OPAL Fuels Inc. Q2 FY2025 earnings call

Adam's Overview - Second quarter results were in line with expectations and guidance for the year maintained. - Making progress on building operating platform for RNG production and fueling stations. - Second quarter adjusted EBITDA was $16.5 million, impacted by lower RIN price environment, reduced renewable power earnings, and nonrecurring expenses. - Key highlights: RNG production up 33%, Fuel Station Services segment EBITDA up 30%, sold $16.7 million of IRA investment tax credits, added to Russell indices. ### Jon's Commercial and Business Development Update - RNG production up 33% y-o-y due to ramp-up of Sapphire and Polk facilities and improved uptime. - Atlantic RNG project in commissioning, expected to enter full commercial operations in fourth quarter. - Burlington, Cottonwood, Kirby projects in various stages, with plans to place 2 million MMBtu into construction in 2025. - Fuel Station Services business performing well, segment EBITDA up 30% y-o-y, 45 stations under construction, 20 owned. ### Kazi's Financial Results - Revenue and adjusted EBITDA for the quarter were $80.5 million and $16.5 million respectively, lower y-o-y due to lower RIN prices, loss of ISCC carbon credits, and nonrecurring expenses. - Capital expenditure totaled $16.4 million, liquidity was $203.2 million as of June 30, monetized ~$17 million in investment tax credits in June, and expects ~$50 million in gross ITC sales in 2025.

The RNG Fuel segment produced 1.2 million MMBtus in the second quarter, which is 33% higher versus the same period last year. The Fuel Station Services segment EBITDA was approximately $11.2 million in the second quarter, 30% higher versus the second quarter of 2024. The RNG Fuel segment's production growth contributed to the overall performance, while the Fuel Station Services segment showed strong EBITDA growth.

- Second quarter results were in line with expectations, and guidance for the year is maintained. ### - Maintaining guidance to place 2 million MMBtu into construction in 2025. ### - Expecting adjusted EBITDA to be within the range of guidance despite lower RIN prices.

- Lower RIN price environment. ### - EPA policy uncertainty, including administration of cellulosic D3 category within renewable fuel standard and small refinery exemptions. ### - Macro headwinds for new CNG and RNG adoption from tariffs, equipment availability and pricing, and EPA policy uncertainty.

Q: One of our biggest takeaways from your and [ Klean's ] releases yesterday was really the strength of your dispensing business. Perhaps for Adam, could you speak to how the competitive landscape has changed in recent quarters on the downstream side and the demand you're seeing from customers for conversions from fossil to RNG now that EV and hydrogen options are seemingly being pushed to the right?

A: Yes. I would say that given some of those recent policy changes and what we're seeing from equipment pricing and equipment availability, there has been a market shift, where really a lot of the large major national fleets are really engaging on CNG and RNG. And I think when those large fleets are looking around to who can really support a successful deployment and really rely on dependable supply of RNG, there aren't too many that have really executed on it. And I think OPAL Fuels is in a really good position given our success and track record that we've had in this space working with these major national fleets. So I would say there have been earlier in the year some macro headwinds around whether it be where tariffs were playing out and where freight rates have been and that sort of thing which may have slowed a little bit people's thinking on deploying RNG and CNG. We are seeing some of that abate, and we're really front and center for these national fleet deployments. So we're really enthusiastic about what the prospects look to be for this as a good cost-effective and proven technology versus diesel. And although -- you have also seen some folks on the margin that maybe are no longer being forced to focus as much on sustainability. There are still a number of significant fleets that still have sustainability targets. And we're -- we have -- feel good about where we sit and where the industry is headed from that perspective.

Q: So as mentioned, you've been able to maintain your guidance despite the weaker RIN price environment. Could you just give some more detail around what the main drivers are that have allowed you to keep guidance unchanged?

A: There are a couple of areas that we see we would be able to continue to maintain our guidance. Part of the issue -- part of the drivers are, if you remember, we do have some forward purchases of the RINs -- forward sales of the RINs. That allows us to have a little bit of confidence in terms of our achievement of revenue. The second area that I see is our production, the way the production is trending. If we can keep it towards the lower end of our guidance, I think we will be able to hit that. The third major area is, even if you see the quarter has a onetime nonrecurring G&A expenses and investments, those will normalize for the rest of the year. In addition to -- so these are generally, and including our RNG project. The other major contributor would be our downstream business, our constructions. And both in ourself, FBA stations as well as construction for third parties, it has got lumpiness. And those lumpiness has shown up partly in the lack of it during Q2, which are picking up pretty strongly in Q3 and Q4. So these are the few areas that gives us enough confidence that we will be within that range.

Q: I want to kind of follow on the last question and ask about returning capital to shareholders. And I realize you just talked about having an Investor Day towards the end of the year. So if you want to tell me "just hold on," that I get it. But any thoughts on timing of returning capital to shareholders? Would it ever make sense to ratchet back maybe on CapEx spending and institute a dividend?

A: Yes, Marty, this is Adam here again. And I want to impress upon everybody that we are here to maximize shareholder value. And we are really disciplined in looking at how to allocate what is liquidity and discretionary free cash flow available. We do have a robust set of project opportunities, which, even given where RIN prices are today and -- still affording attractive spreads between our cost of capital and investing that capital. And -- but we're always flexible in our thinking on what we think is going to drive and maximize shareholder value. So I would say let's hold off a little bit until the Investor Day, and we give a little bit more thought and share our thoughts around discretionary free cash flow and what to do it and what the optionality is. The nice thing about our business and our business platform is we're going to have that optionality. And we always think that we are going to be creative and proactive in how we use that discretionary free cash flow to maximize shareholder value. So the nice thing about our business, again, is that when you're doing that -- when you build that platform, you do not require CapEx to produce our fuel in the future. We are going to have options on what to do with that discretionary free cash flow, whether it be M&A opportunities, returning cash to shareholders or investing in new greenfield projects.

Q: Nice to see the 30% EBITDA growth in Fuel Station Services. On one hand, I think the comps get a little bit harder from here. On the other hand, it sounds like underlying policy and macro environment is becoming more supportive. Just how are you thinking about what growth can look like for that business on a more normalized basis in the medium term?

A: Yes. So I'm going to -- this is Adam again. I'm going to sort of reiterate some of the comments that Kazi said. So 2Q, a little bit light in terms of finishing out construction, and that's just the timing of when stations are set to come online or finish out construction. So we do see a pickup in the back half from -- and even in Q3, from some of those activities and remain comfortable with our -- the guidance we provided for Fuel Station Services for the year. And as we get into the -- so that's what I'm going to consider, the medium-term outlook, the next 2 quarters, given how investors think of things. But in reality, we'll talk a little bit more about '26 and beyond sort of later in the year and as we provide guidance for '26 and beyond.

Q: I wanted to go back to the previous question, maybe a similar -- in a similar vein, how are you thinking about balancing investment and growth between the upstream RNG production and the downstream fuel distribution? Are you looking to grow RNG supply? Or is it more about building out more RNG distribution?

A: Another very good question. So we're actually looking at it in 2 different perspectives. One, the opportunity sets in both upstream and downstream, how each of those opportunity in of itself give us what kind of risk-adjusted return. The second criteria we're looking at is -- when I'm combining these 2, to what extent each one of those are enhancing the value for the others as well as bringing the stability to the portfolio in the longer term. So these are the criteria we are going to have to maintain as we greenlight whether to invest in new RNG facilities or/and investing in the downstream. So both has to be fulfilled -- both criteria has to be fulfilled for us to move forward in investing in this area. As Adam mentioned, that is where ultimately we will decide if we have the opportunity set for us to be able to continue to invest to improve the shareholder value or we'll give the money back to the shareholders in some other form.

Q: I wanted to ask about voluntary markets. Just curious what you're seeing there. If you could provide an update, that would be helpful.

A: Yes, it's been a little quiet on voluntary markets, is how I would describe it. There are a couple of state-level programs that are thinking about pushing it through. I know New York is thinking about one. And again, we're trying to maximize the value of the molecules that we produce and that continues to be in the transportation fuel market. It really drove what our business strategy has been in terms of integrating the upstream and the downstream to be able to have offtake into that most valuable market. That being said, we are agnostic to whether or not the fixed price voluntary markets will be at a level enough to what we think makes sense for us to contract in those markets. We've said time and time again we thought it was a little bit of mispriced regulatory risk between the discount in the fixed price voluntary markets and what we're able to achieve in transportation fuel. That may change over time. And the other voluntary market that we're waiting to open up would be export markets over to Europe and that sort of thing, which is still challenged with pathways. So for now, it's been a little quiet on the voluntary fixed price market from our perspective, but we are, as we always like to say, flexible in our thinking. And should that make sense, we'll evaluate those as they materialize.