clean Energy Fuels Corp (CLNE -2.18%) reported second-quarter financial results and once again showed pretty strong growth in fuel volumes delivered, even as oil prices have made natural gas less attractive over the past year-plus. The highlights:
- Gallons delivered increased 15%.
- Total revenue decreased 11%, but entirely because of seasonality in compressor and station construction revenue. Fuel sales revenue was up $7.9 million.
- Gross margin rose to 26.6% from 25.3% one year ago.
- Capex and operating expenses continue to fall.
Let's take a closer look at the key metrics that help investors better understand whether Clean Energy is making progress toward profitability or just spinning its wheels.
Growing recurring revenue and making more profit
The core focus of Clean Energy's business is to build a strong base of recurring revenue. When a customer acquires a new bus, trash truck, or heavy-duty tractor, those vehicles will be in operation for as long as a decade or even more. So while the company's station construction and compressor businesses can be very up and down based on sales demand, every new vehicle a customer acquires will require fuel every quarter for years and years.
For this reason, the company highlights gallons-equivalent delivered as a key metric each quarter, as it more accurately reflects how the company's efforts to add new customers to its base drive results. As a result -- not to mention that Clean Energy Compression (formerly IMW) sells globally and is feeling the pains of China's slowdown and a strong dollar -- it's probably best to not put too much weight in quarterly changes in revenue attributed to these segments of the business.
Last quarter, that recurring revenue increased almost $8 million, which led to the improvement in gross margin to 26.5%, even with fuel prices down about $0.10 per gallon from last year, and the company's fuel costs per gallon down only $0.08. The faster decline in fuel prices versus fuel costs did trim per-gallon margins from $0.29 to $0.27 in the quarter, but considering how far prices have fallen, that's a relatively steady rate.
Working capital and cash position
Over the past several quarters, I've really focused on the company's cash and equivalents position, and with good reason. Over the past couple of years, the company has blown though a lot of money, investing in a substantial network of over-the-road stations. And while the return on those stations has been slow to develop while heavy-trucking customers continue to test natural gas vehicles, CEO Andrew Littlefair said the company now fuels more than 3,000 heavy-duty trucks at its 200-plus truck-ready stations.
At any rate, the company has spent significantly less money this year for capital expenditures than it did last year. Through the first six months of 2014, Clean Energy spent $62 million on capex, versus $26 million this year. If we further parse and peel out the $10 million spent on NG Advantage expansion (which has doubled fuel sales versus last year) and look only at capex spent on station expansion for the transportation business, the company has spent $46 million less than in 2014.
Instead of just looking at cash and equivalents, let's take a closer look at the company's working capital, which includes cash but also adds in assets such as accounts receivable and inventories, while subtracting current liabilities such as interest and debt due, accounts payable, and other accrued liabilities:
| End of Period | Q4 '13 | Q2 '14 | Q4 '14 | Q1 '15 | Q2 '15 |
|---|---|---|---|---|---|
| Current Assets | $521,096 | $437,305 | $413,639 | $378,186 | $330,073 |
| Current Liabilities | $120,106 | $116,325 | $120,211 | $116,178 | $91,729 |
| Working Capital | $400,990 | $320,980 | $293,428 | $262,008 | $238,344 |
|
Change from Prior Qurater |
($31,420) | ($23,664) | |||
| Change YTD | ($80,010) | ($55,084) |
Yes, the company continues to burn through cash and working capital, but is significantly cutting that rate as compared to last year.
How Clean Energy is cutting capital outflows
There are three things at work in cutting capital outflows::
- Reducing capex.
- Reducing SG&A expenses.
- Increasing more profitable fuel volume.
Starting last year, the company began taking steps to rationalize its cost structure, in the core refueling business and also in the compressor business, and it continues to pay off. From the year-ago quarter, sales, general, and administrative expenses are down $5.4 million. The company also reported a strong sequential decline of $1.2 million, demonstrating that even as fuel volumes increase, the company's operating costs don't necessarily go up in lockstep.
As a result of all of these things, management says it expects to get to adjusted EBITDA positive on a quarterly basis by year-end. In short, that means the company's operations would essentially be cash-flow positive. And that's a pretty big milestone for a number of reasons.
Debt's still an overhang
Next year's $150 million convertible note expiration remains a key concern for many investors, and as the company consumes more capital each quarter, the fear is this will cause significant shareholder dilution to address. And while it's a very real possibility there will be some dilution -- management says it will file a $500 million shelf tender soon to replace a recently expired one -- to pay down that debt, the company's consistent steps toward positive cash from operations is likely to strengthen its ability to secure new financing to replace the expiring notes.
It's also not completely out of the question that the company may be in a position to attain debt on better terms because of improved operational cash flows. Nonetheless, it's likely that this will continue to weigh on the stock until there's a clear resolution, sometime between now and next September, when the notes come due.
The company pays around $40 million per year to service debt, so getting to adjusted EBITDA-positive would still leave the company $40 million per year short of cash breakeven before taxes. In other words, it's just a milestone, but an important one.
Looking ahead
Looking past the inconsistent results in the station and compressor segments, core recurring revenue -- measured by fuel sales -- continues to grow at an impressive rate. This is being driven by strong growth in refuse (27%), trucking (19%), and industrial (NG Advantage, which doubled).
What to watch most closely? Fuel sales growth -- and maintaining or even increasing margins -- remains key, with a continued focus on cutting capex, and improvement in SG&A expense. With around $238 million in working capital, $182 million of which is cash, the company has a pretty solid safety net, but there's only so much longer it can go before it needs to be cash-flow positive. It's been a slow, steady march, but there has been measurable improvement from last year, as well as from last quarter.
Can Clean Energy keep moving forward? Only time will tell, but it's hard to ignore the progress so far.
