Q2 2022 Archaea Energy Inc Earnings Call
Okay.
Good morning, and welcome to the Archea Energy, Inc. Second quarter 2022 earnings call and webcast.
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I would now like to turn the call over to Meghan Light Vice President of Investor Relations speaking.
Please go ahead.
Thank you and good morning, everyone. Welcome to Archea Energy, Inc. Second quarter 2022 earnings Conference call with me today are next door, our kids Chief Executive Officer, and Brian Mccarthy argued Chief Financial Officer.
Archie or 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 <unk> Dot com.
The presentation and access to the webcast for this call are also available on our website and after completion of this call a replay will be available for 12 months.
Before we begin I'd like to remind you that our remarks on this call including answers to your questions contain forward looking statements, which involve risks uncertainties and assumptions.
Forward looking statements are not a guarantee of performance and actual results could differ materially from what is contained in such statements.
Several factors that could cause or contribute to such differences are described on slide two of our presentation.
These forward looking statements reflect our views as of the date of this call and Archie and 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 a discussion of estimated as long term annual earnings power or earnings power, which refers to estimate as long term annual adjusted EBITDA. After a specified projects within the company's R&D development backlog, but what did you guys break agreements are currently in place are completed and ramped up the full flow.
Our presentation includes additional information regarding our estimate as long term annual earnings power and the underlying assumptions used in his estimation.
Certain assumptions regarding these estimates are inherently uncertain and as a result, our actual long term annual earnings power may be different from this estimate and such differences may be material.
A reconciliation of expected 2022 full year adjusted EBITDA and estimated as long term adjusted EBITDA to net income of lost their closest U S. GAAP financial measure cannot be provided without unreasonable efforts due to the inherent difficulty in quantifying certain amount.
We believe the non-GAAP measures presented to provide relevant and useful information and 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 our second quarter results recent highlights and an update on our strategic and operational priorities.
Bryan will then go to 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 next sort Archaeas Chief Executive Officer.
Good morning, everyone and thank you for being here for <unk> 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 the industry changing JV acquired a landfill gas to electricity business had a compelling valuation.
Meaningfully grown our project development backlog and corresponding estimated long term annual earnings.
Secured an amended and Upsized credit facility signed additional long term fixed price commercial contracts produced our first models of all components of our Q version, one plan and made strides under 2022 development program.
The orca team's collective efforts have built <unk> into renewable energy platform that will continue to reshape and lead to the LNG industry.
I'd like to start by sharing a few key highlights of our performance for the second quarter.
First for the second quarter 2022.
Reported Orangey productions sold 2.04 million Btu electricity production sold of 159000 megawatt hours.
Adjusted EBITDA was $30 1 million and net income of $32 6 million.
Our performance was positively impacted by strong market pricing of environmental attributes natural gas and electricity and to a lesser extent negatively impacted by higher cost of sales due to higher gas costs electricity utility costs employee costs as well 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, LNG production sold guidance and re.
A firming our full year 2022 electricity production sales 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 LNG 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 the Genco.
Look forward to seeing the impact of Bolton Genco and lightning renewables on the future growth and success of our business.
Additionally, <unk> recently won three competitive RFP processes to develop new orangey facilities at government own landfills.
Once gas rights agreements are signed for these sites. These projects will increase the company's backlog from 88 to 91 R&D development projects.
These municipal landfill wins are consistent with the company's strategy produced to pursue new R&D 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 R&D sales agreements with energy or in UGI.
Which added additional LNG 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 R&D market and.
We expect to announce additional contracts in the second half of this year.
Operationally, we continue to make meaningful progress on our 2022 development.
We've seen our initial phase of optimization work translating to improved operational performance within our existing R&D asset base, which ultimately results in increased R&D production and expected project returns. We've also made progress on our Newbuild projects.
Our second theory Digest your R&D facility came online in May 2022, and we are preparing for our inaugural RQ first one plan installations in the second half of this year.
When we announced the original business combination between rack legacy archaea and Oreo in April 2021, we committed ourselves to a business plan that was built upon the idea of doing what you said youre going to do.
It's been about 18 months since we've made that commitment and I'm proud to say that we have continue to uphold our commitment to execution across the board we either on track exceeding are actively fighting to achieve our original goals.
Our LNG production from our existing asset base continues to improve year over year as we are optimizing the legacy Oreo asset base and increasing production at assai, despite impacts from winter issues maintenance and timing of the alliance tie and 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 and appreciating pricing environment.
We are dramatically expanding our development backlog at attractive multiples collectively are 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 orange production and EBITDA from our existing asset base.
They are ramping up the <unk> facility to full flows while maintaining operational excellence.
<unk> legacy acquired Oreo assets to Archie operational standards by completing optimizations and mitigating capacity constraints and lastly.
Deploying and perfecting our Erkki version one plant design.
We are currently executing on all these initiatives and believe they will position us with a significant competitive advantage for future development.
Yeah.
The first of these initiatives focuses on project assai and maintaining operation operational excellence there now.
Now that the facility is successfully processing full flows from both the Keystone and the alliance landfills. We are focused on operating assai at or above our internal uptime methane recovery and enlighten methane targets to.
To accomplish this goal we continue to invest in the development of our technical team, while adding design redundancies to key components to mitigate potential downtime events. Our efforts to date have resulted in record daily production for any R&D plant in the industry being achieved multiple times in the last several months and we expect flows into the plan to continue increasing.
Through the remainder of the year.
The next initiative focuses on optimizing our legacy R&D 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 LNG plants are undersized and cannot handle the full flows coming from the landfills, resulting in over 19000, CFM or standard cubic feet per minute, a valuable landfill gas being flared or combusted.
That would be nearly equivalent to flaring combustion nearly all of the inlet landfill gas coming into our site plant rather than creating orangey.
Second many of these same plants have insufficient nitrogen rejection units were interviews <unk> separation systems.
Which if left unaddressed.
The result in additional unscheduled downtime and lost methane.
We are leveraging our robust technical expertise to right size their facilities to handle the full site flows and upgrading.
They're performing interviews and membrane based Iot separation systems to high grade these legacy plants to best in class operational standards.
We also wanted to provide additional specifics around our ongoing optimization program.
Which will not only mitigate the 19000 CFM of lost landfill gas at our legacy facilities through capacity expansions.
But in combination with other efficiency improvements is expected to result in more than $100 million in incremental annual EBITDA added to our existing LNG asset base after completion of ramp.
For our third major initiative, we're actively deploying our archived version one plant design across both optimization and Newbuild projects.
And these revolutionary standardized modularized plants can be easily identified with our bright Archie green.
Shown in the pictures here are some of the first <unk> one nature of injection units shoot to separation systems and other key equipment all of which are <unk>, reflecting the modularized design approach, we often discussed.
I also want to reinforce why we're so excited about the archived version one design. We are increasingly confident that archived version one standardized 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 one design provides a unique competitive advantage relative to our current industry designs.
Moreover, we believe the Orca one 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 ensure a 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 LNG 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 R&D plans from our portfolio of landfill gas to electric plants, and we expect our Archie version one designed to reduce overall power consumption. We also see continued pricing improvement and our long term offtake discussions long term offtake of voyage transportation marketing costs and on a net basis, the improving pricing environment.
As offering a compelling and improving value relative to short term transportation markets and.
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 and inform decision, making and improve 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.
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 lighting renewables, which included the Companys net contribution to the JV for the acquisition of Fort Wayne site.
The Fort Wayne site is the 14th project added to the lending renewables JV and includes a medium btu facility with landfill gas rates.
Discuss in more detail. Shortly we are particularly excited to see the potential benefit of economic upside from the investment tax credits on our JV projects. In addition to other complementary business initiatives.
We also successfully closed our previously announced acquisition of the Genco in July 2022, and believe it was acquired at a very compelling valuation relative to recently announced comparable transactions in.
In Genco landfill gas to electric portfolio is a great example of where we can capture significant value by taking advantage of self source 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 <unk> real time monitoring standards.
In addition to developing R&D projects that a majority of the genco sites over time, we have significant optionality to generate immediate cash flow by monetizing non 95 megawatts of existing nodal capacity at compelling prices in the PJM market, which is short capacity for new solar projects.
These are just a few of the many opportunities that make us excited about continuing to run our landfill gas to electric facilities, even after we construct and commission R&D facilities adjacent to many of them.
Before I turn the call over to Brian I want to lay out our 2023 strategic and operational priorities with our growth pipeline largely secured with 88 projects in our development backlog today, we are now able to shift focus towards executing on scale development and incremental earnings power growth.
Upholding continued operational excellence and capital efficiency.
We believe that we will further grow our competitive advantage by continuing to invest in technical expertise are secured in a high graded supply chain and optimize construction processes that should enable us to construct and commission 20 R&D 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 <unk> 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 $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 <unk> volumes monetizing the waste heat generated across our R&D and electric projects.
And by making improvements and investments into improved collection efficiencies at the landfills, where we operate.
Outside of these opportunities within our existing portfolio, we see additional opportunities for us to add additional municipal landfills LNG projects to our development backlog and pursue.
Economically attractive clean hydrogen projects.
Critical mass of long term highly predictable free cash flow that these initiatives will provide.
Should translate into an increasingly premium yield for argue.
Lastly, we are committed to growing our business in a way that is non dilutive 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 ramp to full flows that will support near term deleveraging and a committed focus on high return low build multiple R&D projects. Moreover, we will continue to explore additional low cost of capital nonrecourse financing opportunities that can further de risk our growth in a non dilutive way.
It has been an action packed first six months of the year and I continue to be amazed at the work our team has accomplished up to this point.
Looking towards the remainder of this year and beyond we're prepared and poised to achieve the next important phase of our development program.
And with that I'll turn the call over to Brian who will provide a commercial and business development update and review our financial results and 2022 guidance.
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 and alignment with our goal of securing 70% of expected RMG production sold under long term fixed price contracts.
We recently expanded our existing commercial partnership with <unk> by entering into a second long term R&D purchase and sale agreement.
Under the agreement, which is subject to regulatory approval energy expects to purchase two $1 5 million Giga jewels or just over 2 million Mmm Btu of RMG and its associated environmental attributes generated by archaea annually from its portfolio of RMG production facilities for a fixed price.
<unk> 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 energy or energy or 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 a new commercial partnership with UGI after entering into a medium term RMG purchase and sale agreement with one of its wholly owned subsidiaries UGI utilities incorporated.
Under the agreement UGI utilities, we purchased just under 1000, MN Btu per day of RMG and its associated environmental attributes annually from our Si <unk> facility for a fixed price for a period of five years.
Deliveries under this agreement commenced on July one 2022.
This is <unk> 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 the program could allow for additional in state commercial offtake opportunities for RMG.
UGI is our interconnection partner of Assai. This agreement represents the first time one of our interconnection partners is purchasing RMG as well, we expect the model of our interconnection partners purchasing our RMG, three 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 RMG market, which remains.
Supply constrained amid growing demand from an increasing number of market participants with regulatory or existential mandates to decarbonize we.
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 in 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 RMG 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 initiative.
<unk>.
For landfill gas to electric and R&D projects. The IRA provides investment tax credits of up to 30% of the qualified costs.
Our landfill gas to electric projects, a production tax credit equal to two six.
Adjusted for inflation per kilowatt of electricity produced may alternatively be available.
For carbon capture projects tax credits of up to $85 per metric ton of Sidoti <unk> stored may be available to archaea.
And for clean hydrogen projects, a tax credit of up to 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 our princess requirements are satisfied or waived or that care 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 R&D and landfill gas to electricity operations.
To clean hydrogen.
A typical landfill gas stream is composed of about 40% Cotwo average when we generate large volumes of high purity <unk> is a natural byproduct of our RMG upgrading process.
Two our RMG, we are committed to repurposing cotwo and naturally occurring emission from landfills into a valuable product that benefits all stakeholders.
Therefore, we are actively pursuing both geologic sequestration and utilization opportunities to unlock the untouched economic value and de carbonization potential of Sidoti <unk> portfolio.
For the last two years, we have made significant strides in advancing geologic sequestration is a commercial pathway for our cotwo.
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 Archea sites.
While we are approaching permits the middle on several highly economic projects. We are also actively pursuing various commercial opportunities in parallel to monetize our sidoti and 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 Cotwo 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 <unk>.
We are also pursuing low carbon clean hydrogen production using <unk> and <unk> technology.
Clean hydrogen projects arent ideal development opportunity at low flow are closed landfill sites that otherwise would not be as economically competitive within our portfolio.
We currently have four potential <unk> plants that are currently in our 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.
Could underwrite these projects without relying on the incremental benefit of potential L CFS 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 Btu of RMG and 159000 megawatt hours of electricity.
R&D production sold was positively impacted by incremental production from the assai and <unk> R&D facilities, which were completed in December 2021, and January 2022, respectively.
And increased methane recovery with LNG production from completed optimization initiatives.
Electricity production sold for the second quarter was.
It was positively impacted by efficiency improvements across the asset portfolio and incremental production from our <unk> 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 and 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 costs for the second quarter totaled $18 9 million and 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 of environmental attributes natural gas and electricity and to a lesser extent negatively impacted by higher cost of sales and higher royalties as previously discussed.
As of June 30, we had $585 million of outstanding borrowings, including $400 million of outstanding borrowings under our term loan and $135 million of outstanding borrowings related to our Si project financing.
Under our revolving credit facility, we had $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 our revolver.
On June 32022, we successfully closed an amendment to our revolving credit and term loan agreement.
Aggregate commitments now totaled $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 sofa, plus 275 basis points for the revolving credit facility and sulfur 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 remained unchanged at September 15, 2026.
Available capacity under the amended facilities along with available cash were used to fund the Companys acquisition of Genco and the initial capital contribution to lightning renewables avail.
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 permanent investments.
To provide working capital 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 companys development capital needs for the foreseeable future.
Eliminating the need for additional external capital in the near term based on the Companys current development plans in backlog.
We believe we are capable of supporting the near term increase in our leverage profile as a result of the amended facilities.
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 contracts.
This provides us with multi decade visibility into a sizable 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 newbuild projects.
Before turning the call over for Q&A I'd like to discuss our updated 2022 guidance.
Two.
And those projects estimated earnings power remained unchanged from our original guidance provided in March.
Currently.
Taking new account volumes expected to be sold under our existing long term fixed price contracts and four grand sales for this year, we estimate approximately 2.5% to $3.5 million. <unk> are are expected second half of 2022, RMG production will be subject to market pricing.
For open RMG volumes in the second half of the year, we assume Ah RIN price range of $2 and 85.
95 per gallon.
Within our adjusted EBITDA guidance, we continued to reaffirm our expected 2022, G&A approximately $35 million.
Which we believe will support our ability to execute on our expanded backlog and obtain operating leverage to efficiently scale even further.
To conclude today's prepared remarks.
I want to end by reiterating the sizeable adjusted EBITDA, we standard 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 the underlying base asset growth.
Leave we can achieve over $200 million and run right EBITDA in about three times 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 archaeas 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.
With that I'll turn the call over to the operator for Q&A. Thank you all for your interest and argue.
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Our first question is comes from the line of <unk> with Stifel. Please proceed with your questions.
Good morning, all and congrats on your operational and commercial progress.
Referencing Karen slides.
Referencing slides nonage and 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 RMG assets.
If we were to assume the incremental 19000, scf them afloat and additional flows at project design.
We got you guys certainly in an excellent position to achieve production guidance from last year's pipe presentation Guide for 2023.
Fair characterization.
Yeah. Derek I think this is this is Nick I think that's fair.
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.
Those things happen and and then generally I think zoning is taken about as long as as could could be taken just from a statutory perspective, and I think that's consistent with other industries as well regulators and municipalities.
A long list of things to approve including renewable energy projects and it just comes down to when they when they get too are when they get to a project for approval we.
As you know our projects are incredibly environmentally beneficial.
And most most local municipalities really really support them and it's not really an existential risk, but just a timing risks and we have.
Let me think.
10, producing RMG assets about a year ago.
Close to 2000 at the end of the year that that that means that there is some concentration risk around single projects and a couple of weeks on the zoning permit could move things back even a quarter, particularly with revenue recognition so and the second part of your question is yes, that's exactly how we see it.
Basically every everything that we thought was possible with the Orient portfolio in terms of capacity improvements in terms of methane recovery improvements in an upset improvements are really on track and we're kind of more excited about them than we were when when looking at ARIA about.
A year ago and or over a year ago. So that it's an incredible asset base when it's fully optimized and I think that's what we're trying to 0.2 and that's what we're really focused on this year and that creates a.
Dramatically stronger company from.
I am and RMG production on earnings power standpoint, before any new builds and future growth is is executed.
Terrific and it's my follow up.
Perhaps shipped over to Ccs.
It would appear based on slides 20, and 21 that the legislation.
Legislation at a minimum has advanced CCF positioning and 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 Desert between you and shell or would you guys like the leverage more of your internal resources.
Yes that great question.
So just to clarify we don't have a partnership with shell, but we're lumped in with with shell is another.
Another developer that was working hard on being the first.
First company in Pennsylvania to do a geological seek illustration.
And permitted classics.
45, Q qualifying project. So just just to clarify that that is an independent kind of Archea project that we're very excited about along with a number of other projects and I think when we started our guests we knew that C. O two had value and that we're throwing away and sending it to a thermal oxidizer.
And we knew that.
We add large volumes that were very unpredictable of highly pure C. O two really close to industrial grade.
Just as a natural byproduct of producing RMG going from our landfill gas to.
To ramble natural gas.
So we were determined to figure out something to do with it initially we build a team around exploiting and exploring geological sequestration and because.
Because that was really only way to to qualify for sequestration and extract them at the maximum value of that C. O. Two with large volumes of C. O two and to do that were initially focused on.
Initial qualifying threshold to show over 100000 metric tons per year of C O two which.
Still created some very compelling opportunities for us with large float projects sitting on top of favorable geology, but it was it a narrower universe certainly than it is today and with the <unk> and the potential for lower qualifying thresholds we dramatically.
Increase the number of projects that could qualify for sequestration related.
R.
Other than use beneficial in your benefits along the 45 Q in addition to that.
We're getting more and more excited about just an industrial market that short C O two and that is what.
What we do is is a kind of a green C O two input.
Input into a lot of industrial processes, where we may not be close to geological sequestration of that infrastructure camp 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 our perspective, and a technology perspective, and we've really feel like we are nearing the point.
Certainly with the <unk> that we have.
Some real opportunities in front us and certainly in expanding set of of opportunities with the with real value.
That's terrific.
Thanks for your responses.
Sure thing.
Thank you. Our next question is coming from the line of Matthew Blair with Tudor Pickering Holt. Please proceed with your questions.
Oh, good morning, Mecom, Brian and thanks for your comments on the support for Orangey than the inflation reduction Act as.
Hoping that you could go into maybe a few more details on how the IRL will directly impact archaea.
So.
Yes, one does this do you expect us to accelerate the pace of year development from receiving the 30% ITC. Two does this expand your addressable market by by making smaller landfills more economic and then three does it have any impact on your long term for.
Financing plans.
Thanks. Thanks, Matthew This is this is Brian I will take this one.
The I think the answer to all three is yes, I think the first thing when we think about our projects even before the the AGC is extremely favorable economics, and and very compelling returns on capital and ultimately on returns on equity given how we finance their projects with our long term offtake and this just.
Takes it to the next level, so with the ability to generate a ITC anywhere between six and 30%.
That would be in total capital spent so on our return on equity perspective that can be extremely valuable and and I think from a perspective of we're already trying to take advantage of our leading <unk>.
Physician in terms of cost of building and so this is just further further increases our advantage, especially in the lower floor projects.
And and I think the last piece would be that when we think about the ability to potentially work with this and some of our JV partners in our JV partners as well or.
Large taxpayers are some additional benefits in terms of having those flow through through through our jv's, which even from July we have not contemplated now it looks very favorable about how we think about it going forward.
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 price than your existing average so in other words as a sixth market getting tighter.
So this is Brian again first of all the the pricing dynamics for the long term fixed price market continued continued to improve and we're seeing that not only from the perspective of desire to work with <unk> 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 as a business scares premium that we're able to receive so it is not only supply and demand, but it's also the fact that folks now see with what we've done it a sigh and our other launch moth take that the volumes do we said we would deliver we're actually.
Delivering and that's why when we see.
Additional second third contracts with our state partners were delighting, our customers with what we're doing we'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 there.
<unk> 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 are providing is the highest quality RMG in the industry and so we continue to have very favorable partnerships, we're continuing to grow with them. We are so excited about there.
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 de value that these projects are highly economic there'll be creating a lot of flow and there'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 are financing partners couldn't be more excited about it because they can now see with over 6 billion of Ford revenue visibility. It makes it a lot easier to say, okay, even before an ITC even before some of the improvements that we are doing just how much that we can provide to the market on an economic basis.
Great. Thank you very much.
Thank you. Our next question comes from the lineup Craig share with Chewy Brothers. Please proceed with your questions.
Good morning, congratulations on all the execution.
Thanks credit facility.
One kind of big picture question.
It doesn't seem like you have liquidity or capital funding issues doesn't seem like you have off tick issues. It doesn't seem like you have technology issues, which seems to be driving even greater.
Cost clubs and faster project development and previously shared.
And now we have the <unk> legislation.
So I'm trying to understand.
What the bottleneck our governor is on how much growth you can pack into five years.
Is it the equipment supply chains labor permitting how.
How should we think about this.
That's a great question.
I think initially it was really critical for us to solve for.
Liquidity and a non dilutive way and to give us enough dry powder to fully fund our entire program, which included in <unk> acquisition, the backlog of 88 development projects, which and janka as a part of and also the Republic J D. As a part of so once we did that in salt four capital needs.
I think that 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 overall 400 and.
And everything that we've done as a first time process and we've tried to standardize these processes across accompany whether it's Archie version, one small medium large extra large approached R&D development or as permitting or zoning.
Or it's it's.
It's.
Or safety <unk>.
Everything is has been a processing with those processes now that we have been built and refined and people trained on them.
It's hard for me to see real limitations to the future I think we are determined to be prudent.
Meaning that we think the business can and will deleverage quickly and we think we have additional sources of capital that are also non dilutive and very and very attractive which is the non recourse project based financing that we achieved assign.
And we have those opportunities across the portfolio.
And it really minimising, our our equity capital contribution while staying overall under leveraged.
And and being being prudent in terms of growth, So I think prudence and and generally being deleverage.
Is important and so that's the sort of the second the second factor of that and and everything that we've done to date.
It should show investors.
We're committed to that kind of period non dilutive growth and then the third part is is really just I think prioritizing returns on capital and we have a we have.
We have the benefit of.
The number of highly compelling projects without signing an additional development agreement or without doing another acquisition and that's not just <unk>, but that's hydrogen and that's you too and Thats heat recovery and some of the other things we were talking about and 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.
So that is that really is kind of outlining our overall philosophy and.
There's no reason to to not expect 20 projects per year from us going forward I think we're all internally very comfortable on that and.
In the process that we build and and what we're able to do and then the limits to that growth.
Would really be at this point I think just being prudent to to to.
To leverage in and.
And saying Saint crew to prioritizing higher returns on capital first.
Great. Thank you.
Our last question is will come from the line of <unk> with Stifel. Please proceed with your questions.
Hey, guys just wanted to follow up on a couple of items.
Perhaps for Brian referencing the 2023 strategic and operational priority slide could.
Could you provide some parameters around capex expectations for 2023.
Given your legacy program and that use substantially prefunded development Capex for the Lightning JV.
Derek This is Brian so right now, we're not giving out specific guidance on Capex for 2023, we're giving out or.
Our perspective of doing 20 projects next year and in terms of the lightning JV that capital that went into the lightning JV is too.
Fund the first <unk>.
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 were already continuing to expand that relationship and that the to.
To bring in a project that is already targeted to be at 5000 CFM with the plant that will be built at 9600 to be able to bring that forward is something that's been unique because of the partnership with Bill with Republic. So we're very very excited about relationship with them. It's off to a great start taking some of the learnings that Nick.
<unk> speaking about about going out and doing all the permitting zoning and interconnections for all those projects.
Bored upfront, we can minimize risk over time.
And we've built.
As we laid out as well just to highlight not increasing our G&A as we've now right sized our company to be able to do that normally it public portfolio, but for the entire company to continue to.
Derisks the things that we we are out of our control are have mandatory timelines, we need to think about.
Eric. This is next I would just add one thing to that I mean.
Important to.
You can think about what you could look at our.
Previous previously made statements around what a typical plant with a typical for doesn't see it then plant would cost and then.
Also taking into account multiplying that by the projects that we expect to get online next year, but you have to remember too that we've also said that.
This time last year, basically we purchase measuring equipment itself components for everything and 2022 and most of 2023 as well so.
We spent a lot of 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 the systems and skids are increasingly being.
Being made and being.
Being being put in a place where they are truly off the shelf won't already to deploy them with the zoning permitting and.
And and sidewalks construction completion.
That's terrific.
Perhaps.
For Brian and the last one is well referencing page 18.
State to how impactful the UGI remake could be in the state of PA I know, it's a pilot program at present, but just any any perspective and that would be appreciated.
Sure 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 orangey contract with a regulated utility.
It's a huge deal and.
Sure, especially as we think about the mid Atlantic and we think about a recent acquisition of Genco with a portfolio it looks more and more compelling as even as every day that goes by is that are 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 effective hopefully, having R&D tariffs across the board 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 with UGI.
<unk> is our interconnection partner, where that they're the ones that are accepting the RMG from our side project. They are at that interconnection point is the largest one.
Fourth America in terms of accepting RMG 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 RMG tariffs. The second model for US is that when we work with and new interconnection partners across our 88 development opportunities to say, okay. Now we have this interconnection agreements perhaps would you.
Like to buy RMG.
And really a line that the project that's going in is 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 with local utilities are buying local RMG to be used.
And for their customers, it's very very powerful so with a five years as 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 over the near term.
That's helpful. Thanks for your time and responses.
There are no further questions at this time I would now like to turn the call back over to management and Burny closing comments.
Thank you.
The last several months served as a wonderful reminder, on Mister market, who he is and how he thinks our business materially improve but the stock price went down rooms were down and we were down along with him. Despite having very little short term exposure to environmental attribute and only positive exposure to environmental actually beats 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 infrastructure.
Price is not value in our intrinsic value has continued to improve.
We announced significant additions to our long term earnings power and announce a prudent nondilutive strategy for realizing this value we've executed on nearly everything we said we would do on both short term operational in long term strategic initiatives, we stayed consistent with their capital allocation philosophy and families to exploit new sources of value from existing assets.
Built archea under the premise of developing long term predictable free cash flows with highly attractive but three options.
<unk> options are overwhelmingly better than our expectations and are increasingly real decent.
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 seat utilization across our asset base exciting near term opportunities for collection efficiency improvements in landfill gas collection systems, and increasing alignment with landfill.
The owners to prevent period of missions and increase RMG outputs.
Low carbon intensity hydrogen and expanding set of C O two monetization opportunities.
Archie is better today than it was last quarter to 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.
Of course, my viewpoint is unique.
<unk> I get to interact daily with over 400, <unk> across the company and across the country who are.
Bought into the challenge of doing something radically better than what has been done before then what other said could be done I saw this first set aside where we completed the largest orangey plant in the world under budget and and half the time of our competitors with a total construction timeline closer to 12 months.
We are fully ranted, aside and we achieved this faster and with better efficiency than most people thought we could and we did this largely without the help of nature 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 ORC is something more than a job of being pirates.
I'd like to thank all of our incredible employees with ignore the noise from the market from competitors and from the doubters and embraced the challenge of excellence to continue to add value to all stakeholders elegy.
Thank you. This task concludes today's teleconference. We appreciate your participation.
May disconnect your lines at this time enjoy the rest of your day.