OPAL Fuels Q2 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 10, 2023

There are 10 speakers on the call.

Operator

Morning, and welcome to Opel Fuel's Second 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. You will then hear an automated message advising you that your hand is raised. As a reminder, today's conference is being recorded.

Operator

I would now like to turn the conference over to Todd Firestone, Vice President of Investor Relations to begin. Please go ahead.

Speaker 1

Thank you, and good morning, everyone. Welcome to the Opel Fuel Second Quarter 2023 Earnings Conference Call. With me today are Co CEOs, Adam Camora and Jonathan Camora and Ann Anthony, Opel's Chief Financial Officer. Opal Fuel's release, financial and operating results for the Q2 of 2023 yesterday afternoon, and those results are available on The Investor Relations section of our website at opalfuel.com. The presentation access to the webcast for this call are also available on our website.

Speaker 1

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, Actual results could differ materially from what is contained in such statements. Several factors that could cause or contribute to such differences are described in Our investor presentation, which is posted to our Investor Relations section of our website. These forward looking statements reflect our views as of the date of this call. Noble Fuel does not undertake any obligation to update forward looking statements to reflect events or circumstances after the date of this call.

Speaker 1

Additionally, this call will contain discussion of certain non GAAP measures, including but not limited to adjusted net loss, adjusted net loss per basic share, Adjusted net loss per diluted share and adjusted EBITDA. 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 updates On our strategic and operational priorities, John will give a commercial and business development update, after which Anne will review financial results. We'll then open the call for questions. And now, I'll turn the call over to Adam Quorum, Co CEO of Opel Fuels.

Speaker 2

Thank you, Todd. Good morning, everyone, and thank you for being here for Opel Fuel's Q2 2023 earnings call. I'd like to highlight several points from this quarter's results. 1st, operational performance at our in service RNG facilities Continue to meet our expectations in the Q2, which we expect to continue for the balance of the year. We also saw an improvement in our Fuel Station Service segment, which we also expect to continue.

Speaker 2

John and Anne will go into further detail on the quarterly results and some of the puts and takes we see playing out in our full year results. One key development in the quarter, which we were very pleased with was the final set rule published by the EPA in June. This final rule strongly supported cellulosic biofuels and the use of renewable natural gas as a transportation fuel. For Opal Fuels, this gives us confidence in strong and less volatile B3 RIN pricing for at least the next 3 years And further validates our vertically integrated business model, which is best positioned economically and strategically to deliver our growing RNG production base into the highest value and growing end market. Specifically, The final rule resulted in higher compliance targets of D3 RIN volumes that must be purchased by obligated parties and extended these targets through 2025.

Speaker 2

These higher 3 year targets, which provide multiyear visibility of D3 RIN demand, Not only give the industry a strong investment signal, but also provide the potential to sell production forward for multiple years. Post the final set rule, B3 RIN prices have risen from under $2 per RIN early in the year to recently trading just above $3 With the improvement in RIN prices, we sold some credits from our existing inventory, which we had previously elected to hold leading up to the EPA's ruling in June. In the Q2, we sold approximately 5,700,000 RINs at an average price of roughly $2.80 We continue to sell RIN credits from our unsold inventory in the Q3 at prices in excess of $3 A more detailed table was posted in our earnings press release last night and is also disclosed in our investor presentation available on our website this morning. The value of Opal's unsold environmental credits and environmental attributes awaiting certification this quarter increased by more than $15,000,000 to $34,000,000 Note, we include this increase in value and adjusted EBITDA similar to prior quarters in order to match The associated expenses in our GAAP financials recorded in the quarter the RNG is produced.

Speaker 2

However, we don't book revenues for GAAP purposes until the environmental credits are actually sold. While ERINs failed to make it into the EPA's final set rule, They are still being considered and we believe there is a reasonable chance they will be implemented, perhaps with some modifications to the original proposal. We're highly supportive of the ERIN pathway. It is the right environmental public policy to incentivize more methane capture projects, which may be too small to justify a full RNG plant and therefore remain undeveloped. For Opel Fuels, it enables us to leverage our existing renewable power portfolio and increase the value of those assets with little incremental capital and opens up numerous Smaller renewable electricity development opportunities, which would further accelerate our growth.

Speaker 2

We're also excited to announce that we've moved our Polk County, Florida RNG project into construction. This project represents a successful and fast transition through our business development funnel into construction. Pulp represents 1,100,000 MMBtu of additional nameplate capacity, of which we own 100%. 2nd quarter results saw improvement in adjusted EBITDA margins in our Fuel Station Service segment to what we think is trending to more normalized operating environment. This improvement was driven by not only higher RIN prices, But moving forward on completing construction projects and cycling through inflationary cost pressures on some of our fixed price third party station construction contracts, We expect this to continue in the second half of the year.

Speaker 2

We think it's a great time to be Opel Fuels. We have built and continue to add to what we believe is The end results should be a powerful platform of nice return on capital projects, which when operational, Require minimal capital expenditures resulting in sustainable long term free cash flow. With that, I'll turn it over to John. John?

Speaker 3

Thank you, Adam, and good morning, everyone. I want to start out by saying that we're very focused on executing on our growth plans. Not only were our current production expectations

Speaker 4

met, but

Speaker 3

we are moving high quality projects forward in our business development funnel, providing significant momentum and visible growth to our business. In our RNG Fuel segment, We have 7 projects in operation, representing roughly 3,900,000 MMBtu of annual nameplate capacity. These operating projects provide a solid base to our ongoing business. At Noble Road, New River and Pine Bend, 3 of our more recent landfill RNG projects to come online, gas production continues to increase as the landfill trash increases And as our expert gas collection team works hand in hand with our landfill partners to improve gas quantity and quality. In addition to our operating projects, we currently have 6 RNG projects in construction, representing an additional 5.4 1,000,000 MMBtu of annual nameplate capacity.

Speaker 3

These construction projects provide visibility to near term growth for our underlying business. I would highlight the following. First, our Emerald RNG project completed construction in June and is expected to be added to our in operation portfolio during this Q3 as the project completes commission. 2nd, as Adam mentioned, we added our Polk County, Florida project to our in construction portfolio. This project will contribute 1,100,000 MMBtu of annual nameplate capacity and is 100% owned by us.

Speaker 3

We expect the project to reach COD in Q4 of 2024. I want to shift gears and discuss the permitting process of some of our We've experienced some delays at our Emerald, Prince William and Sapphire RNG projects In large part due to permitting processes. First, I want to stress that these delays are not a reflection of whether The projects will ultimately come online. In our experience, they are a matter of when and not if, Given the dramatic decrease in harmful emissions. 2nd, not all permits are required to be obtained when we sign a construction contract and formally place a project into construction.

Speaker 3

While we schedule reasonable timeframes for completing this permitting, It's important to note that these processes are particular to the varying state and local agencies. In practice, Many of these projects are the first time a municipality has sanctioned an RNG project. So it's a new process And with anything new, sometimes it takes longer than expected to get it over the line. The takeaway here is that the earnings power of these projects remains intact despite the several months of delay. Our Prince William project is now expected to be online in the Q1 of 2024.

Speaker 3

Our Sapphire project is expected to be online in the first half of twenty Due to the several months delay at Emerald and Prince William, we expect 2023 production volumes to be at the low end or modestly below Our previous full year guidance. Moving on to our advanced development pipeline, we continue to make encouraging progress. We now have 8,100,000 MMBtu of nameplate capacity across 18 projects in our advanced development pipeline. The majority of the Advanced Development pipeline is landfill, but also contains dairy and food waste project. Remember, these projects are ones we have qualified and that we reasonably expect can be in construction within the next 12 to 18 months.

Speaker 3

We set a target in March of putting at least 2,000,000 MMBtu in construction this year. With Polk County now in construction, we are over halfway our goal and we remain optimistic that we will hit that goal. Our advanced development pipeline does not include other earlier stage projects. As we have mentioned on prior calls, we are one of the larger and more experienced operators in the space and our integrated platform continues to aid us and discussions as we seek out new projects. Turning to our Fuel Station Services business, as Adam mentioned, We believe we have cycled through some of the inflationary cost pressures and we expect to move to more normalized margin trends.

Speaker 3

We continue to hear very positive feedback on the new Cummins 15 liter engines being tested and have seen more large national fleet interest and engagement than ever before for RNG as a transportation fuel. We await like everyone else on clarity and timing for the commercial rollout and deliveries of the new trucks, but believe when it happens, it will result in accelerating adoption and deployment of RNG /cng, which will require new fueling station construction, service and RNG fuel. Opal Fuels is a market leader in building and servicing new stations and our vertically integrated model puts us in a strong position To be the fuel provider of choice and to capitalize on this potential growth. Our Renewable Power segment Currently, as 17 electric projects representing 112.5 Megawatts of nameplate capacity and continues to provide good optionality. Besides serving as an inventory of projects that can potentially be converted to RNG projects, These electric projects stand to benefit from the proposed ERIN pathway.

Speaker 3

Currently, 3 of these projects are under construction In the process of being converted to RNG facilities and 3 others are in advanced development pipeline for conversion to RNG. The remaining 11 projects stand to benefit from the proposed ERIN pathway. We await updated guidance from the EPA on this topic later this year. I will now turn the call over to Anne. Anne?

Speaker 5

Thank you, John, and good morning, everyone. Last night, we filed our earnings press release, The biggest driver of the quarter's results was environmental attribute pricing, which moved higher near the end of the quarter after the EPA's final set rule was announced, And we were able to start monetizing credits we held in inventory. Net income was $114,100,000 this quarter, but was impacted by the deconsolidation of our Emerald and Sapphire projects, which we'll discuss shortly. Excluding this one time gain, Our adjusted net loss for the 3 months ended June 30, 2023 was $7,800,000 G and A costs for the 2nd quarter totaled $13,700,000 with approximately $1,900,000 of that total included as stock based compensation, which is non cash. We reported adjusted EBITDA of $21,400,000 for the 2nd quarter compared with $8,700,000 in the 1st quarter.

Speaker 5

The difference was primarily the result of approximately $5,700,000 of unmonetized credits we sold in the last 10 days of June, Along with the mark to market impact of higher RIN prices at the end of the second quarter, plus some normalization in our fuel station services business, As construction projects move forward and some of the inflationary pressures that we experienced in the last year started to abate. 2nd quarter adjusted EBITDA does exclude one time items such as the one time gain associated with the deconsolidation of our Emerald and Sapphire projects. It should be noted that the value of the unsold environmental attributes is marked at the quarter end value and could fluctuate up or down. As I just mentioned, in June, we disclosed the formation of Paragon RNG LLC, The company owns fifty-fifty between Opel Fuels and GFL Environmental, which resulted in the deconsolidation of our Emerald and Sapphire RNG projects. We have 2 RNG projects under construction today in this joint venture and expect to move forward with up to 7 additional projects.

Speaker 5

We'll talk more about the impact of deconsolidation in a moment and in our 10 Q. In our Fuel Station Services segment, We dispensed 35,500,000 GGEs in the 2nd quarter and saw results improve compared to the Q1 of 2023. We were able to recognize higher revenue in the quarter as construction projects move closer to completion. This dynamic As well as diminishing impacts from cost inflation helped improve margins, which should continue for the rest of the year. In Renewable Power, we saw sequential improvement compared to the Q1, which was impacted by unplanned downtime primarily at one of our projects.

Speaker 5

Year over year, we saw a decline due to the shutdown in the Q3 of 2022 of a landfill gas to electricity project that had reached end of life. Year to date, we've spent $72,000,000 in CapEx as we continue to build out RNG projects and fuel stations that we own on balance sheet. As of June 30, 2023, liquidity was $44,100,000 consisting of Cash and cash equivalents of $27,100,000 including restricted cash of $5,500,000 $17,000,000 in short term investments Maturing within 90 days. This compares to $181,000,000 at March 31, 2023, Consisting of $39,800,000 of cash and cash equivalents, including restricted cash of $6,600,000 plus $37,000,000 in short term investments And availability of $105,000,000 under a senior secured term loan facility. The primary driver of this reduction in liquidity is attributed to the assignment of the term loan facility to Paragon as part of the deconsolidation of the Emerald and Sapphire projects.

Speaker 5

This also reflects a reduction of $11,900,000 of cash that is now excluded from consolidated cash and cash equivalents, again, as a result of the deconsolidation. Note, both the cash that was deconsolidated and the available funds under the credit facility Remain available for these projects. Paragon was assigned to the existing senior credit facility related to these projects, Again, with a 2 year delayed term and maximum principal amount of $85,000,000 and a debt reserve facility up to $10,000,000 There was no debt outstanding as of the date of the assignment. We believe that our liquidity, Anticipated cash flows from operations, including the value associated with our unsold environmental credits and access to expected sources of capital will be sufficient to meet our existing funding needs. We continue Pursue additional funding for our advanced development pipeline and streamlining our capital structure to include financing Higher up in the capital structure and less financing on an individual project basis.

Speaker 5

I'd like to reiterate that at current RIN prices, We expect our full year 2023 adjusted EBITDA guidance to be within our prior $85,000,000 to $95,000,000 range. RIN prices have rebounded quite strongly since the EPA provided the higher RVO targets, and we expect now to have averaged realized prices above The 2 $0.25 implied price in our guidance. However, as John noted earlier, we anticipate that production will be at or modestly below The low end of guidance given the delays at Emerald and Prince William. The RNG projects that are in operation as well as our other business segments With that, I'll turn it back to John and Adam for concluding remarks.

Speaker 3

Thanks, Anne. In closing, I want to remind everyone that Opel Fuel's business is addressing 2 of the most significant global warming issues. We are collecting harmful methane gas and we are using this gas to displace fossil fuels. These impactful benefits are what drive the policy tailwinds, which continue to build from the EPA's resounding support of the industry To the significant IRA benefits and to the increasing demand in the market for our products, we remain committed to furthering Opal's vertically integrated mission to build and operate best in class RNG facilities that deliver industry leading, And with that, I'll turn the call over to the operator for Q and A. Thank you all for your interest in Opel Fuel.

Operator

Our first question is going to come from the line of Derrick Whitfield with Stifel. Your line is open. Please go ahead.

Speaker 6

Good morning all and congrats on your progress with several Of the RNG projects.

Speaker 5

Thanks, Derek.

Speaker 6

For my first question, I wanted to focus on your 2023 EBITDA Got it. And we're in their prepared remarks. While there are certainly puts and takes from the standpoint of timing and production volumes, The combination of your RIN inventory and production profile and the materially stronger RIN pricing we're experiencing now versus your plan Seemingly suggests there is still upside to your 2023 guidance. Is that a reasonable conclusion?

Speaker 5

Thanks, Derek, for your question. And again, we appreciate your support. And I think, again, as we look at guidance at this It is offset though by where we see production coming out for the remainder of the year. So for that reason, I think we were comfortable leaving guidance where

Speaker 6

Yes. I'll start by follow-up. I wanted to focus on your capital spending and liquidity outlook. As we think about the advancement of your in construction and ADP project backlogs, could you help us understand the associated CapEx profile over the next few quarters? And perhaps elaborate on your sources of capital and liquidity as highlighted on Page 13, inclusive of ITC, if you're able to monetize that over that timeframe.

Speaker 5

Sure. So I guess if you step back and you think about CapEx, year to date we've spent $72,000,000 Roughly 39 in the Q1 and just over 33 in the Q2. And if you step back as well and look at where projects are In terms of the construction queue, Emerald is starting to ramp down, right? We've completed construction. We're in the middle of commissioning.

Speaker 5

And yes, there are final bills to pay, but that one is starting to tail off. We've put pulp into construction. And again, in the beginning, you put it into construction, you're not Spending a lot of money and then it starts to ramp up as construction ramps up. So we think that that's moved out. I think as we look out over the remaining 6 months and then into 2024, from an overall CapEx perspective, I think we Back to the kind of right in the middle of what we told you originally from a guidance perspective.

Speaker 5

And we've also seen again the delays In Sapphire and in Prince William. So again, it all kind of factors into the soup. But from a relative perspective, Quarter to quarter, that $30,000,000 to $40,000,000 ish range seems pretty good. In terms of capital and liquidity, Again, as we disclosed yesterday, we've got roughly $44,000,000 ish on the balance sheet as of June 30. And we were sitting on roughly $34 ish million of rent and LCFS value We expect to be able to monetize over the coming months as part of cash flow from operations.

Speaker 5

We also do have the debt facility still available to us We amended as part of the GFL transaction, and that can be used again for the remainder of Emerald and for Sapphire. As you can imagine, we are talking to our bankers pretty frequently. We've said that our goal is to look at financing higher up in the capital structure and again we feel pretty good about remaining availability under that The other piece that we haven't talked about is ITC. And again, we've been pretty We have circumspect about a total amount, but we do anticipate being able to monetize via transfer the ITC associated with Emerald This year and potentially Prince William again depending on when that comes online whether it's this year or the beginning of 2024 Being able to monetize that as well. So again, it all kind of goes into the soup and that's why we're able to say we're comfortable Around our ability to fund CapEx and continue to run this business and grow.

Speaker 6

That's very helpful. Thanks.

Operator

Our next question is going to come from the line of Ryan Todd with Piper Sandler. Your line is open. Please go ahead.

Speaker 7

Great. Thank you. Maybe as a follow-up on some of your comments there On cash flow, I mean, can you walk us through the cadence of some parts of the RNG business through year end? When I mean, Emerald should come online this quarter. How should we think about the timing of gas production As that ramps and monetization in the coming quarters from Emerald, and then obviously you talked about the inventory balance that you have there of credits, any commentary on kind of the cadence of monetization, how you would look to monetize or draw that down over

Speaker 2

Yes. We'll let hey, this is Adam here. Thanks for the question. We'll let Anne Start on the ITC and then maybe I'll talk a little bit about our rent inventory and how we're thinking about monetization.

Speaker 5

Sure. I guess, again, from an ITC perspective, we do anticipate monetizing ITC associated with Emerald. Obviously, it would be our half because it's a fifty-fifty project. But to the extent that it comes on in Q3, we anticipate that we'll be able to monetize that Hopefully within the quarter as well.

Speaker 2

And this is Adam here talking about our RIN monetization strategy and there may be some additional questions on how we're viewing the D3 rig market. We sort of saw the first half being a little bit of an episodic Hold on to our inventory upgrades as we were anticipating a positive outcome out of the EPA in terms of how they were going to treat the cellulosic Biofuel category and perhaps rethink their RVO targets for cellulosic biofuels. And that did play out as we sort of expected. And we will begin and have begun Unwinding some of the credits that we had been holding on to the balance sheet. We think over the next 3 years this was not a one time Sort of top in D3 RIN prices and the way the RPOs have been set up now for multi years, which we think is really healthy for the industry Providing that visibility, we actually think the D3 RIN market is going to continue to tighten Over the balance of 2023 and should lead to higher pricing quite frankly in the balance of 2023 and as we look out into 20 24 and 2025.

Speaker 2

We think the RIN market will start to be much less volatile and we don't see ourselves in the future Having as much volatility in our GAAP results and see that really smoothing out over the balance of the year and into

Speaker 5

I'll just add as well, obviously, once Emerald comes online during under the current rules, We are able to store that gas once it reaches, call it, critical mass, right, we're out of that commissioning period. And we do assign the value of equivalent credits associated with that gas and storage as part of adjusted EBITDA. It does take, I'll call it 3 to 4, 5 months to get through the certification process with the EPA to actually be able to generate and monetize those RINs. So again, just want to remind everyone that there is that little bit of delay between when you actually go online in a real way And start to actually recognize any significant revenue. Obviously, that potentially changes next year under the rules that they are currently Promulgated by the EPA that you will not be able to put that gap in virtual storage pending certification.

Speaker 7

Perfect. That's very helpful. And then maybe changing gears to the fuel station margins. I know you talked about some of the drivers Could you maybe provide a little more clarity in terms of maybe a little more color on what all drove the improvement on fuel station margins? And then is that the right the margins that we saw this quarter, is that kind of the right run rate going forward as we think about modeling this out?

Speaker 2

Yes. This is Adam again here. And I think as we mentioned in our previous quarters, There's 3 there's 2 different components to our fuel station service segment. We have a construction business where we're building stations Under turnkey EPC contracts and those stations can typically take 12 months or so to complete. So we did have a lagging inflationary cost pressure Rolling through that business, which we do believe have now run its course, we also have some RNG marketing Business in our fuel station business that's associated with our dispensing capacity And that does also get the benefit of rising credit prices, which we think are going to continue.

Speaker 2

And we also have our service business there as well. And we don't think we've gotten to the full endpoint of where we think normalized margins are. We're not going to provide a margin target there, But we do think that that business still has some good upside to it. And we've got some A little ways to go there in terms of where we think margins ultimately shake out.

Speaker 7

From here, is it going to be I mean, I guess in terms of the potential future gains From here, is that is the RIN price like the biggest component of that or within those other two buckets, is there more tailwind

Speaker 2

This is Adam here. And where we see some good upside, and by the way, Not only on growing volumes and I know we'll get some questions later on the 15 liter engine and what that means and what that could be to growth in our fuel station service segment. But we also have some exposure to potential rising LCFS pricing, Specifically out of our California dispensing market. So we think there's some interesting potential Optionality to that part of that segment as we move through some carve actions that may be taken And also how to maximize our California dispensing with the OCI dairy gas. So More to come on that in the future.

Speaker 7

Perfect. Thank you.

Operator

Thank you. Our next question is going to come from the line of Martin Molloy with Johnson Rice and Company, your line is open. Please go ahead.

Speaker 8

Good morning. I want to ask on a little bit about ERIN. And assuming that there's a positive outcome for the ERIN pathway later this year, Could you maybe talk about your expectation for how that might impact your advanced development pipeline? Could we see a number of smaller projects that are out there to start to move in the advanced development pipeline.

Speaker 3

Hey, Marty, John Moore. Great question. Thanks so much. Yes, the great thing about the ebrin pathway is it Support the policy of collecting this harmful methane gas and it I think really promotes smaller, more difficult projects as well. You see significant value Being provided to those electric projects.

Speaker 3

So in addition to our 11 or so electric projects that stand to benefit from the e ring pathway. We think that it really opens up a whole new Avenue of development for us, we've been developing and operating Electric landfill gas projects were 25 years and that's really our legacy business and our bread and butter. And we see the growth of that really coming back as the ERIN pathway and other pathways for monetizing The cellulosic attributes of the landfill through an electric project. So we do expect that our existing portfolio will benefit. We do expect that we'll be building more projects In the electric realm and we look forward to significant growth in that sector.

Speaker 8

Thank you. And for a follow-up question, just on those alternative uses for the RNG. One of your competitors recently had an announcement regarding a letter of intent for eMethanol. Could you maybe talk about some of these other Pathways?

Speaker 3

I think that there's a lot of pathways that are developing. I think the e methanol is certainly attractive. We see pathways developing In Europe, and we see some of the prices in Europe competing with prices in the U. S. However, the transportation fuel market continues to be a strong market, both In terms of the CNG RNG fuel as well as the growing electric vehicle market So there will definitely be more and more Options for monetizing the value of these and that's just another tailwind for our business.

Speaker 2

Yes. This is Adam. Just to follow-up there. It's really interesting. As John was talking about before, what we're really doing here at Opal Fuels is capturing harmful methane emissions.

Speaker 2

These are not agricultural biofuels. There's no food versus fuel to be. And it's not just here in the U. S, it's really everywhere Where public policy is focused on figuring out how we can capture more harmful methane emissions. Even when we're looking at some of these electric projects where you could build landfill gas to electric facilities And perhaps sell the electricity.

Speaker 2

There are new pathways developing all the time to still Take those green attributes and find new markets for it. So it's not just dependent We think there could be additional value to some of these Lantogas to electric projects as other new markets and other new policies develop. So we're optimistic on some of these potential electric projects. The uterine pathway obviously is close and front and center, but there can be other things that get developed as well.

Speaker 8

Great. Thank you. I'll turn it back.

Speaker 3

Thanks, Marty.

Operator

Thank you. And our next question is going to come from the line of William Griffin with UBS. Your line is open. Please go ahead.

Speaker 9

Great. Hi, everybody. Thanks for the time. Just wanted to circle back on the topic of ERINs here and specifically Wondering if you could elaborate a bit more on maybe what you're hearing around How that program could develop? But I know previously before the final RVO came out, there were obviously some fears that that could drive oversupply of D3.

Speaker 9

Do you think the EPA could somehow structure a program to mitigate that concern?

Speaker 2

Yes, that's a great question. This is Adam again. And Look, it's still we're still early on in those conversations or the industry is still early on in those conversations about talk. And you're exactly right, by the way. That was one of the things that You know the pricing of RINs down was how the implementation of the rollout of that ERIN program What's happening?

Speaker 2

And that was one of the key messages that the industry gave back to the ETA is, hey, look, this is the right policy. Let's just make sure that we're not disrupting the market and not capturing as much harmful methane as we can as that rolls out. And that's what we're working with Through right now is just to make sure that there aren't unintended consequences from how that gets developed. So There could be so we're still early on or the industry is still early on in those discussions. I think they're going to happen and continue to happen in earnest over the balance of the year.

Speaker 2

And that's exactly what we're trying to do is work with the EPA to make sure that, hey, let's make sure this policy works. New projects get developed to capture new methane and that is structured in a way to continue to do the original intent of the RFS which is to promote cellulosic biofuels and provide that strong framework to continue investment and development in the sector.

Speaker 9

Got it. Appreciate that color. And then just as a follow-up, Going back to the deconsolidation of the GFL assets, just curious, could GFL require you potentially to do this on other projects that You're working with them on and, also forgive my lack of accounting knowledge here. But as a result of the deconsolidation of Emerald, does that Change or impact the amount of EBITDA you're recognizing from that project?

Speaker 5

Sure. So thank you for that question. And I'm going to just say right upfront, there's a lot complicated GAAP accounting that goes into all of this. Basically, the reason for doing this is because obviously we've got the 2 projects today with GFL, But we do anticipate that our relationship will continue to grow, right. We've got the 7 additional projects that we anticipate and they'll be part of This is JV.

Speaker 5

So now this entity becomes standalone for both of us, right? Neither GSL nor Opel will be consolidating its Results. And results for us will continue to show up now on the P and L basically as an equity pickup, right, investment in I guess as we think about adjusted EBITDA, it would flow through that way As opposed to flowing from revenue all the way down, right, as a consolidated entity, once Emerald, let's say, comes into operations, Revenue, etcetera, would flow through the income statement and then GSL's portion would have been backed out. So it's a long answer of saying we still get The EBITDA, but it becomes an add back, right, from equity pickup as opposed to flowing through and then backing out GFL's portion.

Speaker 3

And the magnitude would be unchanged.

Speaker 5

Correct. That's Correct. But I think again, as this relationship continues to grow, it becomes a very meaningful part of our business. And At this point, we think that this sets us up to include actually up top as part of revenue, The equity earnings, that's how others in this space have done it previously, but you have to be able to demonstrate and It is truly a part of your business, not just kind of a one time event.

Speaker 2

Yes. This is Adam here. And just in summary, there was no change to any of the economics From the original fifty-fifty partnership, previous to this JV, we were fifty-fifty partners With GFL on a project basis for both Sapphire and for Emerald, nothing has changed there. The adjusted EBITDA, no change to how those are being run. And the JV really was set up to hopefully grow And do more projects together.

Speaker 3

And let me just add, GML didn't cause us or make us do this. This is

Speaker 9

Got it. I appreciate the clarification. I'll turn it back.

Speaker 5

I mean, a better way to say it is, it's a reflection, I think, of the growing commercial relationship Between the 2 firms, right. The accounting is just kind of like what you have to do after the fact, but accounting didn't drive the bus here.

Operator

Thank you. Our next question is going to come from the line of Craig Shere with Tushy Brothers, your line is open. Please go ahead.

Speaker 4

Good morning. Thanks for taking the question. So first on the project delays, is that pretty much all a Case by case permitting issue or are there any outstanding supply chain concerns as far as delivery times? And how do you think about your confidence on the projects you had previously guided in the 2024 at this point

Speaker 3

Hey, Craig, John Moore. Thank you for your question. We continue to execute On our pipeline, we're not in any doubt as to the ultimate value of these projects. The delay is substantially permitting oriented. There's a few other Odds and end issues, but I would say that the substance of it is permitting delays.

Speaker 3

Like other companies in construction And particularly in RNG, there are a number of permitting authorities that touch on these projects during construction. Typically, we build in time frames for those. But as I said earlier, Each of these permitting authorities is its own local and individual group With various degrees of experience, particularly with this new product RNG, The RNG projects really have a very Impactful reduction in emissions locally. And so ultimately, they're very attractive. And all of the Permian authorities that we deal with see that and ultimately get comfortable with it, But they do provide a level of scrutiny and questions.

Speaker 3

I think a good example might With our Emerald project, this project we completed construction in June, We probably would have started commissioning a little bit earlier on it, but the permitting authority there just took more time in terms of The final permit to get us started on the commissioning phase, whereas it might have been started commissioning In early June, it really started in early July. So those types Of delays, are again, we try to build in, we try to deal with, but they're Relatively small in nature and from a big picture standpoint, when you go out 100,000 feet to look at our business, The earnings power of these projects are unaffected and we'll continue to see it add to our business As we roll through 2023 2024.

Speaker 4

Thanks for that. And Speaking of the construction portfolio, digging in a little on William's Paragon question and Derek's CapEx liquidity question. It seems like now we've got kind of separately domiciled liquidity and CapEx requirements between Paragon and Your wholly owned operations or consolidated operations. On a go forward basis, do you plan on Separating out your proportional or gross JV spend versus what You have to spend on balance sheet for capital projects?

Speaker 5

So Craig, are you asking are we just going to break it up for reporting Are you asking more from the perspective of separate facilities for JV think versus kind of for 100% owned projects?

Speaker 4

I'm talking less about GAAP reporting than looking out over the next year or 2 in terms of CapEx requirements and outlook.

Speaker 5

Got it. Okay. So I think from our perspective, I mean based on where we sit right now, The relationship with GFL, I think is a unique one, right? It's a large relationship due to Emerald and Sapphire And it's growing. So we took the actions that we took, right, as a result of evaluating that relationship.

Speaker 5

I think at this point, we We continue to be interested in, obviously building projects that we have 100%, but there are projects in the ADP where we have a partner. Based on where we sit right now, I don't envision that we would do a similar thing to what happened with TFL. But again, if those relationships also took off With the amount of growth that we see, I don't know that we would be opposed to it either, right? Again, you want to maximize the commercial relationship And that is ultimately the economic benefit and you do what you have to do behind the scenes to support it.

Speaker 4

Fair enough. Thank you.

Operator

Thank you. And I'm showing no further questions at this time. And I'd like to turn the conference back over to Adam Kumar for any further remarks.

Speaker 4

All right.

Speaker 2

Well, thank you very much for your interest in oval fuels and joining us today, and we hope everybody has a great day.

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Key Takeaways

  • Opal Fuel’s RNG facilities delivered on expectations in Q2 and its Fuel Station Services segment saw margins normalize as construction projects advanced and inflationary cost pressures eased.
  • The EPA’s final 2023–2025 rule raised D3 RIN volume targets, pushing RIN prices from under $2 to over $3 and enabling Opal to sell ~5.7 million RINs at an average of ~$2.80 in Q2, with ongoing inventory sales in Q3 above $3.
  • Opal’s RNG project pipeline comprises 7 operating facilities (3.9 MMBtu nameplate), 6 under construction (5.4 MMBtu), including the new Polk County project (1.1 MMBtu COD Q4 2024), plus 18 advanced development projects (8.1 MMBtu), with modest production delays due to permitting.
  • In Q2, Opal reported adjusted EBITDA of $21.4 million (vs. $8.7 million in Q1), a net income impacted by JV deconsolidation gains, liquidity of $44.1 million, and maintained its 2023 adjusted EBITDA guidance of $85–95 million despite slight volume shortfalls.
  • Opal formed Paragon RNG LLC with GFL Environmental to own Emerald and Sapphire projects 50/50, shifting these assets to equity accounting while preserving the original economics, and intends to expand the joint-venture portfolio.
AI Generated. May Contain Errors.
Earnings Conference Call
OPAL Fuels Q2 2023
00:00 / 00:00