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spk07: Good morning and welcome to the Arkea Energy third quarter 2021 earnings column webcast. This event is being recorded. If you'd like to ask a question after the company's presentation, please press star one from your telephone keypad and a confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. I would now like to turn the call over to Megan Light, Vice President of Investor Relations. To begin, please go ahead.
spk01: Thank you, and good morning, everyone. Welcome to Arkea Energy, Inc.' 's third quarter 2021 earnings conference call. With me today are Nick Stork, Arkea's chief executive officer, and Eric Javity, Arkea's chief financial officer. Arkea released financial and operating results for the third quarter 2021 yesterday afternoon, and those results are available on the investor relations section of our website at ArkeaEnergy.com. The presentation and access to the webcast for this call are also available on our website, and after completion of this call, a replay will be available for 12 months. Before we begin, I'd like to remind you that our remarks on this call, including answers to your questions, contain forward-looking statements which involve risks, uncertainties, and assumptions. Forward-looking statements are not a guarantee of performance, and actual results could differ materially from what is contained in such statements. Several factors that could cause or contribute to such differences are described on slide 2 of our presentation. These forward-looking statements reflect our views as of the date of this call, and ARKEA does not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date of this call. Additionally, this call will contain discussion of certain non-GAAP measures, including but not limited to combined financial results and adjusted EBITDA. A definition of non-GAAP measures used and a reconciliation of these measures to the nearest GAAP measure is included in the appendix to the presentation. We believe the non-GAAP measures presented provide relevant and useful information in evaluating the effectiveness of our operating performance in a manner that is consistent with management's evaluation of financial and operating performance. Non-GAAP financial measures should be considered in addition to the results prepared in accordance with GAAP and should not be considered in isolation or as a substitute for GAAP results. The call agenda is shown on slide three. Nick will begin today's call by providing an overview of ARKEA, reviewing our strategic priorities, and highlighting our competitive positioning. Eric will then review our financial results for the third quarter and discuss full year guidance. We will then open the call for questions. And now, I will turn the call over to Nick Stork, ARKEA's Chief Executive Officer.
spk05: Good morning, and thank you for being here for ARKEA's inaugural quarterly earnings call. Given our relatively short tenure as a public company, we thought it'd be helpful to spend some time today providing a more detailed overview of the company, progress toward our strategic goals, and our competitive positioning. We're excited about what we're building at Arkea and the opportunities ahead of us. Let's look at slide five. As you all know, we closed the previously announced business combinations between Rice Acquisition Corp., or RAC, Arkea Energy LLC, and Aria Energy LLC on September 15th. The combined company was renamed Arkea Energy Inc., and our stock began trading under the New York Stock Exchange under the ticker LFG on September 6th. We appreciate the shareholders' support leading into the special meeting and continuing after the transactions close. Arkea is one of the largest and fastest-growing producers of R&G in the U.S., and we are on track to be the largest producer in the U.S. in 2022. Our businesses focus on producing RNG from landfill gas, which is one of the lowest cost, most predictable, and longest-term feedstocks used to produce renewable energy. We have an industry-leading platform of over two dozen operating sites, including 10 landfill gas to RNG facilities and 17 landfill gas to electric facilities. And we have a substantial runway for future growth, with approximately 35 development projects in our portfolio today. and this includes RNG upgrades, electric RNG conversions, and greenfield RNG projects. This backlog of projects alone gives us a multi-year runway of low-risk growth. We have about 250 employees, including approximately 100 world-class plant operators around the country who have a strong record of safety and environmental compliance. We also have a gas processing team made of what we believe to be the best minds in the industry. And a senior leadership team with extensive experience in biogas and across the energy industry. We've been intently preparing to integrate the company since the transaction was announced and to execute on our growth plans and strategic priorities. And those efforts have accelerated since the close. RK's story is an execution story, and we have positioned ourselves to hit the ground running and to deliver on our strategic priorities. Turning to slide six, I'd like to review our strategic priorities. First, we are dedicated to optimizing our existing asset base. to increase the Utah generating power of those assets. As we continue to assess the operating performance of our facilities, we've identified additional meaningful opportunities to increase uptime, methane recovery, and gas flows into our plants. As a result, we have a handful more upgrades and conversion opportunities in our development plan today than we previously anticipated. We intend to upgrade almost all of our operating RNG facilities with the goal of increasing plant uptime and methane recovery, and in some cases, dramatically improving plant capacity, which will increase the amount of RNG produced from these facilities. We intend to capture every molecule that we can from existing plants. Upgrade projects range in scope from optimizing equipment to building new plants on existing operating sites, and we expect a meaningful amount of uplift from these projects. We're also working with landfill owners at several sites to create increase the amount of landfill gas flowing into our plants, which will enable us to produce more RNG, and we intend to add additional RNG facilities by converting the majority of our landfill gas to electric facilities over time. RNG is the highest value used for landfill gas, particularly with our capital efficient approach. Some of our electric facilities have substantial gas flows, and we expect electric RNG conversions to be a material contributor to EVA drug growth in the coming years. Beyond our existing asset base, we also have the right to develop a number of greenfield R&G projects. Our next project scheduled to come online, Project ASAI, is nearing completion. ASAI is an R&G plant under construction at the Keystone Sanitary Landfill in Dunmore, Pennsylvania, and expected to be the world's largest R&G facility when completed. ASAI is a marquee project for us, one that highlights elements of our go-forward approach to project development and construction. has been a key focus of our team's efforts in the third quarter and continuing into the fourth quarter. We have installed all major equipment for the project, and we are in the late stages of commissioning. We expect Project DECI to be completed in the first quarter of 2022, approximately two years after signing a development agreement. And that development timeline is a major achievement in our industry. We expect a ramp-up period of several months after completion and a run rate production between 4 and 5.5 million MMBTU of RNG annually. which equates to a very attractive build multiple of approximately three times on the estimated run rate EBITDA contribution from the project. Beyond project design, we have additional greenfield development projects of various sizes in our development portfolio. Our development plan will require execution on a scale that has never been done in the R&G industry before. We are confident in our ability to execute on our development plan, and today we see timing as the most meaningful driver of uncertainty in our model. The settlement elements remain outside of our control, like permitting, zoning, pipeline interconnection, that may impact project timing. However, we are extremely confident that the long-term earnings power of our project backlog is locked in. We have been building out teams, processes, and the supply chain to facilitate execution, and that's our focus on removing the development risks to the extent that we can. We're making significant investments in equipment and people, to help facilitate rapid development over the next two to three years and beyond. And we have additional work to do in this area as we trend towards internalization of our supply chain. We are also committed to increasing our project development portfolio beyond the approximately 35 projects I mentioned earlier. We've recently added five projects to our portfolio, We executed an agreement that grants us the rights to develop a new R&G facility in Pennsylvania, and we acquired four operating landfill gas for electric projects that we intend to convert to R&G facilities over time. While we intend to grow our portfolio development projects primarily through gas rights agreements, we may also strategically acquire assets when we're able to do so in a disciplined way and an attractive process. Our recent acquisition is a great example. We acquired these facilities at an expected pro forma multiple about three and a half times, including both acquisition costs and the total capital cost we estimate to spend to convert these projects to RNG facilities. Beyond the five new projects, our pipeline of development opportunities remains robust, and our team is as busy as ever working to sign additional gas rights agreements with landfill owners. The total market opportunity is significant. Today, only 13% convert gas to RNG, while over half of the landfills have no landfill gas to electric or RNG projects. We believe there are 300 to 500 landfills that are ideal for RNG development based on flows and location, and several hundred more candidates that we expect to be attractive at our future development costs, providing a significant runway for long-term growth. Another pillar to our value proposition is our differentiated commercial strategy, which relies on securing long-term fixed-price contracts with creditworthy counterparties for the majority of our RNG production volumes. We expect to lock up at least 70% of our RNG volumes under long-term contracts, with terms of at least 10 to 20 years. Doing so would significantly reduce our exposure to market pricing, which can be volatile, and increase the predictability of our project returns and financial results. Project ASAI is not only a great example of our approach to project development and construction, but also to a commercial strategy, with 80% of the projected volumes contracted under long-term fixed-price contracts. We made additional progress toward our contracting goals this week when we signed a 21-year fixed price contract with Northwest Natural with environmental attributes related to up to 1 million MMBTU of our RNG production annually. This is the first contract in our portfolio with a U.S. natural gas utility, and it's a testament to the growing voluntary market for RNG demand, which is driven by decarbonization targets. This contract begins next year and ramps up to the full annual quantity of 1 million MMBTU in 2025. We look forward to a multi-decade partnership with Northwest Natural. We anticipate the secular shift to a more circular, sustainable economy will drive additional growth and demand for long-term contracted R&D volumes. And we expect additional commercial progress in the near term. Our target customers are entities that use natural gas in their infrastructure today for power, thermal, or industrial or other uses. And these that want to or are required to decarbonize and reduce their emissions by displacing conventional natural gas. I'll turn now to slide seven. I'll walk through why I believe Archaea is competitively positioned to secure additional development projects and commercial contracts. First, our team's extensive knowledge and expertise. As I mentioned earlier, we have an incredible gas processing team, and we believe we're the only R&D developer with in-house gas processing Our understanding of gas separation at the molecular level enabled us to build plants with a high tolerance for variance in inlet gas conditions. We have incredible people throughout the organization, and our leadership team has decades of experience in biogas, RNG, and across the energy industry. Additionally, I have experience as a landfill owner, which provides a unique understanding of the concerns and priorities of long-term landfill partners. Landfill owners can trust that we have the ability and track record be able to reliably build and operate projects, converting landfill gas from a cost center to a profit center, and providing them with stable long-term cash flow streams. Second, we are developing a standardization and modularization approach to project development and construction. We are developing what we call RTO version 1 design for RNG projects, which consists of standard plant design on skids of various sizes for various gas flows with largely interchangeable subcomponents. Like it's been hours talking about the design, its technical advantages, and the revolutionary impact we expect to have on the industry, we'll do a deeper dive closer to the implementation. Today, I'll keep it to a couple of highlights. We expect the ARCA version 1 design to have industry-leading methane recovery rates, increased ease of serviceability, and ability to process a wider range of inlet gas conditions, all of which increases expected RNG production volumes. We estimate the design will cost approximately 40% less than industry averages and will enable us to construct projects faster and with lower execution risk. Our speed to market and lower execution risks are significant competitive advantages and also increase customer confidence and our ability to reliably produce their volumes. Our third competitive advantage is our scale. As I mentioned before, we are developing projects on a scale that has not been achieved before in the industry. We've been building teams, processes, and supply chains to facilitate our desired pace of project development, and we are continuing to build with the goal of being able to execute on a scale that has not been achieved in the industry before. For landfill owners, this means that we can work through our backlog of development projects faster and potentially bring their facilities online sooner. For customers, this rapid development program, combined with their 10 operating sites today, provides a great deal of commercial flexibility. We have a portfolio of R&G production that we can use to track volumes, reducing site-specific execution and operating risk for our customers. We also have flexible, uncontracted volumes in our portfolio, which means we can tailor contracts to customers' needs and timelines. The fourth major competitive advantage is our strong balance sheet. With over $400 million of liquidity as of September 30th, and cash flows expect to be generated from operations, we expect to be able to fund a substantial portion of our approximately 35 development projects. Project funding has been a source of risk in our industry due to its fragmented nature, a number of small developers, and exposure to environmental attributes that are variable priced and have political risk. Our liquidity position reduces any near-term risk of not being able to execute on a project because of lack of funding. And our commercial strategy bolsters our strong financial position by providing a stable, predictable cash flow stream that we can reinvest to grow in our business. These advantages put us in a great position to win additional business and to increase our cash flow generating ability. What we have accomplished as a company over the past few months is remarkable, and I'm proud of our team and even more excited about what we intend to accomplish going forward. And with that, I'll turn the call over to Eric Javity, our Chief Financial Officer, to discuss our financial results.
spk03: Thank you, Nick, and good morning. Turning to slide nine, before I get into our third quarter results, I'd like to give a quick overview of how our financials are presented this quarter. As Nick mentioned earlier, we closed our business combinations on September 15th. After performing an acquisition accounting analysis, Archaia Energy LLC, or legacy Archaia, was deemed the acquirer of Rice Acquisition Corp. and of Aria Energy LLC. What this means is that our financial statements and results as filed in our 10-Q with the SEC have been stated so that the full period presented includes Legacy Archaea and ARIA results are included beginning on the closing date for the period of September 15th through September 30th. Predecessor ARIA results are also included separately for periods before the closing date through September 14th. We have presented certain financial and operating metrics on a combined basis as we believe it will assist in your assessment of the results of the full asset base of the company today. We have calculated combined results as the sum of the ARKIA results plus the ARIA predecessor results. We believe this presentation of our results gives more meaningful information to the investment community. Our earnings release contains additional information about combined results and the basis of presentation of our financials for the three and nine months ended September 30th, 2021. For the third quarter, we produced 1.43 million MMBTU of renewable natural gas and 175,000 megawatt hours of electricity on a combined basis. We had a combined net loss of $21.9 million and combined adjusted EBITDA of $22.3 million. Net loss was driven primarily by non-recurring costs related to our business combinations, which totaled $19.2 million for the third quarter, as well as a loss from changes in fair value of derivatives primarily related to warrant liabilities, and increased G&A costs as a result of scaling headcount for the future growth of our business and as a result of operating as a public company. As Nick mentioned, scaling the company for our future growth goals requires significant upfront investment that impacts our financial results today, but enables us to stay on track for achieving our longer-term objectives. Increased costs during the third quarter were partially offset by strong market pricing of environmental attributes, natural gas, and power. For the nine months ended September 30th, we produced 4.19 million MMBTU of renewable natural gas and 703,000 megawatt hours of electricity on a combined basis. Electricity production included approximately 203,000 megawatt hours from LES PH assets, which were sold by ARIA in June. We generated a combined net income of $52.7 million and combined adjusted EBITDA of $59.8 million. Net income was driven primarily by non-recurring gains related to the LES-PH sale from ARIA, including a gain on extinguishment of debt of $61.4 million and a gain on disposal of assets of $1.3 million. Net income was also positively impacted by strong market pricing, partially offset by non-recurring transaction costs, loss from change in fair value of derivatives, and increased G&A. Non-recurring transaction costs totaled $22.4 million for the nine months ended September 30th. Our financial and operating results for the three and nine months ended September 30th were in line with management expectations. Based on the operating performance of our combined assets, as well as continued strong market pricing, today we are announcing full year 2021 combined RNG production guidance, of approximately 5.4 million MMBTU and a full year 2021 combined adjusted EBITDA guidance range of $72.5 million to $77.5 million. Turn now to slide 10. Concurrent with the closing of the business combinations, we received $236.9 million in gross cash proceeds from Rice Acquisition Corp. We issued approximately 29.2 million shares and 250,000 warrants in a pipe transaction for gross proceeds of $300 million. And we entered into a $220 million term loan, which was fully drawn on the closing date. And we also entered into a $250 million revolving credit facility. The ARIA holders received $377.1 million in cash proceeds and 23 million Class B shares and OPCO Class A units. The Legacy Archaea holders received 33.4 million newly issued Class B shares and OPCO Class A units, and all ARIA debt and Legacy Archaea debt was repaid. As of September 30th, we had no borrowings outstanding under the revolver and had issued letters of credit totaling $14.7 million. The only debt the combined company has outstanding, which relates to Legacy Archaea or ARIA, is the project financing debt for Project SI. As of September 30th, our liquidity position was over $400 million, including $153.6 million of cash, $17.2 million of restricted cash, and $235.3 million of undrawn capacity under our revolving credit facility. Combined cash used in investing activities totaled $134.8 million on a combined basis during the nine months ended September 30th, excluding the acquisition of ARIA. Year-to-date purchases of property, plant, and equipment totaled $90.5 million on a combined basis, primarily related to the development of Project SI and our Boyd County Renewable Natural Gas Facility. Additionally, we acquired PEI Power LLC for $31.5 million and contributed $12.5 million on a combined basis to our equity method investments. We pulled forward some project spending during the third quarter, which impacted our ending cash balance. However, with over $400 million of liquidity as of September 30th and cash flows projected to be generated from operations, We still expect to be able to fund a substantial portion of the approximately 35 projects in our development portfolio today. Last week, we issued a redemption notice for our 12.1 million outstanding public warrants. This was an important step to simplify our structure and remove any potential stock price overhang related to share dilution as a result of warrant exercises. To minimize dilution to existing stockholders related to exercises of these warrants, we entered into a share repurchase agreement to use any cash proceeds received from the exercise of warrants to buy back shares at $17.65 per share from ARIA Renewable Energy Systems LLC, which received shares at the closing of the business combinations related to ARIA ownership. While warrant holders have until early December to exercise their warrants on either a cash or cashless basis, the share repurchase agreement ensures that dilution related to the redemption of these 12.1 million warrants will be less than approximately 4.4 million shares. And now I will turn the call over to the operator for Q&A. Thank you all for your time this morning.
spk07: Thank you. We'll now be conducting a question and answer session. If you'd like to ask a question today, please press star 1 from your telephone keypad, and a confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys.
spk06: One moment, please, while we poll for questions. Thank you. Our first question is from the line of Hamza Mazari with Jefferies.
spk07: Please proceed with your questions.
spk00: Hey, good morning. My first question is just around, you know, the future project pipeline. So, you know, I understand the 35 projects you have in the portfolio today. But maybe if you could talk about, you know, what the incremental pipeline looks like. And are you seeing sort of – incremental competition given the favorable economics in landfill to gas from, you know, either waste companies taking projects in-house or, you know, other energy sector participants getting sort of more aggressive on the landfill to gas side. So, again, just kind of address kind of the pipeline that's incremental to the 35 and then just the competitive dynamics as well if those have changed at all.
spk05: Yeah, great question. This is, this is Nick. Yeah, I think on the, on the 35, you know, projects, those, those are, you know, development opportunities that are across three categories, right? It's optimization opportunities within the existing RNG portfolio today. It's, it's electric conversions of the existing assets that are producing or landfill gas to electric projects. And then it's the greenfield development pipeline. And so, you know, what we talked about is, is that is a business that has an earnings power between $300 and $400 million of EBITDA when you look at the total sort of MMBTU production potential of that and apply kind of our commercial strategy and our expected operating expenses and EBITDA per MMBTU. And so we're really confident about the earnings power of that business. And it's really about what we're focused on right now is realizing that earnings power as quickly as we can through execution. And then we're also focused on securing that sort of next chunk of development opportunities that go from, let's say, $300 to $400 million of EBITDA sort of earnings power to a billion dollars of earnings power. And so that's a change from 30 to 40 million MMB2s annually to about 100 million MMB2s annually, just sort of if you assume similar sort of production profiles on a per-plant basis. And so to get there, you need sort of 50 to 100 projects, 50 to 100 sort of incremental opportunities. And then so where are you looking to get those? You know, we think there's really a total addressable market, at least in our core landfill business, of a couple thousand. But, you know, we're really focused on right now at least a subset of 300 to 500 sort of potential development opportunities in that group. And, you know, we're seeing a lot of greenfield projects sort of opportunities, um, within, in, in that, in that segment. And, and that's with, you know, municipal landfill owners and that's with a lot of the waste companies. And it is competitive. I'd say it's, it's just as competitive as it was maybe a couple of years ago. Um, we haven't seen a really dramatic increase in, in, in competition for other developers. I think the, the conversation, um, is really, um, going back to our competitive strengths, um, So we are having discussions around are you going to do what you said you're going to do? Are you going to get the plant online? Is it going to be tolerant of inlet gas variability? Are we going to have to have constant discussions about percent nitrogen, percent oxygen that's coming into my plant? And, you know, are you really going to be able to execute at a scale that's consistent with my goals as a waste company of getting trying to get as much RNG out of my assets as possible and trying to capture as much fugitive emissions that are coming from my site as possible. So when it's conversations around credibility and speed and supply chain and gas processing expertise that allow for greater inlet variability, we do really well. So I'd say that the competition is about the same over the last couple of years, but the competitive dynamics are increasingly pointing towards you know, really our strengths, which are reliability and speed and gas processing expertise.
spk00: Got it. Very helpful. And just on the RNG demand side, could you maybe talk about, you know, the willingness to pay premium prices? You know, how much of your fixed price offtake agreements are sort of customers with either regulatory mandates or are you beginning to see more volunteer customers mandates as well. So just any thoughts on demand?
spk05: Yeah, I think, you know, if you take the subset of customers that we publicly announced that we've signed contracts with, Energear, Fortis, BC, UCAL, Northwest Natural, you've got customers that are both sort of voluntary and also responding to regulatory demand. I'd say broadly they're existentially committed to decarbonization and view that as really critical to the future of their energy infrastructure or sort of their core business. And if you add up the kind of demand just from those potential – those customers that we've already contracted with, their stated demand exceeds the supply of renewable natural gas today. So this is just a subset of the industry, and if you think about – know uh sort of the broader industry which includes more natural more natural gas utilities both in canada and u.s includes really anyone that's consuming natural gas or fossil fuels more broadly that wants to keep this existing kind of non-intermittent highly reliable energy infrastructure in place but replace it with a decarbonized fuel that's chemically identical and so rng really really speaks to you know really significant volumes there and i'd say Our customers are really not thinking about sort of the current value of environmental attributes, but they're really thinking about the cost of decarbonization. And it's an opportunity cost, and it's a more holistic economic evaluation that really justifies the premiums that we're seeing today. And I think premiums that go beyond our current contracted prices.
spk00: Great. And just last question, I'll turn it over. Any thoughts as to impact on your business from the Build Back Better Biden infrastructure plan? I guess it allocates funding for biofuel infrastructure, creates a new tax credit around SAF, maybe extends RNG tax credit. But just any thoughts as to do you see anything in there that's incrementally more positive in to your business, and that's it from me. Thank you.
spk05: Yeah, you know, quick read on that internally is that it's all positive. You know, we're positioned to really benefit from, you know, what we think is going to be a good sort of ITC classification and definition. You know, there's additional incentives that I think point the market towards green hydrogen, which we play, really well in, and then just broadly, even beyond that piece of legislation, there's more support for carbon sequestration. So, you know, we had previously looked at sequestration projects using a max, you know, $50 a metric ton of CO2e per the 45Q guidance about a year ago, and so seeing that, you know, potentially expand to $85 a metric ton per CO2e on projects that We're already economically compelling at $50 a metric ton of CO2. It was really nice and excited about, you know, continued support on that side of things.
spk06: Great. Thank you. Our next question is from the line of Craig Shearer with TUI Brothers.
spk07: Please proceed with your questions.
spk04: Good morning. The opening comments on the V1 design advantages sounded a lot more definitive than the possible upside shared in the original April merger deck. Do you now see your competitive technology advantages having been proven out? And if so, does that suggest the original growth guidance through 25 is likely to prove conservative?
spk06: I think that it really reflects what's been an underlying
spk05: confidence in what we're doing. And I wouldn't say it necessarily changes our thoughts more. There's been sort of additional proof points that elevated that confidence level. But, you know, I think that what has happened maybe since we've talked about in the past has been, you know, more thought and work going into our supply chain. And so it's one thing to have you know, a theoretical plan on how the subcomponents are going to come together into processing skids and how that's going to translate into lower costs, but then to go out and do, you know, significant procurement towards those ends and really lock in, you know, both delivery schedules and material pricing where we can has really been a focus over the last nine months. So if there's any sort of elevation in confidence around that, but not necessarily a change in confidence around the technology, I think we've been really confident about that. And that really comes from You know, an approach that is not doing anything super different that's been done before. You know, it's proven technologies and processes. It's just more intelligence in terms of procurement and putting things together ourselves. You know, that being said, I think we'll have three to five patents that come out of ARCA version one, you know, maybe more. So there is some proprietary stuff in there that we're really excited about. But I'd say that most of the sort of cost reduction is just about being more intelligent about how to put things together in a way that really allows for modularization and scale.
spk04: Great. And I want to clarify your answer to the prior question about the $300 to $400 million EBITDA. I believe your original April deck had targeted about $395 and $25 million. So are we to construe that the five new landfill site development opportunities alluded to in the third quarter earnings release are merely helping to true that up?
spk05: Not really. I wouldn't read into it that much. I think generally when I talk about earnings power, it's a rough range that's may be different than, you know, a modeled range that includes some environmental attributes. When I think about earnings power, I think about total potential MMBTU production from flowing sites, you know, multiplied by methane recovery uptime, and really sort of 100% applied to our commercial strategy. So that's sort of how I think about, you know, earnings power simplistically. And then, you know, the actual model outputs, I think, will be updated here in early 2022 and And that will be reflective of more of a scaled approach towards that commercial strategy, you know, as well as some contribution from environmental attributes and, you know, project timing and all those things.
spk04: Great. That kind of segues to my last one. Thoughts about trends in institutional offtake pricing? Are we getting closer to $20 an M versus the original $14, you know, outlook? are you starting to weigh the fixed price long-term offtake heavier in your portfolio? I think the original expectation was 65%, and now you're talking 70%. Yeah.
spk05: I think we're really happy with, you know, the continued appreciation that we've been seeing in our contracted prices and also just reflective of the current state of discussions with other opportunities that are that are in the pipeline, you know, that's reflective of, I think, you know, our really strong position in terms of being a scale producer into the R&D market and also the demand profile, you know, our counterparties are realizing what that production profile looks like or what it could look like in the next five to ten years. So I think we're right where we thought we'd be in terms of seeing price appreciation, but also just improvement in terms and contract flexibility, which is also really important. And, yeah, I mean, I think internally we expect to see, you know, continued price appreciation without getting into sort of specific contracted price targets, but we expect to see kind of continued annual price appreciation that's consistent with our current contracts and our pipeline.
spk06: Thank you. Thank you.
spk07: As a reminder, if you'd like to ask a question today, you may press star 1 from your telephone keypad. The next question is from the line of Tim Snyder with Citi. Pleased to see you with your questions.
spk02: Hey, good morning. And actually, my first question is kind of a follow-up to the last one that was asked, and I'm probably not going to get an answer here, but just curious if you could talk a little bit about the pricing mechanism in the deal you just signed with Northwest.
spk05: We are not going to, neither us or Northwest Natural is going to disclose the pricing terms of that agreement, but I think it's consistent with where we thought we'd be if you look at kind of the evolution of our contracts and where we thought we'd be signing contracts and pricing and terms at this time. Yeah, we're really happy with that contract.
spk02: Got it. So just from a modeling perspective, it shouldn't really veer too much from what you guys kind of previously outlined.
spk03: Yeah, the conversations that Nick and I have been having throughout the past several months, it's consistent with the ranges we've been discussing on an all-in basis.
spk02: Okay, thank you. That's helpful. The other question I had, it kind of goes to your project backlog issue. beyond what you had, I guess, kind of to the questions the first person asked. In the proxy, I think you had outlined $600 million or so of potential additional CapEx. Some of that was going to hydrogen projects, and I think there was two in California, and I think there was three or four potential dairy digesters in there as well. Can you just kind of give us an update on what is going on with those projects specifically?
spk06: Yeah.
spk05: We already had an existing portfolio of projects that were in development in California, dairy digester projects that we're excited about, and there's good progress being made there. It's kind of a hub-and-spoke model cluster of projects that we're executing on. And I'd say, you know, it's an exciting project, but it's not a huge contributor of our overall earnings power, and that's, you know, going to be heavily weighted towards core landfill gas projects that are, you know, 10 to 20 times in size in terms of flows. And then on the hydrogen side, I'm not going to give a specific update on the projects that we're in that we've previously talked about, but I'd say we're – I'm really encouraged by – the seriousness of conversations that are going on in the hydrogen market. I think it seems like with every quarter, there's more real money being put to work. And I think we're sort of getting beyond this chicken and the egg scenario and getting into real kind of potential demand where similar kind of investment-grade counterparties to the ones that we've been contracting regular renewable natural gas with would also be interested in in signing a long-term, you know, fixed price, fixed price plus contract on the hydrogen side. So, you know, that is emerging, and the volumes there are, you know, potentially very large, but right now it's a little premature to get into, you know, project specifics and those discussions.
spk02: Okay, sure. That makes sense. Last question from me is, as you kind of look at your existing portfolio, what are you guys thinking about or potentially what is going to happen over the next couple quarters, years, whatnot, to get your carbon intensity score even lower? What are some of the things you can do there?
spk05: Yep. I'm not sure that you're going to see the results of that in the next couple quarters, per se. These are longer-term investments, so like a You know, we have projects that we've been working on on the carbon sequestration side that are classics wells that are almost 18 months of geological data in, have been invested into those projects so far and pre-permitting work. So we're really excited about the status of a lot of those projects and certainly going from $50 a metric ton to $85 a metric ton just on the 45Q, right, potential benefit. That doesn't include any benefit from lowering carbon intensity in our projects is really compelling. But I'd say that timing on those projects is still very permitting dependent. And there's some that we'd love to do tomorrow that we're just going to work really closely with EPA or with state levels if we can and sort of capture their encouragement for seeing these types of projects into what we hope will be a shorter and shorter permitting timeline as the world gets more comfortable with geological CO2 sequestration. And solar, similar, you know, we've identified we have a lot of sort of pre-engineered and pre-permitting work done on onsite solar and sort of behind the meter renewable energy for a lot of our projects. And those are going to take, you know, longer to come to fruition. get an RNG project online, you know, and you might see, you know, the benefits of carbon intensity reduction come 18 to 36 months after.
spk02: Okay, thanks. Actually, I lied. I have one more. You made me think of it. Can you just remind us of what the permitting timelines look like on these Section 6 wells?
spk05: That is a great question. It could be as short as a year, but it's been as long as five or six years. And there are very few actual class six wells in existence today. It's generally our thought is that it should take less time to permit a geological CO2 sequestration well as it does to permit a gas or oil well. So society wants to see, I think, permitting timelines go from five years to three months, which is sort of the inverse relationship of those two things. And I think we're going to get there. And what we're doing with right now is doing sort of more work than necessary in the geological side to really show that what we're doing is or proposing to do is going to be very safe and very environmentally beneficial. And that's going to have sort of long-term benefits. But, you know, a quick answer to your question is it's been as long as five. We're optimistic that it could be. could be down sort of sub-three-year, sub-two-year permitting timelines with the right pre-permit diligence and work.
spk06: Okay. I really appreciate it. I'll let someone else get in, and then Megan, I'll follow up with you offline and some other stuff. Thank you. Thanks, Tim. Thank you. We've reached the end of our question and answer session. I'll turn the floor back to management for closing remarks.
spk05: We really appreciate everyone's time today and excited about what we've accomplished so far in a short period here as a public company. We've got a tremendous base of assets to execute from, and we're really excited about the growth opportunities and how this company is really well positioned to make material reduction in greenhouse gas emissions, particularly on methane emissions, which is going to be increasingly critical for us to globally meet decarbonization targets.
spk06: Thanks, everyone. This concludes today's conference. Let me disconnect your lines at this time. Thank you for your participation.
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