OPAL Fuels Inc. — Q3 2023 Form 10-Q
Business context and reporting period. The filing covers the three and nine months ended September 30, 2023. OPAL develops and operates biogas-to-renewable-natural-gas (RNG) and renewable-power projects, and builds, services and operates natural-gas fueling stations. Amounts below are in U.S. dollars; financial figures are in millions unless noted.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $71.1 | $66.6 | $169.1 | $168.8 |
| Gross profit (revenue less cost of sales) | $19.2 | $17.2 | $36.9 | $44.0 |
| Gross margin | 27.0% | 25.8% | 21.8% | 26.1% |
| Operating income (loss) | $1.9 | $(1.9) | $(15.8) | $(0.6) |
| Net income | $0.2 | $5.4 | $106.9 | $0.6 |
| Net income (loss) attributable to Class A stockholders | $(0.4) | $(1.1) | $15.9 | $(1.1) |
| Class A diluted EPS | $(0.01) | $(0.06) | $0.58 | $(0.06) |
Nine-month net income included a $122.9 million noncash gain on deconsolidating Emerald and Sapphire; it should not be viewed as recurring operating earnings. The company reported no income-tax provision.
- Cash flow: Nine-month operating cash flow was $4.8 million, versus cash used of $22.0 million in 2022. Investing used $44.9 million, including $92.3 million of property, plant and equipment purchases; financing used $15.5 million. Cash, cash equivalents and restricted cash ended at $21.6 million.
- Liquidity: At September 30, cash and cash equivalents were $15.0 million, restricted cash $6.6 million, and short-term investments $18.0 million. Management reported $285.9 million available under delayed-draw term loans and $41.0 million under the revolver, and expects resources to cover commitments for at least 12 months.
- Debt: Principal debt was $187.1 million, comprising $164.1 million under the OPAL Term Loan and $23.0 million under the Sunoma Loan. The new OPAL facility matures in 2028; its term loans initially bear interest at Term SOFR plus 3.5%, with annual step-ups. The company said it was in compliance with its financial covenants at quarter-end.
- Investment needs: OPAL anticipates approximately $179.3 million of capital expenditures over the next 12 months for projects and fueling stations under construction and its share of equity-method project contributions.
Material changes versus the prior comparable period
- Q3 revenue rose 7% year over year, while nine-month revenue was essentially flat. Nine-month RNG Fuel revenue fell 23%, mainly from lower brown-gas and environmental-credit pricing and lower RIN volumes; Renewable Power revenue rose 33%, principally on higher environmental-attribute sales.
- Q3 operating results improved to income of $1.9 million from a loss of $1.9 million. For the nine-month period, operating loss widened to $15.8 million, reflecting higher costs, including Fuel Station Services and Renewable Power cost of sales and SG&A.
- On May 30, OPAL contributed Emerald and Sapphire to the 50/50 Paragon joint venture, deconsolidated the facilities and began equity-method accounting. The transaction produced the $122.9 million gain and increased investment in other entities to $199.5 million from $51.8 million at year-end 2022.
- In September, OPAL refinanced and expanded its term-loan financing, drew funds to repay prior debt and the convertible note, and repaid $16.5 million of accrued preferred dividends. The company also repaid its Senior Secured Credit Facility in March.
Outlook, risks and unusual items
- Management expects the majority of construction-in-progress projects to become operational in Q4 2023 or early 2024. The project table lists expected commercial dates extending into 2025; schedules remain estimates subject to permits, supply chains and construction progress. Aggregate RNG inlet-capacity utilization is expected to be 75%–85%; renewable-power capacity utilization is expected to remain below 50%.
- Backlog was $46.5 million at September 30, 2023, anticipated to be recognized within 12 months. Management expects to seek additional debt or equity capital for growth and cautions financing may not be available on acceptable terms.
- OPAL disputes contractor change-order requests of approximately $14 million per project for two Central Valley dairy RNG facilities. The company, contractor and surety are in settlement discussions under a temporary funding arrangement; no formal legal proceedings had been filed. The company also disclosed an equity commitment of up to $2.1 million for Paragon project cost overruns.
- Key business exposures include environmental-credit prices and regulation, natural-gas and diesel prices, project delays and cost increases, customer and supplier concentration, and the availability of biogas resources. Two customers accounted for 49% of Q3 revenue and 41% of nine-month revenue.
- Disclosure controls were deemed ineffective because of previously reported material weaknesses involving review of significant transactions, account reconciliations and revenue accounting under ASC 606. Remediation steps were implemented during 2023 but had not operated long enough to be considered remediated.
- After quarter-end, CFO Ann Anthony announced her departure and Scott Contino was appointed interim CFO. A subsidiary also agreed to sell a Prince William pipeline-extension project to Washington Gas Light for $25 million after completion; closing depends on regulatory approval and other conditions.
Important facts for investors to verify
- How much of the nine-month reported net income is attributable to the one-time, noncash Paragon deconsolidation gain, and what are ongoing earnings and cash generation excluding it?
- Whether the RNG projects meet construction, permitting and commissioning schedules, especially the Central Valley projects with disputed change orders.
- Whether available credit, operating cash flow and other funding can support the stated $179.3 million of next-12-month capital expenditures and debt obligations.
- Whether revenue and margins can withstand changes in RIN, LCFS, REC and other environmental-credit prices, given customer concentration and related-party commercial arrangements.
- Whether the internal-control material weaknesses are remediated and the Washington Gas Light asset sale receives approval and closes as expected.