Earnings Call Transcript - OPAL Q4 2022

Operator, Operator

OPAL Fuels Fourth Quarter and Full Year 2022 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. As a reminder, today's conference call is being recorded. I would now like to turn the conference over to your host Mr. Todd Firestone, Vice President of Investor Relations. Please go ahead.

Todd Firestone, Vice President of Investor Relations

Thank you, and good morning, everyone. Welcome to the OPAL Fuels fourth quarter and full year 2022 earnings conference call. With me today are Co-CEOs, Adam Comora and Jonathan Maurer; and Ann Anthony, OPAL’s Chief Financial Officer. OPAL Fuels released financial and operating results for the fourth quarter and 12 months year-to-date of 2022 yesterday afternoon and those results are available on the Investor Relations section of our website. The presentation and access to the webcast for this call are also available on our website. After completion of this call, a replay will be available for 90 days. Before we begin, I'd like to remind you that our remarks on this call including answers to your questions contain forward-looking statements, which involve risks, uncertainties and assumptions. Forward-looking statements are not guarantees 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 Slide 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 discussion of certain non-GAAP measures, including but not limited to, adjusted EBITDA. A definition of non-GAAP measures used and reconciliation of these 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 fourth quarter results, recent highlights and an update on our strategic and operational priorities. John will then give a commercial and business development update. After which Ann will review financial results and full year 2023 guidance. We'll then open up the call for questions. And now, I'll turn the call over to Adam Comora, Co-CEO of OPAL Fuels.

Adam Comora, Co-CEO

Thank you, Todd. Good morning, everyone. And thank you for being here for OPAL Fuels fourth quarter and year-end 2022 earnings call. 2022 was a remarkable year for OPAL Fuels filled with many achievements for our company as well as positive developments for the RNG industry as a whole. We are proud of what we've accomplished and we remain steadfast in our focus on executing our plan. I'd like to highlight several points. First, we continue to execute on our strategic and operational priorities. We believe our integrated platform is a powerful model in delivering renewable low carbon RNG to the marketplace. Strategically, our goal is to continue to grow our RNG production and maximize the value of that RNG, which currently dominates the US transportation fuel market as the highest value distribution. Operationally, we remain committed to be the premier vertically integrated RNG company in the industry, one that excels at providing value to not only our shareholders but also our customers and partners. Importantly, we think our visible and tangible growth profile is a differentiating factor in the marketplace. We grew our RNG output by more than a third this past year. As we disclosed in our 2023 outlook, we expect growth to accelerate this year by greater than 50% over 2022 to more than 3.4 million MMBtus at the midpoint of our guidance. Our projects in construction remain on track, which provides visibility to accelerating production growth once again in 2024 from 2023. In addition to production, our advanced development pipeline continues to grow and mature. And as John will touch on later, we have seen some of the development delays from 2022 ease and we expect to place at least 2 million MMBtus of output capacity into construction in 2023. I want to touch on our vertical integration business model and our current views on environmental credit pricing. We continue to believe our business model both maximizes the value of our produced RNG and provides important flexibility and optionality in the future to capitalize on RNG tailwinds, both new off-take markets and public policy initiatives as those evolve and strengthen. The US transportation fuel market continues to be the highest value off-take, averaging twice the value of fixed-price contracts and again leaving us the option in the future to explore new end markets and test incremental pricing power with fleet customers. We do get a lot of questions on this merchant model and Ann will speak later about some of our business segments, fuel station services and renewable power and the long-term contract nature of those business segments, which mutes some of the volatility by remaining merchant on our RNG production. Having said that, let's dive into some of the recent dynamics in both D3 RIN pricing and LCFS credits. On D3 RIN dynamics, we see the recent drop in price being driven by the potential oversupply of cellulosic D3 RIN volumes in the proposed set rule introduced by the EPA in December of 2022 with rule finalization expected to occur in June of this year. This potential oversupply is driven by two factors; continued growth in RNG production capacity and additional supply from the proposed eRIN pathway. It is important to note that OPAL Fuels will see strong benefits from this eRIN pathway as our existing renewable power segment will be able to participate and generate significant incremental RIN without investing new capital. We will be providing more clarity around this potential as the rules get finalized. On the demand side of D3 RINs, we remain optimistic that EPA RVO targets could be adjusted higher to account for both cellulosic supply additions, as well as anticipated eRIN volumes as those rules become finalized. It is the clear intent of both the original RFF and proposed rule of commentary to support and grow the cellulosic category. The original law stated that the cellulosic D3 category was targeted to be $16 billion D3 RINs and the EPA administration is meant to support growth up to that figure. With updated industry production actuals over the past six months and demonstrated new supply growth coming online, the EPA has support to raise volumes and has opened the door for future reenactment of the waiver credit over the multi-year set period. It is important to remember why the law and EPA are so supportive of the cellulosic category. The source of this category of biofuels is capturing harmful methane emissions, the single most important thing we can do to combat climate change. Another interesting feature of the proposed set rule is the multi-year RVOs. We believe that feature may dampen volatility in the future and perhaps open up two to four-year contracts for RINs now that obligated parties will have visibility into their volume obligations for multi-year periods. So from our perspective, we believe OPAL will ultimately create more value from existing and future projects from the eRIN pathway and structurally, we may see new contracting opportunities from the multi-year RVOs. Given this outlook, we are currently limiting our 2023 RIN sales in the first half of the year as rules are finalized, and Ann will touch on later how that will roll through our financials and reporting. As you see in our guidance sensitivities, we have much less exposure to LCFS pricing. Our Sonoma project has an off-take contract with a floor of $100 per credit and we have much less dairy production currently online versus landfill. On LCFS though we remain very optimistic on credit pricing and the direction that CARB has intimated it is heading to on proposed program changes to be finalized over the balance of 2023 for 2024. CARB is giving clear signals to the market they would like to encourage more investment by supporting pricing, which will likely include stronger compliance targets, creating incremental demand for LCFS credits starting next year. As we look to this year, we are introducing our 2023 adjusted EBITDA guidance, which we expect to range from $85 million to $95 million. Our RNG production range from $3.2 million to $3.6 million MMBtus and capital expenditures to range from $220 million to $240 million. Ann will provide more detail but we expect an $8 million change to 2023 adjusted EBITDA for every $0.25 gallon change in D3 RIN prices. We continue to benefit from substantial and broad-based developments in our industry. First, I'd like to provide some insight into how our thinking on the IRA has evolved over the last several months. While we still await the final guidance from treasury, we are confident that the ITC provisions will apply to landfill RNG projects thus encompassing nearly all of our in-construction and advanced development pipeline projects. While we are still determining the exact level of ITC benefit, we have been in advanced discussions with the appropriate advisors and counterparties to believe we will benefit significantly. Second, the 45Z credits are set to be impactful as well and we expect clarity from treasury in the coming months on that front. We expect to begin realizing these benefits in 2023 and see them growing in 2024 and throughout the next five years. 2023 is set to be a very good year for OPAL Fuels. To some degree, a bit of a contrast from 2022. In 2022, we saw very good commodity environmental credit pricing but saw some near-term headwinds in the development of our new project pipeline. In 2023, we have begun the year with lower near-term commodity and environmental credit pricing but see positive momentum beginning with our new project development, which is ultimately the long-term value driver of our business.

Jonathan Maurer, Co-CEO

Thank you, Adam, and good morning, everyone. I want to start out by saying that we are very focused on executing on our growth plans. We grew RNG production nearly 40% in 2022 and we expect to grow by more than 50% this year. Our in-construction portfolio's timing is progressing with a cadence that is in line with our expectations and we think sets us up for accelerated growth into 2024. During 2022, our operating project portfolio increased from three to six projects and now seven with the just completed Bio Town dairy project in Indiana. In 2022, we commissioned three landfill RNG projects, the Noble Road project in Ohio, our New River project in Florida and the Pine Bend Project in Minnesota. These RNG projects represent 1.6 million MMBtu of nameplate RNG capacity. At all three of these landfill projects, gas production continues to increase as the trash volumes there increase. In addition to our operating projects, we currently have six RNG projects in construction with the Bio Town dairy RNG project having just entered operations as we said. Of these six, we expect Emerald to go online in the next several months, Prince William in the fall and Sapphire late in the year, our two dairy projects we expect to be commissioned in early 2024 and the Northeast landfill later in 2024. As Adam mentioned, we expect production increases this year from our operating and in-construction portfolio that are in line with our prior expectations with the 3.4 million MMBtu midpoint of production guidance being a 57% increase compared to RNG production in 2022. I want to pick up on what Adam mentioned earlier about development conditions easing. The good news is that the project development logjam is breaking and conditions are improving in terms of moving projects forward compared with last year. Recall that we described how last year presented a number of challenges, which tended to delay projects as landfill owners assessed the substantial market dynamics surrounding the value of their RNG resource. We provided some color on this topic on our third-quarter call. Fast forward to today and we are already seeing improvements. We anticipated an acceleration of executed agreements for gas rights and for construction contracts, and that this acceleration should translate into progressing projects through our advanced development pipeline more quickly and placing projects into construction as we progress through the year. Since we last reported, we have added over 0.8 million MMBtu of biogas to our advanced development pipeline, most of which is landfill but also contains dairy and food waste projects. These projects are ones that we have qualified and that we reasonably expect can be into construction within the next 12 to 18 months. I'd also remind listeners that our advanced development pipeline does not include other earlier stage projects, which we continue to evaluate. As one of the largest RNG players in the sector, we tend to see most of the projects in the marketplace, all of which makes our pipeline dynamic and growing as we screen for the best opportunities. Our overall development funnel continues to see positive momentum and provides opportunities in excess of what qualifies as our advanced development pipeline. OPAL Fuels is on track to commence construction of 53 fueling stations this year, approximately 24 OPAL Fuels-owned stations and another 26 for third parties. Our overall RNG fuel dispensing volumes are expected to grow to approximately 55 million gallons this year from nearly 30 million gallons in 2022. In terms of our landfill gas-to-electric projects, OPAL Fuels owns and operates 19 landfill gas-to-electric projects, representing about 124 megawatts of nameplate capacity. Recall that we began developing this portfolio 25 years ago back in 1998. While six of these projects are candidates for conversion to RNG projects, the majority will remain electric projects. The EPA’s recently proposed eRIN pathway stands to substantially increase the value of these projects, adding over $300 per megawatt-hour gross to the existing values of these projects, which has the potential to substantially increase the EBITDA from this business segment, depending on eRIN sharing and RIN price. We await updated guidance from the EPA on this topic, which is expected in the next few months. In the meantime, we are positioning ourselves to meet this market opportunity by continuing discussions with auto manufacturers who are proposed to create these eRINs through the EV data that they collect. As we highlighted early on, continued industry consolidation remains a significant tailwind for the RNG industry and certainly for OPAL Fuels. We’d highlight recent upstream and downstream transactions that acted as additions to existing upstream infrastructure. We think those acquisitions tend to support how industry players are thinking about the value of integration. Some of the thinking driving this consolidation revolves around how demand expectations for RNG are expected to shift over the next several years. We're already seeing the beginning of this trend with demand growth from utilities in the form of RNG mandates for power generation, as well as increasing demand in European end markets, and many expect increasing demand coming from Asia too. Separately, hydrogen producers are seeking low-carbon sources of renewable methane and our portfolio production assets and fueling stations is well positioned to take advantage as that market moves forward.

Ann Anthony, Chief Financial Officer

Thank you, John. And good morning to all the participants on today's call. Last night we filed our earnings press release, which detailed our quarterly and year-end results for the period ending December 31, 2022. We anticipate filing our 10-K in the next day or so. We saw strong growth in two of our three business segments, RNG fuels and fuel station services. The biggest driver of the quarter and year-to-date results is RNG fuels where we are starting to see the contribution from the RNG projects that have come online in 2022. We saw strong topline growth for the fourth quarter with revenue up 42% year-over-year, driven primarily by higher volumes produced and sold in the RNG fuel segment, as well as higher prices for brown gas and higher RINs under forward sales contracts we had entered into earlier in 2022. These benefits were partially offset by higher cost of sales due to electric utility costs and employee costs to support our growth, as well higher royalties driven by higher energy revenues. G&A costs for the fourth quarter totaled $14 million, reflecting transaction and other costs, of which $10 million is considered one-time. As a result, we generated net income in the fourth quarter of $32 million. For the full year 2022, before considering the impacts of preferred dividends, we achieved net income of $32.6 million, reflecting the standalone results for OPAL Fuels LLC and ArcLight Clean Transition Corp. II through the closing of our business combination last July 21st, plus the combined operations since then. Consistent with the results we saw in the fourth quarter, we benefited from pricing for environmental attributes that we had locked in via forward sales early in 2022 coupled with higher commodity prices. Looking at fourth quarter results compared to the third quarter, RNG production remained constant at 0.6 million MMBtus, which represents volume net to OPAL Fuels. Adjusted EBITDA was $20.1 million in the fourth quarter versus $25.5 million in the third quarter. The difference was primarily the result of the previously disclosed $3 million gain from the Bio Town debt associated with monetizing an in-the-money LCFS off-take contract. We also did experience some seasonality with some of our downstream fueling customers that see heavier volumes in the summer months along with some timing associated with downstream fuel station construction contracts. We reported adjusted EBITDA of $20.2 million for the fourth quarter and $60.7 million for the 12 months ended December 31, 2022. Adjusted EBITDA benefited from the same drivers we discussed above. Higher environmental attribute pricing and commodity pricing offset by higher cost of sales and higher royalties. Fourth quarter adjusted EBITDA excludes several one-time items, including an unrealized loss related to our warrant exchange we completed in December. We also had a number of one-time costs related to going public that occurred during the fourth quarter and throughout 2022, which are excluded from adjusted EBITDA. As of December 31, we had $167.8 million of outstanding borrowings, net of deferred financing costs, including $94.3 million of outstanding borrowings under Term Loan A, $28.5 million related to the remaining amount of the convertible note we had issued to Ares for the acquisition of the Imperial and Greentree projects in 2021, $22.1 million of the Sonoma loan and $22.8 million related to our renewable power project financing. Our second term loan, which we closed in August and which will finance a portfolio of RNG projects that are or shortly will be in construction remains undrawn. As of December 31, our liquidity position was $257.2 million, including $40.4 million of cash and cash equivalents, $36.8 million of restricted cash $65 million of short-term investments and $115 million of undrawn capacity under our term loan. We did recently draw down the final $10 million remaining under Term Loan 1. I will also note that we did not have any exposure to either Silicon Valley Bank or Signature Bank. So we were spared any of the associated distractions that many other growth companies have been dealing with in the past few weeks. We expect these existing sources of liquidity to be sufficient to fund the company’s construction and development capital needs for the next 12 months. We also anticipate that significant capital continues to be available for deployment in the RNG space. As a newly public company, we are very focused on how best to attract long-term investors. The OPAL team continues to believe that the most powerful way to do this is to deploy capital effectively and demonstrably grow earnings power. Before turning the call over for Q&A, I'd like to discuss our 2023 guidance. I will note that all guidance is current as of the published date and is subject to change, and we undertake no obligation to update it. As Adam noted earlier, we anticipate our full year 2023 adjusted EBITDA guidance range to be $85 million to $95 million, which is based on our expected range of RNG production in 2023 of $3.2 million to $3.6 million MMBtus. Our adjusted EBITDA outlook is predicated on several key pricing assumptions such as $2.25 per gallon for D3 RIN, $90 per ton LCFS credit price and $3 for MMBtu brown gas. This quarter, we also included details on the impact of commodity price changes to our full year revenue and adjusted EBITDA outlook. We expect an approximately $8 million change to 2023 adjusted EBITDA for each $0.25 per gallon change in D3 RIN price, a $1.4 million change for every $0.50 per MMBtu change in natural gas price and a $400,000 change for every $10 per metric ton change in LCFS credit price. We are also updating our guidance for our portion of capital expenditures, excluding acquisition costs and net of any partner capital contributions to $220 million to $240 million. Our guidance does include some assumptions about the amount of ITC we can monetize in 2023 but we await, like everyone else who follows the RNG space, definitive guidance from treasury, so our specific disclosure will be limited until we have that clarity. All of our IRA benefits will be recognized as income likely in other income, but a reminder that these are real cash proceeds not just cash tax avoidance. Hence, the recognition is income, which is expected to continue for at least five years. As a reminder, in accordance with GAAP ASC-606, we can only recognize revenue and the related earnings from environmental attributes once they are sold to, transferred and accepted by the counterparty. We present the value of stored gas and unsold environmental attributes as part of adjusted EBITDA to allow the reader to understand the value and timing of production. We will continue to report our adjusted EBITDA with visibility as to stored gas and credits as we anticipate only selling a minority of our production in the first half of 2023 while we await EPA's updated RVOs. As a result, revenue and net income will be lower for the first half of the year with 2023 results being skewed to the latter half of the year. Again, the EBITDA adjustment is intended to levelize this reporting and match inventory produced within the period costs are recognized. Finally, going forward for 2023, we will be presenting the revenues and expenses associated with our CNG tolling business in fuel station services. As noted earlier, OPAL owns and operates a number of dispensing stations where we dispense the fuel and service the location for a customer. This activity had been reported in the RNG fuel segment in 2022 and prior periods. Going forward, we will include this in the fuel station services segment to better differentiate between the business activities and value drivers in the upstream and downstream portions of our business and facilitate easier comparisons to peers in our space. Adding to that, although we are labeled as a merchant play due to our exposure to the volatility inherent in environmental attributes, there are several earning streams in this business that dampen volatility. Our renewable power business is predominantly contracted under long-term power purchase agreements. The fuel station services business is profitable and growing supported by ten-year contracts, both service and fuel supply agreements, as well as construction revenue from stations we build, which provides visibility out for roughly 12 months. The net effect of these two key business segments provides recurring stable earnings and cash flow, which dampens our overall corporate volatility from changing environmental credit markets.

Adam Comora, Co-CEO

Thank you, Ann. In closing, we believe our future is bright. We continue to add new projects and advance projects through our development funnel into operations with accelerating growth in gas production and distribution. While the world around us continues to lean into this sector, we are continuing to carry forward OPAL’s vertically integrated mission to build and operate best-in-class RNG facilities that deliver industry-leading, reliable and cost-effective RNG solutions to displace fossil fuel and mitigate climate change. And with that, I'll turn the call over to the operator for Q&A. Thank you all for your interest in OPAL Fuels.

Operator, Operator

Our first question comes from Derrick Whitfield of Stifel.

Derrick Whitfield, Analyst

Good morning all and congrats on a successful first year as a public company, and certainly in a difficult operating environment. For my first question, I wanted to lean into your prepared comments on the progression of your backlog both near term and medium term. For 2023, it appears that Emerald, Prince William and Sapphire projects are all progressing along the schedule you laid out in Q3. Looking beyond 2023, could you place some parameters on the amount of project capacity from your advanced development pipeline that could be placed in production in 2024 based on the improving operating conditions you are experiencing?

Jonathan Maurer, Co-CEO

So we have advanced development pipeline of a little over 8 million MMBtus of nameplate capacity of gas available. And as we continue into 2024, we see our dairy projects and the Northeast landfill project that we placed into construction last year coming online. Because of the gap in projects going into construction, there will be fewer coming online next year beyond that. But the projects that we placed into construction this year will go online in about 18 months or so, would be your average construction time frame from commencement of construction until you start seeing the gas production, could be a little faster, could be a little bit slower. So we will see gas from the projects that are going online this year continue to increase our output during 2023 and 2024 as those projects come online. And then we will see the projects putting into construction this year start to contribute during the really late 2024, 2025 timeframe.

Adam Comora, Co-CEO

I think the only thing I would add there is, obviously, we will have a full year production in ‘24 on the Emerald project that goes in, in a couple of months and you will also get a full year output from the two in the later half of this year, and that's really visible growth and accelerates production from '23 into '24.

Derrick Whitfield, Analyst

And then as my follow-up, I wanted to focus on the implications of the IRA to your business. Referencing Slides 13 and 14, you arguably have more optionality in your portfolio than ever before as a result of the IRA. As you assess your RNG, eRIN and hydrogen opportunities, how does the eRIN pathway impact your view on the allocation of capital between RNG and electricity with the understanding that the time and likely your friend based on the growth of EVs relative to landfill gas? And then more specifically for 2023 guidance, could you comment on the degree of ITC embedded in your projections?

Adam Comora, Co-CEO

I'll let Ann handle the ITC one first, and then I'll talk a little bit about some of the regulatory stuff happening, both in terms of IRA and eRIN pathway.

Ann Anthony, Chief Financial Officer

So as I had commented, I think given the fact that we’re still waiting for additional guidance from treasury, which we expect to come most likely in Q2, we’re being a little circumspect in terms of the specific amounts and details of what we’ve included in adjusted EBITDA for ITC. I think we are making some underlying assumptions, obviously, about the projects that are in construction and that we’ll COD this year. But beyond that, I think at this point, we’re not really ready to disclose much more than that.

Adam Comora, Co-CEO

This is Adam speaking. Regarding some of the other public policy developments we're observing, in addition to the ITC where we anticipate getting clarity, we expect further information in 2023 about the 45Z calculations and the allocation of carbon intensity scores. This will be particularly significant for addressing the heavy negative CI gap, but we still require more clarity to gain a comprehensive understanding. We find the eRIN pathway quite intriguing for our business, as it could create numerous profitability opportunities with our existing landfill gas-to-electric projects and influence new project development. However, there is some uncertainty regarding when the rule will be finalized. The EPA received several comments back in February, and we are awaiting clarity, potentially in June, about whether finalized rules on eRINs will be included in the RVO volumes or if that will extend into later in 2023. From a capital perspective, we appreciate the flexibility brought by new end markets, such as hydrogen, and the numerous export markets that are emerging. If we can achieve favorable risk-adjusted returns on capital for RNG projects, we plan to continue deploying capital while maintaining options for off-take in new or strengthening voluntary markets. Overall, we view this as a positive addition to our business. For our existing landfill gas-to-electric projects, this could mean incremental profitability without the need for new capital investments, and we are eager about the potential outcomes as we wait for final rulings.

Ryan Todd, Analyst

Congratulations on the results. I apologize for missing some of your earlier comments, so I'm not certain if you addressed some of this during the call. It has been a tough period for many in the RNG industry regarding project execution and meeting volume delivery timelines and budgets. What have been the main challenges for you concerning project execution, both in dairy and landfill, and are those improving? Can you discuss how aspects of the supply chain and your ability to manage your significant backlog are improving going forward, and what specific improvements have been made, if any?

Jonathan Maurer, Co-CEO

I'll start with this one off. I think we reported last quarter that there was a slowdown in execution of contracts and movement through the pipeline as landfills realize the value of the RNG inherent in their landfills and each of the major landfills and many of as far took the opportunity to reassess how they wanted to approach that value proposition. So that resulted in a bit of delay. But I think they are through that process and we're seeing a lot of movement through our advanced development pipeline and progress there. So conservatively, we think that we will put 2 million MMBtu into construction this year. Our overall pipeline, we have reported 8 million, we think there is great opportunity to accelerate that. But we want to stay conservative on the outset and really update our projections and guidance to you as we execute on those projects in that pipeline.

Ryan Todd, Analyst

And is there anything on the supply chain side of things that is problematic at this point, or has that moderated to a level that it’s not an issue anymore?

Jonathan Maurer, Co-CEO

No. In terms of acquiring equipment, there has been a little bit of a lead time effect. But most of that anticipated and there is plenty of opportunity to get the equipment that we need to build out our projects. So nothing material there that we are seeing, Ryan.

Ryan Todd, Analyst

Maybe shifting gears, from conversations with investors, liquidity in your stock remains a challenge, even for those that are positive on the story and the valuation. Can you talk about what options you may have to address current liquidity in the stock, what sort of timeline might be a possible? And how much of a focus is this or is this an issue where we just have to grow the EBITDA and the earnings and move things along that way?

Adam Comora, Co-CEO

I will say we hear similar questions when we have our investor meetings where people are really positively disposed to RNG and really like the OPAL story, and maybe would like to see more liquidity in our stock. I'll answer it in a couple of different ways. One is we don't need to do any primary share issuance. We have got enough liquidity in place and capital raising plans in place to continue to execute on our development pipeline. So there is no need to raise capital from a primary share issuance. From a secondary share issuance, I'd say, like most management teams, we feel our shares offer compelling value here. So I don't know if there is a lot of interest currently on a secondary and we don't have any immediate plans in place. We do think that there could be some opportunities to increase the flow with smaller tuck-in acquisitions and perhaps increased liquidity and flows that way. We are going to spend continue to ratchet up time spent with investors and analysts and thinking about an analyst or investor day later in the year. So we will be visible and try to increase the visibility of OPAL Fuel, but we don't currently have anything on the table for either a primary or a secondary.

Matthew Blair, Analyst

Could you share any thoughts on how Q1 is progressing? Seems like you’ve had some volume and potentially margin benefit from the startup of the Bio Town dairy, but then headwinds from lower D3 RIN prices as well as rolling off the locked in D3 RINs from last year. Does that sound about right, is there anything else that we should be thinking about in regards to Q1? And at this stage, can you say if Q1 EBITDA is likely to be higher or lower quarter-over-quarter?

Ann Anthony, Chief Financial Officer

I can address that, and others can add their thoughts as well. We are reporting on 2022 and have provided initial guidance. We will share Q1 results in about six weeks. I generally agree with your observations. From our perspective, gas production is increasing, which is a positive trend. However, there are two important points to consider. First, with Bio Town, we are a minority owner, so we will see equity impact in our results, but we do not have direct control over it. Second, as I mentioned, regarding RIN and LCFS, we expect to be minimal sellers in the first half of the year, just enough to manage operations. However, we do see value in that area. Our results are likely to be stronger in the latter half of 2023. It's essential to keep these two factors in mind. We will also continue to highlight the value of stored gas and unsold environmental attributes as an adjustment to adjusted EBITDA, allowing people to see what is on the verge of being monetized, hopefully in the latter half of the year.

Adam Comora, Co-CEO

I just want to follow up on that. It’s really key for us to do that to be able to match current period expenses versus what the value of the gas that we’re producing, holding in inventory and credits that we’re missing and holding in inventory. We do report current period expenses for all of that gas that is produced in credits that are in inventory.

Matthew Blair, Analyst

So just to follow up on that. Ann, when you said that results will be skewed to the back half of the year, when you said that initially, I took it to mean that your cash flows would be skewed to the back half of the year, but it sounds like you’re saying that the actual EBITDA would be skewed. Is that the right interpretation?

Ann Anthony, Chief Financial Officer

So, no. Again, we will be adding back the value in adjusted EBITDA. So we’ll be reporting it in each quarter. So to your point though cash will be skewed towards the latter half of the year, it may show up in lower revenues and lower net income.

Adam Comora, Co-CEO

So when you report your GAAP and operating income, it will be lower in the first half to the second half and once we plan on monetizing the balance of RINs in RNG that’s in inventory. But from an adjusted EBITDA basis, it gets smoothed out.

Jonathan Maurer, Co-CEO

And Matthew, I'll just add as well. Good morning, nice to hear you on the call here, that, with the Emerald project coming online midyear, you will see a substantial pickup in gas, in revenues, income and EBITDA in the second half of the year as well from that.

Matthew Blair, Analyst

And then follow up is just on the renewable power portfolio. It looks like there was an asset where you are, I guess, your contract wasn’t renewed. Could you talk a little bit about that? And do you view that as a risk going forward?

Jonathan Maurer, Co-CEO

Yes, that was a project where we held long-term gas rights in collaboration with the municipality. The gas rights expired as per the agreement, and the municipality chose to reclaim those rights, discontinue the power projects, and consider future options. It didn't directly impact our project, other than the fact that they are keeping their options open regarding their future plans.

Adam Comora, Co-CEO

And I'd say when you look across the portfolio, I'm just looking at Jon here and we can follow up. I don't think we’d have any gas rights expiring.

Jonathan Maurer, Co-CEO

No, nothing in the near future.

Matthew Blair, Analyst

Very helpful, thank you.

Jonathan Maurer, Co-CEO

And I'll add that when we do renewable natural gas projects and we build these, we get gas pricing that are generally 20 years or longer with regard to those projects. So that’s kind of a legacy renewable power feature, but we don’t see it affecting other projects going forward in the near future.

Adam Comora, Co-CEO

Yes, I would really consider that one one-off.

Martin Malloy, Analyst

I had a question about costs in relation to the revenue for landfill gas on Slide 7, specifically regarding dollars per MMBtu. Could you discuss where you anticipate costs will go in terms of dollars per MMBtu and the steps you plan to take to reach that point?

Adam Comora, Co-CEO

Yes, I'd say in general, although, there were some escalated utility costs in 2022 and some other general inflationary pressures, our cost per MMBtu has not changed materially from what we have talked about previously. We are still in the high single digits for our cost of production on landfill and, call it, somewhere in the low 20s on dairy. And we are always trying to drive efficiencies in our business and try to maximize output and productivity of our plants. So I’m not going to give you a specific target on where we think we can get costs down to. But we don’t see a lot of material changes from where we’ve been and what we’ve discussed historically.

William Grippin, Analyst

Appreciate all the color that you've already provided. I just have a couple maybe more modeling questions here. But first, could you provide any color on the SG&A that you have embedded in the adjusted EBITDA guide for 2023?

Ann Anthony, Chief Financial Officer

So I don't think that we want to get to the level of detail of actually guiding there. As you can imagine, first year public company, I think we’ve tried to model out something that’s appropriate and reasonable. But I don't think we want to get to that level of detail in our guidance.

William Grippin, Analyst

Can you share the key developments you expect in the eRIN pathway to help clarify its potential impact on OPAL?

Adam Comora, Co-CEO

From a high level, we need to determine whether it will be included in the final rule as a pathway. Currently, they have proposed using renewable power as electricity and transportation fuel. The first priority is whether they will incorporate that as a pathway this June. The second priority could potentially be delayed. There is considerable momentum behind including it, but the industry has many questions about the mechanics that require clarification, such as the equivalency value, the number of RINs assigned per megawatt produced, and who will be the RIN generator. While these details may not significantly impact economics, there are many questions regarding whether the auto OEM will generate that RIN credit and who will be assigned on the pathway, affecting the entire value chain of the e-RIN and the division of economics. We believe this could be highly beneficial, and there’s also a possibility of taking RNG from a pipeline to create some eRINs. There are many nuances in this area, but this gives you an idea of what we're awaiting clarification on.

Ryan Pfingst, Analyst

Maybe I’ll just sneak one in here. Going back to your comments around the multi-year RVO allowing for the potential of longer-term contract. Are those discussions happening today and what would be your expected time frame for entering into contracts like that?

Adam Comora, Co-CEO

They’re happening internally, they’re happening with other market participants. I wouldn’t say they’ve begun in real earnest yet with obligated parties. We would anticipate those kinds of things to potentially start happening once the volumes are set. So that’s something that we can report back on in the back half of the year.

Craig Shere, Analyst

So first, could you help me understand how eRINs work in a biogas to power project with a long-term PPA? If the PPA lasts three to five years, does the off-taker own it, or how does it function?

Jonathan Maurer, Co-CEO

So it varies. Some projects find the carbon value either through reps or otherwise through the power purchaser and some do not. And in all cases where it has been assigned and the projects is potentially a material participant in this market, we commence discussions with counterparties to substitute third-party acquired RINs for the renewable attributes from our gas that will enable us to then sell the eRIN. So it’s kind of a mixed bag out there. But I would say that we see a pathway to getting the majority of our renewable power into the eRIN pathway.

Craig Shere, Analyst

And then you talked a couple of times on this call about the hiccup or reassessment of landfill operators last year that seems to be thawing, allowing projects to move forward or at least contracting. If they were reassessing the underlying value of RNG in their footprint, does that mean for new contracts and projects that perhaps higher splits have to be afforded to the site host?

Jonathan Maurer, Co-CEO

I think all of that took place over the course of the last year or two. And people settled out as to what the right splits ought to be. I think that the value has shifted somewhat as some of that has been recognized, but most of that has taken place. And we will still see some dynamics out there. But I think that the pathing is open for getting more contracts finalized and signed, and putting those projects into construction in the near future.

Adam Comora, Co-CEO

Just a couple of quick follow-ups there. One is, we haven’t seen any real changes in royalty rates that change sort of how build multiples look for us and that sort of thing. So that’s positive. And just to John’s point there, we really do feel like we have gotten some good visibility and traction in getting these things across the finish line. And it’s always a little surprising for how long documentation can take on a lot of these things. But we feel really good about where we’re at today versus maybe six months ago in terms of moving those things through documentation.

Craig Shere, Analyst

And really quick modeling question. If you are banking RINs to sell potentially higher prices after the firm RVO in the second half, how do you assess the pricing at which you report that in your adjusted EBITDA?

Ann Anthony, Chief Financial Officer

We shared our assumptions regarding guidance. As we progress through each quarter, by the time we reach Q1, we will evaluate the pricing relevant to that period and provide an updated sensitivity based on current market prices.

Derrick Whitfield, Analyst

Again, I wanted to ask a follow-up on the last question and ask you really to elaborate on the competitive landscape more broadly. As you’re aware and have noted, we’ve observed unprecedented levels of M&A for RNG assets over the last year with an increased focus more recently in the downstream side based on the BP TravelCenters’ potential acquisition. In your view, what do these transactions imply about the value of your business and how do they alter the competitive and operating environment for you? Seemingly, there are less agile guys at the table right now versus past periods.

Adam Comora, Co-CEO

I found BP's recent acquisition quite intriguing. It aligns with our previous discussions about vertical integration and the potential pricing and power dynamics in the alternative fuels sector within the Class A industry. From my viewpoint, we've also noticed several smaller private downstream companies being acquired by major exploration and production firms, which seems to validate our growth and strategy here. There are promising opportunities for us as a vertically integrated entity, and it will be interesting to see how things progress. Traditionally, investment in this sector has followed a behind-the-fence model with dedicated fueling. We believe the introduction of the 15-liter engine could create new possibilities for trucking and logistics fleets, and there may be fresh approaches for future deployments. Alongside this, there's been significant merger and acquisition activity in upstream production as well, making it an encouraging indication for what we've established at OPAL Fuels.

Jonathan Maurer, Co-CEO

And if I could just say, Derrick, that, in general, the pendulum continues to move towards decarbonization and the value of renewable fuels continues to be central to those strategic players and now to financial players as well. And so we continue to see a lot of interest. As I was saying earlier, I feel like the country and the world is kind of leaning into this sector and you continue to see it quarter after quarter as companies are making moves towards that decarbonization and how they’re going to play in that in the future. It’s a tough decision for a lot of people to make and then to find the right opportunities of companies that are growing and essential to the space really provide that opportunity.

Operator, Operator

I'm showing no further questions at this time. I’m going to turn the call back over to Adam Comora for any closing remarks.

Adam Comora, Co-CEO

Thank you very much for your participation in OPAL Fuels’ full year 2022 earnings call. We look forward to continued engagement and dialogue. Have a great day.

Operator, Operator

Thank you. Ladies and gentlemen, this does conclude today’s conference. Thank you all for participating. You may now disconnect. Have a great day.