Archaea Energy Inc. Class A

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.

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.

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.