OPAL Fuels Inc. Q2 FY2025 Earnings Call

Good morning, and welcome to the OPAL Fuels Second Quarter 2025 Earnings Call and Webcast. As a reminder, this event is being recorded. I would now like to turn the call over to Todd Firestone, Vice President of Investor Relations, to begin. Please go ahead.

Thank you, and good morning, everyone. Welcome to the OPAL Fuels Second Quarter 2025 Earnings Conference Call. With me today are Co-CEOs, Adam Comora and Jonathan Maurer; as well as Kazi Hasan, OPAL's Chief Financial Officer. OPAL Fuels released financial and operating results for the first quarter of 2025 yesterday afternoon, and those results are available on the Investor Relations section of our website at opalfuels.com. The presentation and access to the webcast for this call are also available on our website. After completion of today's call, a replay will be available for 90 days. Before we begin, I'd like to remind you that our remarks, including answers to your questions, contain forward-looking statements, which involve risks, uncertainties, and assumptions. Forward-looking statements are not a guarantee of performance, and actual results could differ materially from what is contained in such statements. Several factors that could cause or contribute to such differences are described on Slides 2 and 3 of our presentation. These forward-looking statements reflect our views as of the date of this call, and OPAL Fuels does not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date of this call. Additionally, this call will contain a discussion of certain non-GAAP measures. A definition of non-GAAP measures used and a reconciliation of those measures to the nearest GAAP measure is included in the appendix of the release and presentation. Adam will begin today's call by providing an overview of the quarter's results and recent highlights and an update on our strategic and operational priorities. John will then give a commercial and business development update, after which Kazi will review financial results. We'll then open the call for questions. And now I'll turn the call over to Adam Comora, Co-CEO of OPAL Fuels.

Good morning, everyone, and thank you for participating in OPAL Fuels' Second Quarter 2025 Earnings Call. Second quarter results were in line with our expectations, and we are maintaining our guidance for the year. We are making solid progress on building our operating platform that will support continued growth of our RNG production assets and expanding network of fueling stations. Our business continues to show solid performance, giving us confidence we will continue to see operational improvements throughout the balance of 2025. Second quarter adjusted EBITDA was $16.5 million, $4.6 million lower compared to the same period last year, with this quarter's results impacted by a lower RIN price environment, a reduction in renewable power earnings, and some nonrecurring expenses that Kazi will discuss later. Key highlights from this quarter include production in our RNG Fuel segment of 1.2 million MMBtu, which is 33% higher versus the same period last year and in line with our expectations. Our second quarter Fuel Station Services segment EBITDA was approximately $11.2 million, 30% higher versus the second quarter of 2024. We completed the sale of $16.7 million of Inflation Reduction Act investment tax credits generated by the Prince William RNG facility, which contributed to cash flow and earnings. These tax credits are not included in our adjusted EBITDA. In addition to our operating results, OPAL Fuels was added to the Russell 2000, Russell 2000 Value, and Russell 2000 Growth indices. It is worth noting that according to Bloomberg, less than 20% of the Russell 2000 companies are included in both the Growth and Value indexes, a testament to the platform and the growth we are delivering. Second quarter earnings also turned the corner for OPAL, producing positive earnings per share. I want to shift topics and discuss the positive movement we've seen in the policy environment during the second quarter, with long-awaited clarity and bipartisan alignment supporting RNG through constructive tax policy. The passage of the One Big Beautiful Bill Act marks a pivotal moment for our sector, with policymakers on both sides of the aisle recognizing the extensive benefits from biomethane capture and its productive use, including economic growth and energy security, while also providing improvements to local air quality and methane abatement. Chief among its provisions is the definitive extension of the 45Z production tax credit through 2029, an improvement implemented by the current Congress compared with the provisions of the earlier Inflation Reduction Act. Although the new legislation still awaits final Treasury guidance and we have not yet recognized these tax benefits in our results, we now have visibility that these production tax benefits will contribute to EBITDA for at least the next four years. Landfill RNG could receive at least $2 per MMBtu of salable tax credits. In addition, the investment tax credit program was left largely intact, and we continue to expect material ITC monetization over the next few years as new RNG projects come online. We do not yet have full clarity from the EPA with regard to its administration of the cellulosic D3 category within the renewable fuel standard or the agency's treatment of small refinery exemptions. On the positive side, it is constructive that the EPA is now engaged on finalizing these rules and that they are showing general support of American biofuels. Although we do not participate in the D4 and D5 liquid biofuels markets, we benefit from higher RVO mandates in these categories as they help support D3 prices. The industry is submitting their comment letters today regarding the proposed Rule 2, and we look forward to further engagement with the EPA and discussing how RNG can promote both the EPA and the administration's broader policy objectives. One final note on public policy is the positive impact we expect to see for our Fuel Station Services segment from the EPA's rollback of Phase III truck regulations, which no longer force zero-emission vehicles for heavy-duty trucking. There has been growing consensus that alternatives to CNG and RNG, such as hydrogen and electric solutions for heavy-duty transport, remain operationally and economically challenged. These developments mean more fleets are looking at CNG and RNG given it is a proven and cost-effective alternative to diesel. OPAL is allocating more capital to grow our Fuel Station Services segment, which produces strong, predictable cash flow with low correlation to environmental credit prices. With policy clarity, OPAL, as one of the largest owners and fastest-growing operators of CNG and RNG fueling stations in the United States, is well positioned to lead in this market. Despite a lower RIN price environment compared to last year, we expect to deliver operating and financial results in line with our guidance. We have momentum, and we will continue executing on our growth plan with financial discipline. With that, I'll turn it over to Jon.

Thank you, Adam, and good morning, everyone. This was another quarter of disciplined execution for us at OPAL. Our team made operational progress, and we are seeing consistent and, more importantly, scalable results from the platform that we are building. It is confirming that our business model that integrates RNG production with marketing and distribution through fueling stations is paying off. As Adam mentioned, we produced over 1.2 million MMBtu of RNG in the second quarter, a 33% increase year-over-year. These gains were driven by the continued ramp-up of our Sapphire and Polk facilities, which came online in late 2024 and improved uptime across the base portfolio. As we discussed on our last call, we are seeing improvement in operating performance. Recent months have shown upward momentum, and that performance is giving us confidence in achieving full-year production results within the lower end of our guidance range. The Atlantic RNG project, which represents 0.33 million MMBtu of annual design capacity, has begun commissioning and is expected to enter full commercial operations shortly. We are pleased with the execution of this project and expect production contribution in the fourth quarter. The next wave of in-construction projects, Burlington and Cottonwood, are expected to come online in 2026 and Kirby thereafter in 2027, together adding an additional 1.8 million MMBtu of annual design capacity. In addition to our in-construction projects, our development pipeline has numerous near-term opportunities with secured gas rights, and we are maintaining our guidance to place 2 million MMBtu into construction in 2025. We follow a rigorous capital allocation framework that includes managing our capital resources, liquidity, and financing arrangements. Within this framework, we are developing a number of investment opportunities that meet these criteria. On the downstream side, our Fuel Station Services business continues to perform well. In the second quarter, segment EBITDA increased 30% compared to last year. Although the first half of this year presented some macro headwinds for new CNG and RNG adoption by logistics and transportation firms from tariffs, from equipment availability and pricing and from EPA policy uncertainty, we are now seeing all three moving in a positive direction. We are on track to meet our guidance for this segment. We have 45 stations under construction today, 20 of which are OPAL-owned. Owning fuel station infrastructure allows us to not only participate in long-term recurring dispensing economics but also to earn a solid rate of return on the infrastructure that is uncorrelated to environmental credit prices. To facilitate and accommodate our growing operating platform, we continue to invest responsibly in our people, systems, and advocacy efforts. We believe these investments and expenses will enhance long-term earnings power and create shareholder value. I'll now turn the call over to Kazi to discuss the quarter's financial performance.

Thank you, Jon, and good morning to everyone joining today's call. Last night, we issued our earnings press release outlining our results for the second quarter ended June 30, 2025. We also concurrently filed our Form 10-Q and posted an updated investor presentation on our website. Revenue and adjusted EBITDA for the quarter were $80.5 million and $16.5 million, respectively, compared to $71 million and $21.1 million in the same period last year. Net income was $7.6 million, up from $1.9 million in Q2 2024. This year-over-year quarterly growth in revenue reflects the continued ramp-up of RNG production at facilities commissioned in 2024 and continuing growth in our Fuel Station Services segment. Included in these results is OPAL's share of adjusted EBITDA from equity method investments, which was $6.1 million for the quarter versus $6.7 million in Q2 2024. While we continue to see growth in most financial parameters, our adjusted EBITDA is lower year-over-year. The primary drivers are lower RIN prices this year with a realized price of $2.50 versus $3.13 last year, and the loss of ISCC carbon credits in our Renewable Power segment. As a reminder, this credit expired in November 2024, and as such, the year-over-year impact will continue through the end of this year. Our second quarter results are also lower sequentially due to increased nonrecurring new project operating expenses and nonrecurring G&A supporting our investments in advocacy and technology for our operating platform. Our income statement also includes a nonrecurring G&A expense of $2 million related to a contract restructuring, which is added back in adjusted EBITDA. The other increase in G&A this quarter reflects targeted upfront investments and expenses in strong advocacy efforts, in addition to strengthening our operational and financial foundation. A key part of strengthening our operational and financial foundation is the improvement in our internal control environment to meet all SOX criteria by 2026. It requires an upfront and nonrecurring end-to-end redesign of our financial processes, implementation of a robust control environment, and the deployment of tools that can scale with our business. These investments will not only enable a sustainable governance structure to support our current complexity, but they will also allow for greater scale and long-term cost savings. Now let's turn to our capital expenditure for the quarter, which totaled $16.4 million, including $7.3 million related to our equity method investments. As of June 30, our total liquidity was $203.2 million, which includes $29.3 million of cash, cash equivalents, and short-term investments, $138.4 million of undrawn availability under our term credit facility, and $35.5 million of remaining capacity under our revolver. In June, we monetized approximately $17 million in investment tax credits and still expect roughly $50 million in gross ITC sales in 2025, which bolsters our operating cash flow. We believe our current liquidity position, combined with operating cash flows, is sufficient to fund our existing construction projects and anticipated funding needs. As Adam mentioned, in spite of lower RIN prices, we continue to expect adjusted EBITDA to be within the range of our guidance. We are planning an Investor Day and engaging with the investor community later this year. We will discuss our long-term business outlook and our ability to generate sustainable discretionary free cash flow during that meeting.

In closing, we remain well positioned for continued disciplined execution of our strategic growth objectives and the expansion of OPAL's vertically integrated platform. And with that, I'll turn the call over to the operator for Q&A. Thank you all for your interest in OPAL Fuels.

Our first question comes from Derrick Whitfield with Texas Capital.

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?

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 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 a 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 feel good about where we sit and where the industry is headed from that perspective.

And just to clarify, I mean, at this point, you guys really haven't seen any pull-through on the X15 insight. Is that fair?

I would say this. In general, trucking and logistics firms tend to move a bit slower than we would prefer. As for whether we are seeing those trucks deployed on the road today, the pace is not as fast as we would like. However, we are really pleased with the active business development efforts. We believe there is a bright outlook ahead. It wasn't long ago that we received clarification on the Phase III EPA truck regulations, and additional equipment has recently entered the market. So, it's not reflected in our results yet, but we are optimistic about these engagements and how they will develop for 2026 and beyond.

That's great. Jon, one of my main takeaways from your release was the confirmed guidance despite RNG production being slightly lower than what consensus anticipated for the quarter. Could you share insights on the exit rates for the quarter and provide details on the status of your construction projects, specifically what percentage of completion they are?

We are very optimistic about our construction projects. The Atlantic project is in advanced commissioning stages and we expect it to come online soon, which will increase our operational capacity this year and significantly impact the fourth quarter. The Burlington and Cottonwood projects are on schedule for next year, and we are confident about their timelines due to their advanced construction status. I mentioned that the Kirby project is now set for 2027 instead of the originally planned end of 2026. This project is located in Northern California, where permitting can be challenging. When a project is in the early stages of construction, permitting delays can influence the overall timeline. Additionally, the construction of Kirby is taking longer due to its complexity and location in California compared to our other projects. Overall, we anticipate having 9.1 million MMBtu operational by the end of this year, 10.2 million by the end of next year, and over 10.9 million in the subsequent year once Kirby and other projects are online. We are successfully executing our growth plans and intend to start additional projects during the year. We are on track with our guidance of 2.0 million, and based on previously announced projects that are in development with secured gas rights, we expect to meet our growth objectives.

Our next question comes from Ryan Pfingst with B. Riley.

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?

There are a couple of areas where we believe we can maintain our guidance. One of the factors is our forward purchases and sales of the RINs, which provide us with some confidence regarding our revenue goals. The second factor is our production trends; if we manage to maintain production at the lower end of our guidance, I think we will be able to achieve our targets. Thirdly, while this quarter includes some one-time nonrecurring G&A expenses and investments, we expect those to stabilize for the rest of the year. Additionally, our RNG project plays a role here. Another significant contributor is our downstream business, particularly in our self-operated FBA stations and construction for third parties, which can be variable. The fluctuations we experienced in Q2 are now showing improvement in Q3 and Q4. These factors give us enough confidence to stay within our projected range.

I appreciate that color. And then for my second question, can you just talk about the landscape for M&A and how you're thinking about potential acquisition opportunities today?

Yes. This is Adam here. We're still in a fragmented industry. And it's clear that we're building a scalable operating platform, both in our people and our technological platform. And our vertical integration also allows for really interesting opportunities on both upstream and downstream. So we do see that there are opportunities for consolidation in the sector. And we always look at what's going to maximize shareholder value. And some of that comes down to what are the best allocation for those resources in order to do it. Is it investing in new projects? Is it looking at some of those M&A opportunities? And it wouldn't surprise us if there is further consolidation in the industry. And I'll leave it at that for now.

Our next question comes from Martin Malloy with Johnson Rice & Company.

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 to '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?

Yes, Marty, this is Adam again. I want to emphasize that our priority is to maximize shareholder value. We are very disciplined in how we allocate our available liquidity and discretionary free cash flow. We have a solid range of project opportunities that present attractive spreads between our cost of capital and potential investments, even with the current RIN prices. However, we remain open-minded about strategies that will enhance shareholder value. I suggest we wait until the Investor Day, where we can share more detailed insights on our discretionary free cash flow and its potential uses. The strength of our business model allows us to have flexibility in how we use that free cash flow, whether it's for M&A, returning money to shareholders, or investing in new projects. Ultimately, our platform does not require significant capital expenditure to produce fuel in the future, giving us various options for utilizing that cash flow effectively to benefit shareholders.

Our next question comes from Adam Bubes with Goldman Sachs.

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?

Yes, this is Adam again. I want to reiterate some of Kazi's comments. Q2 was somewhat behind in terms of completing construction due to the timing of when stations are expected to be operational. However, we expect to see an improvement in the latter half of the year, including Q3, from these activities and we remain confident in the guidance we provided for Fuel Station Services for the year. I'm considering the next two quarters as part of our medium-term outlook, given how investors typically assess these factors. However, we will discuss more about 2026 and beyond later in the year as we provide guidance for that period.

Great. And then I think in May, you announced a joint venture landfill gas project with RSG in North Carolina. I may have missed it, but I don't think I heard or saw an update. How should we be thinking about timing and your share of MMBtu on that project?

Yes, I appreciate you bringing that up. We're very excited about our project with Republic at the CMS landfill in North Carolina. We're finalizing our development plans for the site. You're correct that there's been no formal announcement on the construction start yet. In addition to that project, we secured gas rights earlier this year with our partner GFL for four sites. We have several projects currently in the final stages of development. These projects, along with a few others, give us confidence that we can achieve our target of 2.0 million MMBtu in construction starts for the year.

Terrific. And then last one for me. Can you just update us on returns on prospective landfill gas projects, marking to market for the current D3 RIN pricing? And you spoke to this a little bit earlier, but just how you're thinking about balancing potential to invest in new projects versus sort of letting the strong underlying free cash flow conversion machine of these projects start to flow through the financials?

That's a good question. I would say that the risk-adjusted return is very important for us. As Adam mentioned, when we consider potential capital allocations, whether it's related to the CMS project or other gas rights we've secured in the past, we evaluate these based on the risk-adjusted RIN price outlook. We're not focused on previous high RIN prices. Our assessments and final investment decisions will be based on the realistically expected RIN price throughout the project's duration. We will not approve or construct any assets based on overly optimistic forecasts. This is crucial for us. That's why we are examining capital allocation between both RNG projects and the downstream business, where we are exploring opportunities in owning infrastructures that can provide risk-adjusted returns independent of the environmental credits market. Our goal is to manage and maintain some level of portfolio stability in the long run for the entire OPAL portfolio. In both scenarios, we are focused on risk-adjusted returns and revenue patterns that are uncorrelated.

Our next question comes from Betty Zhang with Scotiabank.

I wanted to go back to the previous question, maybe 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?

Another very good question. So we're actually evaluating it from two different perspectives. First, we are considering the opportunity sets in both upstream and downstream and how each of these opportunities contributes to our risk-adjusted return. The second aspect we’re assessing is how these two areas complement each other in enhancing value and providing stability to the portfolio over the long term. These are the criteria we will use to decide whether to invest in new RNG facilities or in downstream activities. Both criteria must be satisfied for us to proceed with investments in this area. As Adam mentioned, that will ultimately guide our decision on whether we have the right opportunities to continue investing to enhance shareholder value or to return funds to shareholders in another way.

Yes, this is Adam. I want to follow up on that. We believe we have several larger projects in our development pipeline that will meet the investment criteria on their own. At the same time, we really like the Fuel Station Services business and are continuing to allocate more capital to it. Frankly, even if we were to invest more in the downstream fuel station network, we also have the chance to engage in RNG dispensing economics. We are evaluating both areas independently and see strong opportunities on each side while recognizing the synergies of pursuing both simultaneously.

That makes sense. For my follow-up, I wanted to ask about voluntary markets. Just curious what you're seeing there. If you could provide an update, that would be helpful.

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.

I'm showing no further questions at this time. I would now like to turn it back over to Adam Comora for closing remarks.

All right. We appreciate everybody's interest in OPAL Fuels and hope everybody has a great rest of the day and great rest of their summer.

This concludes today's conference call. Thank you for participating. You may now disconnect.