Archaea Energy Inc. Class A

Good morning and welcome to the Arkea Energy Inc. second quarter 2022 earnings call and webcast. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. If you would like to ask a question after the company's presentation, please press star one on your telephone keypad. As a reminder, this event is being recorded. 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 second quarter 2022 earnings conference call. With me today are Nick Stork, Arkea's chief executive officer, and Brian McCarthy, Arkea's chief financial officer. Arkea released financial and operating results for the second quarter and first half of 2022 yesterday afternoon, and those results are available on the investor relations portion of our website at arkeainergy.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 two of our presentation. These forward-looking statements reflect our views as of the date of this call, and ARKEA does not undertake any obligation to update forward-looking statements to reflect events or circumstances after the date of this call. Additionally, this call will contain discussion of certain non-GAAP measures, including but not limited to 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. This call will also contain discussion of estimated long-term annual earnings hour, or earnings hour, which refers to estimated long-term annual adjusted EBITDA after specified projects within the company's R&D development backlog for which GAAP's rights agreements are currently in place are completed and ramped up to full Our presentation includes additional information regarding estimated long-term annual earnings power and the underlying assumptions used in this 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 expected 2022 full-year adjusted EBITDA An estimated long-term adjusted EBITDA to net income or loss, the closest U.S. GAAP financial measure, cannot be provided without unreasonable efforts 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 second quarter results, recent highlights, and an update on our strategic and operational priorities. Brian will then give a commercial and business development update and review financial results and 2022 full year guidance. We will then open the call for questions. And now, I will turn the call over to Nick Stork, ARKEA's Chief Executive Officer.

Good morning, everyone, and thank you for being here for ARKEA's second quarter 2022 earnings call. We're excited to be here today to discuss our team's achievements in the first half of 2022 and where we're heading in the remainder of the year. Over the last six months, we've successfully entered into an industry-changing JV, acquired a landfill gas to electricity business at a compelling valuation, meaningfully grown our project development backlog and corresponding estimated long-term annual earnings power, secured an amended and upsized credit facility, signed additional long-term fixed-price commercial contracts, produced our first models of all components of ARCIA version 1 plan, and made strides on our 2022 development program. The ARCIA team's collective efforts have built ARCIA into a renewable energy platform that will continue to reshape and lead the R&G industry. I'd like to start by sharing a few key highlights of our performance for the second quarter. First, for the second quarter 2022, we reported RNG production sold of 2.04 million MMBTU, electricity production sold of 159,000 megawatt hours, adjusted EBITDA of 30.1 million, and net income of 32.6 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 higher cost of sales due to higher gas costs, electricity utility costs, and employee costs, as well as higher royalties due to higher energy revenues. As we look to the second half of the year, we are increasing our 2022 adjusted EBITDA guidance. We are also increasing our 2022 capital expenditure guidance to incorporate development costs related to recent favorable additions to our development backlog. We are also updating our full year 2022 RNG production sold guidance and reaffirming our full year 2022 electricity production sold guidance. Strategically, we successfully completed two transformative transactions that were announced in the second quarter of this year. In early July, we funded our initial capital contribution to Lightning Renewables, our R&G development joint venture with Republic Services, while concurrently adding a 40th project to the JV with the acquisition of the Fort Wayne site. And we also successfully closed the previously announced acquisition of Ingenco. We look forward to seeing the impact of both Ingenco and Lightning Renewables on the future growth and success of our business. Additionally, ARCA recently won three competitive RFP processes, to develop new RNG facilities at government-owned landfills. Once gas rights agreements are signed for these sites, these projects will increase the company's backlog from 88 to 91 RNG development projects. These municipal landfill wins are consistent with the company's strategy to pursue new RNG development opportunities at scale and across the large total addressable market of public and private landfills in the US. On the commercial front, we recently signed new RNG sales agreements with Energear and UGI, which added additional RNG volumes to our contracted base. Moreover, we continue to benefit from appreciating pricing indications for long-term fixed price contracts driven by increasingly strong supply and demand dynamics within the RNG market, and we expect to announce additional contracts in the second half of this year. Operationally, we continue to make meaningful progress on our 2022 development plan. We've seen our initial phase of optimization work translate into improved operational performance within our existing RNG asset base, which ultimately results in increased RNG production and expected project returns. We've also made progress on our new build projects. Our second dairy digester RNG facility came online in May 2022, and we're preparing for our inaugural ARCA version 1 plant installations in the second half of this year. When we announced the original business combination between RAC, Legacy Archaea, and ARIA in April 2021, we committed ourselves to a business plan that was built upon the idea of doing what you said you're going to do. It's been about 18 months since we made that commitment, and I'm proud to say that we have continued to uphold our commitment to execution. Across the board, we're either on track exceeding or actively fighting to achieve our original goals. RNG production from our existing asset base continues to improve year over year as we are optimizing the legacy ARIA asset base and increasing production at ASAI, despite impacts from winter issues, maintenance, and timing of the Alliance tie-in permit earlier this year. We are on track to deliver our current development projects with higher capital efficiency and lower build multiples than we originally expected. Meanwhile, we are continuing to reinforce the value of our distinctive commercial focus on fixed price, long-term offtake as we continue to sign up additional contracts in an appreciating pricing environment. And we are dramatically expanding our development backlog at attractive multiples. Collectively, our widespread commitment to execution has improved our ability to generate meaningful adjusted EBITDA and attractive returns in both the short-term and the long-term. This year, there are three major operational initiatives we are focused on that are imperative for us to position ourselves for sustained operational execution at scale and to ensure we are maximizing RNG production and EBITDA from our existing asset base. They are ramping up a SAI RNG facility to full flows while maintaining operational excellence, high grading legacy acquired RE assets to ARCHE operational standards by completing optimizations and mitigating capacity constraints. And lastly, deploying and perfecting our ARCHE version one plant design. We are currently executing on all these initiatives and believe they will position us with a significant competitive advantage for future development. The first of these initiatives focuses on Project ASAI and maintaining operational excellence there. Now that the facility is successfully processing full flows from both the Keystone and the Alliance landfills, we are focused on operating ASAI at or above our internal uptime methane recovery and in-light methane targets. To accomplish this goal, we continue to invest in the development of our technical team while adding design redundancies to key components to mitigate potential downtime events. Our efforts to date have resulted in record daily production for any RNG plant in the industry being achieved multiple times in the last several months, and we expect flows into the plant to continue increasing through the remainder of the year. The next initiative focuses on optimizing our legacy RNG asset base. We have identified two key areas that, once addressed, could more than double the earnings power of our legacy business. First, many of the legacy RNG plants are undersized and cannot handle the full flows coming from the landfills, resulting in over 19,000 SCFM, or standard cubic feet per minute, of valuable landfill gas being flared or combusted. That would be nearly equivalent to flaring and combusting nearly all the inlet landfill gas coming into our side plant, rather than creating RNG. Second, many of these same plants have insufficient nitrogen rejection units, or NRUs, and or CO2 separation systems, which, if let undressed, result in additional unscheduled downtime and lost methane. We are leveraging our robust technical expertise to right-size our facilities to handle the full site flows and upgrading underperforming NRUs and membrane-based CO2 separation systems to high grade these legacy plants to best in class operational standards. We also wanted to provide additional specifics around our ongoing optimization program, which will not only mitigate the 19,000 SCFM of lost landfill gas at our legacy facilities through capacity expansions, but in combination with other efficiency improvements is expected to result in more than $100 million in incremental annual EBITDA added to our existing RNG asset base after completion of ramp-up. For our third major initiative, we are actively deploying our ARCA version 1 plant design across both optimization and new build projects. And these revolutionary standardized modularized plants can be easily identified with our bright ARCA green. Shown in the pictures here are some of the first V1 nitrogen rejection units, CO2 separation systems, and other key equipment, all of which are on skids reflecting the modularized design approach we often discussed. I also want to reinforce why we are so excited about the ARCA version 1 design. We are increasingly confident that ARCA version 1's standardized and modularized design will prove to be the cornerstone of our success. As you can see in the chart here, we believe that every aspect of the version 1 design provides a unique competitive advantage relative to our current industry design. Moreover, we believe the RKV1 design will reduce project development costs by about 45% and construction timelines by about 50% as compared to industry averages, while allowing for a standardized off-the-shelf approach that ultimately ensures stronger operating performance and more efficient capital deployment. Staying on the topic of operational excellence, I also want to highlight why we expect our unit-level margins to continue improving both on an absolute basis and relative to industry standards. Ultimately, we expect our unit level margins to be driven higher by increased asset utilization, which ensures we are extracting every molecule of RNG and every dollar of cash flow that we can from our plants. To highlight a few key items that we expect to drive superior asset utilization, we can benefit from self-sourcing power from RNG plants from our portfolio of landfill gas to electric plants. and we expect our RQV1 design to reduce overall power consumption. We also see continued pricing improvement in our long-term offtake discussions. Long-term offtake avoids transportation marketing costs, and on a net basis, the improving pricing environment is offering a compelling and improving value relative to short-term transportation markets, and with significantly less risk. We also continue to run our plants with significant operating leverage, backed by our strong team of in-house technical professionals which results in informed decision-making and improved plant performance. Shifting gears, we are pleased to provide a few exciting updates on our two recent transformative transactions, which we announced during the second quarter. First, our Lightning Renewables joint venture with Republic Services continues to progress and expand. In July 2022, we funded our initial capital contribution of $225 million to Lightning Renewables, which included the company's net contribution to the JV for the acquisition of the Fort Wayne site. The Fort Wayne site is the 40th project added to the Lightning Renewables JV and includes a medium BTU facility with landfill gas rights. Lightning Renewables plans to build a new RNG plant on the site that will be expandable up to 9600 SCFM as flows continue to grow, making it potentially one of the largest RNG plants in our JV portfolio after it's constructed. In addition, Archaea and the JV entered into a new service agreement under our existing EBC contract to allow for upfront permitting, zoning, and engineering work across all 40 Lightning Renewables R&D development projects. We believe the systematic and expedited approach to pre-construction activities will reduce execution and timing risk on project development. On the heels of the recently passed Inflation Reduction Act, which Brian will discuss in more detail shortly, We are particularly excited to see the potential benefit of economic upside from the investment tax credits on our JV projects, in addition to other complementary business initiatives. We also successfully closed our previously announced acquisition of Ingenco in July 2022 and believe it was acquired at a very compelling valuation relative to recently announced comparable transactions. The Ingenco landfill gas to electric portfolio is a great example of where we can capture significant value by taking advantage of self-sourced electricity at scale and the opportunity to hedge electricity costs across our portfolio. We are very constructive on renewable energy in the Mid-Atlantic, especially in Virginia, and this consolidated geographic footprint has many strategic advantages as we bring these plants up to ARCA real-time monitoring standards. In addition to developing RNG projects at a majority of the NGENCO sites over time, We have significant optionality to generate immediate cash flow by monetizing 95 megawatts of existing nodal capacity at compelling prices in the PJM market, which is short capacity for new solar projects. These are just a few of the many opportunities that make us excited about continuing to run our landfill gas to electric facilities, even after we construct and commission R&G facilities adjacent to many of them. Before I turn the call over to Brian, I want to lay out our 2023 strategic and operational priorities. With our growth pipeline largely secured with 88 projects in our development backlog today, we are now able to shift focus towards executing on scale development and incremental earnings power growth while upholding continued operational excellence and capital efficiency. We believe that we will further grow our competitive advantage by continuing to invest in technical expertise, a secured and high-grade supply chain, and optimize construction processes that should enable us to construct and commission 20 RNG projects in 2023. We believe that we'll be able to do this while also maintaining top-tier operational performance that yields a $3 per MMB2 operating expense, excluding royalties and transportation and marketing costs, which is expected to be achievable through many of the initiatives that I discussed earlier on improved asset utilization. In addition, we believe we have identified an organic pathway towards generating a billion dollars in estimated long-term annual earnings power. We can do this without relying on acquisitions. This is underpinned by monetizing our portfolio of CO2 volumes, monetizing the waste heat generated across our RNG and electric projects, and by making improvements in investments into improved collection efficiencies at the landfills where we operate. Outside of these opportunities within our existing portfolio, we see additional opportunities for us to add additional municipal landfill RNG projects to our development backlog and pursue economically attractive clean hydrogen projects. The critical mass of long-term, highly predictable free cash flow that these initiatives would provide should translate into an increasingly premium yield for RGIA. Lastly, we are committed to growing our business in a way that is non-dilutive and allows for a rapid deleveraging. We are already well on our way with a low risk run rate EBITDA greater than $200 million once current year projects are complete and ramped to full flows that will support near-term deleveraging and a committed focus on high return, low build multiple RNG projects. Moreover, we will continue to explore additional low-cost capital non-recourse financing opportunities that can further de-risk our growth in a non-dilutive way. It has been an action-packed first six months of the year, and I continue to be amazed at the work our team has accomplished up to this point. Looking towards the remainder of this year and beyond, we're prepared and poised to achieve the next important phase of our development program. And with that, I'll turn the call over to Brian, who will provide a commercial and business development update and review our financial results, and 2022 guidance.