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Answer One – 2:06 | Robert Sarfatis

So, in the last few years, have been very exciting for RNG particularly, landfill RNG in terms of M&A with a very large transaction last year and another very big one that just closed this year first of the year and a lot more activity to come. So RNG if you’ve heard that term renewable natural gas is kind of synonymous with bio methane or biogas and it’s basically gas that’s fully interchangeable with pipeline quality gas and it’s produced from feedstock that maybe landfill gas or other feedstocks that include livestock waste, wastewater, or other organic waste that otherwise the methane would just leach into the atmosphere, if you will. And the reason why people are into it, or so excited about it today, is not only do you have the capability of selling the constituent product, the bio methane, and although those prices are essentially depressed, what comes with it are other revenue streams. And those other revenue streams include tax credits, compliance mechanisms, if you’ve heard of RINs, which are renewable identification numbers or RECs that are related to the production of electricity using bio methane. And then there’s a number of different state credits that go along with those. And included with that is also, there’s going to be more activity, given the new ITC regulations that came out, so I think they’ll be continued activity from that standpoint. Kyle, anything you want to add?

Answer Two – 3:47 | Kyle Hayes

Sure, thanks, Robert. I would add that one of the other commercial benefits of RNG is that when it is upgraded through a conditioning system in order to ultimately become renewable natural gas, it’s able to utilize the existing gas infrastructure that is already in place. And so, it’s able to utilize both intrastate and interstate gas pipelines, which overcome some of the challenges that we see with other types of renewable fuels, e.g., it is not necessarily commercially feasible in order to truck hydrogen when there is a dearth of dedicated hydrogen pipelines. There are hydrogen pipelines and dedicated hydrogen pipelines in the U.S., but they are not nearly as prevalent as the gas pipeline network. And so, one of the challenges that you eliminate as compared to other renewable fuels, is the ability to take your RNG and put it on a pipeline just like you would with typical fossil fuel gas. I think one of the other benefits in addition to the sale of the commodity, as you mentioned, Robert, and also being able to monetize tax credits, being able to monetize compliance mechanisms in terms of RINs or LCFS credits in in California, is that RNG can also be itself used as a feedstock for other types of renewable fuels. E.g., RNG can be used in the hydrogen production process, such that you can lower your carbon intensity score associated with hydrogen if you were to use RNG instead of fossil gas and there’s been a lot of discussion about how hydrogen is also used actively as in the production of ammonia and so there’s a lot of talk in the industry about the export of ammonia to places like Asia and Europe where it’s being leveraged in power generation assets in those regions. So, it’s not just a matter of selling the commodity itself, selling the RECs, selling the RINS and/or tax credits, but it’s also about the ability to leverage it and lower the CI score with other types of commodities which can, also help in terms of being able to monetize tax credits in those derivative commodities. Like hydrogen, under things like the Section 45B production tax credit for hydrogen that came out of the Inflation Reduction Act.

Answer One – 6:52 | Kyle Hayes

So, the answer is a multitude of, a few different things. There are projects where there is a single offtake, and it could come in the form of a variable price. It could come in the form of a fixed price, in terms of the actual price of a commodity, in addition to a certain value associated with the RINs e.g., and so typically, you will see an offtake contract be structured as a bundle product in terms of selling the commodity, selling the RNG, as well as the corresponding RINs associated with it. There can be multiple off takers from a particular project. I would say that increasingly in what we would call the voluntary markets, where a lot of utilities, because of certain regulatory demands or legislative demands, e.g., in California, with SB 1440, which is the legislative initiative that became law in 2022, effectively establishes a renewable gas standard in California, such that the regular utilities are required to procure a certain amount of renewable natural gas for their gas supply. And in those markets, you’re oftentimes seeing utilities willing to sign up and take all of the offtake from a, from a given, a given contract. And so, it, it, it certainly within the realm of possibility that you could have multiple off takers. But increasingly, as utilities get involved at scale in terms of offtake, I think it’s becoming more common that you’re seeing a single off-taker in those scenarios. I would say that it’s rare that the projects pencil out solely with respect to the sale of the commodity. You can utilize non-upgraded gas or, you know, making other, making electricity and that kind of thing. I think, given the prevalence of the transportation markets, and I should mention, I should clarify, that renewable identification numbers, RINS, and credit, state- level credits that come out of states that have an LCFS program, like Washington, California, Oregon, and now New Mexico, those credits are high of use to RNG or use of a commodity at the transportation fuel and so much of the stacking, if you will, of the credits, or compliance mechanisms comes down to the RNG being sold into transportation markets and so that has been a central way over the last few years about how these projects have penciled out beyond just a sale of gas. The last thing I would say is one of the other revenue mechanisms, or other parts of the revenue stack that come into play, are e.g., when you have a feedstock, that the ultimate project owner in leverage in terms of a tipping fee. So effectively, a tipping fee already exists in the, in the landfill context where the landfill will accept waste for a fee. And so, you see this in the context of certain RNG product developers, e.g., developers that are utilizing food waste for purposes of creating RNG through anaerobic digestion in addition to selling commodity in addition to being able to monetize RINs they will, also accept the tipping fee for accepting that food waste from different suppliers within that particular area. And I’ll also mention that this is part and part of what Robert talked about, is that, in the landfill context, oftentimes, the landfill owner is earning a royalty based on the gross revenue of the sale of the gas, as well as the compliance mechanisms. And so, the higher the gross revenue in terms, the higher the gross revenue is in terms of the sale of that bundle product, the higher the royalty will be, because usually there’s a percentage, there can be a fixed percentage, there can be a tiered percentage of the landfill will accrue in terms of its revenue. So, there’s all different types of revenue mechanisms associated with RNG and they all get leverage depending on the type of feedstock.

Answer One – 11:43 | Kyle Hayes

I would say this is true from our perspective as lawyers but it’s also one of the chief concerns of project developers commercially, and more importantly, their financing parties — is the feedstock supply. And so, one of the best advantages of landfill gas is that there’s a relative consistency in terms of the output of the actual gas to be captured and upgraded. You compare that, on the contrary, with other types of feedstock, such as food waste, or perhaps dairy manure, or other types of manure that ultimately are being used as a feedstock for RNG, those feedstocks can be limited, and those feedstocks, can at times be uncertain. And so, the scale of, say, a dairy farm or a swine farm or a poultry farm can be really important to figuring out just how much feedstock can actually be produced. And so that is a chief concern of trying to develop a project and also try to finance a project, because right without adequate amount of feedstock, it’s hard to achieve the type of carbon intensity scores that you need in order to monetize the compliance mechanisms that we’ve talked about. I would say that it is also the case, and I would just say this as a practical matter, the operators of these projects, it’s a small universe, and so it’s really important, and it has been really important in the transactions I’ve been involved in. And also, with the transactions that Robert has been involved in, is that the management teams and the operation teams, or these platforms, it’s a more bespoke asset class, and therefore it’s really important to keep those teams in place to make sure that the plants are operationally functioning at a high level. And I would contrast that with, say, operation and maintenance of a solar facility in the renewables context, which the O&M is not nearly as comprehensive, particularly given that the feedstock is, you know, a renewable source, right? As opposed to, as we talked about here, you know, you have a much more involved feedstock supply. The management teams operational teams tend to be, really really important at a just operational level, day to day. But also, it becomes a real function of the M&A deals that we’re doing in terms of making sure that, as part of an acquisition, that the management team is going to stay on, or the acquiring company, you know, has its own, you know, adequate management team to an operational team to keep things going.

Answer One 14:44 | Robert Sarfatis

Excellent question and to Kyle’s point earlier, there’s a lot of good regulatory wins that give tailwind to the RNG space in terms of tax credits, compliance, incentives etc., but what giveth also takes away and you know in terms of developing these projects and operating these projects there’s air permitting is always very key that can be both federal as well as state and local. And local aspect is, I’ve seen those be some of the longest, lead time items in terms of trying to get the local authorities on board, as well as homeowners associations, etc. that have the NIMBY “not in my backyard” attitude. You know, it takes a little bit of an education if you’re thinking about whether it’s an aerobic digester in a feedstock that includes animal waste, there’s always smell concerns and noxious odors, etc. And it’s the same issue in terms of landfill. So, there’s a lot of negotiation and a lot of hand holding. And I think the studies show that a lot of these developers actually decrease the odors around their plants and provide much better support in terms of the operations, as opposed to just the landfill operating on its own. Yes, the answer is, in terms of permitting, the air permitting issue is kind of paramount as it relates to getting these projects up and rolling. And it really is site specific as where, if you’re out in the middle of nowhere, obviously it’s sometimes a lot easier, but if you’re in a major metropolitan area where a lot of these landfills are, it makes it a little more difficult to navigate those principles.

Answer One – 16:58 | Kyle Hayes

So, to answer the first part of it, in terms of what does the diligence look like, I think the diligence is not unlike what you would have for any other type of energy infrastructure project, right? So, we’re looking at everything from the feedstock supply, if it’s a straight up feedstock agreement for manure or wastewater sludge, or if it’s a landfill contact. We’re looking at the, the ultimate the gas rights agreement, all of that falls into your pretty important feedstock bucket that we talked about earlier. You’re looking at things like the EPC contracts. You’re looking at the equipment supply. You’re looking at offtake agreement. And you’re looking for a lot of the red flags that you would normally expect, or you would expect to be red flags, I should say, meaning you want to make sure that there are no unilateral termination clauses, right? Associated with in the EPC contractor or your off-taker, and all the things that could ultimately create commercial problems down the line. So, I-I think that the due diligence process is not unlike typical energy projects. I will say that I think one part of it is specialized is where you’re diligent saying the ultimate regulatory approvals associated with generating RINs and other types of compliance mechanisms, differentiating between the type of, the quality of those compliance mechanisms. And so, you can have RINs that are part of a QAP program which is related to call it more “verified forms” of RINs. And that specialist diligence I would say spills into part of your second question which is there is a very active role in what we’ll call verification type advisers in this space. So, folks like Weaver Tidwell are very big in the space. Folks like eco engineers, not an exhaustive list, but those folks that you hear in terms of these transactions, they get very involved in terms of making sure that there are the necessary approvals and pathways associated with generating these compliance mechanisms and also some underlying technical due diligence in terms of verifying carbon intensity scores and that kind of thing. And so, I think it is equally important, as I mentioned earlier, about the small nature of the really knowledgeable, the small universe of really knowledgeable operational management teams. It is also the case in terms of some of these third-party advisers that have a big role in terms of verifying the ultimate operational viability, if you will. These projects that are using these appliance mechanisms to help pencil out, I would say that in terms of operating assumptions, in terms of differentiating between development stage projects and operational projects, naturally I-I also think that gets back to the risk tolerance or the objectives of who is buying these projects and if you have a typical private equity type buyer who doesn’t really want any sort of risk they kind, of just want very stable cash flows. You oftentimes see them buying into operational platforms. It is also the case though, that if you have more strategic type buyers that are already skilled, say, in the gas operation business, they may not have as much aversion to, you know, buying development stage projects because they’ve done that right. That’s their business. And so, it’s not as much of a hill to climb in terms of them getting projects to where they want to be. But I would also mention that we are increasingly seeing private equity type buyers, asset managers, get into the development side, and I think that has to do with capturing the return, right? And the operational projects, generally speaking, are more expensive if you are a private equity buyer who has a certain hurdle rate in terms of your fund, which many of them are in the mid to high teens, one of the ways to capture that value is to come into a project earlier and develop it yourself and therefore be able to capture some of that value as opposed to just paying a higher price for an operational project. And so, I think with that, that’s increasingly why we see so much visibility of the advisers, right? Whether it’s legal, technical, attribute, or compliance mechanism verification. Those roles become increasingly bigger with these projects, particularly as folks are coming in more on the development safe side.