OPAL Fuels Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; filed March 28, 2023. Unless noted, figures are U.S. dollars. Comparisons are with FY2021; the July 2022 business combination and changes in consolidation make some comparisons less directly comparable.
Business context
OPAL captures and converts landfill gas and dairy manure into renewable natural gas (RNG) and renewable electricity, sells related environmental credits, and builds, operates and services natural-gas fueling stations. It completed its business combination and began trading as OPAL Fuels in July 2022. At year-end, it operated 25 projects: seven RNG and 18 renewable-power projects. Operating RNG design capacity was about 3.9 million MMBtu annually; renewable-power nameplate capacity was 118.6 MW. RNG projects under construction represented a further 4.7 million MMBtu of design capacity. The company also reported a network of 242 fueling stations.
Financial and operating performance
| Metric | FY2022 | FY2021 |
|---|---|---|
| Total revenue | $235.5 million | $166.1 million |
| Operating income | $1.8 million | $11.0 million |
| Net income | $32.6 million | $40.8 million |
| Net cash from (used in) operating activities | $(1.4) million | $18.9 million |
| Net cash used in investing activities | $(184.0) million | $(117.2) million |
| Net cash from financing activities | $220.6 million | $125.0 million |
- Revenue rose 42%. RNG fuel revenue increased 80% to $126.8 million; fuel-station services revenue increased 37% to $69.2 million. Renewable-power revenue fell 13% to $39.5 million, partly following an electricity facility’s conversion to RNG and another facility’s closure.
- Operating income fell 84%; operating margin was approximately 0.8%, versus 6.6% in FY2021. Costs increased faster than revenue, including higher RNG and station-services costs and a 65% rise in selling, general and administrative expenses to $48.6 million.
- Net income included a $33.1 million net gain from changes in derivative fair values, primarily earnout-related gains. FY2021 included nonrecurring gains of $19.8 million on an equity-method acquisition and $15.0 million on deconsolidation of variable-interest entities. Net income attributable to Class A common stockholders was $3.4 million; reported basic and diluted EPS were $0.13 and $0.12, respectively. The filing says per-share results reflect the post-business-combination period.
- RNG production was 2.2 million MMBtu, versus 1.6 million; RNG fuel volume sold was 29.4 million GGEs, versus 20.8 million. Total volume delivered was 115.9 million GGEs, versus 96.4 million.
- Operating cash flow turned negative, attributed principally to lower margins, transaction costs and working-capital changes, including receivables. Investing cash use included $131.4 million of property and equipment spending and $65.0 million invested in short-term investments.
Liquidity, debt and capital needs
- At December 31, 2022, cash and cash equivalents were $40.4 million, restricted cash $36.8 million and short-term investments $65.0 million. Management described cash including restricted cash of $77.2 million plus short-term investments as available liquidity of approximately $142.2 million.
- Debt principal was $170.4 million, excluding deferred financing costs. Major balances included $96.1 million under OPAL Term Loan I, $23.0 million under the Sunoma loan, $22.8 million under the senior secured facility and $28.5 million under a convertible note payable. The note was redeemable on demand by either party.
- In March 2023, the company repaid the remaining $22.75 million senior secured facility balance and drew the remaining $10 million available under OPAL Term Loan I. OPAL Term Loan II provided up to $100 million of delayed-draw construction financing and a $5 million debt-service reserve facility; no principal was drawn as of year-end.
- Next-year capital expenditures were budgeted at $231.0 million, of which $184.7 million was committed. The company expected to fund spending with cash, operating cash flows and debt availability, and said additional debt or equity financing may be needed for growth.
Outlook, commentary and material risks
- Management stated that available resources were expected to cover existing commitments for at least 12 months from the filing date, while noting that lower gas collection, construction delays, adverse credit or commodity pricing, and outages could reduce cash flow and alter growth plans. No conventional revenue or earnings guidance is provided in the supplied filing text.
- The company said lower gas collection and delays in construction and project commissioning had negatively affected FY2022 and were expected to continue during 2023. Several projects in construction were expected to become operational in late 2023 or early 2024.
- Revenue and project economics depend substantially on RIN and LCFS credit prices, regulation and incentive programs, feedstock supply and quality, fleet adoption of natural-gas vehicles, and access to pipelines and other infrastructure. The filing identifies declining California LCFS prices and increased dispensing costs as pressures.
- Two customers represented 49% of FY2022 revenue, and two customers represented 44% of year-end receivables. A NextEra agreement covers at least 90% of environmental attributes; FY2022 net revenue under the agreement was $76.9 million. Failure to meet its minimum-volume commitments could trigger a payment; the filing estimated a maximum potential amount of about $10.6 million at then-current prices if terminated at the filing date.
- Redeemable preferred units carried an 8% cumulative dividend, paid in kind during the periods presented, and holder redemption rights arise after four years or upon certain events. The filing also estimates a potential Tax Receivable Agreement lump-sum payment of approximately $192 million upon a change of control, based on specified assumptions.
- OPAL reported ineffective disclosure controls and internal control over financial reporting at year-end, with material weaknesses involving review of significant transactions, account reconciliations and ASC 606 revenue-recognition controls. Management described remediation work in progress. The auditor gave an unmodified opinion on the financial statements but did not opine on internal-control effectiveness.
- Noble Road RNG LLC had an arbitration dispute with Ohio Edison over delays and the inability to operate the facility at expected capacity; a tolling agreement was in effect through October 3, 2023. Management said ordinary-course claims were not expected to have a material adverse effect.
- Other significant risks include dependence on site-host contracts, construction and supply-chain execution, environmental permitting and compliance, commodity and interest-rate volatility, financing needs, and concentrated voting control. The controlling stockholder held approximately 96.4% of voting power as of March 2023.
Key investor verification points
- Confirm the drivers and sustainability of revenue growth, especially environmental-credit revenue, margins and operating cash flow.
- Track RNG project completion dates, commissioning, actual production versus design capacity, and remaining committed capital spending.
- Verify liquidity after the March 2023 debt repayment and subsequent term-loan draw, and review debt maturities, covenant compliance and refinancing needs.
- Monitor RIN and California LCFS pricing, NextEra minimum-volume obligations, customer concentration and any shortfall exposure.
- Assess remediation and independent testing of the disclosed material weaknesses and whether disclosure controls become effective.
- Review the Ohio Edison dispute, preferred-unit redemption and dividend obligations, and the potential Tax Receivable Agreement liability.