# OPAL Fuels Inc. (OPAL) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from OPAL Fuels Inc.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1842279/000184227923000009/wdq-20221231.htm
Accession: 0001842279-23-000009
Filing date: 2023-03-29
Report date: 2022-12-31
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/OPAL/
All MD&A years: /company/OPAL/mda/
Previous year: /company/OPAL/mda/fy2021/ (FY 2021)
Next year: /company/OPAL/mda/fy2023/ (FY 2023)

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 our consolidated financial statements and related notes set forth in Item 8. Financial Statements and Supplementary Data and the risk factors identified in Item 1A. Risk Factors of this Annual Report. For further discussion regarding our results of operations for the year ended December 31, 2021 as compared to the year ended December 31, 2020, refer to the audited consolidated financial statements and notes thereto included in the Company's Current Report on Form 8-K, which was filed with Securities and Exchange Commission (the "SEC") on July 27, 2022. 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

We are a renewable energy company specializing in the capture and conversion of biogas for the (i) production of RNG for use as a vehicle fuel for heavy and medium-duty trucking fleets, (ii) generation of electricity generated from renewable sources ("Renewable Power") for sale to utilities, (iii) generation and sale of Environmental Attributes (as defined below) associated with RNG and Renewable Power, and (iv) sales of RNG as pipeline quality natural gas. 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. The Biogas Conversion Projects currently use LFG and dairy manure as the source of the biogas. 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. The term “Environmental Attributes” refers to federal, state and local government incentives in the United States, provided in the form of renewable identification numbers (“RINs,”) RECs, low carbon fuel standard (“LCFS”) credits, rebates, tax credits and other incentives to end users, distributors, system integrators and manufacturers of renewable energy projects, that promote the use of renewable energy. We separately design, develop, construct, operate and service Fueling Stations for vehicle fleets across the country that dispense RNG and/or CNG to displace diesel as a fleet transportation fuel.

As of the date of this report, we owned and operated 25 projects, seven of which are RNG projects and 18 of which are Renewable Power Projects. As of that date, our RNG projects in operation had a design capacity of 3.9 million MMBtus per year and our Renewable Power Projects in operation had a nameplate capacity of 118.6 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 or in development, with four of our current Renewable Power Projects being considered candidates for conversion to RNG projects in the foreseeable future.

The Company was formerly known as Arclight Clean Transition Corp II ("Arclight"), which was a blank check company incorporated in Cayman Islands on January 13, 2021. Arclight was formed for the purpose of effecting a merger, share exchange, asset acquisition, reorganization or similar business combination with one or more businesses. OPAL Fuels LLC was formed in December 2020 as a wholly owned subsidiary of OPAL HoldCo under the laws of the State of Delaware. On December 31, 2020, Fortistar LLC and certain of its affiliated entities contributed their respective ownership interests in the following legal entities to OPAL Fuels in a common-control reorganization: TruStar Energy Holdings LLC, Fortistar RNG LLC, Fortistar Methane 3 Holdings LLC, Fortistar Methane 3 LLC, Fortistar Contracting LLC, and Fortistar Methane 4 LLC. On December 2, 2021, the Company, OPAL Holdco and OPAL Fuels entered into the Business Combination Agreement.

Business combination

On July 21, 2022, we completed the Business Combination. After giving effect to the Business Combination, the redemption of public shares as described below, the consummation of the related PIPE investment, and the separation of the former ArcLight units, there were (i) 25,671,390 shares of our Class A common stock issued and outstanding, (ii) 144,399,037 shares of our Class D common stock issued and outstanding, (iii) no shares of Class B common stock, par value $0.0001 per share (“Class B common stock”) issued and outstanding (shares of Class B common stock do not have any economic value but entitle the holder thereof to one vote per share) and (iv) no shares of our Class C common stock, par value $0.0001 per share, (“Class C common stock”) issued and outstanding (shares of Class C common stock entitle the holder thereof to five votes per share). The Class A common stock and warrants commenced trading on the Nasdaq Capital Market under the symbols “OPAL” and “OPALW,” respectively, on July 22, 2022.

57

Recent developments

Warrant exchange

On November 18, 2022, the Company announced the commencement of the Offer and consent solicitation relating to its outstanding (i) Public Warrants, and (ii) private placement warrants to purchase shares of Class A common stock (the “Private Placement Warrants”) and together with the public warrants, the (“Warrants”). The Company offered all holders of the warrants the opportunity to receive 0.250 shares of Class A common stock in exchange for each outstanding warrant tendered by the holder and exchanged pursuant to the Offer. Concurrently with the Offer, the Company solicited consents from holders of the warrants to amend the Warrant Agreement to permit the Company to require that each warrant that is outstanding upon the closing of the Offer be exchanged for 0.225 shares of Class A common stock, which is a ratio 10% less than the exchange ratio applicable to the Offer (such amendment, the “Warrant Amendment”).

On December 22, 2022, the Company completed the exchange offer and issued 3,309,296 shares of Class A common stock in exchange for the warrants tendered in the Offer. Pursuant to the Warrant Amendment dated December 21, 2022, the Company effected the Post-Offer Exchange and issued 497,080 shares of Class A common stock. As a result of the completion of the Offer and the Post-Offer Exchange, there are no outstanding warrants. Accordingly, the public warrants were suspended from trading on the Nasdaq and delisted.

UPS Agreement

On December 15, 2022, the Company entered into the UPS Agreement pursuant to which the Company will provide operations and maintenance services to 51 UPS renewable natural gas dispensing stations across the United States. Under the terms of the agreement, the Company will receive an amount based on an agreed price per gas gallon equivalent dispensed at each station.

Senior Secured Credit Facility

On December 19, 2022, FM3, an indirect subsidiary of the Company, which is the borrower under the Senior Secured Credit Facility, dated as of September 21, 2015, provided by a lender group led by MUFG Union Bank Ltd, as administrative agent, and guaranteed by certain direct subsidiaries of FM3, and Opal Fuels, a direct subsidiary of the Company, and the other parties to the Senior Secured Credit Facility entered into the FM3 Amendment. The FM3 Amendment amended the Senior Secured Credit Facility, among other things, to (a) extend the maturity date of the obligations thereunder from December 20, 2022 to March 20, 2023, (b) permit Opal Fuels to purchase the rights and obligations of certain exiting lenders at par, (c) prepay a portion of the outstanding loans made by the remaining lenders and (d) permit the release of certain project company subsidiaries of FM3 from the collateral securing the obligations under the Senior Secured Credit Facility. Upon consummation of the FM3 Amendment, Opal Fuels holds approximately $45,000 of the outstanding loans under the FM3 Credit Agreement as an affiliate lender. On March 20, 2023, the Company repaid in full the remaining outstanding loan of $22,750.

OPAL Term Loan II

On August 4, 2022, OPAL Fuels Intermediate Holdco 2, an indirect wholly-owned subsidiary the Company, entered into the OPAL Term Loan II with a syndicate of lenders. The indebtedness is guaranteed by certain of the direct and indirect subsidiaries of OPAL Intermediate Holdco 2. The OPAL Term Loan II provides for an approximately two year DDTL Facility of up to a maximum aggregate principal amount of $100,000 and the DSR Facility of up to a maximum aggregate principal amount of $5,000. The proceeds of the DDTL Facility are to be used to fund a portion of the construction of the RNG projects owned, either in full or through a joint venture with a third party, by the subsidiary guarantors and the proceeds of the DSR Facility are to be used solely to satisfy the balance to be maintained in the debt service reserve account. In connection with the transaction, the Company paid $2,200 as financing fees to the lenders and incurred $1,376 as third party fees.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations is based upon our interim unaudited 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

58

reported amounts of assets and liabilities, revenues, expenses and warrants 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 Significant Accounting Policies, to our consolidated financial statements included herein.

Revenue Recognition

Renewable Power

We sell Renewable Power produced from LFG fueled power plants to utility companies through our PPAs. Revenue is recognized based on contract specified rates per MWh when delivered to the customer, as this considered to be completion of the performance obligation. Certain PPAs contain a lease element which we account for as operating lease revenue on a straight-line basis over the lease term. The Company utilizes commodity swap contracts to hedge against the unfavorable price fluctuations in market prices of electricity. The Company does not apply hedge accounting to these contracts. As such, unrealized and realized gain (loss) is recognized as component of Renewable Power revenues in the consolidated statement of operations.

Gas — Fuel Purchase Agreements

We own Fueling Stations for use by customers under fuel sale agreements. We bill these customers at an agreed upon price for each gallon sold and recognize revenue based on the amounts invoiced in according with the “right to invoice” practical expedient. These contracts may contain an embedded lease of the equipment which we account for as operating lease revenue. For some public stations where there is no contract with the customer, we recognize revenue at the point in time that the customer takes control of the fuel.

Interstate Gas Pipeline Delivery

We have agreements with two natural gas producers whereby we are contracted to transport the producers’ gas to an agreed delivery point on an interstate gas pipeline via our RNG gathering system. Revenue is recognized over time using the output method which is based on quantity of natural gas transported.

Environmental Attributes

We generate RECs, RINs, and LCFS credits. These Environmental Attributes are sold to third parties that utilize these credits in order to comply with federal and state requirements. Revenue is recognized at the point in time when the credits are transferred to and accepted by the third party buyer.

Operation and Maintenance

We have operating and maintenance agreements in which we are contracted to operate, maintain, and repair landfill site gas collection systems. Revenue is based on the volume of per million British thermal units (“MMBtu”) of landfill gas collected and the MWhs produced at that site. This revenue is recognized as Renewable Power revenue when landfill gas is collected and Renewable Power is delivered. In addition, we have O&M agreements in which we are contracted to maintain and repair Fueling Stations. Revenue is based on the volumes of GGEs of gas dispensed at the site. This revenue is recognized as Fuel Station Services revenue when the site dispenses volumes.

Construction Type Contracts — Third Party

We have various fixed price contracts for the construction of fueling stations for customers. Revenue from these contracts, including change orders, are recognized over time, with progress measured by the percentage of cost incurred to date to estimated total cost for each contract.

Impairment of Goodwill and Long-Lived Assets

59

Impairment of Goodwill

When a business is acquired, goodwill is recognized to reflect any future economic benefits that are not separately recognized, such as synergies. For purposes of impairment testing, GAAP requires goodwill to be allocated to reporting unit(s) at the acquisition date and to be tested for impairment at least annually, and in between annual tests whenever events or changes in circumstances indicate that the respective reporting unit’s fair value is less than its carrying value. Significant judgment is required when identifying the reporting units for goodwill allocation, during our assessment of relevant events and circumstances for qualitative impairment indicators, and when estimating the undiscounted cash flows of reporting unit(s) for quantitative impairment assessments.

Our goodwill impairment assessment is performed during the fourth quarter of each year or at the time facts or circumstances indicate that a reporting unit’s goodwill may be impaired. In conformity with GAAP, we generally first perform a qualitative assessment over whether it is more likely than not that a reporting unit’s fair value is less than its carrying value to determine if a quantitative assessment is required. If, after performing the qualitative assessment, we conclude it is more likely than not that the fair value of the reporting unit is less than its carrying value, then a quantitative test is required. Our qualitative assessment includes evaluation of relevant events and circumstances, such as, macroeconomic conditions, industry and market considerations, cost factors, overall performance, and other relevant events.

As part of our quantitative assessment, we estimate a reporting unit’s fair value based on the income approach. With this approach, the fair value measurement is based on significant inputs that are not observable in the market and thus the fair value measurement is categorized within Level 3 of the fair value hierarchy. Our assumptions include future cash flow projections, a discount rate range based on the weighted average cost of capital, and a terminal value based on a range of terminal earnings before interest, taxes, depreciation, and amortization.

Impairment of Long-Lived Assets

Our long-lived assets held and used with finite useful lives including plant equipment, buildings, patents, and PPAs are reviewed for impairment whenever events or changes in circumstances indicate that the asset group may not be recoverable. In determining the asset group, we assess the interdependency of revenues between assets, shared cost structures, the interchangeability of assets used in operations, and how assets are managed and utilized by the business. Events that may trigger a recoverability assessment include a significant adverse change in the extent or manner in which the long-lived asset group is being used or in its physical condition, and the expectation that, more likely than not, the long-lived asset or asset group will be sold or otherwise disposed of significantly before the end of its previously estimated useful life. Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of an asset group to future net undiscounted cash flows expected to be generated by the asset group. Our cash flow estimates reflect conditions and assumptions that existed as of the measurement date which is the same as the triggering event date. The assets are considered recoverable and an impairment loss is not recognized when the undiscounted net cash flows exceed the net carrying value of the asset group. If the assets are not recoverable, then an impairment loss is recognized to the extent that the carrying value of the asset group exceeds its fair value. We base the fair value of our assets or asset groups off of the estimated discounted future cash flows using market participant assumptions. Assets disposed of are reported at the lower of the carrying amount or fair value less selling costs. Significant judgment is required when determining asset group composition, during our assessment of relevant events and circumstances, when determining an appropriate discount rate, and when estimating the undiscounted and discounted future cash flows of the asset group.

Based on our assessment for the year ended December 31, 2022, there is no impairment recorded on our Plant, Property and Equipment.

Fair Value Measurements

The objective of a fair value measurement is to estimate the exit price, which is the price that would be received to sell an asset or paid to transfer a liability that the Company holds, in an orderly market transaction at the measurement date. We follow GAAP guidance which establishes a three-tier hierarchy for inputs used in fair value measurements, as well as prioritizes valuation techniques that maximize the use of observable inputs and minimizes the use of unobservable inputs. In summary, level 1 inputs are considered the most observable inputs and are more specifically the unadjusted quoted price for identical assets or liabilities in an active market the Company has access to. Level 2 inputs are considered less observable inputs such as quoted prices for similar assets or liabilities in an active market the Company has access to. Lastly, level 3 inputs are unobservable inputs in which little to no market activity exists for the asset or liability at the

60

measurement date. As such, level 3 estimates are subject to a more significant level of estimation uncertainty. Furthermore, when multiple inputs are used and are categorized in different levels of the input hierarchy, then the fair value measurement in its entirety is categorized in the same level as its lowest level input that is significant to the fair value measurement. Our assessment of the significance of an input to a fair value measurement requires judgment and may affect the fair value measurement’s placement in the fair value hierarchy.

Refer to Note 10. Derivative Financial Instruments and Fair Value Measurements, to our consolidated financial statements, for details on our assets and liabilities regularly recorded at fair value and the respective placements in the fair value hierarchy.

Income Taxes

The Company accounts for income taxes in accordance with ASC Topic 740, Accounting for Income Taxes (“ASC Topic 740”), which requires the recognition of tax benefits or expenses on temporary differences between the financial reporting and tax bases of its assets and liabilities by applying the enacted tax rates in effect for the year in which the differences are expected to reverse. Such net tax effects on temporary differences are reflected on the Company’s consolidated balance sheets as deferred tax assets and liabilities. Deferred tax assets are reduced by a valuation allowance when the Company believes that it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized. The Company calculates the interim tax provision in accordance with the provisions of ASC Subtopic 740-270, Income Taxes; Interim Reporting. For interim periods, the Company estimates the annual effective income tax rate and applies the estimated rate to the year-to-date income or loss before income taxes.

Refer to Note 16. Income taxes, to our consolidated financial statements, for additional information.

Emerging Growth Company Status

We are an emerging growth company as defined in the JOBS Act. The JOBS Act provides emerging growth companies with certain exemptions from public company reporting requirements for up to five fiscal years while a company remains an emerging growth company. As part of these exemptions, we need only provide two fiscal years of audited financial statements instead of three, we have reduced disclosure obligations such as for executive compensation, and we are not required to comply with auditor attestation requirements from Section 404(b) of the Sarbanes-Oxley Act regarding our internal control over financial reporting. Additionally, the JOBS Act has allowed us the option to delay adoption of new or revised financial accounting standards until private companies are required to comply with new or revised financial accounting standards.

Use of Estimates

The preparation of the 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 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

61

("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. The Environmental Protection Agency's issuance of timely and sufficient annual RVOs to accommodate the RNG industry's growing production levels is necessary to stabilize the RIN market.The EPA is required to set RVOs for 2023 and beyond and the EPA introduced proposed Set rule in December 2022 with rule finalization expected in June 2023. Until the rules and RVOs are finalized, this may create additional uncertainty as to RIN pricing. 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 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.

Commercial transportation, including heavy-duty trucking, generates approximately 30% emissions of overall CO₂ and other climate-harming GHGs 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 RECs and Renewable Power generated by our biogas-to-Renewable Power projects. RECs exist because of legal and governmental regulatory requirements, and a change in law or in governmental policies concerning Renewable Power, landfill gas ("LFG"), or the sale of RECs could affect the market for, and the pricing of, the RECs that we generate through production at our Biogas Conversion Projects. We periodically evaluate opportunities to convert existing biogas-to-Renewable Power projects to RNG production. This strategy has been an increasingly attractive avenue for growth when RNG from landfills become eligible for D3 RINs. We have been negotiating with several of our Renewable Power off-takers to enter arrangements that would free up the LFG resource to produce RNG. Changes in the price we receive for RECs and Renewable Power, 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 our risk factor 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.

Impact of COVID-19

In response to the COVID-19 pandemic, we instituted a safety committee that oversees our compliance with federal, state, and local government mandates, and ensures that the Company adheres to Centers for Disease Control guidelines to maintain safe working conditions for our employees. Some of the protocols we implemented include limiting in-person work to essential personnel and performing temperature checks. Since March 2020, where practicable, our employees have worked remotely and minimized travel and other non-essential contact. Additionally, we are providing our employees with COVID-19 testing at no cost and personal protective equipment for their safety and well-being.

62

As of the date of this report, the COVID-19 pandemic has had a relatively minimal economic impact on our results of operations.

The duration and future economic severity of the COVID-19 remains uncertain, and our results of operations and financial condition could potentially face material adverse effect(s) in the future due to COVID-19.

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 statement of operations under the following captions:

•RNG Fuel. The RNG Fuel segment includes RNG supply and dispensing activities 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

◦Included here are the Company's interests in both operating and construction projects.

◦RNG and CNG Fuel Dispensing Stations - This includes both the dispensing (or sale) of RNG, commodity natural gas, and environmental credit generation and monetization. The Company operates Fueling Stations that dispense both CNG and RNG fuel for vehicles.

•Fuel Station Services. Through its Fuel Station Services segment, the Company provides construction and maintenance services to third-party owners of Fueling Stations. This segment includes:

◦Service and maintenance contracts for RNG/CNG Fueling Stations.

◦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.

•Renewable Power Portfolio. The Renewable Power portfolio segment generates Renewable Power through combustion of biogas from landfills and digester gas collection systems which is then sold to public utilities throughout the United States. The Renewable Power portfolio operates primarily in Southern California.

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 December 31, 2022 and 2021. No other single customer accounted for 10% or greater of our consolidated accounts receivable,net as of December 31, 2022 and 2021.

63

[[GREPCENT_TABLE]]
[["","","December 31, 2022","","December 31, 2021"],["Customer A","","16","%","","11","%"],["Customer B","","29","%","","\u2014","%"],["Customer D","","\u2014","%","","15","%"]]
[[/GREPCENT_TABLE]]

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):

[[GREPCENT_TABLE]]
[["","","Twelve Months Ended December 31,"],["","","2022","","2021"],["Customer A","","14","%","","16","%"],["Customer B","","35","%","","\u2014","%"],["Customer C","","\u2014","%","","11","%"],["Customer D","","\u2014","%","","18","%"]]
[[/GREPCENT_TABLE]]

Results of Operations for the years ended December 31, 2022 and 2021:

Operational data

The following table summarizes the operational data achieved for the years ended December 31, 2022 and 2021:

[[GREPCENT_TABLE]]
[["","","Twelve Months Ended December 31,"],["","","2022","","2021"],["RNG Fuel volume produced (Million MMBtus)","","2.2","","","1.6"],["RNG Fuel volume sold (Million GGEs)","","29.4","","","20.8"],["Total volume delivered (Million GGEs)","","115.9","","","96.4"]]
[[/GREPCENT_TABLE]]

RNG projects

Below is a table setting forth the RNG projects in operation and construction in our portfolio:

64

[[GREPCENT_TABLE]]
[["","OPAL's Share of Design capacity (MMbtus per year) (1)","Source of bio gas","Ownership (2)"],["RNG projects in operation:"],["Greentree","1,061,712","","LFG","100%"],["Imperial","1,061,712","","LFG","100%"],["New River","663,570","","LFG","100%"],["Noble Road (3)","464,499","","LFG","50%"],["Biotown (3)","48,573","","Dairy","10%"],["Pine Bend (3)","424,685","","LFG","50%"],["Sunoma","192,350","","Dairy","90%"],["Sub total","3,917,101"],["RNG projects in construction:"],["Prince William","1,725,282","","LFG","100%"],["Hilltop","255,500","","Dairy","100%"],["Vander Schaaf","255,500","","Dairy","100%"],["Emerald","1,327,140","","LFG","50%"],["Sapphire","796,284","","LFG","50%"],["New England","318,514","","LFG","100%"],["Sub total","4,678,220"],["Total","8,595,321"]]
[[/GREPCENT_TABLE]]

(1) The Design capacity represents the Company's proportional ownership in the project. Design capacity may not reflect actual production of RNG from the projects, which will depend on many variables including, but not limited to, quantity and quality of the biogas, operational up-time of the facility, and actual productivity of the facility.

(2) Certain projects have 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.

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

Renewable Power Projects

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

65

[[GREPCENT_TABLE]]
[["","Nameplate capacity (MW per hour) (1)","RNG conversion candidate","Stage of RNG conversion"],["California 1","5.2","","Yes","In Advanced Development Pipeline"],["California 2","6.1","","No","N/A"],["California 3","3.0","","No","N/A"],["California 4","3.2","","No","N/A"],["California 5","1.8","","No","N/A"],["California 6","1.6","","No","N/A"],["California 7","6.5","","No","N/A"],["California 8","6.5","No","N/A"],["Florida","2.9","No","N/A"],["Massachusetts 2","3.6","","No","N/A"],["Michigan 1E(2)","28.9","","Yes","In Construction"],["Michigan 3","6.3","","Yes","In Advanced Development Pipeline"],["New York","5.9","","No","N/A"],["North Carolina 1","14.4","","Yes","In Advanced Development Pipeline"],["Pennsylvania","8.0","","No","N/A"],["Prince William 1E (3)","1.9","","Yes","In Construction"],["Prince William 2E (4)","4.8","Yes","In Construction"],["Virginia - Richmond","8.0","","Yes","In Advanced Development Pipeline"],["Total","118.6"]]
[[/GREPCENT_TABLE]]

(1) Nameplate capacity is the maximum permitted output for each facility and may not reflect actual MW production from the projects, which depends on many variables including, but not limited to, quantity and quality of the biogas, operational up-time of the facility, and actual productivity of the facility.

(2) See RNG Projects Table above, reference “Michigan 1” under “RNG Projects In Construction.” It is currently contemplated that the Michigan 1E renewable power plant will continue limited operations on a stand-by, emergency basis through March of 2031.

(3) See RNG Projects Table above, reference “Prince William” under “RNG Projects In Construction.”

(4) See RNG Projects Table above, reference “Prince William” under “RNG Projects In Construction.”

66

Comparison of the Years Ended December 31, 2022, and 2021

The following table presents the period-over-period change for each line item in the Company's consolidated statements of operations for the twelve months ended months ended December 31, 2022 and 2021 .

[[GREPCENT_TABLE]]
[["","","Twelve Months Ended December 31,","","$ Change","","% Change"],["(in thousands)","","2022","","2021"],["Revenues:"],["RNG fuel","","$","126,830","","","$","70,360","","","$","56,470","","","80","%"],["Fuel station services","","69,240","","","50,440","","","18,800","","","37","%"],["Renewable Power","","39,461","","","45,324","","","(5,863)","","","(13)","%"],["Total revenues","","235,531","","","166,124","","","69,407","","","42","%"],["Operating expenses:"],["Cost of sales - RNG fuel","","78,953","","","41,075","","","37,878","","","92","%"],["Cost of sales - Fuel station services","","61,514","","","42,838","","","18,676","","","44","%"],["Cost of sales - Renewable power","","31,580","","","31,152","","","428","","","1","%"],["Selling, general, and administrative","","48,569","","","29,380","","","19,189","","","65","%"],["Depreciation, amortization, and accretion","","13,136","","","10,653","","","2,483","","","23","%"],["Total expenses","","233,752","","","155,098","","","78,654","","","51","%"],["Operating income","","1,779","","","11,026","","","(9,247)","","","(84)","%"],["Other income (expense)"],["Interest and financing expense, net","","(6,640)","","","(7,467)","","","827","","","11","%"],["Change in fair value of derivative instruments, net","","33,081","","","99","","","32,982","","","333","%"],["Other income","","1,943","","","\u2014","","","1,943","","","100","%"],["Loss on warrant exchange","","(3,368)","","","\u2014","","","(3,368)","","","100","%"],["Income from equity method investments","","5,784","","","2,268","","","3,516","","","155","%"],["Gain on acquisition of equity method investment","","\u2014","","","19,818","","","(19,818)","","","100","%"],["Gain on deconsolidation of VIEs","","\u2014","","","15,025","","","(15,025)","","","100","%"],["Net income before provision for income taxes","","32,579","","","40,769","","","(8,190)","","","(20)","%"],["Provision for income taxes","","\u2014","","","\u2014","","","\u2014","","","\u2014","%"],["Net income","","32,579","","","40,769","","","(8,190)","","","(20)","%"],["Net income attributable to redeemable non-controlling interests","","22,409","","","41,363","","","(18,954)","","","(46)","%"],["Net loss attributable to non-redeemable non-controlling interests","","(1,153)","","","(804)","","","(349)","","","43","%"],["Paid-in-kind preferred dividends","","7,932","","","210","","","7,722","","","3677","%"],["Net income attributable to common stockholders","","3,391","","","\u2014","","","3,391","","","100","%"]]
[[/GREPCENT_TABLE]]

Revenues

RNG Fuel

Revenue from RNG Fuel increased by $56.5 million, or 80%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. $18.0 million of this increase was attributable primarily to the impact of full year of Beacon revenues in 2022 versus only eight months in 2021. Additionally, revenues increased by $3.1 million from

67

methanol pathway credits, $9.0 million increase from brown gas sales and $26.4 million increase from sale of environmental credits.

Fuel Station Services

Revenue from Fuel Station Services increased by $18.8 million, or 37%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. This was primarily attributable to an increase of $15.5 million from fuel station construction projects which were completed into 2022, coupled with an incremental $1.6 million from increase in volumes at existing and new service sites and $1.7 million from sale of portable fueling stations.

Renewable Power

Revenue from Renewable Power decreased by $5.9 million, or 13%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. This change was attributable primarily to a decrease of $5.1 million due to conversion of one of our electricity generation facilities into an RNG facility and a decrease of $0.8 million due to the closure of one of our electricity generation facilities as our gas rights agreement concluded.

Cost of sales

RNG Fuel

Cost of sales from RNG Fuel increased by $37.9 million, or 92%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. This change was attributable primarily to the inclusion of full year of Beacon’s cost of sales upon consolidation in May 2021 resulting in an increase of $9.2 million, a $3.2 million increase in development costs for building new RNG facilities, $10.3 million increase from new RNG facilities such as Sunoma and New River, $14.7 million increase relating to increased dispensing fees from an increased volume of environmental credits generated and $0.7 million write down charges relating to our brown gas inventory to its net realizable value due to decrease in prices. Additionally, there were savings of $1.2 million from deconsolidation of Pine Bend and Noble Road as of December 31, 2021.

Fuel Station Services

Cost of sales from Fuel Station Services increased by $18.7 million, or 44%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. This change was attributable primarily to an increase in costs of $17.1 million for third-party construction projects completed in 2022 and an increase of $1.2 million in service from higher volumes dispensed.

Renewable Power

Cost of sales from Renewable Power marginally increased by $0.4 million, or 1%, for the year ended December 31, 2022 compared to the year ended December 31, 2021.

Selling, general, and administrative

Selling, general, and administrative expenses increased by a total of $19.2 million, or 65%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. This change was attributable primarily to higher insurance expense of $5.1 million relating to the insurance policies for Arclight’s former directors and the Company’s current management, higher employee headcount and related compensation and benefit expenses of $6.9 million to support our organic growth year-over-year, a $3.7 million increase in professional fees related to audit, tax, legal and consulting fees, a $2.5 million increase in IT-related expenses, $0.8 million stock-based compensation expense and $0.4 million related to corporate governance expenses for a public company. These costs are related to setting up the administrative, compliance, and governance structure required for operating a public company which do not qualify for capitalization.

Depreciation, amortization, and accretion

Depreciation, amortization, and accretion increased by a total of $2.5 million, or 23%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. This change was primarily due to $2.0 million increase from two new RNG facilities coming online - Sunoma and New River, $0.4 million increase from amortization of right-of-use assets for finance leases from adoption of ASC 842, $0.6 million increase from downstream dispensing sites becoming operational offset by decrease in depreciation for Renewable Power business by $0.3 million.

68

Interest and financing expense, net

Interest and financing expenses, net decreased by $0.8 million, or 11%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. The decrease is primarily attributable to $2.9 million decrease in the Convertible Note Payable as a result of the favorable $2.9 million in change in fair market value as well as an increase in interest income of $2.0 million from the Note receivable and short term investments and $3.7 million was capitalized as part of Property, plant and equipment. These savings were offset by $1.0 million higher expense on the Senior Secured Credit Facility, $0.2 million higher interest expense on the OPAL Term Loan, $0.9 million increase in amortization of deferred financing costs, $1.8 million increase in Sunoma Loan as interest on Sunoma Loan was capitalized in 2021.

Change in fair value of derivatives, net

Change in fair value of derivatives, net increased by $33.0 million, or 333%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. This change was attributable primarily to gain of $37.1 million on our earnout liabilities, change in fair value of contingent payment to a non-controlling interest of one our VIEs, change in fair value of interest rate swaps and put option, offset by negative change in fair value of warrant liabilities. These liabilities were recorded in the consolidated balance sheet upon completion of the Business Combination.

Other income

Other income increased by $1.9 million, or 100%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. This change is primarily related to a gain recognized on redemption of Note receivable.

Loss on warrant exchange

On December 22, 2022, the Company completed the exchange offer of outstanding Public Warrants and Private Warrants and issued 3,309,296 shares of Class A common stock in exchange for the warrants tendered in the Offer. Pursuant to the Warrant Amendment dated December 21, 2022, the Company exercised its right to exchange the remaining outstanding Warrants and issued 497,080 shares of Class A common stock on December 23, 2022. Following the completion of the exchange, the Public Warrants were suspended from trading on the Nasdaq and delisted. There are no longer any Warrants outstanding. The Company recorded $3,368 as loss on exchange of Warrants.

Income from equity method investments

Net income attributable to equity method investments increased by $3.5 million, or 155%, for the year ended December 31, 2022 compared to the year ended December 31, 2021. This change was attributable primarily to the increase in net income from Pine Bend, Noble Road and GREP that exceeded income from Beacon during comparable period in 2021. Upon the step acquisition of the 56% of controlling interest in Beacon in May 2021, the results of Beacon were consolidated in the financial statements. Pine Bend and Noble Road were deconsolidated as of December 31, 2021.

Gain on acquisition of equity method investment

The gain on acquisition of equity method investment decreased by $19.8 million for the year ended December 31, 2022 compared to the year ended December 31, 2021. This change was attributable primarily to the fair value adjustment resulting from our step acquisition of the remaining interest in Beacon in May 2021.

Gain on deconsolidation of VIEs

The gain on deconsolidation of VIEs decreased by $15.0 million, or 100% for the year ended December 31, 2022. This is primarily due to deconsolidation of Pine Bend and Noble Road as of December 31, 2021, which was not a recurring item in 2022.

Net income attributable to redeemable non-controlling interests

Net income attributable to redeemable non-controlling interests for the year ended December 31, 2022 and 2021 is $22.4 million and $41.4 million, respectively. The net income for the year ended December 31, 2022 reflects the net income belonging to OPAL Fuels equity holders prior to Business Combination for the period January 1, 2022 through July 21, 2022 and portion of net income belonging to OPAL Fuels equity holders from July 21, 2022 through December 31, 2022 based on pro-rata ownership.

Net loss attributable to non-redeemable non-controlling interests

69

Net loss attributable to non-redeemable non-controlling interests for the year ended December 31, 2022 increased by $0.3 million or 43%, compared to the year ended December 31, 2021. This reflects the joint venture partners' loss in those entities we sold a portion of our membership interests in certain RNG facilities which are consolidated in our financial statements. These entities for the year ended December 31, 2022, were Sunoma, Emerald, Sapphire and Central Valley. The entities accounted for as non-redeemable non-controlling interests for the year ended December 31, 2021 were Sunoma and Central Valley.

Paid-in-kind preferred dividends

On November 29, 2021, we entered into an exchange agreement with Hillman whereby Hillman exchanged its ownership interests in the four RNG projects of $30.0 million into 300,000 series A-1 preferred units at a par value of $100 per unit and 1.4% of the common units of OPAL Fuels. On the same day, we entered into a subscription agreement with NextEra for up to 1,000,000 Series A preferred units, which were issued to NextEra during first and second quarters of 2022 for total proceeds of $100.0 million. Upon completion of the Business Combination, these were converted to redeemable preferred non-controlling interests.

Redeemable preferred non-controlling interests carry an interest of 8% dividend payable quarterly either in cash or paid-in-kind for the first eight quarters at the option of the Company. The Company recorded the dividend payable of $7.9 million and $0.2 million for the years ended December 31, 2022 and 2021, respectively as paid-in-kind dividends.

Liquidity and Capital Resources

Liquidity

As of December 31, 2022, our liquidity consisted of cash and cash equivalents including restricted cash of $77.2 million and $65.0 million of short term investments. Additionally, we entered into the OPAL Term Loan II where we have undrawn availability of $105.0 million. We also drew down on the remaining $10.0 million available under OPAL Term Loan I in March 2023.

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. If we were to experience any significant further reduction in levels of gas collection, delays in commencement or completion of construction of our projects, adverse regulatory or price changes that affect the value of our environmental credits, or unplanned outages at our production facilities, it would result in lower cash flows from operations which could impact our ability to make investments or require changes to our growth plan. See “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements.”

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 December 31, 2022, we had total indebtedness excluding deferred financing costs of $170.4 million which primarily consists of $22.8 million under the Senior Secured Credit Facility, $28.5 million under the Convertible Note Payable, $96.1 million under the OPAL Term Loan, $0.1 million under the Municipality loan and $23.0 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 8. Borrowings, to our consolidated financial statements.

70

Cash Flows

The following table presents the Company's cash flows for the years ended December 31, 2022 and 2021:

[[GREPCENT_TABLE]]
[["","","Twelve Months Ended December 31,"],["(in thousands)","","2022","","2021"],["Net cash (used in) provided from operating activities","","$","(1,355)","","","$","18,856"],["Net cash used in investing activities","","(184,028)","","","(117,204)"],["Net cash provided from financing activities","","220,550","","","125,014"],["Net increase in cash, restricted cash, and cash equivalents","","$","35,167","","","$","26,666"]]
[[/GREPCENT_TABLE]]

Net Cash Provided by Operating Activities

Net cash used in operating activities for the year ended December 31, 2022 was $1.4 million, a decrease of $20.2 million compared to net cash provided of $18.9 million for the year ended December 31, 2021. The decrease in cash provided by operating activities was primarily attributable to lower margins reducing our operating income year-over-year and higher transaction costs that were not capitalized associated with becoming a public company and negative working capital changes primarily related to accounts receivable.

Net Cash Used in Investing Activities

Net cash used in investing activities for the year ended December 31, 2022 was $184.0 million, an increase of $66.8 million compared to the $117.2 million used in investing activities for the year ended December 31, 2021. This was primarily driven by cash invested in short term investments of $65.0 million, payments made for the construction of various RNG generation and dispensing facilities of $131.4 million as compared to $89.6 million in the prior year. These amounts were partially offset by proceeds from repayment of Note receivable of $10.9 million and lower distribution from equity method investment of $1.6 million.

Net Cash Provided by Financing Activities

Net cash provided from financing activities for the year ended December 31, 2022 was $220.6 million, an increase of $95.5 million compared to the $125.0 million provided from financing activities for the year ended December 31, 2021. The current year activity is primarily driven by proceeds received from the consummation of Business Combination of $138.9 million, issuance of redeemable preferred non-controlling interests for total proceeds of $100.0 million, proceeds from the OPAL Term Loan of $40.0 million, proceeds from the Sunoma Loan of $4.6 million and a capital contribution from a related party of $23.2 million related to a joint venture. This was offset by debt repayments of $58.6 million and $18.9 million on the Senior Secured Credit Facility and the OPAL Term Loan, respectively, and $8.3 million in financing costs.

Capital expenditures and other cash commitments

We require cash to fund our capital expenditures, operating expenses, 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; to fund other activities or pursuits and for other general corporate purposes.

As of December 31, 2022, we have budgeted for $231.0 million in capital expenditures for the next 12 months, of which $184.7 million is committed under existing contracts. These expenditures represent net capital expenditures to be incurred by the Company after expected contributions from our joint venture and non-controlling interest partners. They primarily relate to our development of new RNG facilities and the purchase of equipment used in our Fueling Station services and Renewable Power operations.

71

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 8. Borrowings and Note 9. Leases to our consolidated financial statements for additional information.

We plan to fund these expenditures primarily through cash on hand, cash generated from operations and availability under existing debt facilities.