Q2 2023 OPAL Fuels Inc Earnings Call

August 10, 2023

Okay.

Good morning, and welcome to above your second quarter 2023 earnings call and webcast. At this time all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session.

That's a good question during the session you will need a press star one on your telephone you will then hear an automated message advising you that your hand is raised to withdraw your question. Please press star one again.

Today's conference is being recorded I would now like to turn the conference over to Todd Firestone, Vice President of Investor Relations to begin.

Please go ahead.

Thank you and good morning, everyone welcome to the Apple fuels second quarter 2023 earnings Conference call.

With me today are John Tomorrow.

And Anthony Vogels, Chief Financial Officer.

Fuel's released financial and operating results for the second quarter of 2023 yesterday afternoon, and those results are available on the Investor Relations section of our website at <unk> Dot com.

Presentation and access to the webcast. 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.

All risks uncertainties assumptions forward.

Forward looking statements are not a guarantee of performance and.

Actual results could differ materially from what is contained in such statements.

Factors that could cause or contribute to such differences are described in our investor presentation, which was posted to our investor Relations section of our website.

These forward looking statements reflect our views as of the date of this call.

<unk> 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 net loss.

Adjusted net loss per basic share adjusted net loss per diluted share and adjusted EBITDA.

A definition of non-GAAP measures used in a reconciliation of these measures to the nearest GAAP measure is included in the appendix of the release and presentation.

We'll begin today's call by providing an overview of the quarter's results recent highlights and update on our strategic and operational priorities John will give a commercial business development update afterwards animal review financial results.

Then open the call for questions.

And now I'll turn the call over to Laura <unk>.

Thank you Todd good morning, everyone and thank you for being here for <unk> second quarter 2023 earnings call I'd like to highlight several points from this quarter's results.

First operational performance at our in service R&D facilities continued to meet our expectations in the second quarter, which we expect to continue for the balance of the year.

We also saw an improvement in our fuel station service segment, which we also expect to continue.

John and Andy will go into further detail on the quarterly results and some of the puts and takes we see playing out in our full year results.

One key development in the quarter, which we were very pleased with the final set rule published by the EPA in June .

This final rule strongly supported Cellulosic biofuels and the use of renewable natural gas as a transportation fuel for <unk>. All of this gives us confidence and strong and less volatile <unk> RIN pricing for at least the next three years and further validates our vertically integrated business model, which is best positioned economically.

Strategically to deliver our growing R&D production base into the highest value and growing end market.

Specifically the final rule resulted in higher compliance targets of <unk> volume that must be purchased by obligated parties and extended these targets through 2025.

These higher three year targets, which provide multiyear visibility of <unk> demand not only give the industry a strong investment signal, but also provide the potential to sell production forward for multiple years.

Post the final set rule <unk> RIN prices have risen from under $2 per in early in the year to recently trading just above $3.

With the improvement in her in prices, we sold some credits from our existing inventory, which we had previously elected to hold leading up to the Epa's ruling in June .

In the second quarter, we sold approximately $5 7 million Rins at an average price of roughly $2 80.

We continue to sell RIN credits from our unsold inventory in the third quarter at prices in excess of $3.

A more detailed table was posted in our earnings press release last night and is also disclosed in our investor presentation available on our website. This morning.

The value of vehicles unsold environmental credits and environmental attributes awaiting certification this quarter increased by more than 16 million to $34 million.

Note. We include this increase in value in adjusted EBITDA similar to prior quarters in order to match the associated expenses in our GAAP financials recorded in the quarter. The R&D is produce however.

However, we don't book revenues for GAAP purposes until the environmental credits are actually sold.

While <unk> fail to make it into the Epa's final set rule. They are still being considered and we believe there is a reasonable chance they will be implemented perhaps with some modifications to the original proposal.

We're highly supportive of the <unk> pathway. It is the right environmental public policy to incentivize more methane capture projects, which may be too small to justify a full R&D plant and therefore remain undeveloped.

For Opel fuel it enables us to leverage our existing renewable power portfolio and increase the value of those assets with little incremental capital and opens up numerous smaller renewable electricity development opportunities, which would further accelerate our growth.

We're also excited to announce that we've moved our pulp County, Florida R&D project into construction. This.

This project represents a successful and fast transition through our business development funnel into construction.

Pulp represents $1 1 million btu of additional nameplate capacity of which we own 100%.

Second quarter results saw improvement in adjusted EBITDA margins in our fuel station service segment to what we think.

Is trending to more normalized operating environment. This improvement was driven by not only higher RIN prices, but moving forward on completing construction projects and cycling through inflationary cost pressures on some of our fixed priced third party station construction contracts. We expect this to continue in the second half of the year.

We think it's a great time to be <unk> fuels, we have built and continued to add to what we believe is the best team and best business model in the industry to capitalize on strong and growing tailwind from both public policy and corporate initiatives to Decarbonize.

The end result should be a powerful platform of nice return on capital projects, which when operational require minimal capital expenditures, resulting in sustainable long term free cash flow with that I'll turn it over to John .

John .

Thank you Adam and good morning, everyone.

I wanted to start out by saying that we're very focused on executing on our growth plans.

Not only were our current production expectations, Matt, but we are moving high quality projects forward in our business development funnel, providing significant momentum and visible growth to our business.

And our R&D fuel segment, we have seven projects in operation, representing roughly $3 9 million Btu of annual nameplate capacity.

Operating projects provide a solid base to our ongoing business.

At Noble Road.

New River and Pine Bend three of our more recent landfill R&D projects to come online gas production continues to increase at the landfill trash increases and as our expert gas collection team works hand in hand, with our landfill partners improved gas quantity and quality.

In addition to our operating projects. We currently have six R&D projects in construction, representing an additional $5 4 million Btu of annual nameplate capacity.

These construction projects provides visibility to near term growth for our underlying business.

I would highlight the following.

First our Emerald RMG project completed construction in June and is expected to be added to our in operation portfolio. During this third quarter as the project completes commission.

Second as Adam mentioned, we added our Polk County, Florida projects to our in construction portfolio.

This project will contribute $1 1 million Btu of annual nameplate capacity and has 100% owned by US We expect the project to reach COPD in Q4 of 2024.

I wanted to shift gears and discuss the permitting process in some of our construction project.

We've experienced some delays at our Emerald, Prince William and Sapphire R&D projects in large part due to the permitting process.

First I want to stress that these delays are not a reflection of whether the projects will ultimately come online.

Our experience they are a matter of when and not <unk>.

Given the dramatic decrease in harmful emissions.

Second not all permits are required to be obtained when we sign a construction contract and formally place the project into construction.

While we schedule a reasonable timeframe for completing this permitting it's important to note that these processes are particular to the varying state and local agencies.

In practice many of these projects are the first time a municipality are sanctioned in R&D project. So, it's a new process and with anything new sometimes it takes longer than expected to get it over the line.

The takeaway here is that the earnings power of these projects remains intact. Despite the several months of delay.

Our Prince William Project is now expected to be online in the first quarter of 2024, our Sapphire project is expected to be online in the first half of 2024 and.

And our two dairy projects in California, we expect to be commissioned in the third quarter of 2024.

Due to the several months away at Emerald in Prince William We expect 2023 production volumes to be at the low end or modestly below our previous full year guidance.

Moving on to our advanced development pipeline, we continue to make encouraging progress.

We now have $8 1 million Btu of nameplate capacity across 18 projects in our advanced development pipeline. The majority of the advanced development pipeline as landfill, but also contains dairy and food waste project.

Remember these projects are ones, we are qualified and that we reasonably expect can be in construction within the next 12 to 18 months.

We set a target in March are putting at least 2 million btu in construction this year.

With pulp county, narrowing construction, we are over halfway towards our goal and we remain optimistic that we will hit that goal.

Our advanced development pipeline does not include other earlier stage projects.

As we've mentioned on prior calls we are one of the larger and more experienced operators in this space.

In our integrated platform continues to aid us in discussions as we seek out new projects.

Turning to our fuel station services business as Adam mentioned, we believe we have cycled through some of the inflationary cost pressures, we expect to move to more normalized margin trends.

We continue to hear very positive feedback on the new comments 15 liter engines being tested and have seen more large national fleet interest and engagements than ever before for R&D as a transportation fuel.

Like everyone else I'm clarity and timing for the commercial rollout and deliveries of the new trucks, but believe when it happens. It will result in accelerating adoption and deployment of RMG Flash CMG.

Which will require new fueling station construction service and RMG fuel.

Hopewell fuels as a market leader in building and servicing new stations and our vertically integrated model puts us in a strong position to be the fuel provider of choice and to capitalize on this potential growth.

Our renewable power segment currently has 17 electric projects, representing 112, five megawatts of nameplate capacity and continues to provide good optionality.

Besides serving as an inventory of <unk>.

Projects that can potentially be converted to R&D projects.

These electric projects stand to benefit from the proposed <unk> pathway.

Currently three of these projects under construction in the process of being converted to R&D facilities and three others are in advanced development pipeline.

Version to RMG.

The remaining 11 projects stand to benefit from our proposed <unk> pathway.

We await updated guidance from the EPA on this topic later this year.

I'll now turn the call over to Ann.

And.

Thank you John and good morning, everyone.

Last night, we filed our earnings press release, which details our quarterly results for the period ending June 32023.

We anticipate filing our 10-Q in the next couple of days.

The biggest driver of the quarter's results was environmental attribute pricing, which moved higher near the end of the quarter. After the Epa's final set rule was announced and we were able to start monetizing credits we have in inventory.

Net income was $114 $1 million this quarter, but was impacted by the deconsolidation of our Emerald and Sapphire projects, which we'll discuss shortly.

Excluding this one time gain our adjusted net loss for the three months ended June 32023 was $7 8 million.

G&A costs for the second quarter totaled $13 $7 million with approximately $1 $9 million of that total included stock based compensation, which is noncash.

We reported adjusted EBITDA of $21 $4 million for the second quarter compared with $8 7 million in the first quarter.

The difference was primarily the result of approximately $5 7 million.

Monetize credits we sold in the last 10 days of June along with the Mark to market impact of higher RIN prices at the end of the second quarter, plus some normalization in our fuel system services business.

As construction projects move forward and some of the inflationary pressures that we experienced in the last year started to abate.

Second quarter adjusted EBITDA does exclude onetime items, such as the one time gain associated with the deconsolidation of our Emerald and Sapphire project. It should be noted that the value of the unsold environmental attributes is marked at the quarter end value and could fluctuate up or down.

As I just mentioned in June we disclosed the formation of Paragon RMG LLC a company owned 50 50 between <unk> and Tfl environmental which resulted in the deconsolidation of our Emerald and Sapphire R&D projects, we have two R&D projects under construction today in this joint.

Sure and expect to move forward with up to seven additional projects.

We will talk more about the impact of deconsolidation in a moment and in our 10-Q.

And our fuel station services segment, we dispense to $35 5 million Gigi eased in the second quarter.

And saw results improved compared to the first quarter of 2023.

We were able to recognize higher revenue in the quarter as construction projects move closer to completion.

This dynamic as well as diminishing impacts from cost inflation helped improve margins, which should continue for the rest of the year.

And renewable power, we saw sequential improvement compared to the first quarter, which was impacted by unplanned downtime primarily at one of our projects.

Every year, we saw a decline due to the shutdown in the third quarter of 2022 of the landfill gas to electricity project that had reached end of life.

Year to date, we've spent $72 million in Capex as we continue to build out R&D projects and fuel stations that we own on balance sheet.

As of June 32023 liquidity was $44 1 million.

Consisting of cash and cash equivalents of $27 1 million, including restricted cash of $5 $5 million and $17 million in short term investments maturing within 90 days.

This compares to $181 million at March 31, 2023.

Consisting of $39 8 million of cash and cash equivalents, including restricted cash of $6 6 million plus $37 million in short term investments.

Availability of $105 million under our senior secured term loan facility.

Primary driver of this reduction in liquidity is attributed to the assignment of the term loan facility to Paragon as part of the deconsolidation of the Emerald and Sapphire projects.

This also reflects a reduction of $11 $9 million of cash that is now excluded from consolidated cash and cash equivalents again as a result of the deconsolidation.

Note both the cash that was the consolidated and the available funds under the credit facility remained available for these projects.

<unk> was assigned to the existing senior credit facility related to these projects again with the two year delayed term and maximum principal amount of $85 million and a debt reserve facility up to $10 million there with no debt outstanding as of the date of the assignment.

We believe that our liquidity anticipated cash flows from operation, including the value associated with our unsold environmental credits and access to expected sources of capital will be sufficient to meet our existing funding needs. We continue to pursue additional funding for our advanced development pipeline.

And streamlining our capital structure to include financing higher up in the capital structure and less financing on an individual project basis.

I'd like to reiterate that at current RIN prices, we expect our full year 2023, adjusted EBITDA guidance to be within our prior $85 million to $95 million range.

RIN prices have rebounded quite strongly since the EPA provided higher RVO targets and we expect now you have averaged realized prices above the $2 25 set implied price in our guidance.

However, as John noted earlier, we anticipate that production will be at or modestly below the low end of guidance given the delays at Emerald in Prince William.

The R&D projects that are in operation as well as our other business segments continue to perform well and in line with our expectations.

With that I'll turn it back to John and Adam for concluding remarks.

Thanks Ann.

In closing I want to remind everyone that Opel fuels business is addressing two of the most significant global warming issues.

We are collecting harmful methane gas and we are using this gas to displace fossil fuels. These.

These impactful benefits are what drive the policy tailwind, which continue to build from the EPA is resounding supported the industry to the significant IRA benefits and to the increasing demand in the market for our products.

We remain committed to furthering <unk> vertically integrated mission.

To build and operate best in class R&D facilities that deliver industry, leading reliable and cost effective R&D solutions to displace fossil fuels 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.

As a reminder to ask a question at this time. Please press star one one on your telephone and wait for your name to be announced.

To withdraw your question. Please press star one again one moment.

Our first question is going to come from the line of Derrick Whitfield with Stifel. Your line is open. Please go ahead.

Good morning, all and congrats on your progress with several of the R&D projects.

Thanks, Eric.

For my first question I wanted to focus on your 2023, EBITDA guidance and where and in their prepared remarks, while there are certainly puts and takes from the standpoint of timing and production volumes.

A combination of your RIN inventory and production profile and the materially stronger RIN pricing. We are experiencing now versus your plan seemingly suggest there is still upside to your 2023 guidance is that a reasonable conclusion.

Thanks, Eric for your question again.

Again, we appreciate your support and I think again as we look to guidance at this point in the year.

And we take into account the strength in the G. III random what we expect to happen there is offset though by where we see production coming out.

For the remainder of the year. So for that reason I think we were comfortable.

Yes.

Just one quick follow up I wanted to focus on your capital spending and liquidity outlook as we think about the advancement of your in construction and ADP project backlogs could you help us understand the associated Capex profile over the next few quarters and perhaps elaborate on your sources of capital and liquidity.

As highlighted on page 13, inclusive of ITC, if you're able to monetize that over that timeframe.

Sure.

I guess, if you step back and you think about Capex year to date, we've spent $72 million.

Roughly 39 in the first quarter.

Three in the second quarter, and if you step back as well and look at where projects are insurance construction queue. Emerald is starting to ramp down Brian . We completed construction. We are in the middle of commissioning and yes, Theyre final bills to pay that that when they started to tail off.

Into construction and again at the beginning you put it into construction youre not spending a lot of money.

It starts to ramp up as construction ramps up.

So we think that that system.

I think as we look out over the remaining six months of net interest were from.

From an overall Capex perspective, I think we would expect to be right.

Right and the mill.

<unk> originally from a guidance perspective.

And we've also seen again the delays.

Sapphire.

So again, it all kind of factors into that.

But from a relative perspective.

Quarter to quarter about $30 million to $40 million ish range.

Pretty good.

In terms of capital and liquidity.

Again, as we disclosed yesterday.

We've got roughly 44 million ish on the balance sheet as of June 30, and we were sitting on roughly 34 ish million dollars notes.

In Lcs best value that we expect to be able to monetize over the coming months as part of cash flow from operations.

Also do you have the debt facility is still available to us.

Amended as part of <unk> transfer.

Transaction.

That can be used again for the remainder of Emerald added for Sapphire.

As you can imagine we are talking to our bankers pretty frequently we extended our goal is to you.

Look at financing higher up in the capital structure.

And again, we feel pretty good about remaining.

Remaining.

Availability under that facility as well as access again, the other piece that we haven't talked about is ICD and again, we've been pretty.

Circumspect about a total amount, but we do anticipate being able to monetize via transfer the ITC associated with Emerald This year.

Essentially prince William again, depending on when that comes.

Online whether it's this year, we're at the beginning of 'twenty for being able to monetize that as well. So again it all kind of goes into the soup.

That's why we're able to say we're comfortable around our ability to.

Capex continue to run this business.

That's very helpful. Thanks.

Thank you and one moment for our next question.

Our next question is going to come from the line of Ryan Todd with Piper Sandler. Your line is open. Please go ahead.

Great. Thank you.

Maybe.

There is a follow up on some of your comments there on cash flow.

Can you can you walk us through the to the cadence of some parts of the LNG business through year end.

When Emerald should come on line this quarter, how should we think about the timing of it.

Gas production.

As that ramps and monetization in the coming quarters from Emerald.

And then obviously you talked about the inventory balance that you have there are credits.

Any any commentary on kind of the cadence of monetization and how you would look to monetize or draw that down over the over the coming quarters.

Yes.

Hey, this is Adam here thanks for the question.

And.

Start on the ITC and then maybe I'll talk a little bit about our room inventory and how we're thinking about monetization.

Or I guess again from an ITC ICC perspective, we do anticipate monetizing ITC associated with Amarillo, obviously, it would be our half 50 ft project.

But to the extent that it comes on in Q3.

Anticipate that we'll be able to monetize that.

In the quarter as well.

And this is Adam here I'm talking about our revitalization strategy and there may be some additional questions on networks in the market.

We sort of saw the first half being a little bit and episodic.

Hold onto our inventory up rate as we are.

Anticipating.

A positive outcome.

In terms of how to treat the Cellulosic biofuel category.

Perhaps rethink their their RVO targets for Cellulosic Biofuels.

And that did play out as we sort of expected.

And we will begin.

Unwinding some of the credits that we get.

Holding on to the balance sheet.

We think over the next three years. This was not a one time sort of top 50 treatment and prices and the way. The ipos have been set up now for multi years, which we think is really healthy for the industry.

Providing that visibility.

We actually think that <unk> market is going to continue to tighten over the balance of 'twenty three D and.

And should lead to higher pricing quite frankly.

In the balance of 'twenty three as we look out into 'twenty four 'twenty five, but we think that we're in market.

We will start to be.

Less volatile.

Yes.

We don't see ourselves in the future.

Having as much.

<unk> in our GAAP results and see that really smoothing out.

The balance of the year and into 2025.

I'll just add as well obviously once <unk> comes online during under the current rules, we are able to steward that gas was depreciated call. It critical mass rape, rather that commissioning period, and we do assign the value of equivalent credit associated with that gas storage as part of adjusted EBITDA.

It does take.

Call. It three to four five months to get through the certification process with the EPA to actually be able to generate and monetize those rents. So again just want to remind everyone that there is a little bit of a lag between when you actually go online in a real way and start to actually recognize any significant.

Revenue, obviously that potentially changes next year.

They are currently.

Promulgated by the EPA that you will not be able to use that.

Captive virtual storage pending certification.

Perfect.

That's very helpful. And then maybe changing gears to the fuel station margins I know you talked about some of the drivers of improvement there, but could you maybe provide a little more clarity in terms of.

Maybe a little more color on what all drove the improvement on the fuel station margins in it is that the right. The margins that we saw this quarter is that kind of the right run rate going forward.

We think about modeling this out.

This is Adam again at year end.

I think as we mentioned in our previous quarters.

There is three years two different components to our fuel station service segment.

We have a construction business, where we're building stations under a turnkey EPC contracts.

And those stations can typically take 12 months or so to complete so we did have a lagging inflationary cost pressure rolling through that business, which we do believe.

I have now run its course.

We also have some R&D marketing.

Yes.

Business in our in our fuel station business, that's associated with our dispensing capacity.

That does it also get the benefit of rising credit prices, which we think are going to continue.

We also have our service business there as well.

And we don't think we've gotten to the full end point of where we think normalized margins are we're not going to provide a margin target there, but we do think that that business still has.

So good upside to it.

We've got.

Some are little ways to go there in terms of where we think margins ultimately shake out.

From here or is it going to be I mean, I guess in terms of the potential future gains from here.

That is the RIN price like the biggest component of that are within those other two buckets is there is there more tailwind still within those.

This is Adam here and.

Where we see some some good upside and by the way, it's not only on growing volumes and I know, we'll get some questions later on the 15 liter engine and what that means and what that could be a growth in our in our fuel efficient service segment.

We also have.

Some exposure to <unk>.

Potential rising Lcs pricing, specifically out of our California dispensary market.

So we think there's some interesting.

Potential optionality to that to that part of that segment.

As we move through.

Some card actions that may be taken and also how to maximize our California dispensing.

<unk> gas.

So.

More and more to come on that in the future.

Perfect. Thank you.

Thank you.

Okay.

And one moment for our next question.

Our next question is going to come from the line of Martin Malloy with Johnson Rice <unk> Company. Your line is open. Please go ahead.

Yes.

Good morning wanted to ask on a little bit about <unk>.

And assuming that there is a positive outcome for the <unk> pathway later this year.

You may be talk about your expectation for how that that might impact your advanced development pipeline.

Could we see a number of smaller projects.

That are out there and start to move into advanced development pipeline.

Hey, Marty John Moore.

Great question. Thanks, so much.

Yes.

The great thing about the pathway.

So first of all obviously collecting reduce harmful methane gas.

Okay.

I think really promos smaller difficult projects as well.

Do you see significant value.

You provided to those electric projects so.

Two are.

11, or so electric projects as it stands the benefit from the <unk> pathway.

Got it really opens up a whole new.

Avenue of development for us.

We've been developing and operating.

Electric landfill gas projects were 25 years, and Thats really our legacy business and our bread and butter.

We see the growth.

About really coming back.

As the <unk> pathway.

Pathways for monetizing the.

Cellulosic attributes of OEM so.

Through an electric project.

We do expect that our existing portfolio will benefit we do expect we will be building more.

<unk>.

The electric Brown.

We look forward to significant growth in that sector.

Thank you and follow up question just on those alternative use.

Uses for the.

RMG.

One of your competitors recently.

And announcement regarding a letter of intent for EMA ethanol could you maybe talk about some of these other pathways.

I think I've heard of a lot of.

Pathways that are developing.

The methanol is certainly attractive.

The pathway is developing.

In Europe .

We see some of the prices in Europe competing.

Prices in the U S. However, as a transportation fuel market continues to be a.

Strong market both in terms of the CMG RMG.

Fuel as well as the growing electric vehicle market.

For it so.

Yeah.

There will generally be more and more options for monetizing the value of these and Thats just another tailwind for our business. This is Adam just to just a follow up there.

Really interesting as John was talking about before what we're really doing here at all fuels as cash requirement.

These are not agricultural Biofuels theres, no food versus fuel debate.

And it's not just here in the U S. It's really everywhere.

Public policy is focused on figuring out how we can capture more harmful methane emissions. So even when we're looking at some of these electric projects, where you could build landfill gas to electric facilities.

And perhaps.

Sell the electricity there are new pathways developing all the time to still.

Take those green attribute and find and find new markets for it. So it's not just dependent on an EBIT pathway coming through we think there could be additional value to some of these landfill gas to electric projects as other new markets and other new policies develop.

So.

We're optimistic on.

Some of these potential electric projects the yearend pathway, obviously as close in front and center, but there could be other things that get developed as well.

Great. Thank you I'll turn it back.

Good morning.

Thank you.

Yes.

And our next question is going to come from the line of William Goodman with UBS. Your line is open. Please go ahead.

Great Hi, everybody. Thanks for the time.

Just wanted to circle back on the topic of ear ends here and specifically wondering if you could elaborate a bit more on maybe what you're hearing.

Around how that program could develop I know previously before the final RVO came out there were obviously some fears that that could drive oversupply of D. Three do you think the EPA could somehow structure a program to mitigate that concern.

That's a great question. This is Adam again.

Look it's still we're still early on in those conversations with the industry is still early on in those conversations about youre exactly right by the way that was one of the things that drove.

The pricing.

Rins down was how the implementation and the rollout of that program with.

Whats happening and that was one of the key message is that the industry came back to the EPA is hey look this is the right policy, let's just make sure that we're not disrupting the market and not capturing as much harmful mapping as we can as that rolls out and that's what we're working with.

Through right now is just just to make sure that there arent unintended consequences from how that gets developed so there could be so we're still early on in the industry is still early on in those discussions.

I think they're going to happen and continue to happen in earnest over the balance of the year and that's exactly what we're trying to do is work with the EPA to make sure that hey, let's make sure. This policy works.

Projects get developed to capture new methane.

And that is structured in a way to continue to do the original intent of the RFS, which is to promote cellulosic biofuels and provide that strong framework to continue investment in development in this sector.

Got it I appreciate that color and then just as a follow up going back to the deconsolidation.

The Tfl assets, just curious could could <unk> require you potentially to do this on other projects that youre that youre working with them on and also for <unk>.

My lack of accounting knowledge here, but as a result of the deconsolidation of Emerald does that change or impact the amount of EBITDA youre recognizing from that project.

Thank you for that question and then I'm going to just say right upfront. There is a lot of complicated GAAP accounting that goes into all of that.

I think the reason for doing this is because obviously, we've got the two projects today with Tfl.

Do we anticipate that our relationship will continue to grow right.

Additional projects that we anticipate and they'll be part of this is J D.

So now this entity become standalone for both of us neither <unk>, nor <unk> will be consolidated.

Results.

Results for US we will continue to show up now on the <unk>.

<unk> basically is an equity pickup rate investment and equity affiliate.

I guess as we think about adjusted EBITDA It would flow through that way as opposed to flowing from revenue all the way down right as a consolidated entity months once a month let's.

Let's say comes into operation revenue et cetera would flow through the income statement and then <unk> portion would have been backed out. So it's a long answer of saying, we still get the EBITDA, but it becomes an asset right from equity as opposed to talk through and then backing out to get that was unfortunate.

The magnitude is.

Correct that's correct.

But I think again it's.

Our relationship continues to grow.

If it comes.

Or a meaningful part of our business and.

At this point, we think it sets us up to include actually up top as part of its revenue.

The equity earnings.

How others in the space have done it previously, but you have to be able to demonstrate and justify that it's truly a part of your business not just kind of a one time event, yes, and this is Adam here and just just in summary, there was no change to any of the economics.

The original 50 50 partnership previous to this.

We were 50 50 partners with Tfl on a project basis for both SaaS fire and for Emerald.

Nothing has changed there so the adjusted EBITDA No change no change to how those are being run and the JV really was set up.

So hopefully grow and do more projects together.

And let me just add.

GMO corn.

Cause us or make us do this this is just the accounting results.

Sure.

Got it I appreciate the clarification I will turn it back to you.

A better way to say it is it's a reflection I think of the growing commercial relationship between this <unk> accounting is kind of like what.

But you have to do after the fact that accounting just talked about here.

Yeah.

Thank you Anna.

And if you guys. If you would like to ask a question at this time Please press star.

Star one on your Touchtone telephone.

One moment for our next question.

Our next question is going to come from the line of Craig Shere with Barclays. Your line is open. Please go ahead.

Good morning, Thanks for taking the question.

So first on the project delays is that.

Pretty much all.

Case by case permitting issue or are there any outstanding supply chain concerns as far as delivery times.

And.

How do you think about your confidence on the projects you had previously guided into 2024 at this point.

First time.

Hey, Craig John Moore, and thank you for your question.

We continue to execute on our pipeline.

In any doubt.

As to the ultimate value of these projects.

Is it substantially permitting oriented as theirs.

A few other odds of AD issues, but I would say that the substance of it just permitting delays.

Like other companies in construction and particularly in RMC.

There are a number of permitting.

Authorities are touch on these projects during construction.

Typically.

We build in Timeframes for those.

As I've said earlier.

<unk>.

Each of these permitting authorities.

Local and individual group area.

Degrees of experience.

Particularly with this new product RMG.

The RMG.

Projects.

Really have a very new.

Impactful reduction.

Emissions locally.

So that ultimately they are very attractive.

All of the permitting authorities that we deal with Cedar.

Ultimately get comfortable with that.

They do provide.

Will a scrutiny and questions.

I think a good example might be with our MRO project.

Yes.

<unk>.

This project, we completed construction in June we probably would've started commissioning a little bit earlier on it but the permitting authority there.

It took more time in terms of the <unk>.

Final permit to get US started on the commissioning phase, whereas it might have been started commissioning.

Early June it really started in early July so.

Both those types of.

Delays.

Again, we try to build as.

We tried to deal with but they're relatively small in nature.

And from a big picture standpoint, when you go out 100000 feet look at our business.

The earnings power of these projects are unaffected.

So we'll continue to see it at all.

Our business.

As we roll through 2023 and 2024.

Thanks for that.

And speaking of the construction portfolio.

Digging in a little on Williams paradigm question Capex liquidity question.

It seems like now we've got.

<unk> kind of separately domiciled liquidity and capex requirements between Paragon in your wholly owned operations or consolidated operations.

On a go forward basis.

We plan on <unk>.

Separating out your.

Proportional or gross JV spend versus what you have to spend on balance sheet.

Capital projects.

So Craig are you asking are we just going to break it out for reporting purposes are you asking more from that perspective.

Facilities for JV things versus kind of for 100% out of projects.

Im talking less about GAAP reporting than then.

Looking out.

Over the next year or two in terms of Capex requirements and outlook got it. Okay. So I think from our perspective, I mean based on where we sit right now.

Relationship with Tfl I think as is.

Our unique right, it's a large relationship due to Emerald and Sapphire and it's growing so we took the actions that we took rate as a result of evaluating that relationship.

I think at this point, we continue to be interested in.

Obviously building projects that we have a 100%, but there are projects in the ADT, where we have a partner based on where we sit right now I don't envision that we can do a similar thing.

It happens with TFS and again, if those relationships also took off.

With the amount of growth that we see I don't know that we would be opposed to it either Bryan again.

Maximize the commercial relationships and then ultimately the economic benefit in Q2, what you have to do behind the scenes to support it.

Fair enough. Thank you.

Thank you and I'm showing no further questions at this time I would like to turn the conference back over to Adam Muro for any further remarks, all right well. Thank you very much for your interest in <unk> fuels and joining us today and we hope everybody has a great day.

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

Yes.

[music].

Yeah.

Yes.

[music].

Okay.

[music].

Yes.

[music].

Yes.

[music].

Yes.

[music].

Yes.

[music].

Okay.

[music].

Okay.

Yes.

Thank you.

Okay.

Sure.

[music].

Okay.

[music].

Yes.

[music].

Sure.

Yes.

[music].

Okay.

Yes.

[music].

Okay.

[music].

Okay.

[music].

Okay.

[music].

Okay.

Sure.

[music].

Yes.

Sure.

Okay.

Yeah.

Okay.

[music].

Yes.

Okay.

Yes.

Sure.

Okay.

[music].

Okay.

[music].

Okay.

Yes.

[music].

Okay.

[music].

Okay.

Yes.

[music].

Okay.

[music].

Okay.

Yes.

Okay.

Sure.

Thanks.

Okay.

Sure.

[music].

Yes.

Okay.

[music].

Yes.

Thanks.

Okay.

Sure.

Okay.

Thanks.

Okay.

Yes.

Okay.

[music].

Okay.

Sure.

Okay.

[music].

Okay.

[music].

Yes.

Okay.

[music].

Yes.

Okay.

Yes.

Okay.

Sure.

Yes.

Sure.

Okay.

Yes.

Thank you.

Okay.

Yes.

Sure.

Okay.

[music].

Okay.

Yes.

Okay.

Yes.

Okay.

Great.

Okay.

Yes.

[music].

Okay.

Yes.

Okay.

[music].

Yes.

Okay.

[music].

Yes.

Okay.

[music].

Yes.

Okay.

Sure.

Yes.

Great.

Yes.

Okay.

Sure.

[music].

Thank you.

Thanks.

Yes.

Okay.

Yes.

Okay.

[music].

Okay.

[music].

Sure.

Thanks.

Okay.

[music].

Okay.

Yes.

Okay.

Great.

Okay.

Yes.

Okay.

Thank you.

Okay.

Yes.

Okay.

Yes.

Okay.

Yes.

[music].

<unk>.

Okay.

Sure.

Yes.

[music].

Yes.

Okay.

Sure.

Okay.

Sure.

Okay.

Sure.

Okay.

Yes.

Sure.

Yes.

Okay.

Sure.

Okay.

Thank you.

Sure.

[music].

Okay.

Sure.

Yes.

Okay.

Sure.

Good morning, and welcome to <unk> second quarter 2023 earnings call and webcast. At this time all participants are in a listen only mode.

After the speaker's presentation, there will be a question and answer session.

Ask a question during the session you will need to press star one on your telephone you will then hear an automated message advising you that your hand is raised to withdraw your question. Please press star one again.

Today's conference is being recorded I would now like to turn the conference over to Todd Firestone, Vice President of Investor Relations to begin.

Please go ahead.

Thank you and good morning, everyone welcome to the Apple fuels second quarter 2023 earnings Conference call.

With me today are co CEO , Adam Flora and Gotham Laura.

And Anthony <unk>, Chief Financial Officer.

Fuel's released financial and operating results for our second quarter of 2023 yesterday afternoon, and those results are available on the Investor Relations section of our website at <unk> Dot com.

A presentation and access to the webcast 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.

Default risks uncertainties assumptions forward.

Forward looking statements are not against your performance and that actual results could differ materially from what is contained in such statements.

Several factors that could cause or contribute to such differences are described in our investor presentation, which is posted to our investor relations section of our website.

Forward looking statements reflect our views as of the date of this call <unk> 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 net loss.

The net loss per basic share adjusted net loss per diluted share and adjusted EBITDA.

Definition of non-GAAP measures user and a 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 quarter's results recent highlights an update on our strategic and operational priorities John will give a commercial business development update afterwards, <unk> will review financial results. We will then open the call for questions.

Now I'll turn the call over to Laura <unk>.

Thank you Todd good morning, everyone and thank you for being here for Opel fuels second quarter 2023 earnings call I'd like to highlight several points from this quarter's results.

First operational performance at our in service R&D facilities continued to meet our expectations in the second quarter, which we expect to continue for the balance of the year. We also saw an improvement in our fuel station service segment, which we also expect to continue John .

John and Andy will go into further detail on the quarterly results and some of the puts and takes we see playing out in our full year results.

One key development in the quarter, which we were very pleased with with the final set rule published by the EPA in June .

This final rule strongly supported Cellulosic biofuels and the use of renewable natural gas as a transportation fuel for <unk> fuels. This gives us confidence and strong and less volatile deeply RIN pricing for at least the next three years and further validates our vertically integrated business model, which is best positioned economically.

And strategically to deliver our growing R&D production base into the highest value and growing end market.

Specifically the final rule resulted in higher compliance targets of <unk> volume that must be purchased by obligated parties and extended these targets through 2025.

These higher three year targets, which provide multiyear visibility of <unk> demand not only give the industry a strong investment signal, but also provide the potential for self production forward for multiple years.

Post the final set rule <unk> RIN prices have risen from under $2 per in early in the year to recently trading just above $3.

With the improvement in her in prices, we sold some credit from our existing inventory, which we had previously elected to hold leading up to the epa's ruling to yet.

In the second quarter, we sold approximately $5 7 million Rins at an average price of roughly $2 80.

We continue to sell RIN credits from our unsold inventory in the third quarter at prices in excess of $3.

A more detailed table was posted in our earnings press release last night and is also disclosed in our investor presentation available on our website. This morning.

The value of vehicles unsold environmental credits and environmental attributes awaiting certification this quarter increased by more than $16 billion to $34 million.

We include this increase in value on adjusted EBITDA similar to prior quarters in order to match the associated expenses in our GAAP financials recorded in the quarter. The R&D is produced.

However, we don't book revenues for GAAP purposes until the environmental credits are actually sold.

For <unk> fuel it enables us to leverage our existing renewable power portfolio and increase the value of those assets with little incremental capital and opens up numerous smaller renewable electricity development opportunities, which would further accelerate our growth.

We're also excited to announce that we've moved our pulp County, Florida R&D project into construction. This.

This project represents a successful in SaaS transition through our business development funnel into construction.

Pulp represents $1 1 million btu of additional nameplate capacity of which we own 100%.

Second quarter results saw improvement in adjusted EBITDA margins in our fuel station service segment to what we think.

Is trending to more normalized operating environment.

This improvement was driven by not only higher RIN prices, but moving forward on completing construction projects and cycling through inflationary cost pressures on some of our fixed priced third party station construction contracts. We expect this to continue in the second half of the year.

John .

Thank you Adam and good morning, everyone.

I want to start out by saying that we're very focused on executing on our growth plans.

And our R&D fuel segment, we have seven projects in operation, representing roughly $3 9 million Btu of annual nameplate capacity.

These operating projects provide a solid base to our ongoing business.

At Noble Road, New River and Pine Bend.

Three of our more recent landfill R&D projects to come online.

Production continues to increase at the landfill trash increases and as our expert gas collection team works hand in hand, with our landfill partners to improve gas quantity and quality.

In addition to our operating projects. We currently have six R&D projects in construction, representing an additional $5 4 million Btu of annual nameplate capacity.

These construction projects provides visibility to near term growth.

Our underlying business.

I would highlight the following.

First our Emerald R&D project completed construction in June and is expected to be added to our in operation portfolio. During this third quarter as the project completes commission.

Second as Adam mentioned, we added our Polk County, Florida projects to our in construction portfolio.

This project will contribute $1 1 million Btu of annual nameplate capacity and has 100% owned by US We expect the project to reach COPD in Q4 of 2024.

I want to shift gears and discuss the permitting process in some of our construction projects.

We have experienced some delays at our Emerald, Prince William and Sapphire R&D projects in large part due to the permitting process.

First I want to stress that these delays are not a reflection of whether the projects will ultimately come online.

Our experience they are a matter of when and not give.

Given the dramatic decrease in <unk>.

Harmful emissions.

Second not all permits are required to be obtained when we sign a construction contracts and formally place a project under construction.

While we schedule reasonable timeframe for completing this permitting it's important to note that these processes are particular to the varying state and local agencies in.

In practice many of these projects are the first time, a municipality is sanctioned and R&D project. So it's a new process and with anything new sometimes it takes longer than expected to get it over the line.

The takeaway here is that the earnings power of these projects remains intact. Despite the several months of delay.

Our Prince William Project is now expected to be online in the first quarter of 2024, our Sapphire project is expected to be online in the first half of 2024 and our two dairy projects in California, we expect to be commissioned in the third quarter of 2024.

Due to the several months away at Emerald and principal William We expect 2023 production volumes to be at the low end or modestly below our previous full year guidance.

Moving on to our advanced development pipeline, we continue to make encouraging progress.

We now have $8 1 million Mmm Btu of nameplate capacity across 18 projects in our advanced development pipeline. The majority of the advanced development pipeline as landfill, but also contains dairy and food waste project.

Remember these projects are ones, we are qualified and that we reasonably expect can be in construction within the next 12 to 18 months.

We set a target in March are putting at least 2 million btu in construction this year.

With Polk County, narrowing construction, we're over halfway towards our goal and we remain optimistic that we will hit that goal.

Our advanced development pipeline does not include other earlier stage projects.

As we have mentioned on prior calls we are one of the larger and more experienced operators in this space.

And our integrated platform continues to aid us in discussions as we seek out new projects.

Turning to our fuel station services business as Adam mentioned, we believe we have cycled through some of the inflationary cost pressures and we expect to move to more normalized margin trends.

Like everyone else on clarity and timing for the commercial rollout and deliveries of the new trucks, but believe when it happens. It will result in accelerating adoption and deployment of RMG Flash CMG.

Which will require new fueling station construction service and R&D fuel.

Our renewable power segment currently has 17 electric projects, representing 112, five megawatts of nameplate capacity and continues to provide good optionality.

Besides serving as an inventory of <unk>.

Projects that can potentially be converted to R&D projects.

These electric projects stand to benefit from the proposed <unk> pathway.

Currently three of these projects under construction in the process of being converted to R&D facilities and three others are in advanced development pipeline.

Version to RMG.

The remaining 11 projects stand to benefit from our proposed <unk> pathway.

We await updated guidance from the EPA on this topic later this year.

I'll now turn the call over to Ann.

Ann.

Thank you John and good morning, everyone.

Last night, we filed our earnings press release, which details our quarterly results for the period ending June 32023.

We anticipate filing our 10-Q in the next couple of days.

Net income was $114 $1 million this quarter, but was impacted by the deconsolidation of our Emerald and Sapphire projects, which we'll discuss shortly.

Excluding this one time gain our adjusted net loss for the three months ended June 32023, with $7 $8 million.

G&A costs for the second quarter totaled $13 $7 million with approximately $1 $9 million of that total included stock based compensation, which is noncash.

We reported adjusted EBITDA of $21 4 million for the second quarter compared with $8 7 million in the first quarter.

The difference was primarily the result of approximately $5 7 million.

Monetize credits we sold in the last 10 days of June along with the Mark to market impact of higher RIN prices at the end of the second quarter, plus some normalization in our fuel station services business.