OPAL Fuels Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2024

There are 11 speakers on the call.

Operator

welcome to the Opel Fuel's 2nd Quarter 2024 Earnings Call and Webcast. After the speakers' presentation, there will be a question and answer As a reminder, this event is being recorded. I would now like to turn the call 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 2024 Earnings Conference Call. With me today are Co CEOs Adam Kimura and John Zamora and Scott Contino, Opel's Interim Chief Financial Officer. Opel Fuel's released financial and operating results for the 2nd quarter of 2024 yesterday afternoon, and those results are available on the Investor Relations section of our website at opalfuels.com. The presentation and 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, 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 described on slides 23 of our presentation. These forward looking statements reflect our views as of the date of this call, and Opel 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. 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 and recent highlights and an update on our strategic and operational priorities. John will then give our commercial and business development update, after which Scott will review financial results. We'll then open the call for questions.

Speaker 1

And now, I'll turn the call over to Adam Kimura, Co CEO of Opel Fuel.

Speaker 2

Good morning, everyone, and thank you for participating in Opel Fuel's Q2 2024 Earnings Call. Our 2nd quarter results were solid and in line with our expectations. A number of factors are driving our growth outlook for the remainder of the year, including a strong RIN market, which we've taken advantage of by selling forward the majority of our expected RIN sales at favorable pricing, accelerating production growth from our operating facilities, our Sapphire and Pulk RNG projects remaining on schedule and finally growth in our fuel station services segment. Adjusted EBITDA for the quarter was approximately $19,000,000 sequentially higher versus the Q1 as we've continued to see improvements across our business segments driven by higher RNG production, increasing throughput of RNG in our dispensing network and improved margins in fuel station services. We expect continued sequential growth over the balance of the year and are maintaining our 2024 adjusted EBITDA guidance of $90,000,000 to $100,000,000 One contributing factor to the sequential growth, which we are happy to announce, is that our Prince William project has received EPA certification, and we expect to begin selling RINs from this project in the Q3.

Speaker 2

We remain on track to bring our next two landfill RNG projects, Sapphire and Polk County, online as expected in the 3rd and 4th quarters respectively. We're executing on our growth objectives and are excited that construction has begun on our 16th RNG project at the Burlington County, New Jersey landfill. This project is the 2nd with our joint venture partner South Jersey Industries and represents 0.460000000 MMBTUs of annual design capacity. Combined with the Cottonwood project announced last quarter, we have now placed 1,100,000 MMBtu of new RNG production annual design capacity into construction this year and are maintaining our guidance of placing at least 2,000,000 MMBtu of new RNG production into construction for 2024. Our fuel station service segment continues to perform and grow in line with our expectations, supporting our upstream RNG projects with dispensing in the highest value transportation fuel offtake market.

Speaker 2

We are maintaining fuel station services adjusted EBITDA guidance of 75% to 90% growth in 2024 compared to 2023. I also wanted to mention a change to our full year RNG production outlook, which is now expected to range between 4,040,000 MMBtu versus previous guidance of $4,400,000 to $4,800,000 MMBtu, primarily driven by the ramp up of our most recent facilities, which we expect to be short term in nature. Finally, we continue to believe there is a great opportunity for our industry to expand bipartisan support, including renewable electricity produced from biogas. It is important to remember what we do. We capture harmful methane emissions from decaying organic waste in place and convert them into productive and low carbon energy products that utilize existing pipeline and electricity grids.

Speaker 2

We believe Opel is well positioned to continue to be a leader in the development, operation and distribution of these low carbon intensity fuels utilizing proven technologies and a proven track record. With that, I'll turn it over to John. John?

Speaker 3

Thank you, Adam, and good morning, everyone. Opal Fuels continues to execute on building and operating reliable RNG production facilities and fueling stations. Operationally, 2nd quarter production results were in line with our expectations. RNG production was 900,000 MMBtus for the 3 months ended June 30, 2024, a more than 50% increase year over year. As Adam mentioned, we're making progress on our strategic growth goals by putting projects into construction like Burlington this quarter and Cottonwood last quarter, and we're also executing by moving construction projects into operation.

Speaker 3

We currently have 9 operating RNG projects and 7 RNG projects in construction. Construction of our new projects is proceeding well and they continue to be on schedule. We expect to bring online 3 large landfill RNG projects during 2024. We've already brought online the Prince William RNG project and the Sapphire project is mechanically complete and in commissioning on track for a Q3 completion date. And Polk County continues to be on track for a Q4 completion date.

Speaker 3

We expect to exit the year with 11 RNG facilities online, representing an annual design capacity of 8,800,000 MMBtu compared to 2,300,000 MMBtu at year end 2021, more than tripling over the past 3 years. Atlantic, our first SJI joint venture RNG project, which we put into construction in the Q3 of 2023, is progressing and we continue to expect it to begin commercial operation in the Q3 2025. Atlantic is expecting to contribute 300,000 MMBtu of annual design capacity net to OPAL. Construction at our 100% owned Cottonwood landfill RNG project is also progressing well and represents 700,000 MMBtu of design capacity net to OPAL. We expect the project to begin commercial operations consistent with recent project timelines.

Speaker 3

Finally, we are happy to have announced the start of construction at the Burlington RNG project. As mentioned, this project is the 2nd RNG conversion project with our joint venture partner South Jersey Industries and represents 0.46000000 MMBtu of annual design capacity for our 50% ownership and helps us progress towards our goal of putting $2,000,000 of MMBtu of design capacity into construction this year. Industry tailwinds continue to support Opel's mission. We are seeing demand strengthen across end markets. With that, I'll turn it over to Scott to discuss the quarter's financial performance.

Speaker 3

Scott?

Speaker 4

Thank you, John, 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 quarter ending June 30, 2024. Our 10 Q will be filed tomorrow. Looking at 2nd quarter results, RNG production increased to 900,000 MMBtus from 600,000 MMBtus in the Q2 of 2023. The increase is largely due to both the Emerald and Prince William RNG projects contribution to production volumes.

Speaker 4

Revenue in the Q2 was $71,000,000 as compared to $55,000,000 in the Q2 of 2023. The main driver for the increase in revenues was the timing and pricing of environmental credit sales, including both RNG fuel and fuel station services where we dispense all of the RNG for our projects, including our joint venture projects, as well as other third party RNG supplies. Opal's share of revenues from equity method investments for the quarter was $11,200,000 as compared to $2,100,000 in Q2 2023, which is not included in revenue as reported on the income statement. Net income for the 2nd quarter was approximately $1,900,000 as compared to $114,100,000 in the Q2 of 2023. The difference was primarily driven by the gain last year from the deconsolidation of our Emerald and Sapphire projects.

Speaker 4

Excluding this one time gain, our adjusted net loss for the Q2 2023 was $7,800,000 Adjusted EBITDA was $18,900,000 in the 2nd quarter as mentioned, compared to $5,100,000 in the Q2 of 2023, partially driven by the timing of environmental credit sales. A reconciliation to GAAP results is provided in our earnings release from yesterday and in our investor presentation updated this morning on our website. The fuel station services segment revenues were $39,300,000 for the quarter as compared to $30,000,000 in the Q2 of 2023. The increase in revenues was primarily the result of increased RNG marketing fees, concurrent RIN and LCFS sales and improved margins. Renewable power revenues were $12,200,000 for the quarter compared to $14,500,000 in the Q2 of 2023.

Speaker 4

This decrease was primarily due to the Emerald and Prince William RNG facilities, which are using gas that was previously utilized in renewable power facilities. In the Q2, capital expenditures were approximately $28,500,000 which includes approximately $5,600,000 relating to equity method investments and approximately $7,700,000 associated with downstream stations. Our senior secured credit facility provides up to $450,000,000 of term loans over an 18 month draw period and $50,000,000 of revolving credit. As of June 30, 2024, approximately $211,600,000 was drawn down on the facility and we have utilized approximately $13,700,000 of our revolver availability to issue letters of credit. As of June 30, 2024, liquidity was approximately $302,000,000 consisting of $275,000,000 of availability under the credit facility and $27,000,000 of cash, cash equivalents and short term investments.

Speaker 4

We believe our liquidity and We are maintaining our 2024 guidance, except for RNG production, which is expected to be 4.0000000 to 4,400,000 MMBTUs compared to our previous range of 4,400,000 to 4,800,000 MMBTUs, primarily driven by the ramp up of our most recent RNG facilities. I'll now turn it back to John for concluding remarks.

Speaker 3

In closing, we are pleased with this quarter's results. We remain committed to furthering Opal's vertically integrated mission together with our partners to build and operate best in class biomethane capture and conversion projects that deliver industry leading, reliable and cost effective low carbon intensity energy products that displace fossil fuels and mitigate climate change. And with that, I'll turn the call over to the operator for Q and A. Thank you all for your interest in Opal Fuels.

Operator

Our first question comes from Matthew Blair with TPH.

Speaker 5

TPH. I guess just in regards to the guide, so you maintain the full year EBITDA guidance, but the RNG fuel production numbers coming down. Could you talk about the moving parts there? And what's the offset? Like why is unit profitability, I guess coming in higher than you expected?

Speaker 5

Thanks.

Speaker 2

Yes. Hey, good morning. This is Adam Kamour here and appreciate the question. So on a high level, the math, when we gave our initial guidance of 4,400,000 to 4,800,000 MMBtus of production and using a $3 RIN, we had our adjusted EBITDA guidance of $90,000,000 to 100,000,000 dollars And you can see in that production spread between 4.4 $4.8 about $400,000 leads to about a $10,000,000 adjusted EBITDA between the low end and the high end. And we also had guided folks that every $0.25 in a RIN price move would be about $12,000,000 of adjusted EBITDA when we were giving out the sensitivity in our initial guidance.

Speaker 2

So if you think about our new production range being 400,000 lighter than what the original guidance was and the RIN price being stronger than our original guidance and our forward sales position where we've sold forward the vast majority of our RIN production for this year. You can see that the RIN price that we'll achieve for the year will basically offset where that production shortfall came from. We had guided folks that a $0.25 written price move was a $12,000,000 move in the adjusted EBITDA.

Speaker 5

Okay. Sounds good. And then, Adam, are you seeing any incremental opportunities for selling RNG into non transportation markets? I know in the past Opel has thought that the utility market just doesn't offer enough value. You don't get paid for the full RIN.

Speaker 5

But what about like any sort of other markets, shipping or chemicals? Are there any other opportunities to monetize RNG?

Speaker 2

Yes. Thanks again for that question. There certainly are increasing opportunities and we are seeing new end markets continue to develop and quite frankly strengthen from a demand perspective for RNG. And marine fuel is one that I think is or we think is particularly interesting as we're seeing a lot of ships being delivered that can run off of renewable methanol. And certainly, there are some export markets over to Europe that we think will develop as well.

Speaker 2

I know there are some regulatory matters that are still being figured out in terms of tracking RNG to export over to Europe. And at this point, we think that there are great applications for RNG in marine fuel and we think that there's going to be continued interest there. And the voluntary markets here in the U. S, I know some folks are contracting out to sell their RNG at fixed price contracts. There are some California utilities that are really interested in purchasing it and some others as well.

Speaker 2

I would say that the transportation fuel market still seems too great for us. So we have not yet engaged in those other end markets, but we think that they're going to continue to develop. Pricing likely will continue to rise there to effectively try and procure or entice folks away from the transportation fuel market. So we continue to see all sorts of interest in RNG and I know folks are a little bit longer out talking about renewable hydrogen or SAF. And but at this point, we still feel like the discount is too great versus transportation fuel and are continuing to pursue the transportation fuel offtake market.

Speaker 2

But those markets are developing and we are keeping a close eye on them and do think they will be part of our portfolio mix, just not yet.

Speaker 5

Sounds good. Thanks, Adam.

Operator

Thank you. Our next question comes from Paul Cheng with Scotiabank. Your line is now open.

Speaker 6

Thank you. Good morning, guys.

Speaker 3

Good morning. Hey.

Speaker 6

Adam and Jonathan, I have two questions. First, maybe it's a little bit from a vision or strategic standpoint. As you grow your RNG upstream production, does the business strategy is that to grow your service station business that in tandem or keep track so that you keep relatively a balanced portfolio between upstream and downstream? Or that you say, okay, I mean, you have sufficient scale in the downstream, in the service station and then the industry also have enough, and we really don't need to grow that. And so we will see more Q2 into the upstream over time.

Speaker 6

So what's the business strategy from that standpoint? That's the first question. The second question is I have to apologize, it's a little bit of the detail. On the Q2, your LCFS sales price of $100,000,000 is actually up sequentially. But if we're looking at the industry actual benchmark for LCFS price is down.

Speaker 6

So how's the mechanic work in here? Thank you.

Speaker 2

All right. Great, Paul. I'll take the first question and then John will talk about our offtake contract in the LCFS market. So I believe the first question was how are we viewing the downstream distribution and marketing business and fuel station business in conjunction with our up upstream. And I will say we are extremely excited on both the upstream development of those RNG assets and the downstream fuel station business.

Speaker 2

The fuel station business for Opel is attractive in its own right. We're achieving good returns on capital on fuel stations we own with fuel purchase agreements, long term tenure in nature fuel purchase agreements for those stations. And we have a very profitable business to build and service those stations. So even if RNG was not part of the picture, we like the growth outlook for our fuel station service business and we'll continue to grow that business even if we are taking our RNG and finding other offtake markets. It just so happens that there is that terrific strategic tie in with our upstream business.

Speaker 2

And we're seeing great opportunities to deploy capital both in new RNG projects and the downstream fuel station business. And quite frankly, if you went back 10 years, there was a lot of growth experienced by Opel Fuels, building fuel stations and servicing those fuel stations just for the commodity price differential of CNG versus diesel fuel. And with that 15 liter engine, we see a lot of opportunities even with just the economics of CNG versus diesel. So we think that's going to be an attractive place for us to continue to invest and grow that business and see a lot of conversion potential for the fuel station service business.

Speaker 6

Adam, do you have a CapEx or the number of station growth kind of matrix you can share per year over the next several years?

Speaker 2

Yes. I think what we do well, we don't give guidance out past 2024, but we do provide detail in our CapEx for how much is being invested in the fuel stations versus the RNG projects. Again, the vast majority of the CapEx that we spend is on new biogas capture and conversion projects. I think it's somewhere in the 80% -plus range that likely will continue. But we do give it at least on a historic basis in our filings.

Speaker 3

And the average price of RNG projects obviously is commensurately larger than the average price of the fueling station projects as well. Paul, turning to your LCFS question, we get LCFS credits principally from 2 sources. 1 is our Sonoma dairy project in Arizona. And there we have a offtake contract that has a floor price of $100 for the credit. So we enjoy a $100 sale price there as long as the price is below that.

Speaker 3

And that's currently the situation.

Speaker 2

Yes. And just a follow-up there. That contract goes out for multiple years. So that $100 floor is in place for the next Another four

Speaker 3

and a half years. Yes. And then the other place we get our LCFS credits is from our downstream dispensing where we get a portion of the credits as a marketing fee for low CI projects that we dispense into California. And they are typically we're recognizing those credits at market prices and those market prices have been in the $45 to $50 range most of this year.

Speaker 2

Yes. And I think in the second quarter, we did not sell at those prices. So we've been holding those credits in inventory.

Speaker 3

But they're recognized at that price for accounting.

Speaker 6

I see. Perfect. Thank you. Really appreciate.

Speaker 3

Sure.

Operator

Thank you. Our next question comes from Ryan Thinks with B. Riley. Your line is open.

Speaker 7

Hey, good morning guys. Thanks for taking my questions. Maybe just a follow-up on CapEx. A couple of months ago, we spoke about the maintenance CapEx for your operating assets. Can you just remind us what maintenance CapEx is for the current RNG portfolio or on a dollars per MMBtu basis to help give folks a sense of what your discretionary cash flow looks like?

Speaker 4

This is Scott Cattino. Thank you, Ryan, for the question. With respect to maintenance CapEx, for our renewable power portfolio, there is a reasonable amount of maintenance CapEx a year that we add back to adjusted EBITDA. It's in the $10,000,000 a year range, something like that, maybe a little less in that ballpark. For our RNG projects, there's a lot less major maintenance CapEx that's all capitalized.

Speaker 4

And I don't have a dollars per MMBtu number to give you, but it's not a large number. In fact, since most of our projects are very new, it's not a significant number right now.

Speaker 2

Yes. This is Adam. Just a quick follow-up there because we've been chatting internally where I think it might be helpful for investors to understand the discretionary free cash flow generation of this business. We've told people historically that we'll have 90% to 95% free cash flow conversion from our EBITDA. And I think it's lost on folks and we're going to start really illustrating that.

Speaker 2

As Scott was just mentioning, one of the beautiful things about our business is after we build these facilities, unlike a traditional energy company, we don't have to drill or spend capital to produce our fuel, right? If you remember what we do, we drop PVC pipes into landfills and they have perforations and we connect them all together and we apply a little bit of suction to gather all that gas to our facilities. And the facilities themselves, if you look across the portfolio where it sits today, it's in the single digit millions of maintenance CapEx. And these are 20, 25 year assets. And some of our gas rights even go out longer.

Speaker 2

So when you really think about us and the valuation of Opel Fuels, our discretionary free cash flow after we build these facilities is really pretty phenomenal. And that discretionary free cash flow can be used to invest in new projects. And that's what we're doing today because we still see really attractive opportunities to grow the business. And in the future, you've got other things you could be doing with that discretionary free cash flow. You could make acquisitions.

Speaker 2

You could pay a really healthy dividend. There's all sorts of things that we think can be a powerful sort of shareholder value driving tool. And I think we're going to get back into that and start illustrating to folks, not only is this really are we growing extraordinarily quickly from an adjusted EBITDA perspective, but that adjusted EBITDA translates into discretionary free cash flow to enhance shareholder value. So I'm thankful for the question and we're going to start I think showing better descriptors of growth CapEx versus maintenance CapEx and discretionary free cash flow. So in total, as Scott was mentioning, our maintenance CapEx across Renewable Power and the RNG facilities is in the low between $10,000,000 $20,000,000 I think if we aggregated it all up and you look forward.

Speaker 2

And it's really attractive from that discretionary free cash flow perspective.

Speaker 7

Yes. I appreciate all that color, Adam and Scott. So for my second question, I guess, just wondering if you have an update on the ITC and any thoughts on timing there or potential risks you might see if we have a change in administration in November?

Speaker 2

Yes. Another good question. This is Adam here. So I think we're in a pretty good spot in terms of getting a final rule that we think likely will include our RNG projects for that salable ITC credit. As for timing, I feel like what we've been hearing is that treasury does not want to just issue another piecemeal correction or on specifically Section 48 for RNG projects.

Speaker 2

They may be trying to issue one set of total final guidance on 48. And I think there may be some other issues that they're trying to work through and finalize. So, I feel like our specific Section 48 final rule may be just waiting as they finalize whatever else they're doing in Section 48. I know folks have been saying late summer, we're in late summer, Q3. So we're still anticipating that we'll see that hopefully soon.

Speaker 2

And so there's no change to how we're thinking about it in terms of total dollars that we think we'll be able to sell here as cash proceeds. And we've told folks not included in our adjusted EBITDA, something close to that $40,000,000 range. And we've been in discussions with folks to even potentially close some of those sales as treasury is still coming out with that final guidance. And just an addendum to that previous question that we talked about in terms of discretionary free cash flow, those kinds of levels may be available for us in the next several years because I think everybody understands that it's everything that you place into construction this year that qualifies. And we've got a host of projects that we think we're going to pre qualify here before the end of the year.

Speaker 2

So if you want to think about our discretionary free cash flow over the next several years, that would be something else that's available to us. And we're still working through the accounting treatment of where it will show up on the income statement because they are saleable credits. And so still optimistic that we're going to get that positive final resolution, disappointed it's taking this long, but it's not slow enough down in terms of setting up projects to prequalify it and setting up our monetization for those credits when they ultimately get generated.

Speaker 5

All right.

Speaker 7

Appreciate that, Adam. I'll turn it back.

Speaker 2

Sorry. Yes. Thanks, Scott. Just reminded me, I missed the change of administration and or I should say now potential change of administration or at least change of party. We there's been a lot of Republican support for what we do.

Speaker 2

And I think there was a letter that was sent to the House Speaker signed by 18 or 20 Republicans talking about some of the benefits that are in the IRA and some of the tax credits that go along with it. I don't think that the Section 48 is at particular risk. And there is a lot of Republican support for specifically this tax credit within the IRA. So, we don't think that there's a lot of risk that necessarily this piece of the IRA will fall under that kind of scrutiny.

Speaker 7

Got it. Thanks for that additional detail.

Operator

Thank you. Our next question comes from Adam Bubes with Goldman Sachs. Your line is now open.

Speaker 8

Hi, good morning. Can you update us on just how you're thinking about your capacity to build fuel stations? If demand for the 15 liter natural gas engine takes off, how many fuel stations could you build in a given year?

Speaker 2

So our current build is in that 40 range, 40 to 50 range, and that's sort of how we're set up today. I would say, it would in terms of scaling up that business, it would not be difficult for us. We don't have many constraints to how we would continue to add scaling capacity there. It would be to continue to add to our staff, quite frankly, both on the construction side and the service side. And Opel Fuels is in a little bit we like to think of ourselves as being unique in a lot of ways.

Speaker 2

One of the ways that we're unique is our ability to attract talent. A lot of folks out there want to be part of the Opel Fuels team, really like what we're doing. And we think we'll be in a good spot to continue to add service techs and construction teams to scale up that business and really don't see any constraints from that perspective. If Cummins and others are right in the industry for what the uptake will be for that 15 liter engine.

Speaker 8

And then as we think about the Burlington and Cottonwood projects, what's the mark to market on how you're thinking about project timing today?

Speaker 6

So

Speaker 3

it's interesting because the pulp project, which is coming online in Q4, we expect that to be early Q4 and that project will hit around a 15 or 16 month timeframe. So, I would say that's kind of at the faster end of our projects. We're certainly focused more on, the time period leading up to getting projects into construction to ensure that those construction timeframes remain tight. For a project, an average project, we would think in 2018 to 2021 period would be a reasonable timeframe for us. Recollect that when we put a project into construction, we have a basic project design, we have the gas rights executed and a path to pipeline and electric interconnection supply.

Speaker 3

So those are some of our key critical path items for putting a project into construction. Some people define construction differently. The actual time of getting out and starting to work, turning over the ground and putting in foundations and whatnot may occur somewhat later in the process. And certainly during that period, we'll complete the pipelines, we'll complete the rest of the permitting and other construction. Sometimes in the past, some of those other items have taken a little while longer to complete and so it pushed us out.

Speaker 3

So for example, on the Sapphire project, which is in commissioning right now, at the front end, the landfill was working on some issues associated with PFAS and other things that we delayed our permitting by a couple of months and so set that timeframe longer. But we're seeing projects in the future ought to reach that same 18 to 20 month timeframe that I alluded to before.

Speaker 8

All right. Then last one for me. In the beginning of the year, I think you guided towards an increase of RNG pending monetization in 2024 of $15,000,000 Can you just update us on how you're thinking about the difference between the timing of RNG monetization and actual production in the balance of the year?

Speaker 2

Yes. This is Adam here. Once we started talking about our adjusted EBITDA not having that RNG pending monetization component, we still think it's helpful for folks to see what is being sold in a given quarter and pricing and that sort of thing to get a sense of how the operations are performing. We don't see any major changes to how we were thinking about it, but we just don't think it's as impactful anymore to talk about as a guidance metric. And likely as we move into 2025 and beyond, likely not be talking about that as much and talking more about what our production outlook and adjusted EBITDA outlook is and that sort of thing.

Speaker 3

I think I can illuminate another part of your question. And that is that we look at our production across the year and we will sell when the market when we feel that the market is a good place, those credits on a forward basis. So that as Adam said earlier in his comments, we've sold, as he put it, a vast majority of our credits for the year. Typically, we'll look at credit at the projects that are in operation and try to sell as much of those we can during the course of the given year. As projects come online and complete their commissioning, we'll start to sell those as well.

Speaker 3

And credits are generally saleable within the current year or the current vintage year. And with regard to 2025, in the merchant rim market, there's not really a deep market there yet. That will develop towards the end of the year. So, Adam, I don't know if you wanted to add to that.

Speaker 2

Yes. No, I think maybe I missed that nuance in the question. We are anticipating selling all of our RINs that we generate in 2024 in the calendar year of 2024.

Speaker 8

Got it. Very helpful. Appreciate the color.

Operator

Thank you. Our next question comes from Alex Kania with Marathon Capital. Your line is open.

Speaker 9

Hi, good morning. Thanks for taking my question. Maybe the first thing I was curious about is just as you look to in the face of the updated production guidance for this year, do you expect that really by year end that all of the operating and commissioning assets are going to be roughly at full expected run rate or will it still be a little bit more to go as you move into early 2025?

Speaker 2

Yes. This is Adam here. So just wanted to provide a little bit more color on the production outlook in some of the newer facilities that have been commissioned. And you can see some of that variability in the ramp of those new facilities from time to time. And specifically this year at Prince William, we had done a significant amount of well field drilling and expansion at that landfill before the facility came online.

Speaker 2

And we were not able to tie in all those well field improvements and expansions into the broader collection system before we began operating the facility. And the root cause of that was really flare capacity that the municipality had in terms of us collecting the additional gas and flowing that additional gas. And when we tied in the well field expansion and drilling into the base collection system, there was a little bit of a slower tie in and seeing the gas flow from those additional wells. So we've done we're in the process of remediating them and redrilling some of them. And we believe it's short term in nature.

Speaker 2

And for us, we think short term means several months. So, we've been a little bit conservative for when we'll see the gas production from that well field expansion. And we are, I'd say cautiously optimistic that we'll start to see all those improvements in the gas flowing from the expansions that we had done as we move through the balance of the year and certainly provide obviously our 2025 guidance sort of later on when we issue our final year results. But that's how we think about sort of short term in nature. And the plant is performing excellent in terms of its processing of its inlet gas.

Speaker 2

And so that's the one issue that popped in terms of our production. And we're also continuing to optimize the equipment at our Emerald facility to be appropriately scaled to the size of the project. And you all may recall that it's one of the largest RNG projects in the country. And certain scalability that we're still optimizing, when you're looking at the compressor size that we use there or deoxy skid that we use there. And again, those are relatively short term in nature as we continue to optimize that equipment.

Speaker 2

And really, that's really on the margin there. So feel like both of those facilities will be will show good growth as we move into 2025.

Speaker 3

And just to repeat things that we've talked about in the past that we build projects to a size larger than the current gas resource because these landfills that we're on are all open and growing landfills. And so over time, you'll see these projects continue to improve, as we call, same store sales, as the gas resource continues to grow. We reach fairly quickly on each of these projects, availability and efficiency for these projects in the kind of lowtomid90s range, which when multiplied together gives you kind of a mid 80% productivity factor. And so we look at both of those factors over time, the growth in same store sales, the efficiency and availability of our projects and as Adam was talking about earlier, the ramp on the initial front end of the projects.

Speaker 2

Yes. So our initial thinking just to sort of put a button on that is really more about 24 than 25 at those newer facilities.

Speaker 9

Great. Thanks for that color. And then maybe just to follow-up thinking about the maybe on the fueling side and the Class 8 side, I know that the Phase 3 final rules were out. I think there have been revisions. But just kind of wondering about how you think about the kind of adoption or the pace of acceleration or accelerating pace, I should say, on CNG related vehicles as it stands relative to kind of what EPA has been kind of giving in terms of their guidance

Speaker 2

That is a really interesting question and it dovetails into a couple of things. So on the 15 liter itself, really pleased with the feedback that we're hearing, really pleased that Freightliner is going to be rolling it out and make available for those that like to buy Freightliner trucks and to join PACCAR and really think that it's going to be a terrific product for fleets to replace diesel and save money. And if they're working with an RNG supplier, they'll get all the sustainability benefits with it as well. And there have been a couple of things out there, which I feel like, I would say, not accelerating adoption. How's that?

Speaker 2

And one of them is that noise that has come out of EPA on Phase 3 truck regulations, which I do believe people are starting to listen to industry feedback on people in D. C. I think are going to are starting to listen to what industry is telling them about those Phase 3 regs. And it's one of the interesting things that we and folks in our sector and our industry are really focused on is really educating the democratic side of things or the more progressive climate side of things, that not all molecules are bad. Specifically in our industry, we're collecting waste molecules that exist and transportation fuel and heavy duty trucking is a terrific application form where other technologies are not are struggling to meet sort of emission reductions for transportation.

Speaker 2

And so we spend a lot of time talking to Republicans about, hey, this is a really great pragmatic solution and really supports a lot of Republican constituencies in ag and municipalities and rural communities that we should be incentivizing and recognizing the benefits of collecting biogas emissions at their source. And specifically with Republicans talking to them about we should really be also embracing some of these electron policies, whether it be ERINs or other things that promote renewable electricity. And on the Democratic side, it's really explaining to them that combustion of molecules isn't always bad depending on where it comes from and what the other options are there. So, yes, the Phase 3 EPA regs have created some noise, have created some confusion, have had some fleets say, hey, wait a minute, what do those mean for me deploying RNG? And look, that's one of the things that we're focused on and doing.

Speaker 2

And different political outcomes have different areas of focus for us to do education and advocacy wise. And that's one where if there is a Republican administration, I think we could be off to the races on the use of RNG in heavy duty trucking and maybe have a little bit more work to do on the electric policies, whether they be E RINs or some other incentives for renewable power. And we can all talk about electricity demand and what's happening in this country and why this is a good answer. And if the Democrats happen to win the White House, I think we're off to the races on a lot of those electricity policies, whether it be ERINs or other things. And we got a little work to do to make sure that, hey, this is a really good answer for heavy duty trucking and really work on those Phase 3 regs.

Speaker 2

So needless to say, we think whoever wins, both sides of those policies make sense, which is what we keep talking about. And but it just it'll just direct our focus on to which ones we really have to spend more time on. Great. Thank you.

Speaker 3

Thanks, Alex.

Operator

Thank you. Our next question comes from Thomas Merrick with Janney Montgomery Scott. Your line is open.

Speaker 10

Thanks, gentlemen. Thanks for taking the time for a few questions. Just want to touch base on Cummins 15 liter, ask a question slightly different way. I know you've talked about it extensively so far. Just want to think through potential fleet owners as they look at supply and demand at CNG, are they contemplating kind of a front loading of infrastructure needed for whatever scale of fleet they're looking to operate?

Speaker 10

Or do they look at it and think the supply of stations is adequate for their needs? And then just a follow-up.

Speaker 2

Yes, another good question. So, we're still in early days of deploying either CNG or RNG as transportation fuel for heavy duty trucking. And I would remind folks that 85% to 90% of what we build is really dedicated fueling distribution centers and now looking at potentially rolling out lanes for folks between those distribution centers and that sort of thing. It takes us also about 12 months to 14 months to build a fuel station, which is about the same amount of time for their trucks to get delivered. So we see those fleets making those decisions at the same time on fueling infrastructure and then they're engaged in their fueling strategy.

Speaker 2

One and then they're engaged in their fueling strategy. One interesting thing for Opel Fuels is the beautiful nature of our vertical integration and how certainly RNG has captured the attention of a lot of these fleets because they're also looking for ways to reduce their Scope 1 and Scope 2 emissions. And I would remind folks when fleets use RNG versus diesel, the greenhouse gas accounting protocol is 0 Scope 1 emissions and also 0 Scope 2 because that's derived from your electricity usage. So this is a really powerful product for them. And so they're engaging with us at the same time that they're thinking about that truck order and really working with us to make sure that the fuel station is aligned and they can get their fuel as those trucks are being delivered.

Speaker 10

That's super helpful. And then my follow-up is really on EPA rules or potential EPA rules as they look to potentially update their landfill emission standards from 2016. I'm curious just how you think about that opportunity. What are the puts and takes from the stakeholders? I know it's early days, the rule hasn't even been proposed yet.

Speaker 10

But any color you could provide to us would be helpful just as we contemplate the future of landfill gas and what the EPA is requiring?

Speaker 2

Yes. So I think the EPA is really focused on methane emissions wherever they come from. And quite frankly, rightfully so, 80% more damaging than CO2 and really the most impactful thing we can do to halt climate change. So they are looking at methane emissions from a variety of places and they already came out with a lot of regulations on pipeline companies and E and P companies on how they're going to do methane monitoring and that sort of thing. And I think they're moving on to other sources of methane as well.

Speaker 2

And I think EPA recognizes and folks in DC recognize that it's really important to continue to promote public policies that incentivize the capture of biogas to make sure that it incentivizes the right behavior. And what technologies or how they're thinking about methane monitoring and measurement. I think a lot of that is being worked through and we don't have a specific opinion on how to do methane monitoring or that sort of thing. But what I do know is that focus on methane emissions or methane emissions from organic waste is likely going to come into focus. And we think we're in a terrific place to help folks capture it and turn it into a beneficial use.

Speaker 2

So, we think it's going to be a helpful talent for public policy and what we're doing. And we're happy to partner with folks to make sure we're capturing as many biogenic methane emissions that we can and turning them into their productive use.

Speaker 3

Our landfill partners are super focused on collecting methane and they recognize that this is a real opportunity. I think that the value of the RNG projects has really helped them to increase their focus as well. As the more methane they're able to collect, obviously, that turns into higher royalties as well as for those who have ownership interest in projects, higher equity distributions as well. So it's a great focus. In addition to the RNG projects that the policymakers as they start to focus on methane emissions, particularly at landfills, you will see that the ERIN policy and others really help to promote that capture and conversion and particularly at smaller landfills that may not have the scale to do a larger RNG project.

Speaker 3

So we'll be looking very closely at how we work with our great landfill partners to promote that policy and increase that collection.

Speaker 2

Yes. And really what it does is that focus on methane emissions, it's just going to create greater alignment between us and our feed stock hosts where everybody is going to be aligned to make sure we're doing everything that we can to maximize the gas collection and its productive use.

Speaker 10

Great. Thanks, gentlemen. Appreciate the feedback.

Speaker 3

Thank you.

Operator

Thank you. I'm showing no further questions at this time. I would now like to turn it back to Adam Kimura for closing remarks.

Speaker 2

Yes. I appreciate everybody's interest in Opel Fuels. We are really excited about what we're doing here and our growth outlook, and I hope everybody has a wonderful rest of their day.

Operator

This concludes today's conference call.

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Earnings Conference Call
OPAL Fuels Q2 2024
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