OPAL Fuels Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. OPAL Fuels develops and operates renewable natural gas (RNG) and renewable power projects and provides fueling-station construction, service, and fuel sales.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $55.0 million | $53.2 million | $98.0 million | $102.3 million |
| Operating income (loss) | $(6.4) million | $2.3 million | $(17.6) million | $1.3 million |
| Net income (loss) | $114.1 million | $(0.3) million | $106.7 million | $(4.8) million |
| Net income attributable to Class A | $17.9 million | Not presented | $16.3 million | Not presented |
| Basic / diluted EPS | $0.66 / $0.66 | Not presented | $0.60 / $0.59 | Not presented |
Revenue rose 3% year over year in Q2 but declined 4% for the first half. Q2 operating margin was approximately negative 11.6%; first-half operating margin was approximately negative 18.0%. The reported net profit is not indicative of underlying operating profitability: it includes a $122.9 million noncash gain from deconsolidating Emerald and Sapphire. The gain was largely allocated to redeemable non-controlling interests.
- Revenue mix: Q2 RNG fuel revenue was $16.4 million, fuel-station services $30.0 million, and renewable power $8.7 million. For the first half, the respective amounts were $28.6 million, $50.8 million, and $18.6 million.
- Costs and margins: Q2 selling, general and administrative expense increased 72% to $13.7 million; first-half expense increased 50% to $28.1 million. Fuel-station services and renewable-power costs also rose, contributing to operating losses.
- Cash flow: First-half operating cash flow was $7.8 million, versus cash use of $9.3 million in 2022. Investing cash use was $28.2 million, including $72.0 million of property and equipment purchases; financing cash use was $29.7 million. Cash, restricted cash, and cash equivalents declined by $50.1 million to $27.1 million.
- Liquidity: At June 30, cash, cash equivalents and restricted cash totaled $27.1 million, with $17.0 million in short-term investments. Current assets were $101.0 million and current liabilities $115.3 million. Management said available liquidity, operating cash flows and expected capital sources should cover commitments for at least 12 months.
- Debt and capital structure: Debt principal totaled $144.9 million: $92.2 million under the OPAL Term Loan, $23.0 million under the Sunoma Loan, and a $29.7 million convertible note classified as current and redeemable on demand by either party. The OPAL Term Loan matures in 2025; the Sunoma Loan in 2033. The company reported compliance with OPAL Term Loan financial covenants. Redeemable preferred non-controlling interests were $143.8 million and redeemable non-controlling interests $1.068 billion.
Material changes and unusual items
- In May 2023, OPAL contributed its interests in Emerald and Sapphire to Paragon, a jointly controlled 50%-owned venture, and began accounting for the investment under the equity method. This caused deconsolidation and the $122.9 million noncash gain; OPAL also transferred the associated OPAL Term Loan II rights and obligations to Paragon.
- The company recorded a $1.9 million debt-extinguishment loss related to unamortized financing costs on that facility. It repaid the Senior Secured Credit Facility in full in March 2023.
- Environmental-credit sales were affected by OPAL’s decision to hold internally generated RINs and LCFS credits in inventory amid pricing conditions. Management cited lower first-half RNG revenue in part to lower credit volumes sold and lower brown-gas pricing.
Outlook, risks and contingencies
- Management expects $115.4 million of capital expenditures over the next 12 months, primarily for renewable-energy projects and fueling-station equipment. It anticipates that most facilities then in construction will become operational in late 2023 or early 2024; Polk County is expected to begin commercial operations in Q4 2024. OPAL remained on track to put at least 2.0 million MMBtu of proportional RNG project capacity into construction during 2023. These are forward-looking expectations, not guarantees.
- No quantified earnings or revenue guidance is provided. Management says future funding needs may require additional debt or equity financing; unavailable or unfavorable financing could delay or scale back development plans.
- Results are exposed to RIN and LCFS prices and regulation, renewable-energy incentives, commodity prices, project construction costs and delays, customer demand, and access to biogas resources. Three customers generated 46% of first-half revenue; two customers represented 24% of receivables at quarter-end, and two vendors accounted for 45% of accounts payable.
- Management concluded disclosure controls were ineffective as of June 30, 2023 because of previously reported material weaknesses involving review of significant transactions, account reconciliations, and revenue-recognition controls. Remediation efforts are underway, but completion and effectiveness are not assured.
- Management did not expect current legal claims to have a material adverse effect. The filing reports no material change to the risk factors in the 2022 Form 10-K. A post-quarter, 20-year landfill-gas agreement was entered into on August 11, 2023.
Important facts for investors to verify
- How much of reported earnings and equity value reflects the noncash Emerald/Sapphire deconsolidation gain, and what operating contribution will the Paragon investment generate?
- Whether construction, commissioning, and commercial-operation timelines are achieved, and whether the stated $115.4 million capital program can be funded without materially dilutive equity or additional debt.
- The timing and repayment or refinancing plan for the $29.7 million demand-redeemable convertible note and other debt obligations.
- Whether management remediates the disclosed material weaknesses and improves disclosure controls.
- How environmental-credit pricing, inventory held for sale, customer concentration, and project-level costs affect future cash generation and margins.