OPAL Fuels Inc. (NASDAQ:OPAL) Q3 2023 Earnings Call Transcript

OPAL Fuels Inc. (NASDAQ:OPAL) Q3 2023 Earnings Call Transcript November 14, 2023

Operator: Good morning, and welcome to the OPAL Fuels Third Quarter 2023 Earnings Call and Webcast. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, today’s conference call is being recorded. I would now like to turn the call over to Todd Firestone, Vice President of Investor Relations. Please go ahead.

Todd Firestone: Thank you, and good morning, everyone. Welcome to the OPAL Fuels third quarter 2023 earnings conference call. With me today are Co-CEOs, Adam Comora and Jonathan Maurer; Ann Anthony and Scott Contino, who will serve as OPAL’s Interim Chief Financial Officer. OPAL Fuels released financial and operating results for the third quarter of 2023 yesterday afternoon, and those results are available on the Investor Relations section of our website at opalfuels.com. Presentation and access to the webcast for this call are also available on our website. After completion of today’s call, a replay will be available for 90 days. Before we begin, I’d like to remind you that our remarks, including answers to your questions contain forward-looking statements, which involve risks, uncertainties and assumptions.

Forward-looking statements are not a guarantee of performance, and actual results could differ materially from what is contained in such statements. Several factors that could cause or contribute to such differences are disclosed on slides 2 and 3 of our presentation. These forward-looking statements reflect our views as of the date of this call, and OPAL Fuels does not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date of this call. Additionally, this call will contain a discussion of certain non-GAAP measures. A definition of non-GAAP measures used and a reconciliation of these measures to the nearest GAAP measure is included in the appendix of the release and presentation. Adam will begin today’s call by providing an overview of the quarter’s results, recent highlights and update on our strategic and operational priorities.

Jon will then give a commercial and business development update, after which Scott will review financial results. We’ll then open the call for questions. And now I’ll turn the call over to Adam Comora, Co-CEO of OPAL Fuels.

Adam Comora: Thank you, Todd. Good morning, everyone, and thank you for being here for OPAL Fuels third quarter 2023 earnings call. First, I would like to introduce Scott Contino, who will serve as our interim CFO. Scott has been with Fortistar for over 25 years and has worked with the OPAL companies for all of that period. Scott was also CFO of OPAL up until the spring of 2021, and he has an intimate knowledge of the business and the people. We feel confident in his abilities to stand in while we continue our permanent CFO search. I also want to thank Ann Anthony for her service. Ann was instrumental in helping take OPAL public and our capital raising initiatives. We wish her well in her future endeavors. Moving on, I’d like to highlight several points from this quarter’s results and recent developments.

First, in September, we closed on a $500 million credit facility, which streamlines and simplifies our balance sheet and provides a clear funding pathway for our in-construction projects and execution on the next phase of our growth plan. Second, we recently announced a joint venture with South Jersey Industries to construct and operate RNG facilities. We started construction on the first project, the Atlantic RNG facility in Egg Harbor Township, New Jersey. We expect commercial operations to commence in mid-2025. We hope to expand this JV with additional projects shortly. Third, we brought on line one of our largest RNG projects in North America, our Emerald project in Michigan. OPAL’S 50% share of this 2.6 million MMBtu design capacity facility is under our JV with GFL and is now through its ramp-up period and has received its EPA pathway registration.

We anticipate generating RINs and begin selling them in December. Fourth, post the updated set rule in June, RIN prices have continued to strengthen with prices now in the $3.50 per gallon range. We think supply-demand dynamics will continue to support constructive prices through year-end and into 2024. Finally, we are encouraged by the green shoots we are seeing in the downstream fuel station service business based on very positive feedback from numerous major fleets testing the new Cummins 15-liter natural gas engine. We spend a lot of time discussing our RNG production growth and trends on that side of the business, but there is significant potential for our Fuel Station Services business to grow substantially over the next several years, based on what we are seeing and hearing.

The OEMs are just now starting to take orders for deliveries in the back half of 2024, and it is something we are starting to get excited about here at OPAL as we look to 2025 and beyond. We also want to highlight several new disclosures after corresponding with the SEC, including separating the reporting of RNG pending monetization from adjusted EBITDA and additional disclosures regarding production capacity metrics. These enhanced disclosures should aid investors in their thinking about the near- and long-term earnings power of the business. For adjusted EBITDA, we will no longer be matching the value of the RNG and environmental credits we produce in the same period we recognized cost of that production. Revenue, net income and adjusted EBITDA will now just reflect the credits that are sold and transferred in a period.

RNG pending monetization, now presented in a separate table, includes the volume of stored gas, which we call RNG pending certification, and the inventory of unsold environmental credits held-for-sale at the end of the period. This table will also detail the environmental credit trading activity in a period. Jon will elaborate later on the additional disclosures we are regarding production capacity metrics, which will provide clarity on organic growth potential at our operating RNG facilities. With that, I’ll turn it over to Jon. Jon?

Jonathan Maurer: Thank you, Adam, and good morning, everyone. We are pleased with our accomplishments this quarter. Importantly, we put the Emerald RNG project on line as one of the largest facilities of its kind in the U.S. We now have eight RNG projects in operation with an annual design capacity of 5.2 million MMBtu, more than tripling our capacity over the past two years. Third quarter production continues to be aligned with expectations. RNG production was 2.0 million MMBtus for the nine months ended September 30, 2023, a one-third increase from the same period last year. In addition to our operating projects, we currently have six RNG projects in construction, representing an additional 4.4 million MMBtu of design capacity.

As Adam mentioned, we added Atlantic, our first SJI joint venture project to our in construction RNG portfolio. This project will contribute 0.3 million MMBtu of annual design capacity net to OPAL. We expect Atlantic to commence commercial operations in mid-2025. Moving on to our advanced development pipeline. We continue to make progress. We now have 7.9 million MMBtu of identified biogas in our advanced development pipeline. We continue to target placing 2 million MMBtus of projects into construction in 2023. Together, our operating and construction projects represent 9.6 million MMBtu of design capacity. Adding in our advanced development pipeline, we have 17.5 million MMBtu of annual design capacity in operations, construction and advanced development.

This quarter, we’re providing additional detail on how we measure the production output at our RNG and renewable power projects. We have often discussed the annual design capacity of our facilities, which represents the amount of biogas these facilities are designed to process. We are now adding two new metrics: Inlet design capacity utilization and utilization of inlet gas. Inlet design capacity utilization measures the percentage of quantity of gas available at the inlet of our facilities, compared with the design capacity of these facilities for the relevant period. We generally expect our RNG facilities to begin somewhere in the 70% to 80% range of the inlet design capacity utilization, and expect same-store sales growth and increasing inlet design capacity utilization rates as all of our RNG facilities are in open and growing landfills and we continue to make improvements in gas collection at the well fields.

Second, utilization of inlet gas measures how productive we are in converting the gas coming into the RNG facility into product RNG. It is simply the volume of actual production per given period divided by the volume of inlet gas. This metric should be relatively stable between 80% and 90% with fluctuations based on the efficiency of the system, the planned and unplanned downtime at the plant, as well as the quality of the gas, i.e., methane content, which can be aided by well field and gas collection management. We think both of these metrics should clear up some details regarding the period-end or year-end design capacity statistics and also give investors a sense of organic growth potential at our facilities. I want to shift gears now and address construction delays that we’ve seen in the past.

We’re pleased to report that we have obtained two major permits, and as a result, the timing associated with the completion of these construction projects has an increased level of certainty. In particular, we’ve received the air permits for both the Sapphire and Polk projects, which were major elements outside of our control. As a result, these projects are now on track to reach commercial operations in Q3 and Q4 next year, respectively. Prince William continues to be on track for Q1 2024 commercial operations, as previously reported. Before we move on to the financial results in the quarter, I also want to take the opportunity to say thank you to Ann. She was a pleasure to work with, and perhaps Ann can say a few words before we pass the call over to our Interim CFO, Scott Contino.

Ann?

Ann Anthony : Thank you, Jon and Adam, and good morning, everyone. I wanted to take a minute to thank everyone I have worked with both within OPAL and externally. It has been a very rewarding experience to see such an exciting transformation in such a short period of time. I wish everyone at OPAL the very best of luck, and will continue to cheer you on from the sideline. I hope that I get a chance to work with all of you again very soon.

Jonathan Maurer: Great. Thanks again, Ann. And with that, I’ll turn it over to Scott to give a little more detail on the financial results.

Scott Contino: Thank you, Jon, and good morning to all the participants on today’s call. Last night, we filed our earnings press release, which detailed our quarterly results for the period ending September 30, 2023. Our 10-Q will be filed later today. The biggest driver of the quarter’s results was environmental attribute pricing and the monetization of RINs in inventory. Looking at the third quarter results compared to the second quarter of 2023, RNG production increased to 0.7 million MMBtus from 0.6 million MMBtus. The increase is largely due to increased inlet design capacity utilization and utilization of inlet gas, along with the partial month of start-up at Emerald. RNG production was 2.0 million MMBtus for the 9 months ended September 30, 2023 compared to 1.5 million MMBtus for the comparable period last year.

Revenue in the third quarter was $71 million as compared to $55 million in the second quarter. The main driver of the higher revenues was the sale of 8.4 million RINs at an average realized sale price of $2.83 a gallon as compared to the second quarter where we elected to delay selling in a depressed D3 price environment. Net income for the third quarter was $0.2 million as compared to $114.1 million in the second quarter. Excluding the second quarter’s onetime gain on deconsolidation, third quarter net income was $9 million greater than the second quarter’s $8.8 million net loss. Again, the main driver was the greater sale of RINs. In contrast to prior disclosures, we are now reporting RNG pending monetization separately from adjusted EBITDA.

This value will vary each quarter depending on how much we ultimately produce and sell. We will continue to provide a quarter-end value of RNG pending monetization based on a quarter-end price of D3 RINs and LCFS credits, showing a net value to OPAL after consideration of costs such as royalties, dispensing fees, et cetera. Adjusted EBITDA was $16.5 million in the third quarter. A reconciliation to GAAP results is provided in our earnings release from yesterday and our investor presentation updated this morning on our website. The quarter was negatively impacted by approximately $1.6 million of project ramp-up expenses that were not capitalized and other project development and legal fees also not capitalized. We’ll discuss the impacts of excluding RNG pending monetization for full year 2023 guidance shortly, but first, I want to mention a couple of other drivers of financial performance in the quarter.

The Fuel Station Services segment dispensed 33.1 million GGEs in the third quarter, including service volumes. Revenues for this segment increased to $37.3 million for the third quarter as compared to $30 million in the second quarter. This increase in revenue was primarily the result of increased RIN sales and the segment results continued the trend of improving margins. Renewable Power revenues decreased to $13.7 million for the quarter from $14.5 million in the second quarter. This was primarily due to reduced Arbor Hills revenues as Emerald came on line. As Adam mentioned, in September, we entered into a $500 million senior secured credit facility. The credit agreement provides up to $450 million of term loans over an 18-month draw period and $50 million of revolving credit.

As of September 30, 2023, approximately $164 million was drawn down on the facility. As of September 30, 2023, liquidity was $360 million, consisting of $327 million of availability under the credit facility and $33 million of cash, cash equivalents and short-term investments. As a result, we feel good about our capital position to execute on our growth plan to take advantage of strengthening end markets. At current RIN prices, we expect our full year 2023 adjusted EBITDA guidance to be in the $60 million to $63 million range and RNG production to range from 2.7 million MMBtus to 2.9 million MMBtus. Our adjusted EBITDA guidance includes the anticipated receipt of $8 million to $9 million of ITC sale proceeds in the fourth quarter. This represents approximately 80% of the ITC proceeds from our share of the Emerald project with the balance anticipated in 2024.

As we’ve mentioned, the estimated range for adjusted EBITDA excludes the value of RNG pending monetization, which we expect to be in the $20 million to $22 million range. Our reduced production guidance from our March guidance expectations has resulted from previously reported plant start delays at both Emerald and Prince William and not production levels from operating facilities. Plant start delays also shifted some ITC sales into 2024. With that, I’ll turn it back to Jon for concluding remarks.

Jonathan Maurer: In closing, we are pleased with continuing success in the execution of our business plan. We are aided by multiple tailwinds, including continued industry consolidation, and we have the capital in place to take advantage of these opportunities, creating value for our stakeholders. We remain committed to furthering OPAL’s vertically-integrated mission to build and operate best-in-class RNG facilities that deliver industry-leading, reliable and cost-effective RNG solutions to displace fossil fuels and mitigate climate change. And with that, I’ll turn the call over to the operator for Q&A. Thank you all for your interest in OPAL Fuels.

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Q&A Session

Operator: [Operator Instructions] Our first question comes from Derrick Whitfield with Stifel. Your line is open.

Derrick Whitfield: Good morning, all, and congrats on your operational progress with Emerald and Atlantic. And Ann, best wishes to you on your future endeavors.

Jonathan Maurer: Thanks, Derrick.

Derrick Whitfield: For my first question, I wanted to focus on the implied EBITDA ramp to $42 million in Q4. Could you speak to the project ITC and RIN drivers, specifically for Q4? And then, more broadly, speak to how you plan to manage the monetization of your RIN bank, which, to your credit, it is only increased in value year to date as shown on slide 19.

Adam Comora: Yes. Thanks, Derrick. This is Adam Moore here. And a couple of things on the guidance for the fourth quarter, which is in the $40 million to $42 million range. One is, we are including there the sale of ITC proceeds from the Emerald project. It is important to note, the $8 million to $9 million that we referenced there is about 80% of the proceeds we expect to receive from that with the remaining 20% from those ITC proceeds in 2024. The other piece that’s driving a large sequential increase in EBITDA in the fourth quarter is also the continued monetization of the RINs that we’ve generated. I would just caution folks, when we show the $5 million of RINs at the end of the third quarter, there was a forward sale contract on the majority of that around $3 per RIN.

So, we are anticipating selling — and we’ve been active selling the remaining of the RINs that are getting produced throughout the balance of the fourth quarter. And those are the primary drivers in the fourth quarter.

Derrick Whitfield: That’s great.

Adam Comora: In terms of our — I’m sorry. In terms of our RIN monetization thoughts going forward, I would say this, I think that the RIN market is behaving sort of as we would expect with the updated guidance on the RVOs. And we think we are going to be in the normalized RIN monetization strategy, which would basically mean trying to transact or put forward sales in place, as we produce the RINs. And we really think sort of holding RINs, and having some of that volatility from quarter-to-quarter should normalize as we move forward. We have not seen a lot of trading activity yet on the 2024’s. We expect that really to start in earnest over the coming weeks and months or so. And as we mentioned in our commentary, the supply and demand fundamentals look good for D3 RINs. And it’s our expectations that we should see this constructive pricing continuing into 2024.

Derrick Whitfield: Thanks for the added detail, Adam. Certainly agree with your thoughts on the macro side. From a follow-up, I really wanted to focus on the competitive landscape for RNG and the recent Morrow transaction. On the one hand, Morrow highlights your stock is undervalued based on your online and in construction projects alone. On the other hand, it paints a more competitive backdrop for the growth of your ADP. I’d love your take on both sides of the coin.

Jonathan Maurer: Derrick, this is Jon. So, we’re really excited about our positioning here that transaction really set or reestablish the mark of kind of a 10x multiple on a company that has 5 million MMBtus of projects and without a lot of growth opportunity and certainly without the same downstream opportunities we have in our advanced development pipeline. So, continues to be constructive and positive in terms of the environment out in the industry. When we look at the competitive landscape, we really think of excellence in execution as really being a differentiating factor. And so, we are not troubled by the consolidation, we’re actually encouraged by it. And at the same time, we continue to look at opportunities ourselves.

The $500 million credit facility and other liquidity that we have really gives us a little bit of ability to continue to look for growth opportunities. Our advanced development pipeline is in good shape and growing and really the relationships that we have with our counterparties, I think helps with all of that growth. Maybe, Adam, you’d like to add a little bit.

Adam Comora: Yes, just a couple of quick follow-ups there. We put together OPAL Fuels and really embarked on our business strategy. We had a belief that transportation fuel is going to be the highest value of this RNG product. And, that recent guidance out of the EPA in June, which really sets the stage for transportation fuel being very attractive for the next three years, our vertical integration really comes into play as a lot of these landfill owners or feedstock folks are thinking about how to align themselves with folks that can create the most value from the product. So, I think that vertical integration continues to be impactful as we’re competing for new business. I would say, the fact that we’ve got the capital in place also gives confidence to our new partners to continue to work with us and assign us gas rights.

And although it was a lot of work putting together, a lot of the new disclosures around our operating plan metrics and that sort of thing. I also think that’s going to be a differentiator where you look at the project that OPAL puts on line and operates, I think that also gives counterparties a lot of confidence that they’re going to align with somebody that, A, is going to get a project built and B, is going to operate them efficiently and effectively and C, then also grow those projects organically by continuing to do really good work in the well field to increase gas collection and efficiency of those well fields. So, I think all of those things still stack up really well for us, Derrick.

Operator: Our next question comes from Matthew Blair with TPH.

Matthew Blair: Adam, you mentioned the tight D3 supply-demand, on our numbers, it looks like will be around 100 million RIN short for 2023. Can I ask you what happens in that scenario? Do you think the EPA brings back the cellulosic waiver credit, or is there a possibility that EPA might, I guess, retroactively reduce the 2023 RVO for D3 RINs? Any thoughts would be appreciated.