Archaea Energy Inc. (LFG) CEO Nick Stork On Q2 2022 Results - Earnings Call Transcript

Aug. 17, 2022 12:46 AM ETArchaea Energy Inc. (LFG)
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Archaea Energy Inc. (NYSE:LFG) Q2 2022 Earnings Conference Call August 16, 2022 11:00 AM ET

Company Participants

Megan Light - VP of IR

Nick Stork - CEO

Brian McCarthy - CFO

Conference Call Participants

Derrick Whitfield - Stifel

Matthew Blair - Tudor, Pickering, Holt

Craig Shere - Tuohy Brothers


Good morning, and welcome to the Archaea Energy, Inc. Second Quarter 2022 Earnings Conference Call and Webcast. [Operator Instructions] As a reminder, this event is being recorded.

I'd now like to turn the call over to, Megan Light, Vice President of Investor Relations to begin. Please go ahead.

Megan Light

Thank you, and good morning, everyone. Welcome to Archaea Energy, Inc.'s second quarter 2022 earnings conference call. With me today are Nick Stork, Archaea's Chief Executive Officer, and Brian McCarthy, Archaea's Chief Financial Officer.

Archaea 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 The presentation and access to the webcast for this call are also available on our website and after completion of this call, a replay will be available for 12 months.

Before we begin, I'd like to remind you that our remarks on this call, including answers to your questions, contain forward-looking statements, which involve risks, uncertainties, and assumptions. Forward-looking statements are not a guarantee of performance, and actual results could differ materially from what is contained in such statements. Several factors that could cause or contribute to such differences are described on Slide 2 of our presentation. These forward-looking statements reflect our views as of the date of this call, and Archaea 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 power or earning power which refers to estimated long-term annual adjusted EBITDA after specified projects within the company's R&D development backlog for which gas rates agreements are currently in place are completed and ramped up to full swing.

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 these estimates and such differences may be material.

A reconciliation of expected 2022 full-year adjusted year result and 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 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 in 2022 full-year guidance. We will then open the call for questions.

And now I will turn the call over to Nick Stork, Archaea Chief Executive Officer.

Nick Stork

Good morning everyone. And thank you for being here for Archaea'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 have successfully entered into an industry changing JV, acquired a landfill gas electricity business at a compelling valuation, meaningfully grown our project development backlog and corresponding estimated long term annual earnings power, secured and amended and upsized credit facility, signed additional long term fixed price commercial contracts, produced our first models of all components of Archaea Version 1 Plant and made strides on our 2022 development programs. The Archaea team's collective efforts have built Archaea into renewable energy platform that will continue to reshape and lead the RNG industry.

I'd like to start by sharing a few key highlights of our performance for the second quarter. First, for the second quarter of 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 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 RNG 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, Archaea 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 produce - to pursue new RNG development opportunities at scale and across the large total addressable market of public and private landfills in the U.S.

On the commercial front, we recently signed new RNG sales agreements with Énergir 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 that 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 secondary digester RNG facility came online in May 2022 and we're preparing for our inaugural Archaea 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 are 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 Assai. Despite impacts from winter issues, maintenance and timing of the Alliance high end 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 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're ramping up Assai RNG facility to full flows while maintaining operational excellence. High grading legacy acquired ARIA assets to Archaea operational standards by completing optimizations and mitigating capacity constraints.

And lastly, deploying and perfecting our Archaea Version 1 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 Assai and maintaining operational excellence there. Now that the facility is successfully processing full flows from both the Keystone and the Alliance Landfills, we were focused on operating Assai 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 today 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 address 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 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 combusting nearly all the inlet landfill gas coming into our Assai plant rather than creating RNG.

Second, many of these same plants have insufficient nitrogen rejection units or interviews and or CO2 separation systems, which if left unaddressed, result in additional unscheduled downtime and lost methane. We're leveraging our robust technical expertise to right-size our facilities to handle the full sized flows and upgrading underperforming enter use and membrane based CO2 separation systems to high grade these legacy plans 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 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 a third major initiative, we're actively deploying our Archaea Version 1 Plant design across both optimization and new build projects. And these revolutionary standardized modular plants can be easily identified with our bright Archaea green.

Shown in the pictures here are some of the first V1 measure injection 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're so excited about the Archaea Version 1 design. We're increasingly confident that Archaea Version 1 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 size.

Moreover, we believe that Archaea V1 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 our RNG plants from our portfolio of landfill gas or electric plants. And we expect Archaea 1 designed to reduce overall power consumption. We also see continued pricing improvement in our long term offtake discussions. Long term offtake avoid 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're pleased to provide a few exciting updates on our two recent transformative transactions which we announced during the second quarter. First, our lending 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 Fort Wayne site. The Fort Wayne site is the 40th project added to the Lightning Renewables, JV and includes a medium BTO facility with landfill gas rights.

Lighting 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 EPC contract to allow for upfront permitting, zoning and engineering work across all 40 Lightning Renewables RNG 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 or 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're 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 Archaea real time monitoring standards.

In addition to developing RNG projects at a majority of the INGENCO 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 RNG 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 ADA 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 a 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 MMBtu 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 $1 billion 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 and investments into improve 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 Archaea.

Lastly, we are committed to growing our business in a way that is non-diluted and allows for 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-diluted way.

It has been an action packed for 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.

Brian McCarthy

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 Nick mentioned, we continue to announce additional commercial offtake agreements in alignment with our goal of securing 70% of expected RNG production sold under long term fixed price contracts. We recently expanded our existing commercial partnership with Énergir by entering into a second long term RNG purchase and sale agreement.

Under the agreement, which is subject to regulatory approval, Énergir expects to purchase 2.15 million gigajoules, or just over 2 million MMBtu of RNG and its associated environmental attributes generated by Archaea annually from its portfolio of RNG production facilities for a fixed price for a period of 20 years. The agreement is expected to commence in October 2023. We could not be more thrilled of our expanded relationship with Énergir. Énergir has ambitious decarbonization goals for the natural gas grid in Quebec, and we look forward to continuing to grow with them.

In July 2022, we announced the new commercial partnership with UGI after entering into a medium term RNG purchase and sale agreement with one of its wholly owned subsidiaries UGI Utilities Incorporated. Under the agreement, UGI Utilities will purchase just under 1000 MMBtu per day of RNG and its associated environmental attributes annually from Assai RNG facility for a fixed price for a period of five years deliveries under this agreement commenced on July 1 2022.

This is Archaea's first contract with a regulated utility in Pennsylvania and our second contract with a regulated utility in the United States. Moreover, this is a pilot program in Pennsylvania, where regulatory authority requires purchase of lowest cost gas and we are hopeful that program could allow for additional intake, commercial offtake opportunities for RNG.

UGI is our interconnection partner at Assai. This agreement represents the first time one of our interconnection partners is purchasing RNG as well. We expect the model of our interconnection partners purchasing our RNG through a repeatable and growing market opportunity.

These two additional contracts add to our strong track record of commercial wins over the last 12 months, all of which underpin our continued excitement about our differentiated commercial strategy focused on long term fixed price contracts. It gives credence to the strong supply and demand dynamics within the RNG market, which remains supply constrained amid growing demand from an increasing number of market participants with regulatory or existential mandates to decarbonize. We expect to announce additional commercial offtake agreements in the coming months.

On the policy front, we were pleased to see the introduction and passage of the Inflation Reduction Act of 2022, or IRA, due to the benefits we believe it entails for Archaea and the renewable and alternative energy industry more broadly. The IRA provides over $369 billion in funding and incentives to support the growth of the industry and development of U.S. renewable energy infrastructure.

For Archaea, the IRA provides potential significant benefits in terms of federal tax credits for certain RNG and landfill gas to electric plant development, as well as federal tax credits, and direct pay options for our envisioned carbon utilization and sequestration and clean hydrogen initiatives. For landfill gas to electric and RNG projects, the IRA provides investment tax credits of up to 30% of the qualified costs. For landfill gas to electric projects, the production tax credit equal to [$0.026], adjusted for inflation per kilowatt of electricity produced may alternatively be available.

For carbon capture projects, tax credits of up to $85 per metric tonne of CO2 captured and stored may be available to Archaea. And for clean hydrogen projects, a tax credit of up to $0.60 per kilogram may be available. For some of these activities bonus credits may also be available. The amount of these tax credits may require that certain prevailing wage and apprentice requirements are satisfied or are waived or the cure provisions are satisfied.

In light of the IRA, we are also very excited to highlight the significant potential of two complementary business lines to our core RNG in landfill gas to electricity operations, CO2 and clean hydrogen. A typical landfill gas stream is composed of about 40% CO2 on average, and we generate large volumes of high purity CO2 is a natural byproduct of our RNG upgrading process. Similar to our RNG, we are committed to repurposing CO2 and naturally occurring emission from landfills into a valuable product that benefits all stakeholders. Therefore, we're actively pursuing both geologic sequestration and utilization opportunities to unlock the untouched economic value and decarbonization potential of our CO2 portfolio.

For the last two years, we've made significant strides in advancing geologic sequestration as a commercial pathway for our CO2. We maintain an industry leading team of in-house subsurface technical professionals that are pursuing a growing list of geologic sequestration projects at or near Archaea sites. While we are approaching permit submittal of several highly economic projects, we are also actively pursuing various commercial opportunities in parallel to monetize our CO2 in various end user markets.

As the map shows, many of our sites are located near industrial areas in oil and gas operations that are reachable via trucking, rail, regional pipeline networks. These initiatives are just the beginning of our CO2 business line, which has the potential to generate over 100 million in annual revenues and we look forward to providing additional updates moving forward.

In addition to CCUS, we are also pursuing low carbon clean hydrogen production using RNG and SMR technology. Clean hydrogen projects are an ideal development opportunity at low flow or closed landfill sites that otherwise would not be as economically competitive within our portfolio. We currently have four potential SMR plants that are currently in a feed stage and being managed by a team of veteran hydrogen technical experts. While our business development team continues to evaluate emerging long term offtake opportunities that could underwrite these projects without relying on the incremental benefit of potential LCFS, ITC or PTC benefits.

And now I would like to review our second quarter 2022 results. For the second quarter, we produced and sold 2.04 million MMBtu of RNG and 159,000 megawatt hours of electricity. RNG production sold was positively impacted by incremental production from the Assai and Soares RNG facilities, which are completed in December 2021 and January 2022, respectively. An increase methane recovery in RNG production from completed optimization initiatives.

Electricity production sold for the second quarter was positively impacted by efficiency improvements across the asset portfolio and incremental production from our PEI power facility. We generated net income of 32.6 million for the quarter which was primarily driven by strong market pricing of environmental attributes, natural gas, electricity, and gains from changes in fair value of warrant derivatives partially offset by higher cost of sales due to higher gas costs, electric utility costs and employee costs, as well as higher royalties due to higher energy revenues.

G&A for the second quarter totaled $18.9 million were positively impacted as compared to the first quarter due to reduced acquisition and other transaction costs and severance costs. We reported adjusted EBITDA of $30.1 million for the second quarter, which was positively impacted by strong market pricing environmental attributes, natural gas and electricity, and to a lesser extent negatively impacted by higher costs of sales and higher royalties as previously discussed.

As of June 30, we had $580.5 million of outstanding borrowings, including $400 million of outstanding borrowings under our term loan, and $130.5 million of outstanding borrowings related to our Assai project financing.

Under our revolving credit facility, we have $50 million of borrowings outstanding and issued letters of credit totaling $23.8 million. As of June 30, our liquidity position was $861.3 million, including $213.3 million of cash and cash equivalents, $21.9 million of restricted cash, and $626.2 million of undrawn capacity under revolver.

On June 30, 2022, we successfully closed an amendment to our revolving credit and term loan agreement. Archaea commitments now total $1.1 billion, an increase of approximately $630 million from the original facilities and consist of a $400 million senior secured term loan credit facility and a $700 million senior secured revolving credit facility.

The interest rate for the Amended Facilities is equal to the secured overnight financing rate or SOFR plus 275 basis points for the revolving credit facility and SOFR plus 325 basis points for the term loan credit facility. The Amended Facilities also include an uncommitted $200 million accordion feature. The maturity date of the Amended Facilities remains unchanged at September 15, 2026.

Available capacity under the Amended Facilities, along with available cash, were used to fund the Company’s acquisition of INGENCO and initial capital contribution to Lightning Renewables. Available capacity under the Amended Facilities is also expected to be used to fund capital expenditures related to the Company's development plan and other permitted investments, to provide working capital, and for other general corporate purposes.

The Amended Facilities along with the Company's other existing sources of liquidity, are expected to be sufficient to fund the Company's development capital needs for the foreseeable future, eliminating the need for additional external capital in the near-term based on the Company’s current development plans and backlog.

We believe we are capable of supporting the near term increase in our leverage profile as a result of the Amended Facilities. The company's long term debt profile is underwritten by long term fixed price contracts in place today, which have a weighted average remaining contract term of more than 18 years, and cumulative fixed price value of approximately $6.5 billion over the remaining life of the contract.

This provides us with multi decade visibility into a sizeable, predictable cash flow profile that can readily service our near term debt levels. In the short term, we have also laid out a clear deleveraging plan supported by expected cash flows from our ongoing optimization and new build projects.

Before turning the call over for Q&A, I'd like to discuss our updated 2022 guidance. Today, we are increasing our full-year 2022 adjusted EBITDA guidance range to $132.5 million to $147.5 million. We are also increasing our capital expenditures guidance range excluding acquisition costs to $325 million to $365 million from $255 million to $285 million previously to incorporate development costs related to recent favorable additions to our development backlog balanced by improved capital efficiency. In addition, we are reaffirming our electricity production sold guidance range of 850,000 to 950,000 megawatt hours and updating our RNG production sold guidance range to 10.4 million to 11.4 million MMBtu. All guidance is current as of the published date and is subject to change.

This slide shows the assumptions underpinning our 2022 guidance ranges. Some assumptions, such as assumed contract volumes, expected capital expenditures related to projects with expected completion in 2022, and those products estimated earnings power remained unchanged from our original guidance provided in March. Currently, taking into account volumes expected to be sold under our existing long term fixed price contracts and forward rent sales for this year, we estimate approximately 2.5 million to 3.5 million MMBtu of our expected second half 2022 RNG production will be subject to market pricing.

For open RNG volumes in the second half of the year, we assume a rental price range of $2.85 to $2.95 per gallon. Within our adjusted EBITDA guidance, we continue to reaffirm our expected 2022 G&A of approximately $55 million, which we believe will support our ability to execute on our expanded backlog and obtain an operating leverage to efficiently scale even further.

To conclude today's prepared remarks, I want to end by reiterating the sizable adjusted EBITDA we stand to generate in the near term and the immediate deleveraging it will bring. Moreover, this bridge also shows that we are already achieving results within our expected 2022 adjusted EBITDA guidance range before the impact of additional optimizations and new builds, which further increases our confidence in our expected financial performance.

With cash flow contributions from second half development activities and underlying base asset growth, we believe we can achieve over 200 million in run rate EBITDA in about 3x run rate leverage once all projects in this year's development plan are completed and ramped up to full flows which puts us in a strong financial position to execute on our 2023 priorities and beyond.

In closing, in light of recent reports of methane emissions from landfills, we believe this is truly Archaea's moment to meaningfully improve the lives of people who live near our renewable energy centers and to lower greenhouse gas emissions on a scale that matters for our planet.

And with that, I'll turn the call over to the operator for Q&A. Thank you all for your interest in Archaea.

Question-and-Answer Session


Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question come from the line of Derrick Whitfield with Stifel. Please proceed with your questions.

Derrick Whitfield

Good morning, all, and congrats on your operational and commercial progress.

Nick Stork

Thanks Derrick.

Derrick Whitfield

Referencing slide - referencing slides nine and 10 I wanted to ask if you could add some color on the zoning delays you experienced in Q2 and a reasonable timeline to optimize your legacy RNG assets. If we were to assume the incremental 19,000 SCFM of flow and additional flows at Project Assai we got you guys, certainly in an excellent position to achieve production guidance from last year's pipe presentation guide for 2023. Is that a fair characterization?

Nick Stork

Yes, Derrick, I think this is Nick. I think that's fair but just to answer your first question. It wasn't sort of a pervasive zoning issues across the board, I just we got the permit approval for the Alliance Landfill gas to incorporate into this site plan a couple of months later than we expected and those things happen. And then generally, I think zoning is taken about as long as is could be taken just from a statutory perspective.

And I think that's consistent with other industries as well, you know, regulators and municipalities have a long list of things to approve, including renewable energy projects, and it just comes down to when they get to a project for approval. As you know, our projects are incredibly environmentally beneficial. And most local municipalities really, really support them. And it's not really an existential risk, but just the timing risk.

And we have, a couple going from 10, producing RNG assets about a year ago to close to 20, at the end of the year, that means that there's, some concentration risk around single projects and a couple of weeks on a zoning permit, could move things back even a quarter, particularly with revenue recognition.

So, the second part of your question is, yes, that's exactly how we see it. Basically everything that we thought was possible with the Aria portfolio in terms of capacity improvements, in terms of methane recovery improvements, and an uptime improvements are really on track. And we're kind of more excited about them than we were when looking at Aria, you know, about a year ago, and we're over a year ago.

So that that's a, it's an incredible asset base when it's fully optimized. And I think that's what we're trying to point to. And that's what we're really focused on this year. And that creates a dramatically stronger company from an RNG production and earnings power standpoint, before any new builds and future growth is, is executed on.

Derrick Whitfield

Terrific, and as my follow-up, I perhaps shift over to CCS, it would appear based on Slides 20 and 21, that the IRA legislation at a minimum has advanced CCS positioning in your value chain of opportunities between new development CCS deployment. If that is a fair read, should we expect more partnerships similar to what was discussed in the Pittsburgh? Is that between you and Shell or would you guys likely leverage more of your internal resources?

Nick Stork

Yes just -- that's a great question. So just to clarify, we don't have a partnership with Shell, but were lumped in with Shell as another developer that was working hard on being the first company in Pennsylvania to do a geological sequestration and permit a classics quarterback Q qualifying project. So just to clarify that, that is an independent kind of Archaea project that we're very excited about, along with, you know, a number of other projects.

And I think when we started RNG we knew that CO2 had value and that we were throwing it away and sending it to a thermal oxidizer. And we knew that we had large volumes that were very predictable of highly pure CO2 really close to industrial grade. Just as a natural byproduct of producing RNG going from our landfill gas to renewable natural gas. So we were determined to figure out something to do with it initially, we built a team around exploiting and exploring geological sequestration.

And because that was really the only way to, to qualify for sequestration, and an extract them that the maximum value of that CO2 with large volumes of CO2 and to do that we were initially focused on, initial qualifying thresholds, which are over 100,000 metric tons per year of CO2, which, still created some very compelling opportunities for us with large flow projects sitting on top of favorable geology.

But it was a narrower universe, certainly than it is today. And with the IRA and the potential for lower qualifying thresholds, we dramatically increase the number of projects that could qualify for sequestration related EOR other end use beneficial end use benefits along the 45Q. In addition to that, you know, we were getting more and more excited about just in industrial market, that short CO2 and that sees what we do as a as a kind of a green CO2 input into a lot of industrial processes where we may not be close to geological sequestration, or that infrastructure can't isn't, isn't yet built out.

So I think it's something that we've been exploring in the background, investing heavily in from a personal perspective, and a technology perspective. And we've really feel like we are nearing the point, certainly with the IRA, that we have had some real opportunities in front of us and certainly an expanding set of opportunities with real value.

Derrick Whitfield

That's terrific. Thanks. Thanks for the responses.

Nick Stork

Derrick thanks.


Thank you. Our next question is coming from the line of Matthew Blair with Tudor, Pickering, Holt. Please proceed with your questions.

Matthew Blair

Hey, good morning, Nick, and Brian, and thanks for your comments on the support for RNG in the Inflation Reduction Act. I was hoping that you could go into maybe a few more details on how the IRA will directly impact Archaea. And so I guess one does this, do you expect us to accelerate the pace of your development from receiving the 30% ITC? Two, does this expand your addressable market by making smaller landfills more economic and then three, does this have any impact on your long-term financing plans?

Brian McCarthy

Thanks Matthew, this is Brian, I'll take this one. I think the answer to all three is yes, I think the first thing when we think about our projects, even before the ITC has extremely favorable economics and, and very compelling returns on capital and ultimately on returns on equity, given how we finance our projects with our long-term off-take. And this just takes it to the next level.

So with the ability to generate a ITC, anywhere between 6% and 30%, that would be in total capital spent so on a return on equity perspective, that can be extremely valuable. And I think from perspective of, we're already trying to take advantage of our leading position in terms of costs of building. And so this is just further increases our advantage, especially in the lower flow projects.

Nick Stork

And I think the last piece would be that when we think about, you know, the bill of each potentially work with this, and some of our JV partners, our JV partners as well, our March taxpayers, and there are some additional benefits in terms of having those ITs flow through grow through our JVs which even from July, we had not contemplated, and now it looks very favorable about how we think about it going forward.

Matthew Blair

Sounds good. And then you highlighted two new fixed price contracts. I know the pricing details are sensitive. But is it fair to assume that these new contracts are coming in at a higher fixed price than your existing average? So in other words, is this fixed market getting tighter?

Brian McCarthy

So this is Brian again, first of all, the pricing dynamics for the long-term fixed price market continued to improve. And we're seeing that not only from the perspective of desire to work with Archaea, and we have a very large portfolio flowing volumes and flowing volumes today are scarce. And as you look at operational excellence going forward, the ability to count on those volumes going forward also is a bit of scarce premium that we're able to receive.

So it's not only supply and demand, but it's also the fact that folks now see with what we've done at Assai and our other long-term offtake that the volumes that we said we would deliver, we're actually delivering and that's why when we see, you know, additional second third contracts with offtake partners, we're delighting our customers with what we're doing, they're seeing our excellence and they want to continue to participate in that.

And part of that is that you say, okay well not only are we derisking their - supply that they need for their customers and their regulatory mandate going forward, at the same time that we're derisking that we're also receiving a premium for that, because what we're providing is the highest quality RNG the industry. And so, we continue to have very stable partnerships, we're continuing to grow with them, we are so excited about their demand goals.

And how we can be a part of it, when they see our map, and they see our backlog, they value our backlog, they value that these projects are highly economic, they'll be creating a lot of flow, and they'll be able to serve their customers because they need very large volumes going forward. So we couldn't be more constructive on it.

And then from taking a look at what we did on the financing side, our financing partners couldn't be more excited about it, because they can now see, with over $6.5 billion of forward revenue visibility, it makes it a lot easier to say okay, even before an ITC, even before some of the improvements that we're doing, just how much that we can provide to the market on an economic basis.

Matthew Blair

Great, thank you very much.


Thank you. Our next question is coming from the line of Craig Shere with Tuohy Brothers. Please proceed with your questions.

Craig Shere

Good morning, congratulations and all the execution.

Nick Stork

Thanks Craig.

Craig Shere

Just one kind of big picture question, it doesn't seem like you have liquidity or capital funding issues, it doesn't seem like you have offtake issues. It doesn't seem like you have technology issues, which seems to be driving even greater cost cuts and faster project development than previously shared. And now, we have the IRA legislation. So I'm trying to understand what the bottleneck or governor is on how much growth you can pack into five years. I mean, is it equipment supply chains, labor, permitting, how should we think about this?

Nick Stork

That's a great question Craig. I think initially, it was really critical for us to solve for liquidity in a non-dilutive way and to give us enough dry powder to fully fund our entire development program, which included the INGENCO acquisition, the backlog of 88 development projects, which INGENCO is part of and also the Republic JV is a part of. So once we did that and solve for capital needs, you know, I think the next part of that answer is really about people and processes.

So, this time last year, we were about 170 employees. Today, we're over 400 and everything that we've done is a first time process, and we've tried to standardize these processes across the company, whether it's Archaea’s version 1, small, medium, large, extra-large approached to RNG development, or its permitting or its zoning, or its - or safety. Everything has been a process and with those processes now that we have them built and refined, and people trained on them.

It's hard for me to see real limitations of the future, I think, we are determined to be prudent on and meaning that we think the business can and will be leveraged quickly. And we think we have additional sources of capital that are you know, also non-dilutive and very and very attractive, which is the non-recourse project based financing that we achieved assigned. And we have those opportunities across the portfolio.

And really minimizing our equity capital contribution while staying, overall, under leveraged and, and being prudent in terms of growth. So I think prudence and generally being deleveraged, is important. And so that's the sort of the second - factor of that and everything that we've done today should show investors, you know, that we're committed to that kind of prudent, non-dilutive growth.

And then the third part is really just, I think prioritizing returns on capital. And we have a weird we have the benefit of a number of highly compelling projects without signing an additional development agreement or without doing another acquisition. And that's not just core RNG, but that's hydrogen and that CO2, that's heat recovery and some of the other things we were talking about.

And we are determined also to be disciplined and to focus on high returns on capital first, and then work through the portfolio to lower returns on capital second. So that is - that really is kind of outlining our overall philosophy and - there's no reason to not expect, 20 projects per year from us going forward. I think we're all internally very comfortable on that.

And the processes that we built and what we're able to do, and then the limits to that growth, would really be at this point, I think just saying prudent to leverage and seeing through to the prioritizing higher returns on capital first.

Craig Shere

Okay, thank you.


Thank you. Our last questions will come from the line of Derrick Whitfield with Stifel. Please proceed with your questions.

Derrick Whitfield

Hey guys, just want to follow-up on a couple of items. Perhaps for Brian referencing the 2023 strategic and operational priority slide, can you provide some parameters around CapEx expectations for 2023? Given your legacy program, and that you've substantially prefunded development CapEx for the lightning JV?

Brian McCarthy

Yes sorry Derrick, this is Brian. So right now, we're not giving out specific guidance on CapEx for 2023, we are giving out our perspective of doing 20 projects next year. And in terms of the lightning JV that the capital that went into the lightning JV is to - fund the first seven projects as well as the acquisition of the Fort Wayne project, which I think shows. Want to just highlight just how valuable and wonderful the relationship with Republic has been so far that we're already, continuing to expand that relationship.

And that the - to bring in a project that is already targeted to be at 5,000 SCFM, with a plant that will be built at 9,600, to be able to bring that forward is something that's been unique because of the partnership we've built with Republic. So we're very, very excited about relationship with them, it's off to a great start, we're taking some of the learnings that Nick was just speaking about, about going out and, and doing all the permitting and zoning and interconnections for all those projects off the board upfront.

So we can minimize risk over time. And we've built - as we've laid out as well, just to highlight not increasing our G&A is we've now right-sized our company to be able to do that not only in public portfolio, but for the entire company to continue to derisk the things that we are out of our control or have mandatory timelines, we need to think about.

Nick Stork

And Derrick, this is Nick, I'll just add one thing to that I mean, you know, important to, you can think about kind of what you could look at our previously made statements around, what a typical plant what a typical 4,000 SCFM plant would cost. And then, also taking into account multiplying that by the number of projects that we expect to get online next year, but you have to remember to that we've also said that we've - this time last year.

Basically we purchased major equipment and subcomponents for everything in 2022 and mostly 2023 as well. So we've spent a lot of CapEx, which should give investors a lot of comfort and should add to kind of our deleveraging pathway that we've outlined. We've spent a lot of that CapEx upfront, and those systems and skids are increasingly being made and being put in a place where they're truly off the shelf when we're ready to deploy them with zoning, permitting and siteworks construction completion.

Derrick Whitfield

That's terrific. And perhaps for Brian, on the last one as well referencing Page 18 could you speak to how impactful the UGI agreement could be in the state of PA. I know it's a pilot program - at present, but just any perspective on that would be appreciated?

Nick Stork

I mean, we couldn't be more thrilled about that pilot program. I think this is the first time that a state that requires low cost natural gas purchasing to have an RNG contract with a regulated utility. It's a huge deal. And it's one where, especially as we think about the Mid-Atlantic and we think about a recent acquisition of INGENCO with a portfolio, it looks more and more compelling as even as every day that goes by is that our low cost states.

That have to buy natural gas in the Mid-Atlantic are now going to see how this contract goes over the next five years and be able to point to effect of hopefully having RNG tariffs across the board and in those states. So that's the first piece that we're really thrilled about. And then the second piece is just to highlight our relationship with UGI. UGI is our interconnection partner, where they're the ones that are accepting the RNG from our side project.

They are, you know, at that interconnection point is the largest one in North America in terms of accepting RNG and they've been good partners for us. And so, this is a new model in addition to opening up states that currently don't have RNG tariffs. The second model for us is that when we work with new interconnection partners across our EDA development opportunities to say, okay, now we have this interconnection agreement, perhaps would you like to buy RNG and really align that the project that's going in.

It's also going to be going to a long-term fixed price investment, great buyer to serve the customers that ultimately put the waste in the ground there. So it really turns our products into a circular economy. We've talked a lot about how local matters when local utilities are buying local RNG to be used in for their customers. It's very, very powerful.

So with the five years - it's a pilot program. But on both those fronts, we are extremely constructive about it. We're really thrilled about the relationship with UGI. And we look forward to growing with them, you know over the near term.

Derrick Whitfield

That's helpful. Thanks for your time and responses.


Thank you. There are no further questions at this time. I would now like to turn the call back over to management for any closing comments.

Nick Stork

Thank you. The last several months served as a wonderful reminder on Mr. Market, who he is and how he thinks. Our business materially improved, but the stock price went down. Rents were down and we were down along with them. Despite having very little short-term exposure to environmental attributes, and only positive exposure to environmental attributes in the long-term. The market was concerned about inflation and the potential associated impacts to the economy.

But we benefit from inflation. We are uniquely recession proof given our contracted cash flows and societal demand for renewable natural gas that is low carbon, energy dense and affordable within existing energy infrastructures. Price is not value and our intrinsic value has continued to improve. We announced significant additions to our long-term earnings power and announced a prudent non-dilutive strategy for realizing this value.

We've executed on nearly everything we said we would do on both short-term operational and long-term strategic initiatives. We stayed consistent with our capital allocation philosophy and found ways to exploit new sources of value from existing assets. We built Archaea under the premise of developing long-term predictable free cash flows with highly attractive but free options. These free options are overwhelmingly better than our expectations and are increasingly real.

These include continued price appreciation and our fixed price contracts are reliable, non-intermittent portfolio of renewable electricity producing assets with strong cash flow margins. We see utilization across our asset base, exciting near term opportunities for collection efficiency improvements to the landfill gas collection systems and increasing alignment with landfill owners to prevent fugitive emissions and increase RNG outputs.

Low carbon intensity hydrogen and the expanding set of CO2 monetization opportunities. Archaea is better today than it was last quarter, the quarter before that, and significantly better than it was last year. The prospects continue to be bright and critically, I have 100% confidence in our team's ability to execute on our future earnings power. Of course, my viewpoint is unique.

I get to interact daily with over 400 Archaean's across the company and across the country who have bought into the challenge of doing something radically better than what has been done before than what other said could be done. I saw this first sell-side where we completed the largest RNG plant in the world, under budget and in half the time of our competitors with the total construction timeline closer to 12 months.

We were fully ramped it aside [ph] and we achieved this faster and with better efficiency than most people thought we could. And we did this largely without the help of major equipment vendors and subcontractors. But I see daily examples of this of overcoming challenges of working together to pursue the limits of physics, of ownership of embracing Archaea is something more than a job of being pirates.

I would like to thank all of our incredible employees who have ignored the noise from the market from competitors and from the doubters and embrace the challenge of excellence to continue to add value to all stakeholders LFG.


Thank you. This does concludes today's teleconference. We appreciate your participation you may disconnect your lines at this time. Enjoy the rest of your day.

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