[Call Starts Abruptly] OPAL Fuels Fourth Quarter and Full Year 2022 Earnings Results Conference Call. 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, today's conference call is being recorded. I would now like to turn the conference over to your host Mr. Todd Firestone, Vice President of Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Welcome to the OPAL Fuels fourth quarter and full year 2022 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 fourth quarter and 12 months year-to-date of 2022 yesterday afternoon and those results are available on the Investor Relations section of our Web site at opalfuels.com. The presentation and access to the webcast for this call are also available on our Web site. After completion of this call, a replay will be available for 90 days. Before we begin, I'd like to remind you that our remarks on this call including answer your questions contain forward-looking statements, which involve risks, uncertainties and assumptions. Forward-looking statements are not 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 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 fourth quarter 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 and full year 2023 guidance. We'll then open up the call for questions. And now, I'll turn the call over to Adam Comora, Co-CEO of OPAL Fuels.

Thank you, Todd. Good morning, everyone. And thank you for being here for OPAL Fuels fourth quarter and year end 2022 earnings call. 2022 was a remarkable year for OPAL Fuels filled with many achievements for our company as well as positive developments for the RNG industry as a whole. We are proud of what we've accomplished and we remain steadfast in our focus on executing on our plan. I'd like to highlight several points. First, we continue to execute on our strategic and operational priorities. We believe our integrated platform is a powerful model in delivering renewable low carbon RNG to the marketplace. Strategically, our goal is to continue to grow our RNG production and to maximize the value of that RNG, which currently remains the US transportation fuel market as the highest value distribution. Operationally, we remain committed to be the premier vertically integrated RNG company in the industry, one that excels at providing value to not only our shareholders but also our customers and partners. Importantly, we think our visible and tangible growth profile is a differentiating factor in the marketplace. We grew our RNG output by more than a third this past year. As we disclosed in our 2023 outlook, we expect growth to accelerate this year by greater than 50% over 2022 to more than 3.4 million MMBtus at the midpoint of our guidance. Our projects and construction remain on track, which provides visibility to accelerating production growth once again in 2024 from 2023. In addition to production, our advanced development pipeline continues to grow and mature. And as John will touch on later, we have seen some of the development delays from 2022 ease and we expect to place at least 2 million MMBtus of output capacity into construction in 2023. I want to…

Thank you, Adam, and good morning, everyone. I want to start out by saying that we are very focused on executing on our growth plans. We grew RNG production nearly 40% in 2022 and we expect to grow by more than 50% this year. Our in construction portfolio's timing is progressing with a cadence that is in line with our expectations and we think sets us up for accelerated growth into 2024. During 2022, our operating project portfolio increased from three to six projects and now seven with the just completed Bio Town dairy project in Indiana. In 2022, we commissioned three landfill RNG projects, the Noble Road project in Ohio, our New River project in Florida and the Pine Bend Project in Minnesota. These RNG projects represent 1.6 million MMBtu of nameplate RNG capacity. At all three of these landfill projects, gas production continues to increase as the trash volumes there increase. In addition to our operating projects, we currently have six RNG projects in construction with the Bio Town dairy RNG project having just entered operations as we said. Of these six, we expect Emerald to go online in the next several months, Prince William in the fall and Sapphire late in the year, our two dairy projects we expect to be commissioned in early 2024 and the Northeast landfill later in 2024. As Adam mentioned, we expect production increases this year from our operating and in construction portfolio that are in line with our prior expectations with the 3.4 million MMBtu midpoint of production guidance being a 57% increase compared to RNG production in 2022. I want to pick up on what Adam mentioned earlier about development conditions easing. The good news is that the project development logjam is breaking and conditions are improving in terms of…

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 and year end results for the period ending December 31, 2022. We anticipate filing our 10-K in the next day or so. We saw strong growth in two of our three business segments, RNG fuels and fuel station services. The biggest driver of the quarter and year-to-date results is RNG fuels where we are starting to see the contribution from the RNG projects that have come online in 2022. We saw strong topline growth for the fourth quarter with revenue up 42% year-over-year, driven primarily by higher volumes produced and sold in the RNG fuel segment, as well as higher prices for brown gas and higher RINs under forward sales contracts we had entered into earlier in 2022. These benefits were partially offset by higher cost of sales due to electric utility costs and employee costs to support our growth, as well higher royalties driven by higher energy revenues. G&A costs for the fourth quarter totaled $14 million, reflecting transaction and other costs, of which $10 million is considered 1 times. As a result, we generated net income in the fourth quarter of $32 million. For the full year 2022, before considering the impacts of preferred dividends, we achieved net income of $32.6 million, reflecting the standalone results for OPAL Fuels LLC and ArcLight Clean Transition Corp. II through the closing of our business combination last July 21st, plus the combined operations since then. Consistent with the results we saw in the fourth quarter, we benefited from pricing for environmental attributes that we had locked in via forward sales early in 2022 coupled with higher commodity prices. Looking at fourth quarter results compared to the…

Thank you, Ann. In closing, we believe our future is bright. We continue to add new projects and advance projects through our development funnel into operations with accelerating growth in gas production and distribution. While the world around us continues to lean into this sector, we are continuing to carry forward OPAL’s vertically integrated mission to build and operate best in class RNG facilities that deliver industry leading, reliable and cost effective RNG solutions to displace fossil fuel 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 Instructions]. Our first question comes from Derrick Whitfield of Stifel.

Good morning all and congrats on a successful first year as a public company, and certainly in a difficult operating environment. For my first question, I wanted to lean into your prepared comments on the progression of your backlog both near term and medium term. For 20 23, it appears that Emerald, Prince William and Sapphire projects are all progressing along the schedule you laid out in Q3. Looking beyond 2023, could you place some parameters on the amount of project capacity from your advanced development pipeline that could be placed in production in 2024 based on the improving operating conditions you are experiencing?

So we have advanced development pipeline of a little over 8 million MMBtus of nameplate capacity of gas available. And as we continue into 2024, we see our dairy projects and the Northeast landfill project that we placed into construction last year coming online. Because of gap in projects going into construction, there will be fewer coming online next year beyond that. But the projects that we placed into construction this year will go online in about 18 months or so, would be your average construction time frame from commencement of construction until you start seeing the gas production, could be a little faster, could be a little bit slower. So we will see gas from the projects that are going online this year continue to increase our output during 2023 and 2024 as those projects come online. And then we will see the projects putting into construction this year start to contribute during the -- really late 2024, 2025 timeframe.

I think the only thing I would add there is, obviously, we will have a full year production in ‘24 on the Emerald project that goes in, in a couple of months and you will also get a full year output from the two in the later half of this year, and that's really visible growth and accelerates production from '23 into '24.

And then as my follow-up, I wanted to focus on the implications of the IRA to your business. Referencing Slides 13 and 14, you arguably have more optionality in your portfolio than ever before as a result of the IRA. As you assess your RNG, eRIN and hydrogen opportunities, how does the eRIN pathway impact your view on the allocation of capital between RNG and electricity with the understanding that the time and likely your friend based on the growth of EVs relative to landfill gas? And then more specifically for 2023 guidance, could you comment on the degree of ITC embedded in your projections?

I'll let Ann handle the ITC one first, and then I'll talk a little bit about some of the regulatory stuff happening, both in terms of IRA and eRIN pathway.

So as I had commented, I think given the fact that we’re still waiting for additional guidance from treasury, which we expect to come most likely in Q2, we’re being a little circumspect in terms of the specific amounts and details of what we’ve included in adjusted EBITDA for ITC. I think we are making some underlying assumptions, obviously, about the projects that are in construction and that we’ll COD this year. But beyond that, I think at this point we’re not really ready to disclose much more than that.

And as far as some of the other -- this is Adam here. As far as some of the other public policy stuff that we see happening, in addition to the ITC, which we’ll get some clarity on, we’re also expecting in 2023 to get some clarity around the 45Z calculations and how carbon intensity scores maybe allocated. We think that’s going to be really impactful specifically for the heavy negative CI kind of gap but we need to see a little bit more clarity to really get a better understanding on that. The eRIN pathway we think is really interesting for our business and opens up all sorts of incremental profitability opportunities on our existing landfill gas to electric projects and how we think about some of the new project development and what kind of opportunities that may open up. And it is a little uncertain and the timing of when they may finalize that rule. The EPA has received a number of comments back in February, so we’ll see whether or not they’re going to give that clarity in June. When we do expect perhaps [when] we look at the RVO volumes, whether or not that’s going to include finalized rules on the eRINs or that may slip into later in 2023. As we think about it from a capital perspective on what makes an RNG project versus a landfill gas to electricity project, we like having the optionality for all these new end markets that are opening up that you mentioned whether or not the hydrogens or quite frankly a lot of export markets that are opening up. So we like the idea if we can see good risk adjusted returns on capital for an RNG project to continue to deploy capital and have that flexibility of off take, whether it’d be new fixed voluntary markets or strengthening voluntary markets. So we see it as a big additive to our business overall. And on the landfill -- existing landfill gas electric projects, obviously, that will be incremental profitability without having to invest new capital. So we’re excited about the prospects for it and we’ll see the timing for when they finalize that rule.

Our next question comes from the line of Ryan Todd of Piper Sandler.

Congrats on the result, and let me -- I apologize that I conflict and missed some of your earlier comments, so I hope -- I'm not sure if you addressed some of this earlier in the call. But it’s been a challenging stretch for many in the RNG industry in terms of project execution, getting volumes delivered on time and budget. What have been the biggest challenges for you on the project execution side, I guess, both on dairy and landfill, and are those things improving? Can you talk about how maybe parts of the supply chain and your ability to execute on your significant backlog is improving going forward and what has improved, if anything?

I'll start with this one off. I think we reported last quarter that there was a slowdown in execution of contracts and movement through the pipeline as landfills realize the value of the RNG inherent in their landfills and each of the major landfills and many of as far took the opportunity to reassess how they wanted to approach that value proposition. So that resulted in a bit of delay. But I think they are through that process and we're seeing a lot of movement through our advanced development pipeline and progress there. So conservatively, we think that we will put 2 million MMBtu into construction this year. Our overall pipeline, we have reported 8 million, we think there is great opportunity to accelerate that. But we want to stay conservative on the outset and really update our projections and guidance to you as we execute on those projects in that pipeline.

And is there anything on the supply chain side of things that is problematic at this point, or has that moderated to a level that it’s not an issue anymore?

No. In terms of acquiring equipment, there has been a little bit of a lead time affect. But most of that anticipated and that there is plenty of opportunity to get the equipment that we need to build out our projects. So nothing material there that we are seeing, Ryan.

Maybe shifting gears, from conversations with investors, liquidity in your stock remains a challenge, even for those that are positive on the story and the valuation. Can you talk about what options you may have to address current liquidity in the stock, what sort of timeline might be a possible? And how much of focus is this or is this an issue where we just have to grow the EBITDA and the earnings and move things along that way?

I will say we hear similar questions when we have our investor meetings where people are really positively disposed to RNG and really like the OPAL story, and maybe would like to see more liquidity in our stock. I'll answer it in a couple of different ways. One is we don't need to do any primary share issuance. We have got enough liquidity in place and capital raising plans in place to continue to execute on our development pipeline. So there is no need to raise capital from a primary share issuance. From a secondary share issuance, I'd say, like most management teams, we feel our shares offer compelling value here. So I don't know if there is a lot of interest currently on a secondary and we don't have any immediate plans in place. We do think that there could be some opportunities to increase the flow with smaller tuck-in acquisitions and perhaps increased liquidity and flows that way. We are going to spend continue to ratchet up time spent with investors and analysts and thinking about an analyst or investor day later in the year. So we will be visible and try and increase the visibility of OPAL Fuel, but we don't currently have anything on the table for either a primary or a secondary.

Our next question comes from the line of Matthew Blair of Tudor, Pickering, Holt Company.

Could you share any thoughts on how Q1 is progressing? Seems like you’ve had some volume and potentially margin benefit from the startup of the Bio Town dairy, but then headwinds from lower D3 RIN prices as well as rolling off the locked in D3 RINs from last year. Does that sound about right, is there anything else that we should be thinking about in regards to Q1? And at this stage, can you say if Q1 EBITDA is likely to be higher or lower quarter-over-quarter?

So I can take that and then others can jump in. So obviously, we're just reporting 2022 here and we’ve given initial guidance. We’ll be reporting Q1 in the, call it, next, I don’t know, six weeks or so. But I think everything that you said there I generally agree with. I think from our perspective, we are seeing gas production going in the right direction, right, it's growing. The caveat -- there are two caveats. First of all, Bio Town, we are a minority owner. So we will see an equity pickup in our results for that but it’s not under our direct control. The second piece is, as I highlighted in my comments, from a RIN and LCFS perspective, we anticipate in the first half of the year that we’ll be, I’ll call it minimal sellers, right, just enough to manage the business. But clearly, we see value. So our results will be skewed to the latter half of ‘23. So I think just it’s important to keep those two things in mind. And we will continue, as I commented, to show the value of both stored gas and unsold environmental attributes as an adjustment to adjusted EBITDA. Again, so people can see kind of what’s pending right to be monetized, again, hopefully in the latter half of the year.

I just want to follow up into that. It’s really key for us to do that to be able to match current period expenses versus what the value of the gas that we’re producing, holding in inventory and credits that we’re missing and holding in inventory. We do report current period expenses for all of that gas that is produced in credits that are in inventory.

So just to follow up on that. Ann, when you said that results will be skewed to the back half of the year, when you said that initially, I took it’s mean that your cash flows would be skewed to the back half of the year, but it sounds like you’re saying that that actual EBITDA would be skewed. Is that the right interpretation?

So, no. Again, we will be adding back the value in adjusted EBITDA. So we’ll be reporting it in each quarter. So to your point though cash will be skewed towards the latter half of the year, it may show up in lower revenues and lower net income.

So when you report your GAAP and operating income, it will be lower in the first half to the second half and once we plan on monetizing the balance of RINs in RNG that’s in inventory. But from an adjusted EBITDA basis, it gets smoothed out.

Correct.

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

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

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

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

No, nothing in the near future.

Very helpful, thank you.

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

Yes, I would really consider that one one off.

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

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

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

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

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

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

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

I say from a super high level, we have to see whether or not it’s included in the final rule as a pathway. Right now, they proposed that you could use renewable power to be used as electricity, as transportation fuel. So first order of business, are they going to include that as a pathway here in June? Second order of -- and they may delay it, quite frankly. I think there's a lot of push and a lot of momentum behind including it. But the industry have a lot of questions around some of the mechanics that we need some clarity around, which is what is the equivalency value, how many RINs are they going to size assign per megawatt that you produce, there’s a little bit of mechanics around who the RIN generator will be. I don’t think that necessarily impacts the economics so much but people have a lot of questions over whether or not the auto OEM will be the generator of that RIN credit. And then who needs to be assigned on the pathway, which is that entire value chain of the e-RIN for how the economics are going to get split up. So we think it’s all potentially really positive. And there’s also the potential to take your RNG from a pipeline and potentially create some eRINs. So there’s a lot of little nuances in it and -- but those are, just to give you a flavor from the high level of what we’re waiting for some clarity on.

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

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

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

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

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

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

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

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

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

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

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

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

Again, I wanted to ask a follow up on the last question and ask you really to elaborate on the competitive landscape more broadly. As you’re aware and have noted, we’ve observed unprecedented levels of M&A for RNG assets over the last year with an increased focus more recently in the downstream side based on the BP TravelCenters’ potential acquisition. In your view, what do these transactions imply about the value of your business and how do they alter the competitive and operating environment for you? Seemingly, there are less agile guys at the table right now versus past periods.

I actually thought that was a pretty interesting acquisition that BP made there. And I think the read through is it’s something that we’ve talked about in the past about being vertically integrated and where price and power could be for alternative fuels into the sort of Class A industry. And from my perspective -- and we’ve seen a couple of these other smaller private downstream players as well get acquired by other major EMPs. We feel it’s a little bit of a validation of sort of what we put together here and grown organically. And I think there’s some interesting opportunities as a vertically integrated player and we’ll see how that plays out. Historically, deployment in this industry has really been sort of a behind the fence kind of model and dedicated fueling. We think that 15 liter engine is going to open up some new opportunities with some trucking and logistics fleets, and maybe there could be ways to look at how future deployments could be. And we have seen, obviously, a lot of M&A activity on just the upstream production side as well. So we feel like it’s an interesting read through for what we’ve put together here at OPAL Fuels.

And if I could just say, Derrick, that, in general, the pendulum continues to move towards decarbonization and the value of renewable fuels continues to be central to those strategic players and now to financial players as well. And so we continue to see a lot of interest. As I was saying earlier, I feel like, the country and the world is kind of leaning into this sector and you continue to see it quarter-after-quarter as companies are making moves towards that decarbonization and how they’re going to play in that in the future. It’s a tough decision for a lot of people to make and then to find the right opportunities of companies that are growing and essential to the space really provide that opportunity.

I'm showing no further questions at this time. I’m going to turn the call back over to Adam Comora for any closing remarks.

Thank you very much for your participation in OPAL Fuels’ full year 2022 earnings call. We look forward to continued engagement and dialog. Have a great day.

Thank you. Ladies and gentlemen, this does conclude today’s conference. Thank you all for participating. You may now disconnect. Have a great day.