OPAL Fuels Inc. (NASDAQ:OPAL) Q4 2023 Earnings Call Transcript March 14, 2024
OPAL Fuels Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good morning, and welcome to the OPAL Fuels Fourth Quarter 2023 Earnings Call and Webcast. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] As a reminder, 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.
Todd Firestone: Thank you and good morning, everyone. Welcome to the OPAL Fuels fourth quarter and full year 2023 earnings conference call. With me today are Co-CEOs, Adam Comora and Jonathan Maurer and Scott Contino, OPAL’s Interim Chief Financial Officer. OPAL Fuels released financial and operating results for the fourth quarter and full year 2023 yesterday afternoon and those results are available on the Investor Relations section of our website at opalfuels.com. Presentation and access to the webcast for this call are also available on our website. After completion of today’s call, a replay will be available for 90 days. Before we begin, I’d like to remind you that our remarks, including answers to your questions contain forward-looking statements, which involve risks, uncertainties and assumptions.
Forward-looking statements are not a guarantee of performance and actual results could differ materially 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 2 and 3 of our presentation. These forward-looking statements reflect our views as of the date of this call and OPAL Fuels does not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date of this call. Additionally, the call will contain discussion of certain non-GAAP measures. A definition of non-GAAP measures used and the reconciliation of these measures to the nearest GAAP measure 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 update on our strategic and operational priorities. John will then give a commercial and business development update, after which Scott will review financial results. We will then open the call for questions. And now, I’ll turn the call over to Adam Comora, Co-CEO of OPAL Fuels.
Adam Comora: Thank you, Todd. Good morning, everyone, and thank you for participating in OPAL Fuels fourth quarter and full year 2023 earnings call. OPAL Fuels continues to execute on its business plan and is well positioned to grow in our industry, which is experiencing strong market fundamentals and expanding tailwinds. I’d like to highlight several points from this quarter’s results and recent developments. First, as expected, fourth quarter results benefited from stronger RIN prices. Adjusted EBITDA for the quarter was $32 million, an increase of 57% from 2022 and the strongest quarter in OPAL’s history and $52 million for the full year 2023 meeting our most recent guidance. The positive results in the fourth quarter were driven by continued improvement in our fuel station service segment and the monetization of all environmental credits held for sale, including a portion from the third quarter.
Second, Emerald, our 50/50 joint venture project with GFL and one of the largest RNG projects in North America is showing production growth in line with expectations. We began generating and selling RIN from the project in December. Third, we continue to make good progress on our projects that are in construction, expecting to end the year with 8.8 million MMBtus of RNG design capacity in operation. At the end of 2023, we began construction of a new 2.4 megawatt renewable electricity facility at the Fall River landfill that will utilize approximately 0.2 million annual MMBtu of biomethane equivalent. Fourth, we are encouraged by recent treasury commentary on the ITC, which although not finalized, we believe that the ITC will include biogas conditioning and cleaning equipment as eligible for salable tax credits in the final rules.
It should be noted the support for this inclusion came not only from industry through comment letters, but also from a letter authored by IRA bill sponsor, Senator Brown, which was cosigned by numerous Senators and members of the House stating clearly the intent of including this property in the Section 48 ITC provisions. We expect final rules to be published sometime after March 25, which will hopefully clean up a couple of remaining technical structural issues. Although not included in our adjusted EBITDA guidance for 2024, we have outlined our current thinking of how successful resolution of these rules would impact cash flows and resulting net income, approximately $40 million in 2024. I’d also like to add that our Downstream Fuel Station Service segment is set to have strong adjusted EBITDA growth in 2024, and we are encouraged by the increasing interest from major fleets testing the new Cummins 15-liter natural gas engine, which should lead to continue this upward trajectory over the next several years.
Jon and Scott will go into greater detail regarding our outlook for 2024. But needless to say, we’re very excited about our opportunities excited. RNG production is expected to grow between 60% to 80%. Adjusted EBITDA is forecasted to range from $90 million to $100 million, up from $52 million in 2023. And we see continued growth in 2025 and beyond from annualizing the plants coming online this year, continued growth in fuel station services and our significant opportunity set of new potential projects to put into construction. 2024 also has the potential to be a powerful year in education and advocacy, which can broaden bipartisan support for our industry. Capturing and converting biomethane emissions into low carbon intensity usable energy products has numerous societal and strategic benefits for all Americans, including fighting climate change, improving air quality and socioeconomically challenged communities, supporting the agricultural sector, driving investment and providing economic value for countless municipalities that own landfills and wastewater treatment facilities, while also providing greater energy security for all Americans.
With that, I’ll turn it over to Jon. Jon?
Jonathan Maurer: Thank you, Adam, and good morning, everyone. We’re proud of our accomplishments in the fourth quarter of 2023 and the 2023 year-end results. Importantly, the Emerald RNG project is online and we now have eight RNG projects in operation with an annual design capacity of 5.2 million MMBtu, up from 2.3 million MMBtu at year-end 2021. Production was in line with expectations. RNG production was 2.7 million MMBtus for the 12 months ended December 31, 2023, which is a 23% increase year-over-year. That number is expected to increase significantly this year. Scott will give more detail on this year’s guidance, but we’re expecting roughly 4.6 million MMBtu of RNG production this year. In addition to our operating projects, we currently have six RNG projects in construction, representing an additional 4.4 million MMBtu of annual design capacity and 12.4 megawatt landfill gas to electric project, which is 0.2 million annual MMBtu of biomethane equivalent.
Construction of new projects is proceeding well. Prince William, one which we own 100% and represents 1.7 million MMBtu of design capacity has reached mechanical completion. Commissioning of the plant will continue over the coming weeks as we approach commencement of operations. Sapphire, which we operate in the 50/50 joint venture with GFL and representing 0.8 million MMBtu OPAL share of design capacity is on track to begin operations in the third quarter of 2024. Our Polk County, Florida project, where we also own 100% and which represents 1.1 million MMBtu of annual design capacity is also on track to begin operations in the fourth quarter of this year. Atlantic, our first SJI joint venture RNG project, which we put into construction in the third quarter of 2023, is progressing and we continue to expect it to begin commercial operations in mid-2025.
Atlantic will contribute 0.3 million MMBtu of annual design capacity net to OPAL. As I mentioned, we also began construction of our Fall River 2.4 megawatt renewable electricity project in the fourth quarter of 2023, which will utilize approximately 0.2 million MMBtu of biomethane equivalent and is slated to begin operations by year-end. Our two Central Valley dairy projects are delayed due to a contract dispute. We expect this dispute, which is proceeding through an arbitration process to impact the timing of these two projects, and we plan to give further updates on timing as we move forward this year. Together, our operating and construction RNG projects represent almost 9.6 million MMBtu of design capacity. We expect to place at least 2.0 million MMBtu of RNG projects into construction this year.
As OPAL executes on existing opportunities, growth in our relationships across the landfill sector is resulting in additional project opportunities that we believe will mature into continued growth in construction and operating projects in the foreseeable future. Last quarter, we started providing additional detail on how we measure the production output at our RNG and renewable power projects. We added two new metrics and with design capacity utilization measures the percentage quantity of biogas available at the inlet of our facilities compared with the design capacity of these facilities for the relevant period. We said we generally expect our RNG facilities to begin somewhere in the 70% to 80% range of inlet design capacity utilization and expect increasing utilization rates as all of our RNG facilities are in open and growing landfills and we, along with our landfill partners, continue to make improvements in gas collection at the well fields.
Utilization of inlet gas, the second new metric measures the productivity of converting the biogas coming into the RNG facility into product RNG. It’s simply the volume of the actual production for a given period divided by the volume of inlet gas. This metric should be relatively stable between 80% to 90%, with fluctuations based on the efficiency and availability of the system and the quality of the biogas. Both inlet design capacity utilization and the utilization of inlet gas were within their expected ranges and we expect that to continue this year. With that, I’ll turn it over to Scott to discuss the quarter’s financial performance and provide additional detail regarding guidance. Scott?
Scott Contino: Thank you, Jon, and good morning to all the participants on today’s call. Last night, we filed our earnings press release, which detailed our quarterly results for the quarter and year ending December 31, 2023, our 10-K, will be filed tomorrow. Looking at the fourth quarter results compared to the third quarter of 2023, RNG production increased to 0.8 million MMBtus from 0.7 million MMBtus. The increase is largely due to Emerald production coming online. Compared to fourth quarter 2022, production grew 0.2 million MMBtus due to a combination of same-store sales growth and Emerald coming online. RNG production was 2.7 million MMBtus for the 12 months ended December 31, 2023, compared to 2.2 million MMBtus for the comparable period last year.
Revenue in the fourth quarter was $87 million as compared to $67 million in the fourth quarter of 2022. 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 as well as 100% for our joint venture projects and other third-party RNG supplies. Net income for the fourth quarter was $20.1 million, as compared to $0.3 million in the third quarter. The difference was primarily driven by the increase in revenues from the timing of environmental credit sales, but also recognition of Emerald coming online in equity method investments. Adjusted EBITDA was $32 million in the fourth quarter as mentioned, partially driven by the timing of environmental credit sales as well as improving margins in our Fuel Station Services segment.
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 increased to $46.9 million for the fourth quarter, as compared to $37.3 million in the third quarter. The increase in revenues was primarily the result of increased RNG marketing fees, concurrent RIN and LCFS sales and improved margins. Adjusted EBITDA for this segment grew to $12 million in the fourth quarter versus $6.4 million in the third quarter. Renewable power revenues decreased to $11.3 million for the quarter from $13.7 million in the third quarter. This was primarily due to reduced operations at Arbor Hills as the biogas was diverted to the new Emerald RNG project.
Last September, we entered into a $500 million senior secured credit facility. The credit agreement provides up to $450 million of term loans over an 18 month draw period and $50 million of revolving credit. As of December 31, 2023, approximately $187 million was drawn down on the facility. As of December 31, 2023, liquidity was $348 million consisting of $300 million of availability under the credit facility and $48 million of cash, cash equivalents and short-term investments. As a result, we feel our liquidity and capital resources and access to other sources of capital are sufficient for our growth plans. Now, I’ll turn to this year’s guidance. For full year 2024 guidance, assuming $3 D3 RIN, $2 per MMBtu brown gas and $65 per metric ton LCFS, we expect our full year 2024 adjusted EBITDA to be $90 million to $100 million and RNG production to be 4.4 million to 4.8 million MMBtus.
Our adjusted EBITDA guidance does not include several items of note: One, the potential of $40 million of cash proceeds and income in 2024 that would result from favorable ITC resolution. Two, RNG pending monetization increase of approximately $15 million. And three, project development and start-up costs of approximately $12 million which do not get capitalized. As we disclosed last quarter, we are no longer recognizing RNG pending monetization in our calculation of adjusted EBITDA, although we continue to provide detail on our inventory and credits sold each quarter as well as a period ending balance. A reminder that this represents the value of our December 2024 RNG production, where the costs have been recognized in our 2024 adjusted EBITDA results, but we have not yet sold and transferred the RINs or LCFS credits associated with that RNG, effectively having our 2024 results include revenues associated with December 2023 production, while recording our December 2024 production costs.
This impact can be significant if a company has a large growth trajectory such as OPAL and obviously would not be as impactful if we weren’t growing our production so significantly. One other item worth noting is that we are now breaking out our development and plant start-up costs as a separate line item on the income statement. We thought this disclosure was important to give investors a sense of steady state from our operating facilities. For 2024, development and plant start-up costs include a $12 million operating expense not added back to adjusted EBITDA from a virtual pipeline for Prince William that will be used until the permanent pipeline is operational. We also want to provide some color on the Fuel Station Services segment, where we anticipate adjusted EBITDA to grow by 75% to 90% compared to 2023.
Results driven primarily by increasing RNG marketing revenues through our dispensing network, new OPAL fueling stations coming online and continued improving trends and margins. We expect full year 2024 capital expenditures at wholly-owned and joint venture projects to total approximately $230 million, which includes approximately $41 million relating to equity method investments and approximately $28 million associated with downstream stations. Before I turn it back to Jon, I would just like to mention our press release earlier this week announcing that our controlling shareholder Fortistar has exchanged 71.5 million shares of high-vote stock to Class B shares that are entitled to a single vote. As our press release noted with Fortistar reducing a significant portion of its voting control, we anticipate that our publicly traded Class A common stock will become eligible for inclusion in certain stock market indices.
Of course, there are no assurances that OPAL will be included in any indices. With that, I’ll turn it back to Jon for concluding remarks.
Jonathan Maurer: Thank you, Scott. In closing, we are pleased with the continuing success in the execution of our business plan. We remain committed to furthering OPAL’s vertically integrated mission 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 fuel and mitigate climate change. And with that, I’ll turn the call back over to the operator for Q&A. Thank you all for your interest in OPAL Fuels.
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Q&A Session
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Operator: [Operator Instructions] Our first question comes from John Annis with Stifel.
John Annis: For my first one, how should we think about the timing of RIN sales this year with current D3 prices more favorable to start this year? Should we think about it being more equally weighted than last year?
Adam Comora: This is Adam here and thanks for the question. We are anticipating to be selling and transferring our RINs pretty uniformly as they’re generated and minted throughout the year. And I would also add that thus far we’ve hedged or sold forward approximately half of our production.
John Annis: For my follow-up, the EBITDA guidance for the fuel station service implies strong growth this year. Could you offer some additional color on the drivers of this growth? And maybe related to that, what’s the latest feedback you’re hearing on the Cummins 15-liter?
Adam Comora: As Scott was mentioning in the earlier prepared comments, we’re excited about the Fuel Station Service segment and 2024 is set up to be a really strong growth year for it. The primary drivers this year are really utilizing the dispensing network that we’ve set up and really generating a lot more profitability at that segment as we’re delivering more RNG fuel through that dispensing network. And it’s not only from our production, it’s 100% from the JV projects and then also numerous third-party suppliers. And then we’re also benefiting from a number of OPAL Fuels owned fueling stations coming online and annualizing those that came online sort of mid-year last year. And then we’re also seeing the continued improving trends in the construction and service side of that business.
So 2024 really looks to be a good year for it. And the results this year are not being driven by what we are hearing is good feedback on that 15-liter engine. That 15-liter engine is still going through its testing periods, but the feedback has been really strong and that’ll show up as new business development activity this year and drive growth in 2025 and beyond.
Operator: Our next question comes from Matthew Blair with TPH.
Matthew Blair: I had a question on CapEx. So I think at one point, this might have been a few years ago, you were guiding to CapEx that came out to, call it, roughly $40 per MMBtu for a landfill project, maybe about 160 per MMBtu for a dairy project. Could you give us a sense of where those numbers are today?
Scott Contino: This is Scott Contino. I think we’re going to have to get back to you on the dollars per MMBtu for CapEx.
Matthew Blair: Is it safe to say that there is, there has been some inflation in just the unit cost?
Adam Comora: This is Adam Comora here. And I was just trying to do the math on the last two projects that we are looking at putting into construction here. There’s no doubt that there had been some cost inflation over the last several years. We have seen that level out quite a bit over the last three to four months or so as we’re putting together some project cost estimations. I see Jon working the calculator over there. We’ll come back on what ballpark rule of thumb is. But one of the things that we’ve also been doing here internally is looking at ways to perhaps do things a little bit differently from a construction standpoint and seeing where there are some opportunities to reduce some of those initial — reduce some of those CapEx for MMBtu.
So it is up from the $40 I don’t want to give you an exact number right now. We have seen that level out and we still see extraordinarily good return on capital projects and still see very good paybacks on these projects. And I know there’s going to be a question coming up on ITC, but certainly that also helps as we’re looking at projects that we put into construction here.
Jonathan Maurer: Matthew, it’s Jon Maurer. The costs that you’re citing about 140 to 160 is significantly higher than what we’re experiencing for landfill projects. While that may be more appropriate for dairy where the cost might be similar, but the output dairy projects being substantially lower than landfill projects. Obviously, our focus is on landfill projects and we’re seeing costs that are well below $100 per MMBtu.
Matthew Blair: And then regarding the RNG production guide of 4.4 to 4.8, so I think that implies growth of 1.7 to 2.1 in 2024. It looks like at least part of this 2024 growth is actually coming from higher utilization at your existing plants rather than just bringing on the new projects that you cited. Is that what you’re seeing as well? And if so, what would be driving the higher utilization?
Adam Comora: It goes to how we were thinking about our guidance for the whole year. So there may be some follow ups there. But when we’ve got our production guidance in the midpoint there 4.6, about 3.6 of that is from projects that are operating today. So if you look at that 3.6 over the 5.2 design capacity, you’re looking at about 70% product output on the design capacity. And I think as we’ve noted in our disclosures, we do expect same store sales growth at our projects as they’re at open and growing landfills. We’re always looking at ways to continue to improve gas collection with our land sale partners. So, we do expect these facilities to continue to grow as they mature. So when you look at our guidance this year, about a million of it comes from Prince William, Sapphire and Polk. The bulk of it really from Prince William, which we’re happy, has hit its mechanical completion and has entered the commissioning phase.
Operator: Our next question comes from Ryan Pfingst with B. Riley.
Ryan Pfingst : Adam, you mentioned you hedged or sold forward about half of your production. Could you share what the associated environmental attribute and gas prices are there?
Adam Comora: So we have not yet sold forward the nat gas piece, which we are looking at. And on the environmental piece of it, we feel — you could look at the indices averages or something like that to try and get a feel for it.
