Archaea Energy Inc. Class A

Good morning, and welcome to the Arkea Energy fourth quarter and full year 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 1 from your telephone keypad and a confirmation tone to indicate your line is in the question queue. You may press star 2 if you'd like to remove your question from the queue. For participants that are 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.

Thank you, and good morning, everyone. Welcome to Arkea Energy, Inc.' 's fourth quarter and full year 2021 earnings conference call. With me today are Nick Stork, Arkea's Chief Executive Officer, and Brian McCarthy, Arkea's Interim Chief Financial Officer and Chief Investment Officer. Arkea released preliminary financial and operating results for the fourth quarter and full year 2021 this morning. and those results are available on the investor relations portion of our website at archaeaenergy.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 ARHIA does not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date of this call. Additionally, this call will contain discussion of certain non-GAAP measures, including but not limited to adjusted 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 reported in accordance with GAAP and should not be considered in isolation or as a substitute for GAAP results. Nick will begin today's call by providing an overview of fourth quarter results, recent highlights, and an update on our strategic priorities. Brian will highlight commercial developments and review financial results, and then Nick will discuss our 2022 Guidance and Development Plan. We will then open the call for questions. And now, I will turn the call over to Nick Stork, Archaea's Chief Executive Officer.

Good morning, everyone, and thank you for being here for ARKIA's fourth quarter and full year 2021 earnings call. I'm proud of the results we've delivered, driven by the extraordinary efforts of the ARKIA team. We achieved strong results, a number of milestones across many facets of our business, and advanced our strategic priorities, while successfully merging two private companies, completing a complex D-SPAC transaction, and very quickly building on our public company functions to support our rapidly growing business. I appreciate the hard work and dedication of our team throughout the past year. This morning, we also announced several key additions to our leadership and management teams. We appointed Brian McCarthy, Arkea's co-founder and chief investment officer, into an expanded role as interim chief financial officer. Brian previously served as Arkea's chief financial officer and is the architect of our long-term commercial partnerships, and we're excited to have him resume his participation in our finance division. with the support of additional newly added talent. We also appointed Ed Tavey as General Counsel and EVP of Strategic Initiatives and Government Affairs. Edward has significant experience in corporate management, transaction structuring and execution, and public company governance and regulatory matters. We're excited to have him lead our legal function and support our strategic development efforts. I'd like to thank their respective predecessors, Eric Javity and Lindsay Ellis, for helping us successfully build key public company functions in a tightly compressed timeframe. And I look forward to working with Brian and Edward as they help lead the next phase in Archaea's evolution. Since our last call, we've made meaningful progress across many aspects of our business. I'd like to highlight several of them briefly before diving deeper. First, we're proud to announce strong operating and financial results today. with the full-year pro forma RNG production sold of 5.72 million MMBTU, more than 5% above our guidance of 5.4 million MMBTU. Full-year pro forma revenues of 205.8 million, full-year pro forma net loss of 77.4 million, and full-year pro forma adjusted EBITDA of 76.1 million, above the midpoint of our guidance range. Our outperformance was largely driven by higher RNG production volumes, and higher market pricing of RNG, environmental attributes, and electricity. Operationally, in late December 2021, we achieved commercial operations at ASAI, which is now the highest capacity operational RNG facility in the U.S. Commercial operations were achieved ahead of schedule in under two years, a momentous accomplishment for the industry and a testament to the strength of our in-house technical and project development professionals. We continued this momentum into early January and showcased the breadth of our team's capabilities across biogas sources, We achieved commercial operations at our first dairy facility, the Soares Dairy Digester Facility, within our 50% Mavericks LLC joint venture. Commercially, we entered into two new long-term fixed price contracts with Northwest Natural and Fortis BC for a total of up to approximately 8.6 million MMBTU of RNG annually once volumes under these contracts ramp up. That's almost 25% of our estimated long-term annual production. Brian will tell you more about those agreements in a few minutes. With respect to technology development, we are on track to deploy archaea version 1 plant design in the second half of the year, which is expected to deliver improved project economics by reducing plant capital expenditures by approximately 40% compared to industry averages. We expect this meaningful cost reduction to open up new development opportunities for low-flow landfill sites. Strategically, we added five additional projects to our development backlog since our last quarter of the call, bringing our total development backlog to 38 projects secured by gas rights agreements. And our team is working to capture as many economically attractive development opportunities as possible in an increasingly competitive market to build upon our large, high-quality backlog. Since the business combination was announced in April 2021, we have added 10 total projects to our development backlog, which has expanded our estimated long-term earnings power to approximately $400 million in annual adjusted EBITDA potential once all projects in our backlog today are completed and ramped up. We have substantially de-risked the path to achieving that long-term earnings power by executing on our commercial strategy and entering into long-term sales agreements for RNG. We achieved commercial operations at ASAI on December 30, 2021. We successfully constructed, commissioned, and completed the project in less than two years after obtaining gas rights, a monumental task and a timeline much shorter than industry averages for landfill gas at RNG facilities. ASSAI is located at the Keystone Sanitary Landfill in the Scranton, Pennsylvania area and has an inlet capacity of 22,500 standard cubic feet per minute, or SCFM, making it the highest capacity operational facility in the United States. ASSAI has been operating at full uptime in methane recovery since March 2nd, utilizing full flows from the Keystone Landfill. We expect to add gas flows from the nearby Alliance Landfill in the near future. We are very pleased with the performance of ASSAI so far and expect to continue to fine-tune the plan in the coming weeks. ASSAI is a very attractive return profile, with a billed multiple of around 3x capital expenditures to estimated adjusted EBITDA, including the impacts of the PEI power acquisition. Capital expenditures for the project were within budget and totaled approximately $145 million through December 31, 2021 for the ASSAI project, including the acquisition of PEI power. which included landfill gas rights for the Alliance Landfill, a network of pipelines, and a power generating facility with a combined capacity of approximately 85 megawatts. The expected adjusted EBITDA contribution from our ASSAI RNG facility is expected to be approximately $40 million on an annualized long-term basis at full production, based on long-term contracts currently in place and assuming $1.50 RIN pricing for uncontracted volumes. Landfill gas flows into ASSAI are expected to increase over the next several years. leading to higher expected production from the facility and therefore higher expected adjusted EBITDA and returns. Project stands to benefit from long-term gas rights agreements with the Keystone and Alliance landfills, which have decades of capacity and are strategically located within growing waste markets. In June 2021, the Keystone landfill was awarded a significant expansion by the Pennsylvania Department of Environmental Protection. I'm thankful for our partners on this project, including the teams at Keystone Waste Management, UGI, and the Pennsylvania Department of Environmental Protection, and our long-term commercial partners, which include FortisBC, Energear, and the University of California, for their meaningful long-term commitments to decarbonization and to the success of the project. I'd also like to thank our team for working tirelessly to complete a site safely, under budget, and on a rapidly accelerated timeline. One of our key priorities for 2022 is the implementation of RQ Version 1, a standardized and modularized plant design We made great strides in its development in 2021. We are currently developing four standard plants to be built on skids with interchangeable subcomponents, and sizing ranges from 2,000 to 9,600 SCFM capacity. Throughout 2021, our focus was primarily on system design and procurement, and our focus this year will be on implementation. Our end goal is to build our supply chain and fabrication capabilities to allow us to pull Archaea version 1 plants off the shelf. in the future, which should enable us to construct projects in record time. We currently have orders in place for the key components and major equipment for 22 plants, which covers most of the expected new builds in our current development plan for this year and next. Deliveries of components have begun, and we expect to install our first Version 1 plant in the second half of this year. These substantial preorders have significantly minimized our near-term supply chain and inflation risks. We expect ARCA version one to reduce project development and construction timelines to 18 months and to reduce capital costs per project by about 40% compared to industry averages. We also expect increased uptime and methane recovery from the plants and therefore higher production because the plants are designed to handle a wide array of gas conditions. All new build projects in 2022 and four development plans will implement the ARCA version one design. We're excited to validate and reap the many benefits of this design over the course of the year. We think version one gives us significant advantage in the marketplace and positions us to be the R&D developer of choice, enabling us to build on our market-leading position at a time when competition for attractive project opportunities is increasing. We've had continued success in adding to our backlog of high-quality development projects. We've added five development projects to our backlog since our last quarterly call, bringing the total to 10 projects since our business combination was announced in April 2021. In November 2021, on our last call, we announced the addition of five projects since April 2021. We acquired four operating landfill gas for electric facilities with the intention to build RNG plants on these sites over time. And we executed a gas rights agreement to develop a new RNG facility. In December, we entered into a new joint venture. This joint venture subsequently acquired gas rights at two locations to co-develop RNG facilities with expected combined flows of approximately 4,250 net SCFM. into the facilities after completion. In January 2022, we signed gas rights agreements to develop RNG facilities at two additional landfill sites, expanding an existing relationship with an independent landfill owner. And in February 2022, we acquired a landfill gas to electric asset with RNG development rights. Combined flows for the three projects added year to date in 2022 are expected to total approximately 4,500 net SCFM into the facilities after completion. Today, our total project development backlog includes 38 projects for which we have gas rights agreements in place, including 10 optimizations and 28 new builds. On the new builds, we include R&G plans to be built on existing electric sites and on greenfield sites. We are aggressively striving to procure additional development sites within our return parameters, and we are seeing some shift in an increasingly competitive market to a focus on modest upfront payments for gas rights and acquisitions of existing landfill gas to electric assets. We spent a total of approximately $50 million in 2021 and year-to-date 2022 to add electric assets and gas rights to our portfolio. The economics of these projects remain very attractive, and we expect to be able to acquire gas rights and or existing electric assets and develop R&G facilities on those sites at an estimated all-in pro forma multiple of about 3 to 5x, including estimated acquisition and development capital and estimated post-development EBITDA. In all cases, we plan to stick to our target return parameters, which, as a reminder, include a minimum 10% cash-on-cash on levered return in a downside case scenario. That is based on the long-term contracted volumes only. While we're seeking to add development opportunities to our backlog as quickly as possible, we plan to stick to our capital return parameters, and we won't win them all. We do believe there is a massive opportunity set of economically attractive sites for us to procure, and our cash flow profile, supported by long-term fixed-price contracts with credit-worthy counterparties, can support a certain level of growth through debt finance acquisitions. The quality of our cash flows, combined with the environmental benefits of our product, should enable the attractive debt opportunities and rates for us, and we may from time to time access the debt capital markets to provide dry powder to execute on acquisition opportunities. to fund a portion of our development plan, and for general capital purposes. We've established a business model that supports making additional acquisitions, which will enable us to build more RNG plans. The ultimate goal of our growth strategy is to increase the earnings power of our business, and to do so at attractive returns on capital investment. With the 38 projects in our backlog for which we have gas rights today, we now estimate our long-term earnings power, or estimated adjusted EBITDA, could be approximately 400 million annually once all projects are completed and ramped up, with estimated RNG production of approximately 35 million MBTU annually. That is potential production six times pro forma 2021 production and potential adjusted EBITDA five times pro forma 2021 adjusted EBITDA. This potential earnings power includes what we believe is a conservative assumption set, including only projects that we have rights for today, fixed price volumes only under long-term contracts in place today, and $1.50 per gallon RIN pricing on uncontracted volumes, with no impacts from carbon sequestration, carbon intensity reduction initiatives, or high probability opportunities in our development pipeline. Please refer to our presentation for more information on our modeling assumptions. We see this potential post-development adjusted EBITDA of approximately $400 million as only the beginning, and we believe we could ultimately achieve meaningfully more by capturing additional development opportunities. With that, I'll turn the call over to Brian, who will provide a commercial update and review our financial results.