Clean Energy Fuels Corp and BP Partner to Expand U.S. Renewable Natural Gas Conference Call

Mar 01, 2017 AM EST
BP.L - BP PLC
Clean Energy Fuels Corp and BP Partner to Expand U.S. Renewable Natural Gas Conference Call
Mar 01, 2017 / 03:00PM GMT 

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Corporate Participants
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   *  Tony Kritzer
      Clean Energy Fuels - Director, IR
   *  Andrew Littlefair
      Clean Energy Fuels - President, CEO
   *  Harrison Clay
      Clean Energy Renewable Fuels - President

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Conference Call Participants
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   *  Rob Brown
      Lake Street Capital - Analyst
   *  Eric Stine
      Craig-Hallum - Analyst

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Presentation
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Operator   [1]
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 Welcome to the BP and clean Energy RNG partnership conference call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded. It is now my pleasure to turn your call over to your host Tony Kritzer, Director of Investor Relations. Thank you. You may begin.

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 Tony Kritzer,  Clean Energy Fuels - Director, IR   [2]
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 Thank you, operator. This morning Clean Energy announced a transaction with BP. If you did not receive the release, it is available on the Investor Relations section of the company's website at www.cleanenergyfuels.com where the call is also being webcast. There will be a replay available on the website for 30 days.

 Before we begin, we'd like to remind you that some of the information contained in the news release and on this conference call contains forward-looking statements that involve risks, uncertainties and assumptions that are difficult to predict. Words of expression reflecting optimism, satisfaction with current prospects, as well as words such as believe, intend, expect plan, should, anticipate, and similar variations identify forward-looking statements, but their absence does not mean that the statement is not forward-looking. Forward-looking statements Include those regarding the completion and timing of the proposed transaction of BP and Clean Energy's plans for its RNG business after the completion of such transaction. Actual results and the timing of events could differ materially from those expressed in or implied by these forward-looking statements as a result of a variety of different factors including among others Clean Energy and BP's ability to satisfy the conditions required to close the transaction, market and another general economic conditions, the registrant's ability to implement its RNG business plans and other risk factors described in the registrant's annual report on form 10-K and quarterly reports on 10-Q most recently filed with the Securities and Exchange Commission. The forward-looking statements made herein speak only as of the date of this report and the registrant undertakes no obligation to update publicly such forward-looking statements except as otherwise required by law.

 Participating on today's call from the company is President and Chief Executive Officer, Andrew Littlefair, and President of Clean Energy Renewables Harrison clay. And with that, I will turn the call over to Andrew.

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 Andrew Littlefair,  Clean Energy Fuels - President, CEO   [3]
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 Hello and thank you for joining us. As you have seen from our joint press announcement, we are very excited to be partnering with BP to expand the production and supply of renewable natural gas for transportation customers. Essentially, under the terms of the transaction, BP will be buying our biomethane production plants and our third party biomethane supply contracts. In other words, they are acquiring the upstream of our biomethane business for $155 million. We will continue to take the biomethane supply and sell it as our redeemed branded renewable natural gas fuel through our infrastructure of natural gas fuelling stations. Our focus will be on the downstream part of the market which is our core business. Our relationship with our fuelling customers stays exactly the same. We are the retailer of the biomethane fuel.

 This really allows each of us to concentrate on what we do best. It secures growing biomethane supply for clean energy and our customers and it provides access to downstream fuelling infrastructure for BP. What also has us excited is the validation this provides to RNG fuelling in general and the leadership of Clean Energy in particular. BP's investment is an indication of the confidence they have that this business is poised to accelerate. We really are looking at this as a partnership to which each of us will contribute. BP's presence, training capabilities, financial resources and strategic vision will pair with our fuelling infrastructure, customer relationships, and policy initiatives and on the ground presence. Our incentives are aligned and we all benefit for getting more Redeem into more vehicles. This is a good deal for BP, Clean Energy, our customers and our communities.

 This couldn't happen at a better time. As you have no doubt seen in many media stories, diesel emissions are causing environmental and health issues worldwide. In the United States, and particularly in California, where fuelling infrastructure presence is greatest, authorities are working toward ways to limit emissions, increase renewable fuel use, and increase energy independence. Our Redeem renewable natural gas accomplishes all these goals.

 Sales of redeem have almost tripled since we introduced it just over three years ago. Some of the most environmentally forward-thinking companies like UPS, Ryder, Republic Services, Kroger, and cities like Santa Monica, California, have signed contracts with Clean Energy to guarantee themselves supply of the low carbon renewable fuel for their large fleets of vehicles. A fuel that is rated [70%] cleaner than diesel enables these customers to rapidly achieve aggressive sustainability goals.

 Another exciting development is happening in our backyard. The Ports of LA and Long Beach are putting in place of clean air action plan that could require the thousands of trucks which operate at the ports to use a renewable fuel. We believe RNG is the only solution that meet or exceeds these tough emissions and carbon standards at an affordable cost. Having BP stand behind this can only improve our ability what is sure to be a growing demand for Redeem.

 Regarding the details of the deal, we have filed the HSR documents, and we expect to close by the end of the first quarter. Under the terms of the transaction, Clean Energy will receive $155 million with an additional earn out of up to $25 million, and BP will be responsible for approximately $10 million of debt associated with the production plants. We will continue to share in the revenue stream for RINs and low-carbon fuel credits under our long term biomethane supply contract with BP.

 This will help strengthen our balance sheet in a non-dilutive way and position us well as we a look towards upcoming debt maturities in 2018 and beyond. We couldn't be more pleased with BP as our new partner, their investment and our opportunity.

 And now operator, I'll open it up for questions.

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Questions and Answers
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Operator   [1]
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 Thank you. (Operator Instructions). Our first question comes from Rob Brown with Lake Street Capital Markets. Please proceed with your question.

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 Rob Brown,  Lake Street Capital - Analyst   [2]
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 Good morning. Congratulations on the sale.

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 Andrew Littlefair,  Clean Energy Fuels - President, CEO   [3]
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 Good morning, Rob.

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 Rob Brown,  Lake Street Capital - Analyst   [4]
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 First, can you give us an overview of how the biomethane -- your view on how the biomethane market growth can happen? Is this a -- can this continue to be a 20%, 25% grower net of the California rules? And then maybe upside from there, can you give us a sense of what that market looks like to you?

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 Andrew Littlefair,  Clean Energy Fuels - President, CEO   [5]
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 Sure. I'll start and then Harrison is really an expert on this and working with the market, and so I'll ask him to give some color as well. Rob, I think we've seen that kind of growth if not even greater couple of years ago in this market. But we're beginning to really see some traction with our customers.

 This fuel is one that is pretty powerful. It's very clean and can really help people move rapidly for their sustainable goals, sustainability goals. So we're seeing some of our larger customers opt in to wanting this renewable fuel. So we see the nice thing about this transaction is that our supply contracts will grow substantially, and with the help of BP in developing some more plants that we had under contract, we see the supply -- which has been kind of balanced as we have been growing this market growing rapidly.

 So I think over time you can see this market grow substantially from where it is. Our supply, for instance, could grow from [60 to 60 million] gallons that we have to closer to 180 million gallons. So I think that this market is beginning to be understood when you put this fuel with the new low-NOx engines that we talked about on our calls. You have really the cleanest option and at the most affordable cost out of any offering in the market, 70 -- 90% less on NOx and 70% less on greenhouse gases. So, I think this marketplace and I think BP believes the same thing is set for higher growth rates than we have seen. Harrison, you may have a different take on it.

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 Harrison Clay,  Clean Energy Renewable Fuels - President   [6]
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 No, I think that's right. I mean, if you look at what we have done here at Clean Energy, we have quadrupled fuel sales in three years, up to 60 million gallons. The amount of resource that's out there that can be recovered and sold as vehicle fuel with really no technological breakthrough and done profitably is really significant. There is no reason this couldn't be a multi-billion gallon market for biomethane vehicle fuel, given the upstream resources that are available.

 And we've never seen interesting or investment in this space like we have over the last six to nine months. I mean, it's really been a tremendous acceleration in investment in future production, driven in part by solid pricing for LCFS credits and RINs, which has made this very profitable for companies to produce biomethane and sell it as vehicle fuel. And now we see a company like BP with their kind of scale and their kind of resources coming into the market with a really significant investment in the upstream supply of biomethane to the vehicle fueling market, I think, is a real solid indication that we should see accelerated growth in the coming years.

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 Andrew Littlefair,  Clean Energy Fuels - President, CEO   [7]
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 I think Rob, remember the way -- what we like about this transaction is it really puts BP with a steep balance sheet and its financial resources in the capital-intensive part of this business, right, to generate the supply. Up until now we've been vertically integrated. We had supply and we've had -- we've been moving the product, aggregating the product and getting it to the downstream and to the customers. That really allows us to have a partner that can create a heck of a lot of supply and for us to focus on the downstream, and sell this stuff to our retail customers.

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 Rob Brown,  Lake Street Capital - Analyst   [8]
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 Okay, great. That's a great overview. And then in terms of the economic arrangement, going forward, will you sell -- I think you mentioned getting a fee to sell the gallons, but can you align the going forward arrangement that Clean Energy receives?

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 Andrew Littlefair,  Clean Energy Fuels - President, CEO   [9]
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 Well, through the supply that we take from BP will continue to get a royalty on each of those gallons. We'll be sharing the current revenue stream that we have because obviously BP is paying us for it up front. But we continue to have -- there is no limit to how much we can grow this, and so we'll be getting a split from BP for really ever after on all the supply that comes out of the contract now that we have with them.

 Going forward, we can take as much of the supply that's available from BP. If there is, if BP doesn't have supply we're allowed to go to third parties and contract other supply. And of course, on that we wouldn't be able to -- we wouldn't have to share anything with BP. So it really gives, I think, us great freedom to be able to supply this biomethane to our customers.

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 Rob Brown,  Lake Street Capital - Analyst   [10]
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 Okay, great. Thank you. I'll turn it over.

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Operator   [11]
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 Our next question comes from Eric Stine with Craig-Hallum. Please proceed with your question.

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 Eric Stine,  Craig-Hallum - Analyst   [12]
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 Hi, Andrew. Congratulations.

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 Andrew Littlefair,  Clean Energy Fuels - President, CEO   [13]
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 Thanks, Eric.

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 Eric Stine,  Craig-Hallum - Analyst   [14]
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 So, a lot of my questions were related to kind of BP's thoughts and where you think this can go with their muscle behind it and you addressed most of that. I mean I'm just wondering what you are seeing from other producers in the market and clearly what's going on in California and renewable and natural gas production on the rise, and the strategic importance of your stations since that is the transportation pathway so that people can monetize RINs and LCFS credits.

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 Andrew Littlefair,  Clean Energy Fuels - President, CEO   [15]
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 Right. Why don't I handle the second part of this and ask Harrison give a little overview on the supply front? That, where Clean Energy is valuable -- if you think of BP and this arrangement as the wholesaler, we are valuable because we have the largest network of stations in the country, right? 600. And the most customers, that where we're just getting started. For instance, we're -- we have an arrangement with FedEx but they're just getting started in this business and they're at their first station they would like to have biomethane as well.

 So that's really valuable. You don't get these credits simply if you don't get it into the vehicle. And so for us having the largest fuel system and network that's a valuable -- that's very, very valuable. And that's key to this business and of course BP saw that as well. Harrison, maybe you need to talk about what you're seeing here in California and the supply.

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 Harrison Clay,  Clean Energy Renewable Fuels - President   [16]
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 Yes, I mean, as I referenced earlier, we have seen more interest in investment in production and more people coming to us at an accelerated rate with projects that they are developing and looking for the opportunity to sell some or all of that product into the vehicle fuel market -- and obviously we're the biggest throughput to vehicle market out there. We have got a national network, have the largest network in California for CNG and LNG fuel sales, and so producers see that opportunity for the RIN pricing and the LCFS pricing that we had over the last year and year and a half. They're looking at some very lucrative investment opportunities.

 And we anticipate -- and I'm certainly seeing evidence of a real ramp-up in production over the coming years. I mean, I think that the industry as a whole is going to be growing by multiples over the coming years. The amount of product available. You think about California alone, we have over 200 million gasoline gallon equivalents of biomethane that gets flared every year. That's gas being captured and being sent to the flare here in the state of California. All of that could be redirected into the biomethane processing plants, into the grid, and out to the vehicle fueling network. There is tremendous opportunity here and real money and now we have BP, a perfect example of that that's being invested and making that happen.

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 Eric Stine,  Craig-Hallum - Analyst   [17]
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 Right. Okay. Thanks for the color and I'll take the rest of my questions offline.

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 Andrew Littlefair,  Clean Energy Fuels - President, CEO   [18]
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 Thank you, Eric.

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Operator   [19]
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 Our next question comes from Pavel Molchanov with Raymond James. Please proceed with your question.

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Unidentified Participant Raymond James - Analyst   [20]
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 Here's Michael in for Pavel. I was wondering how this deal came about. Who called whom first and how long has it been in the works if you're allowed to discuss those details?

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 Andrew Littlefair,  Clean Energy Fuels - President, CEO   [21]
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 I don't know that we'll get into too much of the details, Michael. We have worked with BP for a long time.

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 Harrison Clay,  Clean Energy Renewable Fuels - President   [22]
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 Yes, we have worked with BP in this space as a supplier for years. And so we've been close to them and looking at opportunities in the market and just sort evolved that it was a really natural fit with their capital resources, their balance sheet on the production side and what they can bring to the production side of the equation, and obviously what we have in the downstream aggregation -- it really just made a ton of sense.

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Unidentified Participant Raymond James - Analyst   [23]
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 Okay. And quick follow-up. Is there any kind of update on when Congress might reinstate the fuel tax credit? Seems like tax reform is being pushed back a little bit. I'm curious as to where you think the normal --

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 Andrew Littlefair,  Clean Energy Fuels - President, CEO   [24]
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 Yes, Michael that's a difficult one, isn't it, crystal ball.

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Unidentified Participant Raymond James - Analyst   [25]
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 Yes.

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 Andrew Littlefair,  Clean Energy Fuels - President, CEO   [26]
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 I think as you look at grand design tax reform, tax cuts and business tax cuts, that's one thing. But a very large complicated tax reform -- not sure that that gets done this year. And so I think there will be continued focus on the existing tax incentive type packages and so. We think of it in the shorthand as the extenders package. I don't know that we are clear yet on how that might come. But you know, I think there's a chance that that would be reinstated before -- maybe later this year. But I think it will certainly be in the mix as they look at tax reform. Because I don't know that wholesale tax reform, kind of major reform will get done this year. That could be next year. And so therefore I think that some of these extenders, these business extender credits could continue this year.

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Unidentified Participant Raymond James - Analyst   [27]
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 Okay. That's great. That's it from me.

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 Andrew Littlefair,  Clean Energy Fuels - President, CEO   [28]
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 Thank you.

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Operator   [29]
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 (Operator Instructions). Our next question comes from [John Warnock] with JPMorgan. Proceed with your question.

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Unidentified Participant Raymond James - Analyst   [30]
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 Hi, guys. Good morning and congratulations. I guess I have a two part question. One, how does this affect shareholder value? You're stock's been down [80%] in ten years. And did you guys receive equity or any warrants or voting stock inside of BP?

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 Andrew Littlefair,  Clean Energy Fuels - President, CEO   [31]
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 No equity in BP. I think this is very good for shareholders in terms we are paying down up debt and have used some stock to do that. This cash that we received from BP for this part of the biomethane business, I think it's something that we can use in a non-dilutive way to reduce our debt. So I think it's good news for our shareholders.

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Unidentified Participant Raymond James - Analyst   [32]
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 I guess follow-up. How do you plan to potentially use that debt -- excuse me, use that cash to reduce further debt or invest inside of your other assets and businesses?

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 Andrew Littlefair,  Clean Energy Fuels - President, CEO   [33]
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 I think our first -- one of our major priorities is reducing some of the near term debt, the 2018 debt that we have outstanding. So that will certainly be first on the radar screen. Really, John we've spent -- we have a great network now. We've spent a lot of money over the last few years to develop it. And so it is, I don't know how familiar you are with our ongoing CapEx requirements that but that's come down dramatically. Really our job now is to work with these new clean engines, to grow for instance, in the port of LA and these other places around the country and leverage our infrastructure. So the days of having to spend $100 million a year to build out the network, we've done that. So now I think this transaction will help us pay back some of the debt and do it in a non-dilutive way.

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Unidentified Participant Raymond James - Analyst   [34]
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 Very good. And just one last follow-up question and again, congratulations. I think it is going to be a positive purchase and sale for your organization. With regards to your overall debt, do you see it growing or do you see it reducing once the cash is dissolved going forward?

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 Andrew Littlefair,  Clean Energy Fuels - President, CEO   [35]
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 You're saying our debt? Our debt has gone down, right, last year we retired $285 million of debt. And so you should see it reduce further.

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Unidentified Participant Raymond James - Analyst   [36]
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 All right. Very good. Thank you.

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 Andrew Littlefair,  Clean Energy Fuels - President, CEO   [37]
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 You bet.

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Operator   [38]
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 Ladies and gentlemen, we have reached the end of our question-and-answer session. I'd like to turn the call back to Andrew Littlefair for closing comments.

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 Andrew Littlefair,  Clean Energy Fuels - President, CEO   [39]
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 Well, thank you everybody. Thanks for joining us today. We think is a great opportunity to expand our renewable business with a great partner. We look forward to working on BP on this piece of the transaction and other ways to help grow the market. Thank you for joining us today.

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Operator   [40]
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 This concludes today's teleconference. You may disconnect your lines at this time. We thank you for your participation and have a great day.




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