OPAL Fuels Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with Q1 2022 unless noted. OPAL Fuels captures and converts landfill and agricultural biogas into renewable natural gas (RNG), renewable power and environmental credits, and provides fuel-station construction, service and dispensing.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $43.0 million | $49.0 million | Down 12% |
| Gross profit, calculated as revenue less cost of sales | $6.8 million | $13.3 million | Gross margin 15.7%, versus 27.0% |
| Operating loss | $11.3 million | $1.0 million | Operating margin -26.3%, versus -2.0% |
| Net loss | $7.3 million | $4.5 million | Loss increased $2.9 million |
| Net loss attributable to Class A common stockholders | $1.6 million; $0.06 per share | Not presented | 2022 per-share data deemed not meaningful |
| Cash from operating activities | $4.2 million | Used $9.0 million | Improved $13.2 million |
| Cash used in investing activities | $8.9 million | $22.5 million | Lower, despite higher capital spending |
| Cash used in financing activities | $32.7 million | Cash provided $42.4 million | Primarily debt repayments and share repurchase |
Revenue comprised RNG fuel of $12.2 million (down 19%), fuel-station services of $20.8 million (down 16%), and renewable power of $9.9 million (up 9%). SG&A rose 33% to $14.5 million, reflecting higher compensation, bad-debt expense, stock compensation and directors’ and officers’ insurance. Net interest and financing expense fell to $0.6 million from $3.1 million, while a $3.9 million net gain on derivative fair values included a $4.3 million gain on earnout liabilities. Results also included $2.8 million of paid-in-kind preferred dividends.
Balance sheet, debt and liquidity
- At March 31, 2023, total assets were $606.7 million, total liabilities $243.3 million, and current assets and current liabilities were $134.8 million and $130.7 million, respectively.
- Cash and cash equivalents were $33.3 million; restricted cash was $6.6 million. Short-term investments were $37.0 million and described as liquid and available for general use. Management reported liquidity of $39.8 million including restricted cash, plus short-term investments.
- Total debt principal was approximately $151.3 million: $99.2 million under the OPAL Term Loan, $23.0 million under the Sunoma Loan and $29.1 million under the convertible note. The convertible note is classified as current and is redeemable on demand by either the company or lender. The Senior Secured Credit Facility was repaid in full in March.
- OPAL borrowed the remaining $10 million available under its existing term loan in Q1. The separate OPAL Term Loan II had no principal outstanding at quarter-end and provided $105 million of undrawn availability. The company reported compliance with OPAL Term Loan financial covenants.
- Cash, restricted cash and cash equivalents declined $37.4 million during the quarter. The company spent $38.8 million on property, plant and equipment and paid $16.4 million to repurchase shares following exercise of Meteora’s put option.
Changes, outlook and risks
- Management attributed lower RNG revenue mainly to reduced environmental-credit sales as OPAL held RINs and LCFS credits in inventory amid pricing levels, and lower brown-gas pricing; higher methanol-pathway credit revenue partly offset the decline. Fuel-station services revenue was affected by construction delays and lower third-party RIN sales.
- RNG produced increased to 0.6 million MMBtu from 0.4 million; RNG fuel sold rose to 8.3 million GGEs from 6.1 million, and total volume delivered increased to 32.4 million GGEs from 25.6 million.
- No formal financial guidance was provided. Management said it expected available liquidity, operating cash flows and financing availability to cover existing commitments for at least 12 months, while noting future growth may require additional debt or equity financing and that access to capital is not assured.
- Management budgeted $279.3 million of capital expenditures for the next 12 months, including $197.5 million committed under existing contracts. It planned to place at least 2 million MMBtu of proportional RNG project capacity into construction in 2023. Six projects in construction represented approximately 4.7 million MMBtu of annual proportional nameplate capacity.
- Project timing: Emerald was expected to begin commercial operations in the next few months; Prince William in Q4 2023; Sapphire in the first half of 2024 after permitting delays; and two California dairy projects and a Northeast landfill project in the second half of 2024. Management cited construction and permitting delays as risks.
- RIN and LCFS prices and volumes are sensitive to federal and state policy, including finalization of EPA renewable volume obligations. Other stated risks include reduced incentives, weaker demand for renewable fuels, commodity prices, customer and supplier concentration, project costs and delays, and ability to finance growth. Three customers accounted for 44% of Q1 revenue; one vendor represented 54% of accounts payable at quarter-end.
- Disclosure controls and procedures were deemed ineffective due to previously reported material weaknesses involving review of unusual transactions and contracts, account reconciliations and revenue-recognition controls. Remediation efforts were underway; management cautioned they might not be completed timely or successfully.
- Subsequent developments included a 25-year landfill-gas and site agreement for a proposed Illinois RNG facility, and a Florida landfill-gas agreement whose contemplated site lease was not assured. The filing reported no current legal proceedings expected by management to have a material adverse effect.
Important facts for investors to verify
- Whether environmental-credit pricing, credit-sale timing and fuel-station construction delays continue to pressure revenue and margins.
- Execution, permitting and commissioning schedules for projects in construction, and the expected funding and returns on the planned capital expenditures.
- Liquidity after restricted cash, debt service and committed capital spending; the on-demand convertible note and upcoming debt maturities warrant particular attention.
- The terms and economic implications of the redeemable non-controlling interests ($1.014 billion) and redeemable preferred interests ($140.9 million), including the preferred units’ cumulative 8% dividend and redemption provisions.
- Progress in remediating material weaknesses and the effect of customer, vendor and environmental-credit market concentration.