This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk09: Greetings and welcome to our Key Energy Inc. 1Q 2022 earnings conference call and webcast. At this time, all participants are in listen-only mode. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Megan Light, Vice President of Investor Relations. Please go ahead.
spk01: Thank you, and good morning, everyone. Welcome to Archea Energy, Inc.' 's first quarter 2022 earnings conference call. With me today are Nick Stork, Archea's chief executive officer, and Brian McCarthy, Archea's chief investment officer and interim chief financial officer. Archea released preliminary financial and operating results for the first quarter 2022 this morning, and those results are available on the investor relations portion of our website at archeaenergy.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 can differ materially from what is contained in such statements. Several factors that can 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 ARCA 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 of the presentation. This call will also contain discussion of estimated long-term annual earnings power, which refers to estimated long-term annual adjusted EBITDA after specified projects within the company's R&D development backlog for which gas rights agreements are currently in place or are expected to be in place after closing pending transactions are completed and ramped up to full flow. Our presentation includes additional information regarding estimated long-term annual earnings power and the underlying assumptions used in its estimation. Certain assumptions regarding these estimates are inherently uncertain and, as a result, our actual long-term annual earnings power may be different from this estimate and such differences may be material. A reconciliation of estimated long-term adjusted EBITDA to net income or loss, the closest U.S. GAAP financial measure, cannot be provided without unreasonable effort due to the inherent difficulty in quantifying certain amounts. 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 first quarter results, recent highlights, and an update on our strategic priorities and estimated long-term annual earnings power. Brian will then give a commercial update and review financial results in 2022 guidance. We will then open the call for questions. And now, I will turn the call over to Nick Stortz, ARKEA's Chief Executive Officer.
spk04: Good morning, everyone, and thank you for being here for ARKEA's first quarter 2022 earnings call. We are excited to be here today to discuss the momentous achievements of the Arkea team across many aspects of our business so far this year. Our first quarter results, coupled with two transformational strategic transactions, our new Lightning Renewables joint venture with Republic, and our agreement to acquire Ingenco, represent an important positive inflection point for Arkea. We have now cemented our run rate to dramatically increase our estimated long-term earnings power. or Earnings Power for short. And we are committed to positioning Archaea as an industry-leading, profitable, multi-decade provider of decarbonization solutions that deliver value to our shareholders, partners, and communities. I'd like to start by sharing a few key highlights of our performance since the start of the year. First, for the first quarter of 2022, we reported R&G production sold of 1.54 million MMBTU, Electricity production sold of 166,000 megawatt hours, adjusted EBITDA of 20.6 million, and net loss of 33.2 million. Our performance was positively impacted by strong market pricing of environmental attributes, natural gas, and electricity, and to a lesser extent, negatively impacted by increased G&A expenses driven by increased headcount and other costs related to scaling for future growth. along with certain acquisition and other transaction costs and severance costs. Based on our first quarter results, which were in line with our expectations, we are pleased to reaffirm our 2022 adjusted EBITDA on production guidance today. Strategically, we recently announced two landmark transactions, an agreement to acquire Ingenco and the formation of a new joint venture with Republic Services, Lightning Renewable. for the development of 39 RNG facilities at landfills owned or operated by Republic across the U.S. As a result of these transactions, we've added 50 projects to our development backlog since our last call, and a total of 53 projects year-to-date, including the two gas rights agreements we signed and the acquisition of the landfill gas-to-electric facility, which occurred early in the first quarter and which we discussed in our fourth quarter call. Since that call, we have more than doubled the number of projects in our backlog, bringing our total to 88 projects which we have gas rights agreements in place or expect to have gas rights agreements in place after the Ingenco acquisition closes. We expect the Republican Ingenco transactions to be transformative to our business, enabling us to scale faster than we previously anticipated. Since our initial business combination was announced in April 2021, we have added 60 total projects to our development backlog, and we have expanded our earnings power to approximately $600 million in potential annual adjusted EBITDA once all projects in our backlog are completed and ramped up. Please see the appendix for a presentation for additional information regarding earnings power and the underlying assumptions we use to calculate it. As we discussed in our last call, we signed a historic long-term fixed price contract with FortisBC in January, with a sale of up to 7.6 million MMBTU of RNG per year, with volumes expected to commence this year and ramp up to full volumes in 2025. We believe this is the largest long-term RNG supply contract signed to date. We remain as bullish as ever about the supply and demand dynamics of the RNG market, and we continue to advance conversations with an array of potential offtake partners, and we expect to sign additional long-term fixed-price contracts in the coming months. Operationally, we have achieved milestones at key RNG facilities, in line with our 2022 development plan and guidance. As we announced in the last call, we achieved commercial operations at the SOARS RNG facility, our first anaerobic digester in January, showcasing the capabilities of our team across biogas sources. After placing our SCI RNG facility into service in late December 2021, we performed electrical overhaul and plant redundancy upgrades at the facility earlier this year. While we experienced a brief outage while completing our work during the facility's ramp-up process, we believe this downtime has already proven worthwhile and will continue to do so, as SCI has been operating at over 99% uptime and above target methane recovery levels using full flows from the Keystone landfill since the maintenance was completed. We also recently began utilizing gas flows from the Alliance landfill at Assay after receiving necessary approvals earlier this month. We also recently achieved a significant increase in methane recovery at our Seneca RNG facility after upgrading the CO2 separation system and the nitrogen removal system, the first two optimization stages we expect at Seneca. We're incorporating lessons learned at Assay and Seneca into other optimization and new build projects to accelerate timelines and maximize uptime in methane recovery. thereby increasing expected project returns. With respect to technology and project development, we remain on track to deploy our Archaea Version 1 plant design in the second half of the year. We expect Archaea Version 1 to deliver reduced construction timelines and improve project economics, reducing plant capital expenditures approximately 40% compared to industry averages, and have incorporated the expected cost savings from Archaea Version 1 into our 2022 guidance and estimated long-term annual earnings power. We expect this meaningful cost reduction to open new development opportunities for low-flow landfill sites that were previously non-economic. In April, we announced that we have entered into a definitive purchase and sale agreement to acquire Ingenco for $215 million of cash, subject to customary closing adjustments. The acquisition will add 14 landfill gas to electricity plants to our asset platform, and we expect to build R&G facilities on 11 Ingenco sites over time. In addition, the acquisition brings approximately 70 employees who add valuable expertise to our highly skilled and experienced team at Archaea. The acquisition includes the gas rights for the Ingenco sites and Ingenco's asset base is located on landfills with strong growth potential with over 40 years of permitted waste acceptance on average across sites. The 11 sites where we expect to build RNG facilities have current cumulative gross flows of over 5 million MBT per year. The acquisition has an estimated multiple of approximately 6x total capital expenditures, including the acquisition and R&D development costs, to the estimated long-term annual adjusted EBITDA associated with the Ingenco assets. We expect this acquisition to close on or after July 1, 2022. The Ingenco acquisition highlights our ability to acquire electricity generation assets along with the long-term gas rights at scale and at attractive multiples. These projects also provide us the potential future operating efficiencies and economic upside from generating our own power on these sites after RNG facilities are completed. Plus, the option to sell excess power into the market. We are increasingly excited about the synergies of co-locating electric assets with our RNG facilities, as electricity is one of the main components of operating expense for RNG production. Having the option to generate our own power using natural gas at these sites gives us both security of supply and potential cost savings compared to buying electricity off the grid. Last week, we announced that we have formed a landmark joint venture with Republic Services, one of the largest providers of environmental services in the United States. The joint venture, called Lightning Renewables, is the largest landfill gas to RNG development venture in the industry to date. Lightning Renewables has signed a long-term master gas sale and development agreement to develop RNG facilities at 39 landfill sites owned or operated by Republic across the U.S. Joint investments into Lightning Renewables are expected to total $1.1 billion, including approximately $780 million to be invested by Arkea over the course of several years. Arkea will hold a 60% ownership interest in Lightning Renewables. The development projects within Lightning Renewables are located at high-quality landfill sites with strong growth potential and current cumulative growth flows of approximately 13 million MMV2 per year. ARCA will develop, engineer, construct, and operate the RNG facilities within the JV. We will receive fees for the engineering procurement and construction management services during development and construction, and fees for operation and maintenance services after completion. Development and construction of certain projects within Lightning Renewables are expected to begin in 2022, with completion and commissioning of the projects planned through 2027. We estimate build multiples on average of approximately 4.5 times across the 39 projects within Lightning Renewables, based on ARCA's expected net economics. We expect potential for the addition of incremental projects into Lightning Renewables over time, as well as additional potential economic upside. for the JV and for ARKIA through initiatives including well-filled optimization, carbon intensity reduction initiatives, and low-carbon hydrogen projects. We are honored to have been selected by Republic as a partner for this JV, which is the beginning of a renewable energy platform that will become a critical component of ARKIA's mission to achieve best-in-class environmental stewardship and greenhouse gas emission reductions. We are focused on long-term value-oriented capital investments that are expected to make a meaningful sustainability impact for future generations. We are completely aligned in this vision with Republic. Lightning Renewables and the Ingenco acquisition are both incredible achievements in adding to our backlog of high-quality development projects. Including these transactions, we have added 53 development projects to our backlog year-to-date. Our total development backlog today includes 88 projects for which we have gas rights agreements in place or expect to have gas rights agreements in place after the Ingenco acquisition closes. We have more than doubled the number of projects in our backlog year-to-date, and we have no intention of stopping here. We are continuing to aggressively seek additional development sites within our target return parameters, which include a minimum of 10% cash-on-cash unlevered returns in a downside case scenario based on long-term contracted volumes only. The Republican Ingenco transactions highlight our ability to continue winning new projects at these attractive returns. We are also excited about the meaningful expected contributions of the Lightning Renovals and Ingenco transactions to the earnings power of our business. Cumulatively, these transactions are expected to add approximately $200 million to our earnings power. We are excited about the positive impact the Lightning Renovals and Ingenco transactions will have on our long-term development plan. and we are actively optimizing the pace and timing of these new development projects within our broader project backlog. We expect to provide a more fulsome update on our optimized long-term development plan at a later date. In the meantime, it is certain that these new transactions will add to our total expected capital needs over the near term, including acquisition and development costs. We are exploring options to fund these costs and expect to enter into one or more capital markets or private financing transactions. We are committed to securing financing as soon as practicable to meet our near-term capital needs and at the most favorable terms available to ARKIA and with the highest value to our stakeholders. Including the expected impact from all ADA projects in our backlog and our operating assets, we now estimate our earnings power could be approximately $600 million annually once all projects are completed and ramped up, with estimated R&G production of approximately 50 million MBTU annually. That is potential long-term annual production approximately nine times the combined company's 2021 production and potential earnings power approximately eight times the company's 2021 adjusted EBITDA. We expect to achieve this new earnings power in around six to eight years, depending on the speed at which we can scale our development capabilities. This potential earnings power includes only projects for which gas rights agreements are in place or expected to be in place after the Ingenco acquisition closes. and used what we believe to be a conservative assumption set on revenues with fixed price volumes only under long-term contracts in place today, and $1.50 per D3 RIN, $140 per metric ton LCFS credit, and $3 per MB2 brown gas pricing on uncontracted volumes, with no impacts from carbon sequestration, carbon intensity reduction initiatives, or high probability opportunities in our development pipeline. We also assume our electricity facilities remain in operation following construction of RNG facilities on electric sites with natural gas supply costs of $3 per MBTU. Please refer to the appendix of our presentation for more information on our assumptions related to our potential earnings power. I'm incredibly proud of the progress our team has made on expanding the earnings power of our business, which is now 50% higher than what we reported on our last quarterly call. And I'm proud of the high quality development backlog that we've built thus far. Not only do many sites within our backlog have potential for increased landfill gas flows, but also the corresponding gas rights agreements have terms to enable our RNG production well into the future. The weighted average remaining life of our gas rights agreements across all existing RNG sites and RNG development sites is approximately 32 and a half years. This gives us true line of sight to sustainable, multi-decade environmental solutions for our partners and value for our stakeholders. We are accelerating our growth mission and are excited about the future. Our team is focused on executing our development plan, beginning to execute on projects within Lightning Renewables this year, and successfully closing and integrating the Ingenco acquisition, while also seeking additional growth opportunities. As we move forward to the second half of 2022, we are committed to rapidly executing on this mission. This is a critical period in the evolution of the industry, and we are committed to positioning ARCA as a market leader in order to secure a meaningful portion of the significant market growth opportunity. And with that, I'll turn the call over to Brian, who will provide a commercial update and review of our financial results and 2022 guidance.
spk06: Thank you, Nick, and good morning, all. I'm happy to be here today to provide an update on commercial developments and review our financial results and guidance. As Dick mentioned, we remain as excited as ever about the dynamics of the RNG market, which continues to be supply constrained amid growing demand from an increasing number of market participants with regulatory or existential mandates to decarbonize. There have been a few exceptionally large RNG targets from and applicable to gas utilities, including the initiatives from our current customers and the CPUC target that we discussed on our last call. Additionally, in April, National Grid announced a new goal to source at least 30 million MMBTU of its gas supply from RNG by 2030. To put the volumes in perspective, 30 million MMBTU is equivalent to over 40% of the entire U.S. RNG market in 2021, and approximately 60% of Archaea's estimated long-term RNG production. We are continuing to progress commercial discussions with a number of utilities that are looking to RNG as a mode of decarbonization, as well as a wide range of other potential customers. We will continue to leave no stone unturned as we seek additional long-term, fixed-price contracts to further de-risk the underlying cash flows of our business. and we expect to have additional commercial news in the coming months. And now I would like to review our first quarter 2022 results. For the first quarter, we produced and sold 1.54 million MMBTU of RNG and 166,000 megawatt hours of electricity. RNG production was positively impacted by production from our SI and SORES facilities, and negatively impacted by some weather-related downtime at certain facilities and downtime at ASAI related to maintenance activities. We are undertaking weatherization initiatives to minimize any future cold weather-related disturbances and, as Nick mentioned, performance has been very strong at ASAI after completing our maintenance activities. Electricity production for the first quarter was positively impacted by efficiency improvements across the asset portfolio and incremental production from our PEI power facility, and negatively impacted by winter-related seasonality. We generated a net loss of $33.2 million for the quarter, primarily driven by a loss from the change in fair value of our private warrants, as well as increased G&A expenses, partially offset by strong market pricing of environmental attributes, natural gas, and electricity. G&A costs for the first quarter totaled $26.4 million and included increased costs related to headcount, professional services, and other costs related to scaling our business for our next phase of growth, as well as $8.3 million related to acquisition and other transaction costs, including costs related to certain joint ventures in our recent secondary offering and severance payments related to our leadership transition. As we develop projects within Lightning Renewables, and complete the acquisition of MnGenCo and onboard its employees, in addition to developing our prior backlog, we are now scaling up for a larger company than before, and one with substantially higher earnings power. As a result, we have increased our expected 2022 G&A to approximately 55 million, which we believe will support our ability to execute on our expanded backlog and obtain operating leverage to efficiently scale even further. We reported adjusted EBITDA of $20.6 million for the first quarter, which was positively impacted by strong market pricing of environmental attributes, natural gas, and electricity, and, to a lesser extent, negatively impacted by increased G&A. Net loss and adjusted EBITDA were also impacted this quarter by the timing of the ramp-up at ASAI and associated timing of monetization of environmental attributes. We began monetizing RINs in March related to ASAI RNG production in prior months. RINs are typically monetized one month in arrears compared to production, and we will achieve steady state related to RIN monetization from ASAI in the second quarter. As we've mentioned before, there's typically a lag between a facility coming online and the facility receiving certification to monetize RINs and LCFS credits. We estimate approximately three months on average for RINs and nine months on average for LCFS credits. As we complete facilities, place them into service, and ramp up production, the timing lag to monetize environmental attributes also impacts the revenue and EBITDA profile associated with these projects. There is a lag in revenue and adjusted EBITDA when a project is started up because expenses are being incurred and recorded for production in the early months but a portion of revenue corresponding to that production, which could be a material amount, will lag due to the timing of RIN and or LCFS credit sales. Once the projects are ramped up and certifications are received, cash flows from the sale of environmental attributes, excluding the impact of price fluctuations, are expected to generally stabilize on an annual basis, with some projects showing entry-year variations due to seasonality and production. As of March 31st, we had 349.2 million of outstanding borrowings, including 217.2 million of outstanding borrowings under our term loan, and 132 million of outstanding borrowings related to our side project financing. Under our revolving credit facility, we had no borrowings outstanding and had issued letters of credit totaling 19.9 million. As of March 31st, our liquidity position was 269.8 million, including $30.8 million of cash and cash equivalents, $8.9 million of restricted cash, and $230.1 million of undrawn capacity under a revolver. During the first quarter, cash used in investing activities totaled $66.5 million. We spent $61.4 million on development activities related to construction and optimization across our various plants and projects and development, and $7 million primarily related to the acquisition of landfill gas rights assets. We also made contributions of $4 million and received return of investment of $4.1 million related to our equity method investments. In March 2022, Arkea supported an underwritten public offering in which Aria Renewable Energy Systems LLC sold approximately 14.9 million shares of our Class A common stock and a price to the public of $17.75 per share. The transaction resulted in no proceeds to Archaea, a decrease of 14.9 million shares of our Class B common stock, and a corresponding increase of 14.9 million shares of our Class A common stock. At the closing of the offering, Aria Renewable Energy Systems LLC fully exited their position in the company. They had received shares at the close of our initial business combination in September 2021 related to their ownership of Aria Energy LLC. Before turning the call over for Q&A, I'd like to quickly discuss our updated 2022 guidance. Today, we are pleased to reconfirm our full year 2022 R&G production sold guidance of 11.1 to 11.7 million MMBTU electricity production sold guidance of 850 to 950,000 megawatt hours, and adjusted EBITDA guidance of 125 to 145 million. This slide shows the assumptions underpinning our 2022 guidance ranges. Some assumptions, such as volumes expected to be sold under our long-term fixed price contracts and rent pricing on unsold volumes, are unchanged from our original guidance provided in March. Additionally, Our 2022 development plan expected capital expenditures related to projects with expected completion in 2022, and those projects estimated earnings power remain unchanged. Currently, taking into account volumes expected to be sold under our existing long-term fixed price contracts and forward rent sales this year, we estimate approximately 4.7 to 5.3 million MMVTU of our expected 2022 RNG production will be subject to market pricing. Additionally, we have increased expected G&A to approximately $55 million due to additional scaling of our business and expected headcount additions from the acquisition of Ingenco. As Nick mentioned earlier, due to the pending Ingenco acquisition and Lightning Renewables JV, we expect additional near-term capital expenditures including both acquisition and development capital. As a result, prior guidance providing regarding 2022 capital expenditures should no longer be relied upon. We are actively optimizing the pace and timing of our long-term development plan, and we expect to provide guidance for expected capital expenditures at a later date. As a result of recent transactions announced and their impacts to our project development backlog, we expect to enter into one or more capital markets or private financing transactions to fund the acquisition of Ingenco and certain additional capital expenditures related to incremental RNG development projects and potentially to fund a portion of our base development plan to provide additional capital for acquisitions or incremental development projects or for general corporate purposes. As Nick mentioned, We are committed to securing funding for our near-term capital needs as soon as practical and at the best terms available for ARKIA and our stakeholders. To conclude today's prepared remarks, I would like to reiterate how excited we are about where ARKIA is today and about the unified passion our team shares for advancing meaningful decarbonization across industries while delivering strong, risk-adjusted returns to our shareholders and improving the quality of life within communities where we operate. And with that, I'll turn the call over to the operator for Q&A. Thank you all for your interest in RQ.
spk10: Thank you.
spk09: Ladies and gentlemen, we will now begin the question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. 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. One moment, please, while we poll for questions. As a reminder, we request you to limit to one question and one follow-up. We have a first question from the line of Hamza Mazari with Jefferies. Please go ahead.
spk08: Yes, hi, good morning. My first question is just on the Republic JV. Specifically, what does your bandwidth look like internally to execute on this, just from a headcount perspective, management-wise? And do you see other ventures like this in the solid waste industry? I mean, waste management has talked about potentially doing a lot of RNG themselves, but they've also left it open to developers. So curious to see, you know, who you're bidding against on these type of, you know, large kind of projects, JVs, I guess. Any thoughts there?
spk04: Yeah, Hamza, this is Nick. Great questions. So on the first one, I think, you know, when Republic was picking its partner for this, and it was a very competitive process, you know, the first thing that they cared about was execution. I think who's really going to be committed to developing all these projects and more, you know, in a sustainable way. And I mean, sustainable in a very kind of comprehensive way. So that was a key focus for ours. And I think their ability to see how we could execute so many projects so quickly should speak to kind of our internal confidence and our ability to you know, build a company that can do 20 projects per year in a very repeatable and standardized fashion that the industry really hasn't seen before. So, you know, part of it is they looked at kind of our historical abilities, getting a sign online, they looked at our supply chain. I think they confirmed, you know, I think a lot of the things that we've been building for and building the company to be able to execute in the future or something like this. So, yeah, we think about execution going forward as something as getting easier, as really de-risked with increasing standardization, increasing stand-up of our supply chain, and really have a lot of confidence in our ability to do 20 RNG projects a year across a number of different sizes and across the country. And that lends itself to achieve some of the pretty aggressive development targets that both us and Republic have put out related to this JV. And the second question is, We think that the Republic JV is probably unique and unlikely to be repeated at this scale. If you think about the other waste companies, there are additional, the market is probably kind of 50% consolidated across landfill owners, the big public company landfill owners, and Republic has a really significant amount of developable opportunities and then future developable opportunities. I think that you'll see, you know, we are interested in doing other kind of, you know, joint ventures at smaller scale or joint ventures with municipal landfill owners or private landfill owners that also want to participate in our kind of development plan and our economics. But I think we're not going to see anything like this in terms of initial size of 39 projects, 13 million MMBTU annually, and then also sort of growth potential, not just from additional projects which would go get added to the jv which we're very excited about um but also just sort of embedded upside from the core projects that we have and these are really long-term assets and with a world-class partner that's committed to putting in a municipal solid waste in a very sustainable way to keep feeding underlying landfill gas growth in the future through the permitted life of the landfills um that's very helpful and just my follow-up question you know i'll turn it over is just uh
spk08: you know, in terms of the development costs and funding, do you have a sense of, you know, order of magnitude, what type of capital you need to raise and kind of the timing of that? And is it too early to sort of talk about equity versus debt component? Just any thoughts there? Thank you.
spk04: Yeah, I'll try to answer that briefly and then let Brian chime in. I think, You know, these are opportunities that, and I'll include Ingenco in that as well, these are opportunities that we've been working towards for a while. And then simultaneously, we've been, you know, as we've said publicly, for the last couple quarters, we've been looking at ways to, you know, maximize our balance sheet and really take advantage of the predictable free cash flows that we have and the strong contracted cash flows that are underpinning, you know, that potential balance sheet maximization. So, We've been working towards some exciting options there that we're excited about. From my perspective, it's too early to discuss debt versus equity, but we've been working towards this balance sheet maximization process for some time and have a lot of confidence in our ability to to develop all of our core assets in addition to new assets, even beyond the Republic JV and the Ingenco acquisition.
spk06: And Hamza, this is Brian. I would just add that the thing that gives us a lot of confidence is this supply and demand mismatch in the long-term fixed price offtake with investment-free counterparties. And when we look at one of the benefits with the our partnership with Republic is that we're very aligned in a commercial strategy there to go and to serve this market. And also one other piece that is exciting is just thinking about the customers that are already bringing waste into Republic landfills. Thinking about that is now these landfills becoming renewable energy centers that then also we could work together to create new long-term offtake with corporate customers to help decarbonize. Taking their scope three emissions is what they put into landfills and then thinking about lowering their Scope 1 emissions with renewable natural gas. And so with the commercial strategy alignment, that gives us a lot of confidence in terms of how we think about our approach to financing in the future.
spk08: Got it. Thank you so much.
spk09: Thank you. We have next question from the line of Jeric Whitfield with Stifel. Please go ahead.
spk05: Good morning, all, and congrats on your recent JV and acquisition announcements.
spk10: Thank you.
spk05: With regard to your long-term earnings power projection on page 9, could you comment on the embedded efficiency and base organic volume growth assumptions? And also, given the conservatism of your D3 rent assumption, could you offer a high-level sensitivity for your earnings power improvement for every $0.50 increase in D3 rents?
spk10: Sure. This is Nick. I think on the
spk04: When we're looking at earnings power, we're trying to really do it in a very consistent and conservative way. So there's not a lot of underlying, if I understand your question correctly, there's not a lot of underlying landfill gas growth that's going into that earnings power number. It's a relatively near-term ramp of RNG production. And, you know, any future benefits of landfill gas growth or collection efficiency at the landfill itself, you know, would translate to numbers above that. So there's I think, compelling kind of embedded upside in that number on a long-term basis, if you think about where we are on the overall, the cumulative landfill gas curve, given that we're underpinned by really long-term assets that continue to take an increasing amount or stable amount of trustable waste that produces gas in the future. And then if you look at the earnings power number, again, you know, we use the existing contracts that we have, right? And then we also use $1.50 RIN and $140 metric ton. LCFS credit pricing number, and then a $3 MMB2 brown gas number. So it would be pretty easy, I think, to back into, you know, the percentage of volumes in that number that would be uncontracted, given the fact that we're only using the existing contracts that we have. We're not using our long-term target contracted number. And then, so we think there's sort of positive exposure, you know, significantly, and it's an easy math equation to do, but on every 50 cents per gallon. And we can make that more clear in the future. But what we like about that $1.50 RIN and why we don't really talk about higher numbers or sensitivity around RIN pricing in the future is because a $1.50 RIN could be pretty easily underpinned by, you know, by our existing contracts and contracts that we expect to sign in the future. So we think about that number as really de-risked, particularly when you add inflation escalators, which we have across a number of our contracts on the fixed price contract side. So $1.50 per RIN, 11.727 MMBTU RIN, you know, it translates to a sort of outer year, you know, three to seven year increase
spk10: price that's easily underpinned by existing contracts and future contract demand.
spk05: Thanks, Nick. And that's precisely what I was targeting. And we're getting about a 15% sensitivity to the earnings power at 30% of your volumes. I'm sorry, 30% of your volumes having market exposure. That's the kind of math that we were backing into. And I agree, it seems simple and it seems like there's quite a bit of upside there. With regard to the Republic JV, we noted in your disclosure today that you will receive fees for engineering procurement and construction management services during development and construction and fees for O&M services after completion. With the understanding that that's an ideal arrangement in the base case, could you just help us understand the materiality of these fees in this arrangement and if it adds to your earnings power or simply reduces your contributed capital requirement?
spk04: Yeah, I don't think it's a, it's not, I wouldn't think about it as sort of material contributor to earnings power. I would really more think of it as a way for ARCE to control and build plants according to our specifications and costs and future cost targets. And I think that's really what we're trying to create with EPC management and, or the construction management agreement, the O&M agreement that we have for public is that we're going to treat you know, these projects like additional RK projects, and they're going to follow the same processes and standards that we're deploying across our portfolio that will lend itself to benefits in terms of methane recovery, in terms of uptime, in terms of costs to the JV in a very aligned way. And so it's not a significant contributor, I think, either way. It's not a significant quantum, but it's really for us, it's an important point of clarification that we're not reinventing the wheel in terms of developing, you know, a new archaea plant for this particular JV, that it's going to follow the same design goals and targets, you know, with a partner that's very aligned in what those design goals and targets and potential costs will be.
spk06: And this is Brian. I would just echo also what Nick said in his prepared remarks around a four and a half times build multiple. I think that's when you think about what that earnings power is over time. That's really when these projects are in place. That's across an average of the portfolio. And as we think longer term with earnings power, you know, ultimately what we're going to care about is we're going to be completely aligned with Republic to make these plants the highest methane recovery as possible and also the highest uptime as possible. And that's really, really unique about when you're actually, you know, solving for, you're working with the landfill owner themselves, and that's just really, really special. So I would say that's That's really important, and I think second is just as we think about that four and a half times we think about opportunity going forward, you know, Republic searched far and wide in the industry to figure out who they wanted their partner to be, and as they think about, you know, the ability to put more projects to work here, potentially ones that are current electric projects or ones that Arkea has in our own portfolio, you know, we're both really, really excited and incentivized about this 39 projects is the start, and we're going to be growing it over time.
spk10: That's helpful. Thanks for your time and responses. Thank you.
spk09: We have a next question from the line of Matthew Blair with TPH. Please go ahead.
spk07: Good morning, Nick and Brian. You reiterated the adjusted EBITDA guidance of $125 to $145 million for 2022 despite raising your SG&A by $10 million. Could you talk about the offsets there? Are you assuming a higher brown gas price to offset that? that increased SG&A?
spk04: I don't think that the – there's probably some upside still to continued brown gas pricing in the model yet to what we have. I mean, you can tell by our numbers even continuing at the 250 ren despite, you know, much higher ren prices today for the remainder of the year that we're pretty conservative about things we can control, even in near-term models. There's probably a little bit of upside there. You know, I think it reflects some, you know, or reaffirming those targets despite slightly higher SG&A, and that SG&A is very pointed towards the future, and we still think there's considerable operating leverage there. But those hires are really, you know, and that expansion is really pointed towards, you know, the Republic JV, the Ingenco acquisition, those kinds of things. So, yeah, I think it's more just, you know, overall improvement in the business and then continuing to invest in growth. And, you know, we still, we have upside, you know, to those numbers based on continued higher environmental attribute pricing, as well as, you know, continued high natural gas pricing. But I personally have no ability to predict natural gas pricing in the near term or the long term. So, and I feel the same way about RINs. So I'm comfortable with this, with this approach.
spk07: okay and then um the winter downtime in q1 is that a pretty typical uh seasonal impact that we should model in going forward or or would you call that unusual and then as far as quarter date operations did you say that you're running at 99 percent um yeah so when you should not model winter winterization effects or seasonality going forward and uh we um did not
spk04: adequately winterized or have a winterization program going into the winter, which is really painful to watch. But we've corrected it. It's not going to happen in the future. And there's lots of little things that need to be weatherized. And weatherization can degrade over time. And small disconnections in either electrical, mechanical, as related to winter effects can you know, can shut down a plant and can be difficult to troubleshoot. But this is a totally preventable issue that I think we, you know, we got our hands around very quickly after integrating the REA assets, but we're much better prepared for that in the future.
spk06: And specifically to the point on the 99%, specifically to the point on the 99%, that was related to a sigh uptime. So, the beginning of March after we did the optimization and some adjustments. Since that point, running on the Keystone landfill gas, it's been a 99% uptime, and it's also been much higher methane recovery than we modeled. And the good news also is that we recently were able to introduce the flows from the Alliance landfill as well at the beginning earlier this month. So it's exciting to see not only is the uptime, you know, at trend and higher than trend, but also methane recovery and then the ability that now we have both sense of life flow gas flows.
spk10: Got it. Thank you. Thanks. Thank you.
spk09: We have next question from the line of Paige Graff with U.S. Capital Advisors. Please go ahead.
spk00: Good morning, guys. Just wanted to get a little bit more color on the Lightning Renewables JV and kind of how the deal is structured. For the $13 million of production, is that all going to Archaea or that be split between Archaea and your JV partner? And will they be receiving the standard royalties as the landfill owner?
spk06: Hi, Paige. This is Brian. I can speak to that. So I would think about the JV as the entity that has entered into a landfill gas development agreement with Republic, and that entity has also entered into an EPC agreement and a future O&M agreement when the plants are running with Archaea operating. And so when you think about the JV itself, of which the, as we described in our prepared remarks, is 60% Archaea, 40% Republic, that's a gross MMBTU that that JV will produce over time. And then that JV will also, for the ability to have the landfill gas to process, the JV itself will send a royalty to Republic, just as the JV itself will send an EPC fee to ARCA or an O&M fee as we're operating going forward.
spk00: Okay, great. Thank you.
spk10: Thank you. We take the last question for the line of Craig Shearer with
spk03: So does your ever-expanding six to eight year growth project opportunity set push to the sidelines carbon sequestration and solar power opportunities to drive down CI scores? And in your prepared remarks, you mentioned increasingly operating off internally generated power. help reduce your CI scores in addition to cutting costs?
spk04: Yeah, great question. So, I mean, I think generally we're taking an MPV prioritization approach to project development, all things being equal. And we have that flexibility in our portfolio, given that we have sort of held by production assets with very little sort of expiration risk across the 88 projects that we have signed under long-term development agreements. So generally, you know, that being said, carbon sequestration, low CI initiatives, you know, other opportunities may, would be on the lower end of the net present value prioritization list. But there are some compelling opportunities that challenge poor landfill gas projects in terms of rates of return. We're still excited about those. Those need to be de-risked from a permitting standpoint. But there may be a way to do both with partnership structures and to do, certainly to do both at some level. But I think the priority of capital will go towards ISNPV first, all things being equal.
spk03: Gotcha. And just imagining for a moment the magical world where, you know, funding is not a concern. what is an optimal annual growth capex spend over the next two to three years? In other words, said another way, if you really are progressing on 20 projects a year, what is that average run rate you see over time?
spk10: Yeah.
spk04: I think it's really, you know, if we have a portfolio of really high NPV opportunities and And without expiration risk, you know, we should be as aggressive as possible, assuming, you know, assuming that we have no scarcity of capital, right? And so what is occurring now is an optimization problem where we have balance sheet maximization, we have sources and uses, and we have a highly attractive portfolio of opportunities that we'd like to aggressively develop. as quickly as possible. I mean, I think generally we talked about, I mean, that's how we approach the world, right? So it's not as simple as, you know, $300 million a year or $400 million a year, whatever it is. It's the opportunity set and it's the ability to self-finance that as much as possible, you know, balance with kind of scarcity of capital and the attractiveness of capital outside of kind of free cash flow in order to do it as quickly as possible. And then the second part of that is your question around kind of what that looks like on 20 projects a year. I mean, if you take sort of an average project, right, that our competitor might be doing at $40 million a year, like a 4,000 SCFM project that we're doing, you know, at $20 million a year or $23 million a year, you know, that gives you some rough example of total capex if we were doing 20 projects a year, assuming sort of an average flow site of 4,000 SCFM. And We've also shown that because of our commercial approach towards long-term fixed price investment-grade contracts, because of the high predictability of our projects and our plants, that we have the ability to really do that in a very efficient way, not just from free cash flow, but also just balance sheet maximization. And in a world of debt investors that are looking for green yield, where we kind of uniquely offer something to the market that's very attractive and very predictable.
spk03: Great. Last clarification on that. It sounds like what you're saying is some of the newer opportunities may be treated a lot more like a SAI, which has much higher hedged position and much lower equity capital requirement than perhaps the rest of your portfolio at this point. Is it fair to say that you want to model the ASSAI example as you go forward?
spk04: I think what we see ASSAI as an example of what's possible and an example of what's possible given that we have world-class debt investors, you know, Nuveen, Barings, PacLife, you know, believe in this kind of investment-grade credit on a project basis and believe in the predictability of the cash flows going forward. So that sort of business model of the percentage going to those investment-grade contracts and the way that we design that project is sort of core to who we are and how we deploy capital. And I think what that says is that just opens up the opportunity for that kind of financing structure. It's a more complicated problem than that. It's a more holistic problem than that that that involves other areas of growth. But I would just point to that as one way to achieve very attractive balance sheet maximization strategies.
spk10: Thank you very much.
spk09: Thank you. Ladies and gentlemen, we have reached the end of the question and answer session. I'd like to turn the call back to Nick Stork, CEO, for closing remarks. Over to you, sir.
spk10: Thank you.
spk04: This time last year, many of you heard about Archaea for the first time. You probably also heard the company's name pronounced four different ways. We were launching a pipe trying to explain our unique cash flows, competitive differentiation, and favorable market dynamics to world-growing, increasingly skeptical SPACs, lofty profitability aspirations, and difficult to determine greenhouse gas reduction benefits. Twelve months ago, our combined business with Aria had approximately $40 million of EBITDA in the prior year, 2020. with 21 operating plants and $300 million of earnings power on an apples-to-apples basis. RQ version one was technically sound, but not proven in the field. We had some strong commercial agreements from Legacy Aria, but much ado to show that we could secure our target volume percentages under long-term investment-grade contracts. Asai was mid-construction. We talked about a compelling addressable market, though finite, and expressed confidence in our ability to secure a billion dollars of predictable annual free cash flow or earnings power, but the market, Competition was accelerating with new entrants. Fast forward 12 months, we've accomplished the following. We reported EBITDA 90% higher than our previous year and are pointing to 70%, approximately 70% growth this year. We're projecting more than 2x RNG production and 2x electricity production versus the base business from the pipe materials. With Ingenco, we will have more than doubled our number of operating plants across the country. We signed landmark offtake agreements with FortisBC and Northwest Natural, and we've also confirmed the market dynamics we discussed a year ago, that demand exceeds supply, and ARCA is increasingly well-positioned to achieve appreciating pricing and terms with the best counterparties. We completed ASAI, the largest R&D plan in the world, in less than two years from signing the development agreement, with a construction timeline closer to 12 months. We signed a transformative GV with a world-class environmental services partner in Republic. and embarked on an initial platform of 39 projects that I expect to grow considerably in terms of number of projects and project economics over a short period of time. We have field deployed and seen extremely positive results throughout our optimization projects this year today of each major processing system that will go into ARCHI version one, significantly de-risking its success. We built a dedicated supply chain to support future growth and off-the-shelf RNG development We've grown earnings power to 600 million with a realistic near-term path to secure the runway to our billion dollar long-term target. This figure is truly predictable and long-term with attractive underlying growth and positive exposure to inflation. It also excludes new projects we expect to sign, carbon sequestration, hydrogen, and many next generation projects that we are quietly excited about. We've integrated several acquisitions with new people, and built a strong culture around supporting plant operations and the best gas processing nerds in the world. We've done these things without deviating from our capital deployment approach of don't lose money, and we've secured uniquely attractive free upside while also ensuring downside case returns above our target thresholds. How did we do this all so quickly? In short, ownership. As one of our gas processing leaders said recently, when we worked at other companies, we were building equipment for other people. We wanted to drop the equipment off at the customer and get out of there as quickly as possible. But now we are building the systems that we are going to own for a long time. It changes how we design something and how we execute that design. ARKI is like that. Management are significant owners of the company. Nearly every employee is a shareholder. Across this group, we love what we do and believe that this is the best business out there. from returns on capital to predictability of cash flows to supply-demand dynamics to real, easy-to-understand environmental and societal benefits. As owners, when you say you're going to do something, you're much more likely to do it and to support it after you build it. You have to live with the results. You care. It's part of you. It's core to your reputation, and it's important to everyone around you. Your design goals become long-term. This is a significant competitive advantage. And if we can maintain this strategically and operationally, the execution risk on the billion dollars of predictable cash flow goes to nil. I'm proud of how many people have bought into this vision, and I'm very grateful for it. The results are the consequences of buy-in at scale. We are determined to continue operating this way with pride, integrity, and ownership.
spk10: Thank you. Should we now conclude? Yes. Thank you very much.
spk09: Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
Disclaimer