CLNE » Topics » Fixed Price and Price Cap Sales Contracts Without an Underlying Futures Contract

These excerpts taken from the CLNE 10-K filed Mar 16, 2009.

Fixed Price and Price Cap Sales Contracts Without an Underlying Futures Contract

        Our contracts to sell CNG and LNG at a fixed price or a variable price subject to a cap are, for accounting purposes, firm commitments. Under U.S. generally accepted accounting principles, or GAAP, we record the actual results of delivering the fuel under the contract as the sale of the natural gas occurs. When we enter into these fixed price or price cap contracts with our customers, the price is set based on the prevailing index price of natural gas at that time. However, the index price of natural gas constantly changes, and a difference between the fixed price of the natural gas included in the customer's contract price and the corresponding index price of natural gas typically develops after we enter into the sales contract. If we do not have a derivative contract to hedge the natural gas, and if at the time we sell natural gas under the contract the prevailing index price for natural gas exceeds the commodity portion of our contracted sale price, we incur a loss. Prior to December 31, 2007, we entered into several contracts to sell LNG or CNG to customers at a fixed price or an index-based price that is subject to a fixed price cap and subsequently sold the underlying futures contract prior to the expiration of the customer's sales contract. During these contracts, the price of natural gas generally increased from the price of natural gas when we set the CNG and LNG price.

53


        The following table summarizes important information regarding our fixed price and price cap supply contracts where we do not have an underlying futures contract and we are required to sell fuel to our customers as of December 31, 2008:

 
  Estimated
volumes(a)
  Average
price(b)
  Contracts Duration

CNG fixed price contracts

    1,150,067   $ 1.18   through 12/13

LNG fixed price contracts

    1,061,667   $ 0.60   through 07/09

CNG price cap contracts

    1,560,375   $ 0.81   through 12/09

LNG price cap contracts

    525,000   $ 0.62   through 03/09

        This table does not include two 2.1 million LNG gallon per year renewal options beginning April 1, 2009 that one of our customers possesses related to an LNG price cap contract. The contract contains a price cap of $7.50 per MMbtu on the SoCal Border Index.


(a)
Estimated volumes are in gasoline gallon equivalents for CNG contracts and are in LNG gallons for LNG contracts and represent the volumes we anticipate delivering over the remaining duration of the contracts.

(b)
Average prices are in gasoline gallon equivalents for CNG contracts and are in LNG gallons for LNG contracts. The average prices represent the natural gas commodity component in the customer's contract.

        The price of natural gas has generally increased since we entered into these contracts and fixed or capped the price of CNG or LNG that we sell to the customers. If these contracts had a notional amount as defined under GAAP, then the contracts would be considered derivatives and we would record a loss based on estimated future volumes and the estimated excess of current market prices for natural gas above the cost of the natural gas commodity component of our customer's fixed price or price cap. However, because the contracts have no minimum purchase requirements, they are not considered derivatives and any estimated future losses under these contracts cannot be accrued in our financial statements under GAAP and we recognize the actual results of performing under the contract as the fuel is delivered. If we applied a derivative valuation methodology to these contracts using estimated volumes along with other assumptions, including forward pricing curves and discount rates, we estimate our pre-tax net income would have been higher by the following ranges for the periods indicated:

Year Ended
   
   
   
 

December 31, 2006

  $ 14,267,259   to   $ 17,437,761  

December 31, 2007

  $ 4,122,914   to   $ 5,039,117  

December 31, 2008

  $ 348,540   to   $ 425,994  

        These amounts are based on estimates involving a high degree of judgment and actual results may vary materially from these estimates. These amounts have not been recorded in our statements of operations as they are non-GAAP.

        At December 31, 2008, we estimate we will incur between $70,000 and $85,000 to cover the increased price of natural gas above the inherent price of natural gas embedded in our customer's fixed price and price cap contracts over the duration of the contracts. These estimates were based on natural gas futures prices on December 31, 2008, and these estimates may change based on future natural gas prices and may be significantly higher or lower.

54


        Our volumes under these contracts, in gasoline gallon equivalents, expire as follows:

2009

    2,831,296  

2010

    230,000  

2011

    230,000  

2012

    230,000  

2013

    230,000  

(18) Fixed Price and Price Cap Sales Contracts Without an Underlying Futures Contracts

        Prior to December 31, 2007, the Company entered into certain contracts with various customers, primarily municipalities, to sell LNG or CNG at fixed prices or at prices subject to a price cap. Subsequently, the Company sold the underlying futures contract prior to the expiration of the customer's sales contract. The contracts generally range from two to five years. The most significant cost component of LNG and CNG is the price of natural gas.

        As part of determining the fixed price or price cap in the contracts, the Company works with its customers to determine their future usage over the contract term. However, the Company's customers do not agree to purchase a minimum amount of volume or guarantee their volume of purchases. There is not an explicit volume in the contract as the Company agrees to sell its customers volumes on an "as needed" basis, also known as a "requirements contract." The volume required under these contracts varies each month, and is not subject to any minimum commitments. For U.S. generally accepted accounting purposes, there is not a "notional amount," which is one of the required conditions for a transaction to be a derivative pursuant to the guidance in SFAS No. 133.

        The Company's sales agreements that fix the price or cap the price of LNG or CNG that it sells to its customers are, for accounting purposes, firm commitments, and U.S. generally accepted accounting principles do not require or allow the Company to record a loss until the delivery of the gas and corresponding sale of the product occurs. When the Company enters into these fixed price or price cap contracts with its customers, the price is set based on the prevailing index price of natural gas at that time. However, the index price of natural gas constantly changes, and a difference between the fixed price of the natural gas included in the customer's contract and the corresponding index price of natural gas typically develops after the Company enters into the contract. During these time periods, the Company entered into several contracts to sell LNG or CNG to customers at a fixed price or an index-based price that is subject to a fixed price cap. The Company has also generally entered into natural gas futures contracts to offset economically the adverse impact of rising natural gas prices. From an accounting perspective, during periods of rising natural gas prices, the Company's futures contracts have generally been marked-to-market through the recognition of a derivative asset and a corresponding derivative gain in its statements of operations. However, because the Company's contracts to sell LNG or CNG to its customers at fixed prices or an index-based price that is subject to a fixed price cap are not derivatives for purposes of U.S. generally accepted accounting principles, a

100



Clean Energy Fuels Corp. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

(18) Fixed Price and Price Cap Sales Contracts Without an Underlying Futures Contracts (Continued)


liability or a corresponding loss has not been recognized in the Company's statements of operations during this historical period of rising natural gas prices for the future commitments under these contracts. As a result, the Company's statements of operations do not reflect its firm commitments to deliver LNG or CNG at prices that are below, and in some cases, substantially below, the prevailing market price of natural gas (and therefore LNG or CNG).

        The following table summarizes important information regarding the Company's fixed price and price cap supply contracts under which it is required to sell fuel to its customers as of December 31, 2008:

 
  Estimated
Volumes(a)
  Average
Price(b)
  Contracts
Duration

CNG fixed price contracts

    1,150,067   $ 1.18   through 12/13

LNG fixed price contracts

    1,061,667   $ 0.60   through 07/09

CNG price cap contracts

    1,560,375   $ 0.81   through 12/09

LNG price cap contracts

    525,000   $ 0.62   through 03/09

        This table does not include two 2.1 million LNG gallon per year renewal options beginning April 1, 2009 that one of our customers possesses related to an LNG price cap contract. The contract contains a price cap of $7.50 per MMbtu on the SoCal Border Index.


(a)
Estimated volumes are in gasoline gallon equivalents for CNG contracts and are in LNG gallons for LNG contracts and represent the volumes the Company anticipates delivering over the remaining duration of the contracts.

(b)
Average prices are in gasoline gallon equivalents for CNG contracts and are in LNG gallons for LNG contracts. The average prices represent the natural gas commodity component embedded in the customer's contract.

        At December 31, 2008, based on natural gas futures prices as of that date, the Company estimates it will incur between $70,000 and $85,000 to cover the increased price of natural gas above the inherent price of natural gas embedded in its customer's fixed price and price cap contracts over the duration of the contracts. The Company's volumes under these contracts, in gasoline gallon equivalents, expire as follows:

2009

    2,831,296  

2010

    230,000  

2011

    230,000  

2012

    230,000  

2013

    230,000  

        The price of natural gas has generally increased since the Company entered into these agreements to fix the price or cap the price of LNG or CNG that it sells to these customers. However, this difference has not been reflected in the Company's financial statements as these are executory contracts and are not derivatives under U.S. generally accepted accounting principles.

101



Clean Energy Fuels Corp. and Subsidiaries

Notes to Consolidated Financial Statements (Continued)

EXCERPTS ON THIS PAGE:

10-K (2 sections)
Mar 16, 2009
Wikinvest © 2006, 2007, 2008, 2009, 2010, 2011, 2012. Use of this site is subject to express Terms of Service, Privacy Policy, and Disclaimer. By continuing past this page, you agree to abide by these terms. Any information provided by Wikinvest, including but not limited to company data, competitors, business analysis, market share, sales revenues and other operating metrics, earnings call analysis, conference call transcripts, industry information, or price targets should not be construed as research, trading tips or recommendations, or investment advice and is provided with no warrants as to its accuracy. Stock market data, including US and International equity symbols, stock quotes, share prices, earnings ratios, and other fundamental data is provided by data partners. Stock market quotes delayed at least 15 minutes for NASDAQ, 20 mins for NYSE and AMEX. Market data by Xignite. See data providers for more details. Company names, products, services and branding cited herein may be trademarks or registered trademarks of their respective owners. The use of trademarks or service marks of another is not a representation that the other is affiliated with, sponsors, is sponsored by, endorses, or is endorsed by Wikinvest.
Powered by MediaWiki