OPAL Fuels Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. OPAL develops, operates and services biogas-to-renewable natural gas (RNG) and renewable power projects, and builds and services natural-gas fueling stations. It completed its business combination and began trading as OPAL Fuels Inc. on July 21, 2022; the transaction was accounted for as a reverse recapitalization.
Financial performance and liquidity
Amounts below are in millions of dollars except per-share data. The 2021 nine-month figures were restated, and changes in consolidation and the July 2022 business combination affect comparability.
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $66.6 | $47.2 | $168.8 | $105.0 |
| Operating income (loss) | $(1.9) | $3.2 | $(0.6) | $2.4 |
| Net income | $5.4 | $0.8 | $0.6 | $19.0 |
| Operating margin | (2.9%) | 6.7% | (0.4%) | 2.3% |
| Operating cash flow | Not presented separately in the filing summary | $(22.3) | $28.9 |
Gross margin, calculated from reported revenue and cost of sales, was approximately 25.6% in Q3 2022 versus 29.0% in Q3 2021, and 25.9% for the first nine months versus 26.9% in the comparable 2021 period. Class A common stockholders had a reported loss of $1.125 million, or $(0.04) basic and $(0.06) diluted per share, for the three and nine months ended; per-share results cover only the post-combination period.
- Revenue mix and drivers: Q3 RNG fuel revenue grew 81% to $32.4 million, primarily from higher environmental-credit and brown-gas sales. Fuel station services rose 26% to $23.2 million, largely from construction work. Renewable Power revenue was essentially flat at $10.9 million. For nine months, RNG fuel rose 124% and fuel station services 56%; Renewable Power fell 7%.
- Costs and earnings quality: Q3 SG&A nearly doubled to $15.8 million, including higher insurance, staffing, public-company, professional and IT costs. Q3 net income included $6.3 million of other income: a $4.4 million reversal of contingent consideration and a $1.9 million gain on repayment of a note receivable. Nine-month 2021 net income included a $19.8 million gain on acquisition of an equity-method investment.
- Cash flow and investment: Nine-month operating cash flow was $(22.3) million, attributed mainly to operating losses and unfavorable working-capital changes. Investing cash outflow was $218.9 million, including $146.9 million placed in short-term investments and $84.9 million of property and equipment purchases. Financing provided $270.5 million, including business-combination proceeds, preferred-unit issuance and borrowings.
- Liquidity: At September 30, cash and cash equivalents were $25.3 million, restricted cash $46.1 million, and short-term investments $146.9 million; the filing says the short-term investments were liquid and available for general use. Management expected available liquidity, operating cash flows, credit facilities and other expected capital sources to cover existing commitments for at least 12 months, while noting access to future financing is not assured.
- Debt and preferred interests: Principal debt totaled approximately $220.0 million, including $77.7 million under the Senior Secured Credit Facility, $91.2 million under the OPAL Term Loan, $28.0 million under a convertible note, and $23.0 million under the Sunoma loan. The $77.7 million Senior Secured Credit Facility was due in December 2022 and classified as current. Redeemable preferred interests totaled $135.3 million and carry cumulative 8% dividends, paid in kind during the period. A new facility provides up to $100 million of delayed-draw construction financing and a $5 million debt-service reserve facility; no principal was drawn on it by September 30.
Material changes, outlook and risks
- Management said 2022 revenue would be below the earlier projections provided in connection with the business combination, citing lower-than-expected gas collection, delayed RNG-facility construction and delayed fueling-station construction. It said these factors were expected to continue during 2023 and cautioned investors not to rely on the prior projections; no replacement revenue guidance was provided.
- Seven RNG facilities were under construction at quarter-end. Management reported 123 RNG dispensing stations, up from 69 at December 31, 2021, and a development pipeline of 16 projects representing 7.4 million MMBtu of annual feedstock biogas. It budgeted $412.3 million of capital expenditures for the next 12 months, of which $220.2 million was committed under existing contracts.
- Reported nine-month results included significant business-model and accounting changes following the combination. 2021 financial statements were restated for derivative accounting, construction costs recorded in the wrong period, and gross presentation of taxes collected on behalf of customers.
- Key market risks include changes in RIN and LCFS credit prices, regulatory uncertainty around EPA renewable-volume obligations beginning in 2023, declining California LCFS credit prices, construction and supply-chain delays, variable gas collection and facility outages, and reliance on landfill, dairy and other site owners for biogas rights. Two customers represented 49% of Q3 revenue and 45% of nine-month revenue.
- The company reported ineffective disclosure controls due to previously identified material weaknesses involving review of significant transactions, segregation of duties and access controls, account reconciliations, and revenue-recognition controls. Remediation was underway, but management gave no assurance it would be completed timely.
- Noble Road RNG had an arbitration dispute with Ohio Edison alleging delays and reduced ability to operate at expected capacity; the filing describes efforts to resolve the matter. Management said ordinary-course claims were not expected to materially affect the company.
- Other investor-relevant exposures include a potential Meteora repurchase of remaining shares at $10.02 per share, secured by escrowed cash, and possible dilution from warrants, earnouts and future equity financing. The filing also describes substantial voting control held through high-vote Class D shares.
Important facts for investors to verify
- Whether the December 2022 Senior Secured Credit Facility maturity was repaid, refinanced or otherwise amended after quarter-end.
- Actual 2022 revenue and project schedules compared with management’s stated shortfall versus prior projections, including gas collection, RNG certification and construction progress.
- Cash availability after restricted balances, committed capital expenditures and the remaining Meteora repurchase obligation; confirm subsequent borrowing and financing activity.
- Trends in environmental-credit prices and customer concentration, and the terms and performance of the NextEra environmental-attributes sales agreement.
- Progress in remediating material weaknesses and whether subsequent filings report effective controls or additional accounting adjustments.
- Potential effect of preferred-unit redemption and dividends, debt covenants, warrant and earnout liabilities, and any Tax Receivable Agreement obligations on future liquidity and dilution.