OPAL Fuels Inc.: Form 10-Q/A for the period ended Jun 30, 2024

In this Management's Discussion and Analysis of Financial Condition and Results of Operations section, references to "OPAL", "we", "us", "our", and the "Company" refer to OPAL Fuels Inc. and its consolidated subsidiaries. The following discussion and analysis should be read in conjunction with the Company's unaudited condensed consolidated financial statements as of June 30, 2024 and for the three and six months ended June 30, 2024 and 2023, and the audited consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K, which was filed with the SEC on March 15, 2024. In addition to historical information, this discussion and analysis includes certain forward-looking statements which reflect our current expectations. The Company's actual results may materially differ from these forward-looking statements.

Overview

The Company is a vertically integrated leader in the capture and conversion of biogas into low carbon intensity renewable natural gas (RNG) and Renewable Power. OPAL Fuels is also a leader in the marketing and distribution of RNG to heavy duty trucking and other hard to de-carbonize industrial sectors. RNG is chemically identical to the natural gas used for cooking, heating homes and fueling natural gas engines, but it is produced by recycling harmful methane emissions created by decaying organic waste. We have participated in the biogas-to-energy industry for over 25 years.

Biogas is generated by microbes as they break down organic matter in the absence of oxygen. Biogas is comprised of non-fossil waste gas, with high concentrations of methane, which is the primary component of RNG and the source for combustion utilized by Renewable Power plants to generate electricity. Biogas can be collected and processed to remove impurities for use as RNG (a form of high-Btu fuel) and injected into existing natural gas pipelines as it is fully interchangeable with fossil natural gas. Partially treated biogas can be used directly in heating applications (as a form of medium-Btu fuel) or in the production of Renewable Power. Our principal sources of biogas are (i) landfill gas, which is produced by the decomposition of organic waste at landfills, and (ii) dairy manure, which is processed through anaerobic digesters to produce the biogas.

We also design, develop, construct, operate and service Fueling Stations for trucking fleets across the country that use natural gas to displace diesel as their transportation fuel. We have participated in the alternative vehicle fuels industry for approximately 13 years and have established an expanding network of Fueling Stations for dispensing RNG. In addition, we have recently begun implementing design, development, and construction services for hydrogen fueling stations, and we are pursuing opportunities to diversify our sources of biogas to other waste streams.

As of June 30, 2024, we owned and operated 24 projects, nine of which are RNG projects and 15 of which are Renewable Power projects. As of that date, our RNG projects in operation had a design capacity of 5.2 million MMBtus per year and our Renewable Power projects in operation had a nameplate capacity of 105.8 MW per hour. In addition to these projects in operation, we are actively pursuing expansion of our RNG-generating capacity and, accordingly, have a portfolio of RNG projects in construction as well as a portfolio of projects in development, with six of our current Renewable Power projects being considered candidates for conversion to RNG projects in the foreseeable future.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations is based upon our interim unaudited condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States ("U.S. GAAP") and the rules and regulations of the SEC, which apply to interim financial statements. The preparation of those financial statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenues, expenses and related disclosure of contingent assets and liabilities at the date of our financial statements. Actual results may differ from these estimates under different assumptions and conditions.

Critical accounting policies are those that reflect significant judgments of uncertainties and potentially result in materially different results under different assumptions and conditions. We have described below what we believe are our most critical accounting policies, because they generally involve a comparatively higher degree of judgment in their application. For a detailed description of all our accounting policies, see Note 2. Summary of Significant Accounting Policies, to our condensed consolidated financial statements included herein and the section titled “Critical Accounting Policies and Estimates” contained in Part II, Item 7 of our Annual Report on Form 10-K for the year ended December 31, 2023. There have been no material changes to our critical accounting estimates since our Annual Report on Form 10-K for the year ended December 31, 2023.

Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The significant estimates and assumptions of the Company relate to the useful lives of property, plant and equipment, the value of stock-based compensation and the fair value of derivatives including warrant liabilities, earnout liabilities, put option on a forward purchase agreement, interest rate swaps and commodity swap contracts. Actual results could differ from those estimates.

Key Factors and Trends Influencing our Results of Operations

The principal factors affecting our results of operations and financial condition are the markets for RNG, Renewable Power, and associated Environmental Attributes, and access to suitable biogas production resources. Additional factors and trends affecting our business are discussed in "Risk Factors" elsewhere in this report.

Market Demand for RNG

Demand for our converted biogas and associated Environmental Attributes, including RINs and LCFS credits, is heavily influenced by United States federal and state energy regulations together with commercial interest in renewable energy products. Markets for RINs and LCFS credits arise from regulatory mandates that require refiners and blenders to incorporate renewable content into transportation fuels. The EPA annually sets proposed renewable volume obligations ("RVOs") for D3 (cellulosic biofuel with a 60% greenhouse gas (“GHG”) reduction requirement) RINs in accordance with the mandates established by the Energy Independence and Security Act of 2007. In June 2023, the EPA set RVOs for 2023 through 2025 via a new Set rule. This 3 year RVO is expected to reduce volatility in RIN pricing for the associated period. On the state level, the economics of RNG are enhanced by low-carbon fuel initiatives, particularly well-established programs in California and Oregon (with several other states also actively considering LCFS initiatives similar to those in California, Washington and Oregon). Federal and state regulatory developments could result in significant future changes to market demand for the RINs and LCFS credits we produce. This would have a corresponding impact to our revenue, net income, and cash flow.

Transportation, including heavy-duty trucking, generates approximately 30% of overall CO₂ and other climate-harming GHG emissions in the United States, and transitioning this sector to low and negative carbon fuels is a critical step towards reducing overall global GHG emissions. The adoption rate of RNG-powered vehicles by commercial transportation fleets will significantly impact demand for our products.

We are also exposed to the commodity prices of natural gas and diesel, which serve as alternative fuel for RNG and therefore impact the demand for RNG.

Renewable Power Markets

We also generate revenues from sales of Renewable Power generated by our biogas-to-Renewable Power projects, and associated ISCC Carbon Credits and RECs. ISCC Carbon Credits and RECs exist because of legal and governmental regulatory requirements in Europe and the United States, respectively, and a change in law or in governmental policies concerning Renewable Power, LFG, or ISCC Carbon Credits or RECs could affect the market for, and the pricing of, such power and credits.

We periodically evaluate opportunities to convert existing Renewable Power projects to RNG production. We have been negotiating with several of our landfill and Renewable Power counterparties to enter into arrangements that would enable the LFG resource to produce RNG. Changes in the price we receive for Renewable Power, associated ISCC Carbon Credits and RECs, together with the revenue opportunities and conversion costs associated with converting our LFG sites to RNG production, could have a significant impact on our future profitability.

Regulatory landscape

We operate in an industry that is subject to and currently benefits from environmental regulations. Government policies can increase demand for our products by providing incentives to purchase RNG and Environmental Attributes. These government policies are modified and in flux constantly and any adverse changes to these policies could have a material effect the demand for our products. For more information, see the risk factor in our Annual Report on Form 10-K for the year ended December 31, 2023 titled "The financial performance of our business depends upon tax and other government incentives for the generation of RNG and Renewable Power, any of which could change at any time and such changes may negatively impact our growth strategy." Government regulations have become increasingly stringent and complying with changes in regulations may result in significant additional operating expenses.

Seasonality

We experience seasonality in our results of operations. Sale of RNG may be impacted by higher consumption by some of our customers during summer months. Additionally, the price of RNG is higher during the fall and winter months due to increase in overall demand for natural gas during the winter months. Revenues generated from our renewable electricity projects in the northeast U.S., all of which sell electricity at market prices, are affected by warmer and colder weather, and therefore a portion of our quarterly operating results and cash flows are affected by pricing changes due to regional temperatures. These seasonal variances are managed in part by certain off-take agreements at fixed prices.

Key Components of Our Results of Operations

We generate revenues from the sale of RNG Fuel, Renewable Power, and associated Environmental Attributes, as well as from the construction, fuel supply, and servicing of Fueling Stations for commercial transportation vehicles using natural gas to power their fleets. These revenue sources are presented in our condensed consolidated statements of operations under the following captions:

• RNG Fuel. The RNG Fuel segment includes RNG supply as well as the associated generation and sale of commodity natural gas and environmental credits, and consists of:
• RNG Production Facilities – the design, development, construction, maintenance and operation of facilities that convert raw biogas into pipeline quality natural gas; and
• Our interests in both operating and construction projects.
• Fuel Station Services. Through its Fuel Station Services segment, we provide construction and maintenance services to third-party owners of vehicle Fueling Stations and performs fuel dispensing activities including generation and minting of environmental credits. This segment includes:
• Manufacturing division that builds compact fueling systems and defueling systems;
• Design/Build contracts where the Company serves as general contractor for construction of Fueling Stations, typically structured as Guarantee Maximum Price or fixed priced contracts for customers, generally lasting less than one year;
• Service and maintenance contracts for RNG/CNG Fueling Stations; and
• RNG and CNG Fuel Dispensing Stations - This includes both the dispensing (or sale) of RNG, CNG, and environmental credit generation and monetization. We operate Fueling Stations that dispense both CNG and RNG fuel for vehicles.
• Renewable Power Portfolio. The Renewable Power segment generates Renewable Power and associated Environmental Attributes such as ISCC Carbon Credits and RECs through combustion of biogas from landfills which is then sold to public utilities throughout the United States.

Our costs of sales associated with each revenue category are as follows:

• RNG Fuel. Includes royalty payments to biogas site owners for the biogas we use; service provider costs; salaries and other indirect expenses related to the production process, utilities, transportation, storage, and insurance; and depreciation of production facilities.
• Fuel Station Services. Includes equipment supplier costs; service provider costs; and salaries and other indirect expenses.
• Renewable Power. Includes land usage costs; service provider costs; salaries and other indirect expenses related to the production process; utilities; and depreciation of production facilities.

Selling, general, and administrative expense consists of costs involving corporate overhead functions, including the cost of services provided to us by an affiliate, and marketing costs.

Depreciation and amortization primarily relate to depreciation associated with property, plant, and equipment and amortization of acquired intangibles arising from PPAs and interconnection contracts. We are in the process of expanding our RNG and Renewable Power production capacity and expect depreciation costs to increase as new projects are placed into service.

Concentration of customers and associated credit risk

The following table summarizes the percentage of consolidated accounts receivable, net by customers that equal or exceed 10% of the consolidated accounts receivable, net as of June 30, 2024 and December 31, 2023. No other single customer accounted for 10% or greater of our consolidated accounts receivables in these periods:

(1) Relates to sales of Environmental Attributes under Purchase and Sale agreement with NextEra.

The following table summarizes the percentage of consolidated revenues from customers that equal 10% or greater of the consolidated revenues in the period. No other single customer accounted for more than 10% of consolidated revenues in these periods:

Results of Operations for the three and six months ended June 30, 2024 and 2023:

Operational data

The following table summarizes the operational data achieved for the three and six months ended June 30, 2024 and 2023:

Landfill RNG Facility Capacity and Utilization Summary

(1) Design Capacity for RNG facilities is measured as the volume of feedstock biogas that the facility is capable of accepting at the inlet and processing during the associated period. Design Capacity is presented as OPAL’s ownership share (i.e., net of joint venture partners’ ownership) of the facility and is calculated based on the number of days in the period. New facilities that come online during a quarter are pro-rated for the number of days in commercial operation.

(2) Inlet Design Capacity Utilization is measured as the Volume of Inlet Gas for a period, divided by the total Design Capacity for such period. The Volume of Inlet Gas varies over time depending on, among other factors, (i) the quantity and quality of waste deposited at the landfill, (ii) waste management practices by the landfill, and (iii) the construction, operations and maintenance of the landfill gas collection system used to recover the landfill gas. The Design Capacity for each facility will typically be correlated to the amount of landfill gas expected to be generated by the landfill during the term of the related gas rights agreement. The Company expects Inlet Design Capacity Utilization to be in the range of 75-85% on an aggregate basis over the next several years. Typically, newer facilities perform at the lower end of this range and demonstrate increasing utilization as they mature and the biogas resource increases at open landfills.

(3) Utilization of Inlet Gas is measured as RNG Fuel Volume Produced divided by the Volume of Inlet Gas. Utilization of Inlet Gas varies over time depending on availability and efficiency of the facility and the quality of landfill gas (i.e., concentrations of methane, oxygen, nitrogen, and other gases). The Company generally expects Utilization of Inlet Gas to be in the range of 80% to 90%.

(4) Data not available for the Company's dairy projects, i.e., Sunoma and Biotown.

(5) Utilization of Inlet Gas (%) is lower for the three and six months ended June 30, 2024 primarily due to Emerald RNG project which is in the start up phase as it commenced operations in the fourth quarter of 2023.

(1) Nameplate Capacity for Renewable Power facilities is the manufacturer’s expected capacity at ISO conditions for each facility and may not reflect actual production from the projects, which depends on many variables including, but not limited to, (i) quantity and quality of the biogas, (ii) operational up-time of the facility, including dispatch and maintenance downtime and (iii) actual efficiency of the facility.

(2) Nameplate Capacity Utilization for Renewable Power facilities is measured as Renewable Power Produced divided by Design Capacity for the period. Given (i) built-in un-utilized capacity from historical designs, (ii) availability (a function of higher maintenance requirements compared to RNG facilities) and (iii) commencement of operations of the Emerald RNG facility, which will result in low levels of dispatch for the Arbor Hills facility (which will operate on a standby basis but remain in the operating portfolio), the Company’s Design Capacity Utilization is expected to remain below 50%.

RNG projects

Below is a table setting forth the RNG projects in operation and construction in our portfolio as of June 30, 2024:

(1) Reflects the Company’s ownership share of design capacity for projects that are not 100% owned by the Company (i.e., net of joint venture partners’ ownership). Design capacity is measured as the volume of feedstock biogas that the plant is capable of accepting at the inlet and processing and may not reflect actual production of RNG from the projects, which will depend on many variables including, but not limited to, (i) quantity and quality of the biogas, (ii) operational up-time of the facility and (iii) actual efficiency of the facility.

(2) We record our ownership interests in these projects as equity method investments in our consolidated financial statements.

(3) This project has provisions that will adjust or “flip” the percentage of distributions to be made to us over time, typically triggered by achievement of hurdle rates that are calculated as internal rates of return on capital invested in the project.

(4) Prince William commenced the start-up phase of operations in April 2024.

(5) Expected Commercial Operation Date (“COD”) for commencement of the RNG projects in construction is based on the Company’s estimate as of the date of this report. CODs are estimates and are subject to change as a result of, among other factors out of the Company’s control: (i) regulatory/permitting approval timing, (ii) disruption in supply chains and (iii) construction timing.

(6) Please see Part II, Item 1: Legal Proceedings and Note 17 - Commitments and Contingencies to the financial statements.

(7) The construction of the Cottonwood project began in the second quarter of 2024 and is expected to be completed on a time frame consistent with our other RNG projects - approximately 18-20 months.

Renewable Power Projects

Below is a table setting forth the Renewable Power projects in operation in our portfolio:

(1) Nameplate capacity is the manufacturer’s expected capacity at ISO conditions for each facility and may not reflect actual production from the projects, which depends on many variables including, but not limited to, (i) quantity and quality of the biogas, (ii) operational up-time of the facility and (iii) actual productivity of the facility.

(2) We have determined that some of our Renewable Power projects are currently RNG conversion candidates. The Company identifies suitable RNG conversion candidates based on highest return of capital which is driven by certain factors including, but not limited to (i) the quantity and quality of LFG, (ii) the proximity to pipeline interconnect and (iii) the ability to enter into contracts, including site leases and gas rights agreements, with host sites. The Company may change its decision to convert a Renewable Power Project into an RNG project in the future. The Company believes disclosing Renewable Power conversion candidates provides visibility into the effect of those conversions on the existing Renewable Power portfolio.

(3) Although the RNG conversion is completed, it is currently contemplated that the Arbor Hills Renewable Power plant will continue limited operations on a stand-by, emergency basis through March of 2031.

(4) It is expected to complete construction in the fourth quarter of 2024.

Comparison of the Three and Six Months Ended June 30, 2024 and 2023

The following table presents the period-over-period change for each line item in the Company's statement of operations for the three and six months ended June 30, 2024 and 2023.

(in thousands)

55

Revenues

(in thousands)

(1) Revenues from Environmental Attributes in the RNG Fuel segment relate to revenues earned from sales of RINs and LCFSs. Revenues from RNG marketing in the Fuel Station Services segment relate to fees associated with generation and sales of RINs and LCFSs.

(2) Revenues from Environmental Attributes in the Renewable Power segment include revenues earned from sales of ISCC Carbon Credits and RECs.

RNG Fuel

Revenue from RNG Fuel increased by $8.8 million or 83% for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. This is primarily from a $4.0 million increase from higher volume of sales of RINs, $2.0 million from higher volume of LCFSs sales and a $2.5 million increase from higher RIN pricing compared to the same period prior year.

Revenue from RNG Fuel increased by $19.8 million, or 114%, for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. This is primarily due to an increase of $9.3 million from higher volumes of RINs sold as the Company made a decision to hold the RINs as inventory at hand in 2023, $8.0 million due to higher RIN pricing year over year after the EPA Set Rule was finalized in the second half of 2023, $2.3 million from the sale of LCFSs and an $0.6 million increase in management fees earned from providing services to equity method entities offset by lower brown gas sales due to a decrease in volumes year over year.

Fuel Station Services

Revenue from Fuel Station Services increased by $9.3 million, or 31%, for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. This is primarily due to an increase in revenues from RIN and LCFS minting services of $5.0 million from higher volumes (Emerald, Biotown), a $7.1 million increase in third party RIN sales due to increases in volumes and RIN pricing, a $0.6 million increase in third party sales of LCFSs, an increase of $2.5 million in brown gas sales due to increases in price and volumes, a $0.8 million increase from service revenues offset by a decrease in construction revenues of $6.7 million.

Revenue from Fuel Station Services increased by $25.6 million, or 50%, for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. This is primarily due to an increase in revenues from RIN and LCFS minting services of $9.9 million from higher volumes from new supply from facilities coming online (Emerald, Biotown), a $13.3 million increase in third party RIN sales due to increases in volumes and RIN pricing, an $0.7 million increase in third party sales of LCFSs, an increase of $3.7 million in brown gas sales due to increases in price volumes, $1.0 million increase from service revenues offset by decrease in construction revenues of $2.8 million.

Renewable Power

Revenue from Renewable Power decreased by $2.2 million, or 15%, for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. This is primarily due to loss of revenues of $1.3 million from the conversion of two of our Renewable Power facilities into RNG facilities, $1.3 million from decrease in electricity pricing year over year, an $0.6 million decrease in revenues from sale of ISCC carbon credits offset by increase of $1.0 million revenues from higher volumes at one of our Renewable Power facilities.

Revenue from Renewable Power decreased by $7.5 million, or 25%, for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. This change was attributable primarily to loss of revenues of $2.9 million from the conversion of two of our Renewable facilities into RNG facilities and planned shut down of one of our facilities, $2.3 million of lower revenues from sale of ISCC Carbon Credits and RECs, $2.5 million from decrease in electricity pricing offset by higher volumes.

Cost of sales

RNG Fuel

Cost of sales from RNG Fuel increased by $0.7 million, or 9%, for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. This is primarily due to Prince William coming online in second quarter of 2024.

Cost of sales from RNG Fuel increased by $2.5 million, or 18%, for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. This is primarily due to a $1.0 million increase from royalties on higher environmental credit sales, $0.7 million from Prince William coming online in second quarter of 2024, and an $0.8 million increase in operating expenses such as consumables, gas flare expenses and routine maintenance in the current year compared to prior year.

Fuel Station Services

Cost of sales from Fuel Station Services increased by $3.5 million, or 13%, for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. This is primarily due to an increase of $8.8 million in higher dispensing fees due to higher environmental credit sales offset by savings of $5.5 million in equipment, parts and construction costs, which are in line with the decrease in construction revenues.

Cost of sales from Fuel Station Services increased by $13.5 million, or 28%, for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. This is primarily due to an increase of $15.4 million in higher dispensing fees due to higher environmental credit sales offset by savings of $2.3 million in equipment, parts and construction costs, in line with the decrease in construction revenues.

Renewable Power

Cost of sales from Renewable Power increased by $0.1 million, or 2%, for the three months ended June 30, 2024 compared to the three months ended June 30, 2023.

Cost of sales from Renewable Power increased by $1.0 million, or 6%, for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. This is primarily due to an increase in major maintenance costs and unplanned maintenance at one of our Renewable Power facilities offset by savings from conversion of two of our Renewable Power facilities into RNG facilities and lower royalties and non labor costs.

Project development and startup costs

Project development and startup costs increased by $1.8 million, or 163%, for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. This is primarily due to virtual pipeline costs for Prince William offset by deconsolidation of Emerald and Sapphire in the second quarter of 2023.

Project development and startup costs increased by $0.7 million, or 24%, for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. This is primarily due to virtual pipeline costs for Prince William offset by deconsolidation of Emerald and Sapphire in the second quarter of 2023.

Selling, general, and administrative

Selling, general, and administrative expenses increased by a total of $0.9 million, or 7%, for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. This is primarily due to an increase of $0.5 million in compensation expense and $0.4 million in corporate expenses such as marketing and professional fees.

Selling, general, and administrative expenses increased by a total of $0.5 million, or 2%, for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. This is primarily due to an increase in compensation costs.

Depreciation, amortization, and accretion

Depreciation, amortization, and accretion marginally increased by a total of $0.6 million, or 18%, for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. This is primarily due to depreciation expense on Prince William which became operational in the second quarter of 2024.

Depreciation, amortization, and accretion marginally increased by a total of $0.8 million, or 11%, for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. This is primarily due to depreciation expense on Prince William which became operational in the second quarter of 2024.

Income (loss) from equity method investments

Net income attributable to equity method investments increased by $4.8 million, or 481%, for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. This is primarily attributable to Emerald coming online in the second half of 2023 and higher net income from Pine and Noble Road.

Net income attributable to equity method investments increased by $8.3 million or 2832% for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. This is primarily attributable to Emerald coming online in the second half of 2023 and higher net income from Pine and Noble Road.

Interest and financing expense, net

Interest and financing expenses, net increased by $4.0 million, or 422%, for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. This is primarily due to an increase of $3.5 million in interest expense on the OPAL Term Loan due after the refinancing in third quarter of 2023 resulting in higher borrowing and lower capitalized interest, an $0.3 million increase in amortization of deferred financing costs, and higher interest on finance leases.

Interest and financing expenses, net increased by $7.4 million, or 460%, for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. This is primarily due to an increase of $6.3 million in interest expense on the OPAL Term Loan due after the refinancing in third quarter of 2023 resulting in higher outstanding debt balance and lower capitalized interest, a $1.1 million increase in commitment fees and other fees, an $0.6 million increase in interest on finance leases and amortization of deferred financing costs, $0.8 million of lower interest income offset by savings of $1.1 million of interest on a convertible note payable which was repaid in full in the third quarter of 2023 and savings of $0.3 million of interest on the Senior Secured Credit Facility as the loan was repaid in full in first quarter of 2023.

Loss on debt extinguishment

On May 30, 2023, OPAL Intermediate Holdco 2 assigned to Paragon its rights and obligations under the OPAL Term Loan II. The joint venture partner of Paragon reimbursed the Company $826 as its portion of the transaction costs incurred.

The Company expensed the remaining deferred financing costs of $1,895 as loss on debt extinguishment in its condensed consolidated statement of operations for the three and six months ended June 30, 2023. There was no loss on debt extinguishment for the three and six months ended June 30, 2024.

Change in fair value of derivatives, net

Change in fair value of derivatives, net decreased by $0.4 million, or 33%, for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. This is primarily attributable to $0.8 million of gain recorded on termination of interest rate swaps in June 2023 offset by $0.4 million of lower gain on earnout liabilities in June 2024.

Change in fair value of derivatives, net decreased by $3.9 million, or 77%, for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. This is primarily attributable to $3.4 million lower gain on earnout liabilities year over year, an $0.8 million gain recorded on termination of interest rate swaps in 2023 offset by $0.3 million of lower loss on a put option.

Other income

Other income decreased by $122.7 million, or 100%, for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. This is primarily attributable to $122.9 million gain recorded on deconsolidation of Emerald and Sapphire in 2023 offset by $0.3 million higher gain on transfer of non-financial assets to a vendor.

Other income decreased by $121.9 million, or 99%, for the six months ended June 30, 2024 compared to the six months ended June 30, 2023. This is primarily attributable to $122.9 million gain recorded on deconsolidation of VIEs in 2023, offset by $0.7 million higher gain on transfer of non-financial assets to a vendor, and $0.3 million lower loss on warrant exchange compared to prior year.

Net (loss) income attributable to redeemable non-controlling interests

Net income attributable to redeemable non-controlling interests decreased by $94.2 million, or 101%, for the three months ended June 30, 2024 compared to the three months ended June 30, 2023. The net income for the three months ended June 30, 2024 and 2023 reflects the portion of earnings belonging to OPAL Fuels equity holders. The decrease is primarily attributable to lower net income in the current period compared to the same prior-year period.

Net (loss) income attributable to redeemable non-controlling interests decreased by $87.6 million, or 103%, for the six months ended June 30, 2024 compared to the six months ended June 30, 2023, and reflects the portion of earnings belonging to OPAL Fuels equity holders. The decrease is primarily attributable to lower net income in the current period compared to the same prior-year period.

Net income (loss) attributable to non-redeemable non-controlling interests

Net income (loss) attributable to non-redeemable non-controlling interests increased by $0.4 million, or 207%, for the three months ended June 30, 2024 compared to three months ended June 30, 2023. This reflects the joint venture partners' income (loss) in certain RNG facilities in which we sold a portion of our ownership interests but are consolidated in our financial statements. These entities for the three months ended June 30, 2024 were Sunoma and Central Valley. The entities for the three months ended June 30, 2023 were Sunoma, Central Valley and two months of Emerald and Sapphire. The increase was primarily attributable to higher net income earned by Sunoma and lower net loss upon deconsolidation of Emerald and Sapphire in May 2023.

Net income (loss) attributable to non-redeemable non-controlling interests for the six months ended June 30, 2024 increased by $0.7 million or 141%, compared to six months ended June 30, 2023. This reflects the joint venture partners' income (loss) in certain RNG facilities in which we sold a portion of our ownership interests but are consolidated in our financial statements. These entities for the six months ended June 30, 2024 were Sunoma and Central Valley. The entities for the six months ended June 30, 2023 included Sunoma and Central Valley for the full six months and Emerald and Sapphire up to May 30, 2023. The increase was primarily attributable to higher net income earned by Sunoma and lower net loss upon deconsolidation of Emerald and Sapphire in May 2023.

Dividends on redeemable preferred non-controlling interests

Redeemable preferred non-controlling interests decreased by $0.2 million for the three months ended June 30, 2024 compared to three months ended June 30, 2023. They carry an 8% dividend payable quarterly. This decrease is primarily due to lower interest accrued on paid-in-kind interest in the current period compared to the same prior-year period as the dividends are being paid quarterly instead of being paid-in-kind.

Redeemable preferred non-controlling interests decreased by $0.4 million for the six months ended June 30, 2024 compared to six months ended June 30, 2023. They carry an 8% dividend payable quarterly. This decrease is primarily due to lower interest accrued on paid-in-kind interest in the current period compared to the same prior-year period as the dividends are being paid quarterly instead of being paid-in-kind.

Liquidity and Capital Resources

Liquidity

As of June 30, 2024, our liquidity consisted of cash and cash equivalents including restricted cash of $22.4 million and $8.6 million of short term investments. Additionally, we have availability of $238.4 million under the delayed draw term loan and $36.3 million under the revolver facility under the OPAL Term Loan.

We expect that our available cash together with our other assets, expected cash flows from operations, available lines of credit under various debt facilities and access to expected sources of capital will be sufficient to meet our existing commitments for a period of at least twelve months from the date of this report. Any reduction in demand for our products or our ability to manage our production facilities may result in lower cash flows from operations which may impact our ability to make investments and may require changes to our growth plan.

To fund future growth, we anticipate seeking additional capital through equity or debt financings. The amount and timing of our future funding requirements will depend on many factors, including the pace and results of our project development efforts. We may be unable to obtain any such additional financing on acceptable terms or at all. Our ability to access capital when needed is not assured and, if capital is not available when, and in the amounts needed, we could be required to delay, scale back or abandon some or all of our development programs and other operations, which could materially harm our business, prospects, financial condition, and operating results.

As of June 30, 2024, we had total indebtedness excluding deferred financing costs of $233.3 million in principal amount which consists of $211.6 million under the OPAL Term Loan and $21.7 million under Sunoma Loan.

As part of our operations we have arrangements for office space for our corporate headquarters under the Administrative Services Agreement as well as operating leases for office space, warehouse space, and our vehicle fleet.

We intend to make payments under our various debt instruments when due and pursue opportunities for earlier repayment and/or refinancing if and when these opportunities arise.

See Note 7. Borrowings, to our condensed consolidated financial statements.

Cash Flows

The following table presents the Company's cash flows for the six months ended June 30, 2024 and 2023:

(in thousands)

Net Cash Provided by Operating Activities

Net cash provided by operating activities for the six months ended June 30, 2024 was $14.3 million, an increase of $6.5 million compared to $7.8 million for the six months ended June 30, 2023. The increase in cash provided by operating activities was attributable to higher operating income year over year driven by increase in revenues, increase of $8.7 million from distributions from equity method investments offset by negative working capital changes.

Net Cash Used in Investing Activities

Net cash used in investing activities for the six months ended June 30, 2024 was $54.1 million, an increase of $25.9 million compared to the $28.2 million used in investing activities for the six months ended June 30, 2023. This was primarily driven by decrease in cash invested in short term investments of $46.7 million, a $4.8 million decrease in distributions from equity method investments ($8.7 million recorded as part of cash flows from operating activities), $8.6 million in contributions to equity method investments offset by a decrease in cash from deconsolidation of VIEs of $11.9 million in 2023, and lower payments made for the construction of various RNG generation and dispensing facilities of $22.3 million in 2024 compared to 2023.

Net Cash Provided by Financing Activities

Net cash provided by financing activities for the six months ended June 30, 2024 was 15.0 million, an increase of $44.7 million compared to the net cash used in financing activities of $29.7 million for the six months ended June 30, 2023. This increase was primarily driven by a $15.0 million increase in proceeds from the OPAL Term Loan, a decrease of $36.6 million in repayments on the Senior Secured Facility and the OPAL Term Loan facilities, a decrease of $16.4 million paid on termination of put options in 2023, offset by an increase of $7.9 million in payments of preferred dividends, a decrease in proceeds from non-controlling interests of $12.8 million, an increase of $0.8 million in repayment on the Sunoma Loan, an increase of $0.6 million in taxes paid on vesting of equity awards, and a decrease of $0.8 million in reimbursement of financing costs by a joint venture partner.

Capital expenditures and other cash commitments

We require cash to fund our capital expenditures, operating expenses and working capital and other requirements, including costs associated with fuel sales; outlays for the design and construction of new Fueling Stations and RNG production facilities; debt repayments and repurchases; maintenance of our electrification production facilities supporting our operations, including maintenance and improvements of our infrastructure; supporting our sales and marketing activities, including support of legislative and regulatory initiatives; any investments in other entities; any mergers or acquisitions, including acquisitions to expand our RNG production capacity; pursuing market expansion as opportunities arise, including geographically and to new customer markets; and to fund other activities or pursuits and for other general corporate purposes.

As of June 30, 2024, we anticipate spending approximately $237.4 million in capital expenditures for the next 12 months for projects and fuel stations currently under construction and our share of contributions in our equity method investment projects. These expenditures do not include any expected contributions from our joint venture partners and primarily relate to our development and construction of new renewable energy facilities and the purchase of equipment used in our Fueling Station services and Renewable Power operations.

In addition to the above, we also have lease commitments on our vehicle fleets and office leases and quarterly amortization payment obligations under various debt facilities. Please see Note 7. Borrowings and Note 8. Leases to our condensed consolidated financial statements for additional information.

We believe that our cash and cash equivalents on hand, anticipated cash flows from operations and our access to expected sources of capital will be sufficient to meet our anticipated funding needs. We continue to pursue additional funding opportunities for growth and streamlining of our capital structure.

The Company is not required to provide the information required by this Item because it is a “smaller reporting company.”

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Co-Chief Executive Officers and our Interim Chief Financial Officer (our co-principal executive officers and principal financial officer, respectively), evaluated, as of the end of the period covered by this Quarterly Report on Form 10-Q, the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act. The term “disclosure controls and procedures,” as defined in the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosures. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

Based on that evaluation of our disclosure controls and procedures as required by Rules 13a-15(b) or 15d-15(b) under the Exchange Act, as of June 30, 2024, our Co-Chief Executive Officers and Interim Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective for the period covered by this report.

Changes in Internal Controls over Financial Reporting

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) was identified in the evaluation required by Rule 13a-15(d) or 15d-15(d) under the Exchange Act during the quarter ended June 30, 2024 that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

There have been no material changes from the “Risk Factors” previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the SEC on March 15, 2024. The risks described in the Annual Report on Form 10-K for the year ended December 31, 2023 are not the only risks facing us. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.