OPAL Fuels Inc. (NASDAQ:OPAL) Q4 2022 Earnings Call Transcript

Jonathan Maurer: And Matthew, I’ll just add as well. Good morning, nice to hear you on the call here, that, with the Emerald project coming online midyear, you will see a substantial pickup in gas, in revenues, income and EBITDA in the second half of the year as well from that.

Matthew Blair: And then follow up is just on the renewable power portfolio. It looks like there was an asset where you are, I guess, your contract wasn’t renewed. Could you talk a little bit about that? And do you view that as the risk going forward?

Jonathan Maurer: Yes, that was a project that we have long term gas right on, it was with the municipality and the municipality — the gas rights ended pursuant to its term and the municipality decided that they wanted to take those gas rights back, remove the power projects and look at the future later in life. It did involve anything to do with our project other than the fact that they are, I guess, keeping their options open in terms of what their future might look.

Adam Comora: And I’d say when you look across the portfolio, I’m just looking at Jon here and we can follow-up. I don’t think we’d have any gas rights expiring.

Jonathan Maurer: No, nothing in the near future.

Matthew Blair: Very helpful, thank you.

Jonathan Maurer: And I’ll add to that that when we do renewable natural gas projects and we build these, we get gas price that are generally 20 years or longer with regard to those projects. So that’s kind of a legacy renewal power feature, but we don’t see it affecting other projects going forward in the near future.

Adam Comora: Yes, I would really consider that one one off.

Operator: Our next question comes from the line of Martin Malloy of Johnson Rice.

Martin Malloy: I had a question on the cost side, and relative to Slide 7 with the revenue for landfill gas, dollar per MMBtu. Could you maybe — and I realize those projects coming online, there is a lot of movement around the cost side. But can you maybe talk about where you expect to get to on the cost side in terms of dollar per MMBtu and the path towards getting there?

Adam Comora: Yes, I’d say in general, although, there were some escalated utility costs in 2022 and some other general inflationary pressures, our cost per MMBtu has not changed materially from what we have talked about previously. We are still in the high single digits for our cost of production on landfill and, call it, somewhere in the low 20s on dairy. And we are always trying to drive efficiencies in our business and try to maximize output and productivity of our plants. So I’m not going to give you a specific target on where we think we can get costs down to. But we don’t see a lot of material changes from where we’ve been and what we’ve discussed historically.

Operator: Our next question comes from the line of William Grippin of UBS.

William Grippin: Appreciate all the color that you’ve already provided. I just have a couple maybe more modeling questions here. But first, could you provide any color on the SG&A that you have embedded in the adjusted EBITDA guide for 2023?

Ann Anthony: So I don’t think that we want to get to the level of detail of actually guiding there. As you can imagine, first year public company, I think we’ve tried to model out something that’s appropriate and reasonable. But I don’t think we want to get to that level of detail in our guidance.

William Grippin: So just pivoting to the eRIN pathway. Just what are the key developments that you need there to — or expect to come there to gain clarity on how impactful that could be for OPAL?

Adam Comora: I say from a super high level, we have to see whether or not it’s included in the final rule as a pathway. Right now, they proposed that you could use renewable power to be used as electricity, as transportation fuel. So first order of business, are they going to include that as a pathway here in June? Second order of — and they may delay it, quite frankly. I think there’s a lot of push and a lot of momentum behind including it. But the industry have a lot of questions around some of the mechanics that we need some clarity around, which is what is the equivalency value, how many RINs are they going to size assign per megawatt that you produce, there’s a little bit of mechanics around who the RIN generator will be.

I don’t think that necessarily impacts the economics so much but people have a lot of questions over whether or not the auto OEM will be the generator of that RIN credit. And then who needs to be assigned on the pathway, which is that entire value chain of the e-RIN for how the economics are going to get split up. So we think it’s all potentially really positive. And there’s also the potential to take your RNG from a pipeline and potentially create some eRINs. So there’s a lot of little nuances in it and — but those are, just to give you a flavor from the high level of what we’re waiting for some clarity on.

Operator: Our next question comes from the line of Ryan Pfingst of B. Riley.

Ryan Pfingst: Maybe I’ll just sneak one in here. Going back to your comments around the multi-year RVO allowing for the potential of longer term contract. Are those discussions happening today and what would be your expected time frame for entering into contracts like that?

Adam Comora: They’re happening internally, they’re happening with other market participants. I wouldn’t say they’ve begun in real earnest yet with obligated parties. We would anticipate those kinds of things to potentially start happening once the volumes are set. So that’s something that we can report back on in the back half of the year.

Operator: Our next question comes from the line of Craig Shere of Tuohy Brothers.

Craig Shere: So first, maybe you can help me to understand, if there is a biogas to power project that has a long term PPA off take. How does the eRINs work in that case it is three to five years on the PPA, does the off taker own that or how’s all that work?

Jonathan Maurer: So it varies. Some projects find the carbon value either through reps or otherwise through the power purchaser and some do not. And in all cases where it has been assigned and the projects is potentially a material participant in this market, we commence discussions with counterparties to substitute third party acquired RINs for the renewable attributes from our gas that will enable us to then sell the eRIN. So it’s kind of a mixed bag out there. But I would say that we see a pathway to getting the majority of our renewable power into the eRIN pathway.

Craig Shere: And then you talked a couple of times on this call about the hiccup or reassessment of landfill operators last year that seems to be thawing, allowing projects to move forward or at least contracting. If they were reassessing the underlying value of RNG in their footprint, does that mean for new contracts and projects that perhaps higher splits have to be afforded to the site host?

Jonathan Maurer: I think all of that took place over the course of the last year or two. And people settled out as to what the right splits ought to be. I think that the value has shifted somewhat as some of that has been recognized, but most of that has taken place. And we will still see some dynamics out there. But I think that the pathwaying is open for getting more contracts finalized and signed, and putting those projects into construction in the near future.

Adam Comora: Just a couple of quick follow ups there. One is, we haven’t seen any real changes in royalty rates that change sort of how build multiples look for us and that sort of thing. So that’s positive. And just to John’s point there, we really do feel like we have gotten some good visibility and traction in getting these things across the finish line. And it’s always a little surprising for how long documentation can take on a lot of these things. But we feel really good about where we’re at today versus maybe six months ago in terms of moving those things through documentation.

Craig Shere: And really quick modeling question. If you are banking RINs to sell potentially higher prices after the firm RVO in the second half, how do you assess the pricing at which you report that in your adjusted EBITDA?

Ann Anthony: So I think we shared with you kind of what our assumptions were in terms of guidance. And as we get through each quarter, we come to Q1, we’ll probably — we’ll make an assumption around kind of what that pricing looks like for the value at that time and provide an updated sensitivity in terms of where market prices are.

Operator: Our next question comes from the line of Derrick Whitfield of Stifel.