Archaea Energy Inc.
Q1 2022 Earnings Call Transcript

Published: 10 May 2022

[Operator:]

Greetings and welcome to Archaea Energy, Inc. 1Q 2022 Earnings Conference Call and Webcast. At this time, all participants are in listen-only mode. . 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.

[Megan Light:]

Thank you, and good morning, everyone. Welcome to Archaea Energy, Inc. First Quarter 2022 earnings conference call. With me today are Nick Stork, Archaea's Chief Executive Officer, and Brian McCarthy, Archaea's Chief Investment Officer and Interim Chief Financial Officer. Archaea 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 archaeaenergy.com. The presentation and access to the webcast for this call are also available on our website, and after completion of this call, a replay will be available for 12 months. Before we begin. I'd like to remind you that our remarks on this call, including answers to your questions, contain forward-looking statements, which involve risks, uncertainties, and assumptions. Forward-looking statements are not a guarantee of performance and actual results could differ materially from what is contained in such statements. Several factors that could cause or contribute to such differences are described on Slide 2 of our presentation. The 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 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 rates agreements are currently in place or are expected to be in place after closing pending transactions are completed and ramped up to full swing. Our presentation includes additional information regarding estimated long-term annual earnings progress 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 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 Stork, Archaea Chief Executive Officer.

[Nick Stork:]

Good morning, everyone. And thank you for being here for Archaea's first quarter 2022 earnings call. We're excited to be here today to discuss the momentous achievements of the Archaea team across many aspects of our business so far this year. Our first-quarter results, coupled with two transformational strategic transactions, our Lightning Renewables joint venture with Republic and our agreement to acquire INGENCO, represents an important positive inflection point for Archaea. We have now cemented our run rate to dramatically increase our estimated long-term earnings power, or earnings power for short. And we're 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 2022 we reported RNG 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're pleased to reaffirm our 2022 adjusted EBITDA 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 renewables 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 rates 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 Republic and 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 to our presentation for additional information regarding earnings power and the underlying assumptions we used to calculate it. As we discussed on our last call, we signed a historic long-term fixed price contract with FortisBC in January. The sale of up 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, we are continuing to advance conversations with an array of potential off take partners. We expect to sign addition 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 Soares RNG facility, our first anaerobic digester in January, showcasing the capabilities of our team across biogas sources. After placing our Assai 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 facilities ramp up process, we believe this downtime has already proven worthwhile and we'll continue to do so as Assai has been operating at over 99% up time 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 Assai 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 NRU removal system, the first two optimization stages we expect at Seneca. We're incorporating lessons learned at Assai 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 deliver reduced construction timelines and improved 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 not economic. In April, we announced that we have entered into a definitive purchase and sale agreement to acquire INGENCO for $215 million cash, subject to customary closing adjustments. The acquisition will add 14 landfill gas electricity plants to our asset platform, and we expect to build R&D facilities on 11 INGENCO sites over time. In addition, the acquisition brings approximately 70 employees who add valuable expertise for our highly skilled and experienced team at Archaea. The acquisition includes the gas rates for the INGENCO sites and INGENCO asset bases located on landfills with strong group potential with over 40 years of permitted waste acceptance on average across sites. The 11 sites where we expect to build R&D facilities have current cumulative gross flows of over 5 million MMBtu 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 1st, 2022. 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 with 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 collocating 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 up for 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 today. 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 Archaea over the course of several years. Archaea 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 gross flows of approximately 13 million MMBtu per year. Archaea 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 RNG’s expected net economics. We expect potential for the addition of incremental projects in the Lightning Renewables over time, as well as additional potential economic upside for the JV and for Archaea through initiatives including Wellfield 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 Archaea's mission to achieve best-in-class environmental stewardship and greenhouse gas emission reductions. We're focused on long-term value-oriented capital investments that are expected to make a meaningful sustainability impact for future generations. And we're 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've 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 rates 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're continuing to aggressively seek additional developments sites within our target return parameters, which include a minimum of 10% cash-on-cash on levered returns in a downside case scenario based on long-term contracted volumes, only. The Republic and INGENCO transactions highlights our ability to continue winning new projects at these attractive returns. We're also excited about the meaningful expected contributions of the Lightning Renewables 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 Renewables and INGENCO transactions will have on our long-term development plan. And we're actively optimizing the pace and timing of these new development projects within our broader project outlook. We expect to provide a more full-some update on our optimized long-term development plan at a later date. In the meantime, it is certain that these transactions will add to our total expected capital needs over the near-term, including acquisition and development costs. We're exploring options to fund these costs and expect to enter into one or more capital markets with private financing transactions. We're committed to securing financing as soon as practicable to meet our near-term capital needs and at the most favorable terms available to Archaea and with the highest value to our stakeholders. Including the expected impact from all ETA projects in our backlog and our operating assets, we now estimate our earnings power to be approximately $600 million annually once all projects are completed and ramped up with estimated RNG production of approximately $50 million MMBtu 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 68 years depending on the speed at which we can scale our development capabilities. This potential earnings power includes only projects for which gas rates agreements are in place or expected to be in place after the INGENCO acquisition closes and use what we believe to be a conservative assumption set on revenues with fixed-price volumes only under long-term contracts in place today, at a $1.50 per D3 RIN, $140 per metric ton of LCFS credit, and $3 per MMBtu 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 MMBtu. 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 this far. Not only do many sites within our backlog have potential for increased landfill gas flows, but also the corresponding gas rates agreements have terms to enable our RNG production well into the future. The weighted average remaining life of our gas rates agreements across all existing RNG sites and RNG development sites is approximately 32.5 years. This gives us a true line of sight to a sustainable, multi-decade, environmental solutions for our partners and value for our stakeholders. We're accelerating our growth mission and we're 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're committed to positioning Archaea as a market leader in order 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 a review of 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 remain as excited as ever about the dynamics of the R&D market, which continues to be supply constrained, a mid growing demand from an increasing number of market participants with regulatory or existential mandates to decarbonize. There have been a few exceptionally large R&D targets from an approval to gas utilities, including the initiatives from our current customers and the CPUC target that we discussed on our last call. Additionally, in April, National Grid announced a new goal to source at least 30 million MMBtu of its gas supply from R&D by 2030. To put the volumes in perspective, 30 million MMBtu is equivalent to over 40% of the entire US R&D market in 2021, and approximately 60% of Archaea's estimated long-term R&D production. We are continuing to progress commercial discussions with a number of utilities that are looking to R&D as a mode of decarbonization, as well as a wide range of other potential customers. We will continue to leave no stone unturned as we seek additional long term fixed-price contracts to further de -risk the underlying cash flows for our business. And we expect to have additional commercial news in the coming months. And now, I would like to review our first-quarter 2022 results. For the first quarter, we produced and sold 1.54 million MMBtu of RNG and 166,000 megawatt hours of electricity. RNG production was positively impacted by production from our Assai and facilities and negatively impacted by some weather-related downtime at certain facilities and downtime at Assai related to maintenance activities. We're undertaking weatherization initiatives to minimize any future cold weather-related disturbances, and as Nick mentioned, performance has been very strong at Assai after completing our maintenance activities. The electricity production for the first quarter was positively impacted by efficiency improvements across the asset portfolio, an incremental production from our PEI power facility, and negatively impacted by winter-related seasonality. We generated a net loss of $33.2 million for the quarter, primarily driven by a loss from the change and fair value of our private warrants, as well as increased G&A expenses, partially offset by strong market pricing of environmental attributes, natural gas and electricity. G&A costs for the first quarter totaled $26.4 million and included increased costs related to headcount professional services, and other costs related to scaling our business for our next phase of growth, as well as $8.3 million related to acquisition and other transaction costs, including costs related to certain joint ventures in our recent secondary offering and severance payments related to our leadership transition. As we develop projects within Lightning Renewables and complete the acquisition of INGENCO and onboard of employees in addition to developing our prior backlog, we're now scaling up for a larger company than before, to one with substantially higher earnings power. As a result, we have increased our expected 2022 G&A to approximately $55 million, which we believe will support our ability to execute on our expanded backlog and obtain operating leverage to efficiently scale even further. We reported adjusted EBITDA of $20.6 million for the first quarter, which was positively impacted by strong market pricing of environmental attributes, natural gas, and electricity, and to a lesser extent, negatively impacted by increased G&A. Net loss and adjusted EBITDA were also impacted this quarter by the timing of the ramp up at Assai and associated timing of monetization of environmental attributes. We began monetizing RINs in March related to Assai RNG production in prior months. RINs are typically monetized one month in arrears compared to production and we will achieve a steady-state related to RIN monetization from Assai in the second quarter. As we've mentioned before, there's typically a lag between a facility coming online and a facility receiving certification to monetize RIN and LCFS credit. We estimate approximately three months on average for RIN and nine months on average for LCFS credit. As we complete facilities, place them into service, and ramp up production, the timing lag to monetize environmental attributes also impacts the revenue and EBITDA profile associated with these projects. There is a lag in revenue and adjusted EBITDA when a project to started up because expenses are being incurred and recorded for production in the early months, but a portion of revenue corresponding to that production which could be a material amount will lag due to the timing of RIN and or LCFS credit sales. Once the projects are ramped up and certifications are received, cash flows from the sale of environmental attributes, excluding the impact of price fluctuations are expected to generally stabilized on an annual basis with some projects showing inter year variations due to seasonality in production. As of March 31st, we had $349.2 million of outstanding borrowings, including $217.2 million of outstanding borrowings under our term loan, and $132 million of outstanding borrowings related to Assai project financing. Under our revolving credit facility, we had no borrowings outstanding and had issued letters of credit totaling $19.9 million. As of March 31st, our liquidity position was $269.8 million, including $30.8 million of cash and cash equivalents, $8.9 million of restricted cash, and $23.1 million of undrawn capacity under our revolver. During the first quarter, cash used in investing activities totaled $66.5 million. We spent $61.4 million on development activities related to construction and optimization across our various plants, and projects, and development, and $7 million primarily related to the acquisition of landfill gas rights assets. We also made contributions of $4 million and received return of investment of $4.1 million related to our equity method investments. In March 2022, Archaea supported an underwritten public offering in which Aria Renewable Energy Systems, LLC sold approximately 14.9 million shares of our Class A common stock at a price to the public of $17.75 per share. The transaction resulted in no proceeds to Archaea, a decrease of $14.9 million shares of our Class B common stock, and a corresponding increase of $14.9 million shares of our Class A common stock. At the closing of the offering, Aria Renewable Energy Systems, LLC fully exited their position in the company. They had received shares at the close of our initial business combination in September 2021, related to their ownership of Aria Energy, LLC. Before turning the call over for Q&A, I'd like to quickly discuss our updated 2022 guidance. Today we are pleased to reconfirm our full-year 2022 RNG production sold guidance of 11.1 million to 11.7 million MMBtu. Electricity production sold guidance of 850,000 to 950,000 megawatt hours, and adjusted EBITDA guidance of 125 to 145 million. This slide shows the assumptions underpinning our 2022 guidance ranges. Some assumptions, such as volumes expected to be sold under our long-term fixed-price contracts and RIN pricing on unsold volumes are unchanged from our original guidance provided in March. Additionally, our 2022 development plan expected capital expenditures related to projects with expected completion in 2022. And those projects estimated earnings power remained unchanged. Currently, taking into account volumes expected to be sold under our existing long-term fixed price contracts. And forward RIN sales this year. We estimate approximately 4.7 million to 5.3 million MMBtu of our expected 2022 RNG production will be subject to market pricing. Additionally, we have increased expected G&A to approximately $55 million due to additional scaling of our business and expected headcount additions from the acquisition of INGENCO. As Nick mentioned earlier, due to the pending INGENCO acquisition and Lightning Renewables JV, we expect additional near-term capital expenditures, including both acquisition and development capital. As a result, prior guidance providing regarded 2022 capital expenditures should no longer be relied upon. We are actively optimizing the pace and timing of our long-term development plan and we expect to provide guidance for expected capital expenditures at a later date. As a result of recent transactions announced and their impacts to our project development backlog, we expect to enter into one or more capital markets or private financing transactions to fund the acquisition of INGENCO and certain additional capital expenditures related to incremental RNG development projects, and potentially to fund a portion of our base development plan, to provide additional capital for acquisitions or incremental development projects, or for general corporate purposes. As Nick mentioned, we are committed to securing funding for our near-term capital needs as soon as practical, and at the best terms available for Archaea and our stakeholders. To conclude today's prepared remarks, I would like to reiterate how excited we are about where Archaea is today, and about the unified passion our team shares for advancing meaningful decarbonization across industries while delivering strong, risk-adjusted returns to our shareholders, and improving the quality of life within communities where we operate. And with that, I'll turn the call over to the Operator for Q&A. Thank you all for your interest in Archaea.

[Operator:]

Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. . One moment please, while we pull for questions. As a reminder, we requested to limit to one question and one follow-up. We have a first question from the line of Hamzah Mazari with Jefferies. Please go ahead.

[Hamzah Mazari:]

Yes. Hi, good morning. My first question is just on the Republic JV. Specifically, what does you go bandwidth look like internally to execute on this, just from a headcount perspective, management wise. And do you see other ventures like this in the solid waste industry? I mean, waste management has talked about potentially doing a lot of RNG themselves, but they've also left it open to developers. So curious to see who you're bidding against on these type of large projects, JVs, I guess. Any thoughts there?

[Nick Stork:]

Hamza, this is Nick. Great questions. So on the first one I think when Republic was picking its partner for this and it was a very competitive process, the first thing that they cared about was execution. I think who is really going to be committed to developing all these projects and more in a sustainable way. And I mean sustainable in a very comprehensive way. So that was a key focus for ours. And I think their ability to see how we can execute so many projects so quickly is -- should speak to our internal confidence and our ability to build a company that can do 20 projects per year in a very repeatable and standardize fashion in -- that the industry really hasn't seen before. So, part of it as they looked at kind of our historical ability is we're getting Assai online that looked at -- they looked at our supply chain. I think they confirmed, I think a lot of the things that we've been building for and building the company to be able to execute in the future something like this. So, we think about execution going forward as getting easier, as really de -risk with increasing standardization, increasing stand up of our supply chain and really have a lot of confidence in our ability to do 20 RNG projects year, across a number of different sizes and across the country, and that lends itself to achieve some of the pretty aggressive development targets that both us and Republic put out related to this JV. And the second question is, we think that the Republic JV is probably unique and unlikely to be repeated at the scale. If you think about the other waste companies, there are additional -- the market is probably consolidated across landfill owners -- the big public company landfill owners, and Republic has a really significant amount of developed co-opportunities and then future developed co-opportunities. I think you'll see we are interested in doing other joint ventures at smaller scale or joint ventures with municipal landfill owners or private landfill owners that also want to participate in our development plan and in our economics. But I think we're not going to see anything like this in terms of scope -- in terms of initial size of 39 projects, 13 million MMBtu annually and then also growth potential, not just from additional projects which would go -- get added to the JV, which we're very excited about but also just embedded upside from the core projects that we have and these are really long-term assets. And with the world-class partner that's committed to putting in municipal solid waste in a very sustainable way to keep feeding underlying landfill gas growth in the future through the permanent Lifebuoy rentals.

[Hamzah Mazari:]

That's very helpful. And then on my follow-up question I'll turn it over as just, in terms of the development costs and funding do you have a sense of order of magnitude, what type of capital you need to raise and the timing of that, or is it too early to talk about equity versus deck component? Just any thoughts there. Thank you.

[Nick Stork:]

Yeah, maybe I'll try to answer that briefly and then let Brian chime in. I think these are opportunities that include INGENCO in that as well. These are opportunities that we've been working towards for a while and then simultaneously we've been, as we've said publicly for last couple of quarters, we've been looking at ways to maximize our balance sheet and really take advantage of the predictable free cash flows that we have and the strong contracted cash flows that are underpinning that potential of balance sheet maximization. We've been working towards some exciting options there that we're excited about. And from my perspective it's too early to discuss debt versus equity, but we've been working towards this balance sheet maximization process for some time and we have a lot of confidence in our ability to develop all of our core assets in addition to new assets even beyond Republic, JV, and the INGENCO acquisition.

[Brian McCarthy:]

This is Brian. I would just add that the thing that gives us a lot of confidence is the supply and demand mismatch in the long-term fixed price off-take with investment-grade counter-parties and when we look at one of the benefits with our partnership with Republic is that we're very aligned in a commercial strategy there to go and to serve this market. And also, one other piece that is exciting is just thinking about the customers that are already bringing waste into Republic landfills, thinking about that as now these landfills become renewable energy centers and then also, we can work together to create new long-term off-take with corporate customers to help decarbonize, taking their scope 3 emissions is what they put into landfills and then thinking about lowering their scope 1 emissions with renewable natural gas. And so, with the commercial strategy alignment, that gives us a lot of confidence in terms of how we think about our approach to financing in the future.

[Hamzah Mazari:]

Got it. Thank you so much.

[Operator:]

Thank you. We have next question from the line of Derrick Whitfield with Stifel. Please go ahead.

[Derrick Whitfield:]

Good morning, all. Congrats on your recent JV and acquisition announcements.

[Nick Stork:]

Thank you.

[Derrick Whitfield:]

With regard to your long terms -- long-term earnings power projection on page 9, could you comment on the embedded efficiency and base organic volume growth assumptions? And also given the conservatism of your D3 RIN assumptions, could you offer high-level sensitivity for your earnings power improvement for every $0.50 increase in D3 RINS?

[Nick Stork:]

Sure. This is Nick. I think on the -- when we're looking at earnings power, we're trying to really do it in a very consistent and conservative way. So there's not a lot of underlying -- if I understand your question correctly, there's not a lot of underlying landfill gas growth, that's going into that earnings power number. It's a relatively near-term ramp of R&D production, and any future benefits of landfill gas growth or collection efficiency at the landfill itself would translate to numbers above that. So there's, I think, compelling embedded upside in that number. On a long-term basis, if you think about where we are on the overall the cumulative landfill gas curve, given that we're underpinned by really long-term assets that continue to take an increasing amount -- or stable amount of addressable waste that produces gas in the future. And then, if you look at the earnings power number again, we use the existing contracts that we have, and then we also use $1.50 ran in $120 metric ton. LCFS credit pricing number, and then a $3 MMBtu up round gas numbers. It'll be pretty easy, I think, to back into the percentage of volumes in that number that would be uncontracted, given the fact that we're only using the existing contracts that we have, we're not using our long-term target contracted number. And then so we think there's a positive exposure significantly and it's an easy math equation to do but on every $0.50 per gallon. And we can make that more clear in the future, but what we like about that door fit duration and why we don't really talk about higher numbers are sensitivity around RIN pricing in the future is, because $1.15 RIN could be pretty easily underpinned by a buyer existing contracts and contracts that we expect to sign in the future. When we think about number is really duress. Particularly when you add inflation escalators, which we have across a number of our contracts on the fixed-price contract side. $1.50 per RIN is 11.7 BTU RIN, it translates to out of a year, three to seven year price that's easily underpinned by existing contracts and future contract demand.

[Derrick Whitfield:]

Thanks, Nick. And that's precisely what I was targeting. And we're getting about 15% sensitivity to the earnings power that 30% of your volumes having market exposure. That's the math that we were back into. And I agree, it seems simple and it seems like there's quite a bit of upside there. With regard to the Republic JV, we noted in your disclosure today that you will receive fees for engineering procurement and construction services during development and construction in fees for O&M services after completion. With the understanding that that's an ideal arrangement and the base case, could you just help us to understand the materiality of these fees in this arrangement. And if the adds to your earnings power or simply reduces your contributed capital requirement.

[Nick Stork:]

Yes. I don't think it's a -- it's not -- I wouldn't think about is sort of material contributor to our earnings power. I would really more think of it as a way for Archaea and build plants according to our specifications and costs and future cost targets. And I think that's really what we're trying to create with EPC management and -- or the construction management agreement in the O and M agreement that we have Republic is that we're going to treat these projects like additional Archaea projects. And they're going to follow the same process and standards that we're deploying across our portfolio that will lend itself the benefits in terms of methane recovery, in terms of up-time, in terms of costs to the JV in a very aligned way. And so I -- it's not a significant contributor. I think either way it's not a significant quantum, but it's really for us -- it's an important point of clarification that we're not reinventing the wheel in terms of developing a new Archaea plant for this particular JV that it's going to fall at the same design goals and targets with a partner that's very aligned and what those design goals and targets and potential costs will be.

[Brian McCarthy:]

Hey, this is Brian, I would just echo also what Nick said in his prepared remarks around the 4.5 times build multiple. I think that's when you think about what that earnings power is over time. And that's really when these products are in place. That's across an average of the portfolio as we think longer-term. With what earnings power, ultimately what we're going to care about is we're going to be completely aligned with Republic to make these plans the highest methane recovery as possible, but also the highest up-time as possible. And that's really unique about when you're actually solving for your -- you're working with the landfill owner themselves and that's just really, really special. I would say that's really important. And I think second is just as we think about that 4.5 times, we think about opportunity going forward. Republic search far and wide in the industry to figure out who they wanted their partner to be. And as they think about the ability to put more projects to work here, potentially one is that our current electric projects or once Archaea has it in our own portfolio. And we're both really, really excited and incentivized about. These 39 products is the start and we're going to be growing it overtime.

[Derrick Whitfield:]

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

[Operator:]

Thank you. The next question is from the line of Matthew Blair with TPH. Please go ahead.

[Matthew Blair:]

Good morning, Nick and Brian. You've reiterated the adjusted EBITDA guidance of $125 to $145 million for 2022 despite raising your SG&A by $10 million. Could you talk about the offsets there? Is that -- are you assuming a higher brown gas price to offset that increased SG&A?

[Nick Stork:]

I don't think that there's probably some upside still to continue brown gas pricing in the model yet to what we have. You can tell by our numbers even continue on that for $250 RIN despite much higher RIN prices today for the remainder of the year. We're pretty conservative about things we can control even in near-term models. There's probably a little bit of upside there. I think it reflects some or reaffirming those targets is slightly higher SG&A and that SG&A is very pointed towards the future. And we still think there's considerable operating leverage there. But those hires are really -- and that expansion is really pointed towards the Republic JV, the INGENCO acquisition, those kinds of things. I think it's more just overall improvement in the business and then continuing to invest in growth. And we still -- we have upside to these numbers based on continued higher environmental attribute pricing, as well as continued high natural gas pricing. But I personally have no ability to predict natural gas pricing in the near-term or the long term. And I feel the same way about RINs. So I'm comfortable with this stretch.

[Matthew Blair:]

And then the winter downtime in Q1, is that a pretty typical seasonal impact that we see modeling going forward or would you call that unusual? And then as far as quarter-to-date operations, could you say that you're running at 99%?

[Nick Stork:]

Yes. So winter -- you should not model winter -- winterization effects or seasonality going forward. And we did not adequately winterize or and have a winterization program going into the winter, which is really painful to watch. But we've corrected it. It's not going to happen in the future. And there's lots of little things that need to be weatherized, and weatherization and degrade over time and small disconnections in either electrical, mechanical as it related to winter effects can shut down a plant, and that can be difficult to troubleshoot. But this is a totally preventable issue that I think we got our hands around very quickly after integrating the assets, but we're much better prepared for that in the future.

[Brian McCarthy:]

And specifically, to the point of the 99%, that was related to Assai uptime. So, the beginning of March after we did the optimization and some adjustments, since that point running on the Keystone Landfill gas, it's been a 99% uptime, and it's also been much higher methane recovery than we modeled. The good news also is that we recently were able to introduce the flows from the Alliance Landfill as well to beginning earlier this month. So it's exciting to see not only as the uptime up trend in higher than trend, but also methane recovery, and then the ability that now we have both sets of lateral gas flows.

[Matthew Blair:]

Got it. Thank you.

[Operator:]

Thank you. We have next question from the line of Paige Graf with US Capital Advisors, please go ahead.

[Paige Graf:]

Good morning, guys. Just wanted to get a little bit more color on the Lightning Renewables JV and how the deal is structured. For the 13 million of production, is that all going to Archaea or would that be split between Archaea and your JV partner? And will they be receiving the standard royalties as landfill owner?

[Brian McCarthy:]

Hey Paige, this is this is Brian, I can speak to that. So, I would think about the, JV as the entity that has entered into a landfill guests agreement with Republic and that entity is also entered into an EPC agreement and a future, O&M agreement, when the plants are running with Archaea operating. When you think about the JV itself of which the, as we described in our prepared remarks is 60% Archaea, 40% Republic. That's a gross MMBtu that that JV will produce over time. Then that JV will also for the ability to have the landfill gas to process. Will the JV itself will send a royalty to Republic, just as the JV itself will send an EPC fee to Archaea or an O&M fee as we're operating going forward.

[Paige Graf:]

Okay. Great. Thank you.

[Operator:]

We take the last question for the line of Craig Shere with Tuohy Brothers. Please go ahead.

[Craig Shere:]

Morning. Does your ever-expanding six to eight year growth project opportunity set push to the sidelines carbon sequestration and solar power opportunities to drive down CI scores? And in your prepared remarks, you mentioned increasingly operating off internally generated power. Does that help reduce your CI scores in addition to cutting costs?

[Nick Stork:]

Yeah, great question. I mean I think generally we're taking an MVP prioritization approach to project development all things being equal. And we had that flexibility in our portfolio given that we have held the production assets without -- with very little exploration risks on -- across the 88 projects we have signed under long-term development agreement. Generally, that being said, carbon sequestration, low CI initiatives, other opportunities may -- would be on the lower end of the net present value prioritization list, but there are some compelling opportunities that challenge for landfill gas projects in terms of rates of return. And so we're still excited about those B2B risks from a permitting standpoint, but there may be a way to do both with partnership structures and certainly to do both that at some level, but I think the priority of capital will go towards -- by MVP first, all things being equal.

[Craig Shere:]

Got you. And just imagining for a moment the magical world whereas funding is not a concern, what is an optimal annual growth CapEx in over the next two to three years. In other words, so in another way if you're really are progressing on 20 projects a year, what is that average run rate you see overtime?

[Nick Stork:]

I think it's really -- if we have a portfolio of really high NPD opportunities and without exploration risk, we should be as aggressive as possible, assuming that we have no scarcity of capital. What is occurring now is a optimization problem where we have balance sheet maximization, we have sources and uses, and we have a highly attractive portfolio of opportunities that we'd like to aggressively develop as quickly as possible. I think generally we talk about -- that's how we approach the world. So, it's not as simple as $300 million a year, $400 million a year or whatever it is. It's the opportunity set and it's the ability to still finance that as much as possible balanced with scarcity of capital and the attractiveness of capital outside of free cash flow in order to do it as quickly as possible. And then the second part of that is your question around, what that looks like on 20 projects a year? If you take an average projects that our competitor might be doing at $40 million year like 4,000 SCFM projects that we're doing at $20 million year, $23 million a year, that gives you some rough example of total CapEx if we're doing 20 projects a year, assuming an average flow side of 4,000 of SCFM.

[Brian McCarthy:]

And we've also shown that because of our commercial approach towards long-term fixed-price investment grade contracts, because of the high predictability of our projects in our plants, we have the ability to really do that in a very efficient way and not just from free cash flow, but also just balance sheet maximization. And in a world of debt investors that are looking for green yield, that's where we uniquely offer something to the market that's very attractive and very predictable.

[Craig Shere:]

Last clarification on that, it sounds like what you're saying is some of the newer opportunities may be treated a lot more like a side, which was a much higher hedged position and much lower equity tap or requirement than perhaps the rest of your portfolio at this point. Is it fair to say that you want to model the Assai example as you go forward?

[Nick Stork:]

I think what -- we see Assai as an example of what's possible. And example what's possible given that we had world-class debt investors in a new being -- bearings pack life believe in this kind of investment-grade credit on a project basis and believe in the predictability of the cash flows going forward. So that business model of the percentage going to those investment-grade contracts in the way that we design that project is sort of (ph.) to who we are and how we deploy capital. And I think what that says is that just opens up the opportunity for that financing structure. It's a more complicated problem than that, it's a more holistic problem than that, that involves other areas of growth. But I would just point to that as one way to achieve very attractive balance sheet maximization strategies.

[Craig Shere:]

Thank you very much.

[Operator:]

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. I'd like to turn the call back to Nick Stork, CEO for closing remarks. Over to you, sir.

[Nick Stork:]

Thank you. This time last year, many of your heard about Archaea for the first time. You probably also heard the company's name pronounced four different ways. We're launching a pipe, trying to explain our unique cash flows, competitive differentiation, and favorable market dynamics to real growing increasingly skeptical of SPACS, lofty profitability aspirations, and difficult to determine greenhouse gas reduction benefits. Twelve months ago, our combined business with Aria had approximately $40 million of EBITDA in the prior year 2020, with 21 operating plants and $300 million of earnings power on an apples-to-apples basis. Archaea Version 1 was technically sound, but not proven in the field. We had some strong commercial agreements from Legacy Aria, but much to do to show that we could secure our target volume percentages under long-term investment grade contracts. Assai was mid-construction. We talked about a compelling, addressable market, the finite, and expressed confidence in our ability to grew billion dollars of predictable annual free cash flow or earnings power but the market competition was accelerating with new entrants. Fast forward 12 months, we've accomplished the following. We reported EBITDA 90% higher than our previous year and reporting to 70% -- approximately 70% growth this year. We're projecting more than 2x RNG production and 2x electricity production versus the base business from the pipe materials. With INGENCO, we have more than doubled our number of operating plants across the country. We signed landmark off-take agreements with FortisBC and Northwest Natural. And we've also confirmed the market dynamics we discussed a year-ago. The demand exceeds supply and Archaea is increasingly well-positioned to achieve appreciating pricing and terms with the best counter-parties. We completed aside the largest R&D plan in the world in less than two years from signing a development agreement with a construction timeline closer to 12 months. We signed a transformative JV with a world-class environmental services partner named Republic, and embarked on the initial platform of 39 projects that are expected grow considerably in terms of a number of projects and project economics over a short period of time. We have since deployed and seen extremely positive results throughout our optimization projects this year today of each major processing system that will go into Archaea Version 1 significantly de -risking at success. We've built a dedicated supply chain to support future growth and off-the-shelf RNG development. We've grown our earnings power to $600 million with a realistic near-term path to secure the runway to a billion-dollar long-term target. This figure is truly predictable and long-term with attractive underlying growth and positive exposure to inflation. It also excludes new projects that we expect to sign, carbon sequestration, hydrogen, and many next generation projects that we are quietly excited about. We've integrated several acquisitions with new people and build a strong culture around supporting plant operations and the best gas processing nerds in the world. We've done these things without deviating from our capital deployment approach of don't lose money and we've secured uniquely attractive free upside, while also ensuring downside case returns above our target thresholds. How did we do this all so quickly? In short, ownership. As one of our gas processing leaders said recently, when we worked at other companies, we're building equipment for other people. We wanted to drop the equipment off at the customer and get out of there as quickly as possible. But now we're building the systems that we're going to own for a long time. It changes how we design something, and how we execute that design. Archaea's like that. Management are significant owners of the company. Nearly every employee is a shareholder. Across this group, we love what we do and believe that this is the best business out there. From returns on capital to predictability of cash flows, to supply demand dynamics, to real, easy to understand environmental and societal benefits. As owners, when you say you're gonna do something, you're much more likely to do it, and to support it after you build it. You have to look at the results, you care. It's part of you. It's core to your reputation, and it's important to everyone around you. Your design goals become long-term, this is a significant competitive advantage. And if we can maintain this strategically and operationally, the execution risk on the a billion dollars of predictable cash flow goes to nil. I'm proud of how many people have bought into this vision and I'm very grateful for it. The results of the consequences of buy-in at scale, and we're determined to continue operating this way with pride, integrity, and ownership.

[Operator:]

Thank you. Should we now conclude?

[Nick Stork:]

Yes.

[Operator:]

Thank you very much. Ladies and gentlemen. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.