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Presentation

Operator: Good day, and thank you for standing by. Welcome to the OPAL Fuels First Quarter 2023 Earnings Call. At this time, participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. [Operator Instructions] Please be advised today’s conference is being recorded. I would now like to hand the conference over to your speaker today Todd Firestone. Please go ahead.

Todd Firestone: Thank you, and good morning, everyone. Welcome to the OPAL Fuels first quarter 2023 earnings conference call. With me today are Co-CEOs, Adam Comora and Jonathan Maurer; and Ann Anthony, OPAL’s Chief Financial Officer. OPAL Fuels released financial and operating results for the first quarter 2023 yesterday afternoon, 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. 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 Slide 2 and 3 of our presentation. These forward-looking statements reflect our views as of the date of this call and OPAL Fuels does not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date of this call. Additionally, this call will contain discussion of certain non-GAAP measures, including but not limited to adjusted EBITDA. A definition of non-GAAP measures used and reconciliation of these measures to the nearest GAAP measure is included in the appendix of the release and presentation.

Adam will begin today’s call by providing an overview of the quarter’s results, recent highlights and update on our strategic and operational priorities. John will then give a commercial and business development update. After which Ann will review financial results for the quarter, then we’ll open the call for questions. And now, I’ll turn the call over to Adam Comora, Co-CEO of OPAL Fuels.

Adam Comora: Good morning, everyone, and thank you for being here for OPAL Fuels first quarter 2023 earnings call. I’d like to highlight several points from this quarter’s results. First, we continue to execute on our strategic and operational priorities. Our first quarter RNG production volumes were consistent with our expectations and keeps us on track to meet our full year forecast of production from our operating facilities. OPAL Fuels continues to lead the RNG market with best-in-class facilities and operations, which is absolutely critical as landfill and other feedstock owners evaluate, which companies they want to award gas rights to and partner with if they choose to invest capital. To that end, our advanced development pipeline continues to mature and grow and we are pleased to share some details on two of these projects recently disclosed in 8-K filings.

We recently announced two newly executed gas rights agreements on landfill RNG projects, which include one landfill with WM located in Illinois and another with a municipality in Florida. Both of these projects are greenfield new business wins where OPAL Fuels secured gas rights for RNG projects and not conversion of projects where OPAL Fuels had existing gas rights or an existing landfill gas to electric project. The WM project will be 100% owned by OPAL Fuels and we expect it to have nameplate capacity in the range of 600,000 to 700,000 annual MMBtu. We are completing design and development work including the pipeline interconnect and are hopeful to put it into construction during the third quarter. This project had previously been included in our advanced development pipeline, but it is important to note the most uncertain timing from a project moving from the advanced development pipeline into construction is typically finalized in the gas rights agreement.

We are excited about this new project with WM. We have a good longstanding partnership with WM across our business segments and hope to continue to expand this relationship. We’re also excited to talk about our most recently executed gas rights agreement with the municipality in Florida. OPAL Fuels will own 100% of this project and we expect the nameplate capacity to be slightly over 1 million annual MMBtus of production. This project has an accelerated development schedule with anticipated construction start next month and commercial operations starting towards the end of 2024. This project was not included in our previously disclosed advanced development pipeline and is a great example of OPAL Fuels continuing to find very attractive greenfield opportunities.

These two projects give us confidence we’ll meet our guidance of placing at least 2 million MMBtus into construction during 2023. In addition, we have multiple projects with nationally recognized landfill owners and other partners that we anticipate moving forward in the coming months and we look forward to giving you more color as those are finalized. As we discussed during our call in March, we see 2023 continuing to unfold as a contrast to 2022 when our new plant construction starts were slower than we would’ve liked, but we were experiencing a favorable environmental credit and commodity pricing environment. In contrast to 2022, we believe the progress we are making on these new projects underpin strong growth in 2024 and beyond, which should lead to long-term value creation for OPAL Fuels shareholders.

As for the headwinds in 2023, I wanted to speak about the current RIN market and our current approach on monetizing our RINs, which has an impact on our reported GAAP results. As a reminder, GAAP does not allow us to record revenues on minted RINs and LCFS from RNG we produce and dispense until those credits are actually sold and transferred. Ann will go into a little more detail in the call, but we do believe it is important to highlight for investors in our adjusted EBITDA calculation what the value of stored gas and credits are that are placed or minted in the quarter but not sold as it better matches the expenses recorded under GAAP in the quarter. The renewable fuel standard was created to encourage the growth of cellulosic biofuels and the EPA continues to reiterate this goal throughout the language in the proposed set rule announced December of last year.

Despite this guiding principle, the proposed rule in December had volumes the market believed were too low versus anticipated D3 RIN production and prices suffered. Dropping from the mid-$3 range for much of 2022 to hitting a low of around $1.90 in January of this year. Given the EPA has not yet finalized the set rule, which includes volume obligations for D3 RINs, affectively the demand side of D3 RINs, we are still cautiously optimistic they will revise the numbers higher in line with anticipated growth of RNG production when they issue the final rule expected in June. Given this view, we have taken a slower approach to selling our RINs in the first half of 2023 until there is better clarity in rule finalization. Holding some of our produced RIN credit inventory has the effect of dampening reported GAAP results in a given period and inflating quarterly results when they would be sold.

We believe the adjusted EBITDA metric is helpful to better understand our current period earnings and reduce volatility from the actual timing of sales. In addition to finalizing the final RVO numbers, we also await final rule making on the eRIN pathway, which could be a material tailwind to our existing portfolio projects and new landfill gas to electric projects. We also await the potential effects of multi-year RVOs as it could lead to multi-year contracting opportunities and smoothing out year-to-year volatility in RIN prices. Current D3 RIN pricing has come off its lows and we’re recently trading at $2.15 per gallon. On LCFS, we remain optimistic on credit pricing and the direction that CARB is heading on proposed program changes to be finalized for 2024.

CARB is giving clear signals to the market they would like to encourage more investment by supporting pricing, which will likely include stronger compliance targets creating incremental demand for LCFS credits. LCFS prices have begun to move higher in 2023 and now sit in the mid-$80 per credit. Finally, I want to add that demand for RNG continues to be very strong across multiple end markets where particularly encouraged by how many new fleets are testing and talking about the 15 liter Cummins engine. Although material traction for adoption starts later in the year as fleets move through testing, we think this product has great potential to expand the market for RNG within the heavy-duty transportation market. We would remind everyone the heavy-duty transportation market in the U.S. uses approximately 45 billion gallons of diesel per year, and RNG currently has just over 1% market share.

We see great potential for demand in trucking to outpace supplies, which has positive future implications on pricing given RNG is currently priced at such a steep discounted diesel fuel with the sustainability benefits of zero Scope 1 and zero Scope 2 emissions. Separately, the voluntary market is evidencing increased interest with new growing mandates from regulatory authorities for RNG to be used in power generation. We think it’s a great time to be OPAL Fuels. The industry is still in the early innings of growth and OPAL Fuels continues to be a partner of choice for new projects. There is growing customer interest and demand in the products we produce and sell, which bodes well for future pricing and economics. There are strong federal and state level policies supporting investment in our industry and there is increased knowledge and participation from capital providers across the balance sheet helping us capitalize on this exciting opportunity.

With that, I’ll turn it over to Jon.

Jonathan Maurer: Thank you, Adam, and good morning, everyone. I want to start out by saying that we are very focused on executing on our business plan, including maximizing output from our operating projects, commissioning our construction projects, moving other advanced development projects into construction, as well as adding to our perspective opportunities funnel. Our operating projects are performing well. We have seven projects in operation representing approximately 4 million MMBtu of nameplate RNG capacity. At Noble Road, New River and Pine Bend, three of our more recent landfill RNG projects to come online. Gas production continues to increase as the trash increases. As Adam said, we are meeting our output projections.

Our construction projects are moving forward and are largely on track. We currently have six RNG projects in construction representing another 4.7 million MMBtu of nameplate capacity. Consistent with what we said last quarter, Emerald is expected to be online in the next several months and Prince William in the fourth quarter. The two dairy projects we expect to be commissioned in the first half of 2024 and the Northeast landfill later in 2024. We have experienced some delays associated with permitting. Sapphire COD is delayed into the first half of 2024 as a result of delays by permitting authorities. Our advanced development pipeline is growing. These projects are ones we have qualified and that we reasonably expect can be in construction within the next 12 months to 18 months.

We now have more than 9.3 million MMBtu of biogas across our 20 projects in our advanced development pipeline, which now includes our recently announced municipal project in Polk County, Florida. We expect to place Polk into construction next month. Our ADP includes opportunities for electric projects that are well positioned to take advantage of the recently announced eRIN pathway that is being finalized. Other ADP projects are advancing towards construction as well. We continue to expect to meet our goal of putting at least 2.0 million MMBtu of projects into construction this year. Our ADP does not include the additional opportunities we continue to evaluate and qualify. Polk County was recently on our prospective projects list until it jumped forward this past month to our ADP.

We have added other opportunities to our prospective project lists as well. We are one of the larger and more experienced operators in the space and our successful operating projects as well as our integrated platform continue to aid us in discussions as we speak out new projects. All of the foregoing represent significant momentum for OPAL’s growth and provides visibility to continued production and earnings growth beyond 2024. In our Fuel Station Services segment, there are a couple of highlights call out. First, there can be lumpiness in third-party fuel station construction revenues, as revenues are recorded on percentage completion and timing of equipment delivery construction activity in a quarter can vary. Our contracted backlog remains very healthy at approximately $65 million, which we expect to be realized and completed over the next 12 months.

We are also seeing the tail effects of inflationary pressures from 2022 on projects that are now being completed and see normalizing margins in this segment as we move through 2023. It should also be noted, the earlier effects we described from holding back RIN sales in stored gas also affects this segment. And we’ll describe in a little more detail our reclass of this segment, now includes fuel sales from stations we own and the RNG marketing and dispensing fees to stations received by dispensing the RNG. Of the $10.3 million stored gas and inventory credits we add back to adjusted EBITDA, approximately $2 million would be attributable to the Fuel Station Services segment. From an overall transportation fuel market perspective, we are all excited about the instruction of the new 15 liter engine.

As this happens, we do expect to see a slight pause or slow down in new fuel station construction order activity, as the 12 liter engine is being phased out and fleets are putting together their order books with new engines. Our Fuel Station Service segment experiences similar challenges working with permitting authorities and utility providers, which have stretched out construction project timing in that segment. Right now, we are on track to commence construction on 39 fueling stations this year, approximately 16 OPAL Fuel zone stations and another 23 for third parties. Our overall RNG fuel dispensing volumes are expected to grow to approximately 56 million gallons this year from nearly 30 million gallons in 2022. In our Renewable Power segment, we continue to focus on the potential opportunities stemming from the proposed eRIN pathway for our 17 landfill gas to electric projects, representing about 124 megawatts of nameplate capacity.

We still see approximately six of these projects as candidates for conversion to RNG projects, while the majority are expected to remain electric projects. As we mentioned last quarter, the eRIN pathway stands to substantially increase the value of our landfill gas electric projects, and ultimately, depending on eRIN sharing arrangements and RIN prices. We expect updated guidance from the EPA on this topic next month. That said, we are accelerating preparation of our facilities to meet this market opportunity. I will now turn the call over to Ann to discuss our first quarter financial results.

Ann Anthony: Thank you, Jon, and good morning to all the participants on today’s call. Last night, we filed our earnings press release, which detailed our quarterly results for the period ending March 31, 2023. We anticipate filing our 10-Q in the next few days. The biggest driver of the quarter’s results is our decision to defer selling some RINs in inventory as well as environmental attribute pricing, which has been lower year-to-date compared to the first quarter and full year 2022, resulting in lower GAAP results for the first quarter of 2023. Before we talk about first quarter results, I’d like to note that we are now presenting revenues and expenses associated with our CNG tolling business along with RNG marketing and dispensing revenues in the Fuel Station Services segment as opposed to the RNG Fuel segment where we reported them previously.

Including dispensing results in the Fuel Station Services segment, better aligns how we think about the business segments as it differentiates between our upstream and downstream portions of our business, and this change facilitates easier comparisons to peers in our space. Each quarter, we will recast 2022 results to provide an apples-to-apples comparison to 2023. Now let’s talk about our results. For the first quarter, RNG production remained the same as the fourth quarter of 2022, coming in at 0.6 million MMBtus, which represents volume net to OPAL Fuels after adjusting for our equity ownership across projects. Compared to the first quarter of 2022, RNG production was up approximately 50%. Revenues for the quarter were $43 million, a 12% decrease compared to the first quarter of 2022.

The primary drivers here are our decision to hold RINs in inventory along with the lower price we’ve seen primarily for RINs year-over-year offset by the higher production. In the first quarter of 2022, we sold RINs in an average price of $3.23. As we told you last month, we are only selling a portion of environmental credits at these price levels. And during the first quarter, we transacted at a net average price of $2.38, which included a final forward sale contract we entered into last year, as well as at spot trade. The impact of lower prices, if production was held constant and we assume that we sell all available credits, equates to approximately $6 million of revenue that was not achieved based on the year-over-year price differential.

Net loss for the first quarter before considering the impacts of preferred dividends was $7.3 million compared to $4.5 million for the first quarter of 2022. In addition to our strategic decision to limit the sales of credits that we just discussed. In our Fuel Station Services segment, we experienced a low revenue quarter compared to our backlog and continued to see inflationary pressures flow through stations and construction. We expect that these trends will reverse over the balance of the year. I’d also like to note that OPAL Fuels is not heavily exposed to the volatility of natural gas as some of our peers are. We do see benefits in our upstream revenues, which offsets higher operating expenses when the commodity cost rises, but we are not exposed to significant commodity volatility in our downstream fueling business as the cost of natural gas is a pass through to our customer along with other costs such as utilities and taxes.

First quarter adjusted EBITDA was $8.7 million compared to $4.1 million last year. We have included a $10.3 million adjustment for the value of both stored gas and unsold environmental attributes at the market price as of March 31, to better illustrate the performance of the business when we match production and expenses occurring in the same period. The ultimate actual sale price of these environmental credits may be different than the quarter and price used in adjusted EBITDA. As of March 31, we had $148.9 million outstanding borrowings. In March, we repaid $22.8 million related to our renewable power project financing. Our second term loan, which we closed last August, and which we’ll finance a portion of RNG projects that are or shortly will be in construction remains undrawn.

As of March 31, our liquidity position was $181.8 million, including $33.3 million of cash and cash equivalents, $6.6 million of restricted cash, $37 million of short-term investments, and $105 million of undrawn capacity under our term loans. Restricted cash declined principally due to the settlement of the Meteora put last January, as well as continued investment in construction projects where we had to contribute our equity upfront and spend it as construction occurred as the condition to unlock capacity under the second term loan. We expect these existing sources of liquidity to be sufficient to fund the company’s construction and development capital needs for the next 12 months. As we wrap up, I’ll reiterate what Adam and Jon have already said.

We’re very pleased with production results in the first quarter along with our progress in the development of the Advanced Development Pipeline and that in construction project timelines remain substantially in line with our prior expectations. We continue to focus on execution and anticipate environmental market conditions will continue to improve over the coming weeks. This will translate to continued growth and financial results in 2023 and beyond. With that, I’ll turn it back to Jon and Adam for concluding remarks.

Adam Comora: Thank you, Ann. In closing, we remain committed to furthering OPAL’s vertically integrated mission to build and operate best-in-class RNG facilities and renewable power facilities. That deliver industry leading reliable and cost effective renewable solutions to displace fossil fuels and mitigate climate change. And with that, I’ll turn the call over to the operator for Q&A. Thank you all for your interest in OPAL Fuels.

Operator: Thank you. At this time, we will conduct the question-and-answer session. [Operator Instructions] Our first question comes from Derrick Whitfield from Stifel.

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

Operator: Our next question comes from Martin Malloy from Johnson Rice Company.

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

Operator: Our next question comes from William Grippin from UBS.

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

Operator: I would now like to turn it back to Adam Comora for closing remarks.

Adam Comora: Okay. We thank everybody for joining us today in your participation in the OPAL Fuels first quarter 2023 earnings call. We look forward to continuing engagement and dialogue, and I wish everybody to have a great day.

Operator: Thank you for your participation in today’s conference. This does conclude the program. You may now disconnect.