39
The accompanying notes are an integral part of these consolidated financial statements.
29
ARIA ENERGY LLC AND SUBSIDIARIES (Predecessor)
Consolidated StatementStatements of Comprehensive Income
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | July 1 to September 14, 2021 | | July 1 to September 30, 2020 | | January 1 to September 14, 2021 | | January 1 to September 30, 2020 |
Net Income (Loss) | $ | (534) | | | $ | 532 | | | $ | 84,520 | | | $ | (6,071) | |
Other Comprehensive Income (Loss) | | | | | | | |
Net actuarial income | 19 | | | 25 | | | 213 | | | 75 | |
Other Comprehensive Income (Loss) | (515) | | | 557 | | | 84,733 | | | (5,996) | |
Comprehensive income attributable to noncontrolling interest | — | | | 22 | | | 289 | | | 61 | |
Comprehensive Income (Loss) Attributable to Controlling Interest | $ | (515) | | | $ | 535 | | | $ | 84,444 | | | $ | (6,057) | |
| | | | | | | | | | | | |
| | | | | | Three Months Ended |
(in thousands) | | | | | | March 31, 2021 |
Net Income (Loss) | | | | | | $ | 8,718 | |
Other Comprehensive Income (Loss) | | | | | | |
Net actuarial income | | | | | | 27 | |
Other Comprehensive Income (Loss) | | | | | | 8,745 | |
Comprehensive income attributable to noncontrolling interest | | | | | | 8 | |
Comprehensive Income (Loss) Attributable to Controlling Interest | | | | | | $ | 8,737 | |
ARIA ENERGY LLC AND SUBSIDIARIES (Predecessor)
Consolidated Statements of Equity
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Controlling Interest | | | | |
(in thousands) | Class A Units | | Class B Units | | Class C Units | | Retained Earnings (Loss) | | Accumulated Other Comprehensive (Loss) Income | | Total Controlling Interest | | Noncontrolling Interest | | Total Equity |
Balance – January 1, 2021 | $ | 299,327 | | | $ | 19,327 | | | $ | 1 | | | $ | (218,957) | | | $ | (1,349) | | | $ | 98,349 | | | $ | (289) | | | $ | 98,060 | |
Net income (loss) | — | | | — | | | — | | | 84,231 | | | — | | | 84,231 | | | 289 | | | 84,520 | |
Adjustments for postretirement plan | — | | | — | | | — | | | — | | | 213 | | | 213 | | | — | | | 213 | |
| | | | | | | | | | | | | | | |
Balance – September 14, 2021 | $ | 299,327 | | | $ | 19,327 | | | $ | 1 | | | $ | (134,726) | | | $ | (1,136) | | | $ | 182,793 | | | $ | — | | | $ | 182,793 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Controlling Interest | | | | |
(in thousands) | Class A Units | | Class B Units | | Class C Units | | Retained Earnings (Loss) | | Accumulated Other Comprehensive (Loss) Income | | Total Controlling Interest | | Noncontrolling Interest | | Total Equity |
Balance – January 1, 2020 | $ | 299,327 | | | $ | 19,327 | | | $ | 1 | | | $ | (188,956) | | | $ | (1,304) | | | $ | 128,395 | | | $ | (266) | | | $ | 128,129 | |
Net income (loss) | — | | | — | | | — | | | (6,132) | | | — | | | (6,132) | | | 61 | | | (6,071) | |
Adjustments for postretirement plan | — | | | — | | | — | | | — | | | 75 | | | 75 | | | — | | | 75 | |
Distributions to noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | (76) | | | (76) | |
Balance – September 30, 2020 | $ | 299,327 | | | $ | 19,327 | | | $ | 1 | | | $ | (195,088) | | | $ | (1,229) | | | $ | 122,338 | | | $ | (281) | | | $ | 122,057 | |
41
The accompanying notes are an integral part of these consolidated financial statements.
30
ARIA ENERGY LLC AND SUBSIDIARIES (Predecessor)
Consolidated Statements of Cash Flows
(Unaudited) | | | | | | | | | | | | | | |
(in thousands) | | January 1 to September 14, 2021 | | January 1 to September 30, 2020 |
Cash flows from operating activities: | | | | |
Net income (loss) | | $ | 84,520 | | | $ | (6,071) | |
Adjustments to reconcile consolidated net income (loss) to net cash provided by operating activities: | | | | |
Depreciation, amortization and accretion | | 15,948 | | | 23,381 | |
Gain on disposal of assets | | (1,573) | | | — | |
Amortization of debt origination costs | | 699 | | | 1,181 | |
Amortization of intangibles and below-market contracts | | 859 | | | 918 | |
Return on investment in equity method investments | | 19,518 | | | 9,295 | |
Equity in earnings of equity method investments | | (19,777) | | | (6,005) | |
Change in fair value of derivatives | | (1,268) | | | (1,113) | |
Gain on extinguishment of debt | | (61,411) | | | — | |
Net periodic postretirement benefit cost | | 106 | | | 79 | |
Changes in operating assets and liabilities: | | | | |
Accounts receivable | | (4,728) | | | (6,338) | |
Inventory | | (1,318) | | | (656) | |
Prepaid expenses and other assets | | (143) | | | (625) | |
Other non-current assets | | (196) | | | 295 | |
Trade accounts payable | | 478 | | | 882 | |
Accrued and other current liabilities | | 19,231 | | | 4,475 | |
Net cash provided by operating activities | | 50,945 | | | 19,698 | |
Cash flows from investing activities: | | | | |
Purchase of property and equipment | | (2,318) | | | (1,558) | |
Contributions to equity method investments | | (8,430) | | | (9,900) | |
Net cash used in investing activities | | (10,748) | | | (11,458) | |
Cash flows from financing activities: | | | | |
Payments on note payable and revolving credit agreement | | — | | | (10,408) | |
Proceeds from revolving credit agreement | | — | | | 4,000 | |
Payments on long-term debt | | (49,551) | | | — | |
Distributions to noncontrolling interest | | — | | | (76) | |
Net cash used in financing activities | | (49,551) | | | (6,484) | |
Net increase (decrease) in cash and cash equivalents | | (9,354) | | | 1,756 | |
Cash and cash equivalents – beginning of period | | 14,257 | | | 7,081 | |
Cash and cash equivalents – end of period | | $ | 4,903 | | | $ | 8,837 | |
Supplemental cash flow information: | | | | |
Cash paid for interest | | $ | 5,940 | | | $ | 9,339 | |
Noncash investing activities: | | | | |
Accruals of property and equipment incurred but not yet paid | | $ | 25 | | | $ | 50 | |
| | | | | | | | |
| | Three Months Ended |
(in thousands) | | March 31, 2021 |
Cash flows from operating activities | | |
Net income | | $ | 8,718 | |
Adjustments to reconcile consolidated net income (loss) to net cash provided by operating activities: | | |
Depreciation, amortization and accretion | | 5,693 | |
Impairment of assets | | 542 | |
| | |
Amortization of debt origination costs | | 245 | |
Amortization of intangibles and below-market contracts | | 343 | |
Return on investment in equity method investments | | 6,419 | |
Equity in earnings of equity method investments | | (5,855) | |
Change in fair value of derivatives | | (312) | |
| | |
Net periodic postretirement benefit cost | | 27 | |
Changes in operating assets and liabilities: | | |
Accounts receivable | | (1,226) | |
Inventory | | (667) | |
Prepaid expenses and other assets | | (344) | |
Other non-current assets | | 30 | |
Trade accounts payable | | 245 | |
Accrued and other current liabilities | | 2,619 | |
Net cash provided by operating activities | | 16,477 | |
Cash flows from investing activities | | |
Purchase of property and equipment | | (771) | |
Contributions to equity method investments | | (1,900) | |
Net cash used in investing activities | | (2,671) | |
Cash flows from financing activities | | |
| | |
| | |
Payments on long-term debt | | — | |
| | |
Net cash used in financing activities | | — | |
Net increase in cash and cash equivalents | | 13,806 | |
Cash and cash equivalents – beginning of period | | 14,257 | |
Cash and cash equivalents – end of period | | $ | 28,063 | |
Supplemental cash flow information | | |
Cash paid for interest | | $ | 2,193 | |
Noncash investing activities | | |
Accruals of property and equipment incurred but not yet paid | | $ | 155 | |
42
The accompanying notes are an integral part of these consolidated financial statements.
31
ARIA ENERGY LLC AND SUBSIDIARIES (Predecessor)
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1 - Description of Business - Predecessor
Aria Energy LLC and its subsidiaries ("Aria"(“Aria”) design, install, own, and operate long-lived energy projects. Aria was originally formed on September 6, 2007, as EIF Renewable Energy Holdings LLC, a Delaware LLC, headquartered in Novi, Michigan. Aria generates its revenue from customers located throughout the United States from the production and sale of electrical energy from landfill gasLFG fuel engines and related Environmental Attributes, production and sale of RNG and related Environmental Attributes, operating and maintaining landfill gasLFG projects owned by third parties, and constructing energy projects.
Revenue is generated from the sale of commodities (power and gas), sale of capacity (power market) and from the sale of Environmental Attributes includinginclude RECs in the power market and RINs and LCFS credits in the RNG market.
Aria benefits from Federalfederal and state renewable fuel standards and Federalfederal compliance requirements for landfill owners and operators.
Funds managed by Ares EIF Management LLC held 94.35% of the ownership interests in Aria before the Closing of the Business Combinations.
The accompanying consolidated financial statements present the consolidated financial position and results of operations of Aria Energy LLC and its wholly owned subsidiaries.
The impact of the pandemic caused by the novel coronavirus (“COVID-19”) and measures to prevent its spread have been impactful and continue to affect Aria's business in several ways. In March of 2020, Aria implemented a COVID-19 response team, led by senior management, which initially met on a daily basis to report health status and develop guidelines to protect our workforce. Daily health monitoring and internal contact tracing protocols were implemented. The response team sought feedback from employees, particularly those working in our plants, in developing policies and protocols. Work-from-home protocols were implemented immediately where possible for non-operations personnel. For on-site employees, PPE was provided and enhanced hygiene and physical distancing protocols were implemented. The necessary IT improvements were initiated to facilitate a remote work environment, and we leveraged supplier networks to source COVID-19 specific PPE. Communications from senior leadership to all employees were enhanced, with weekly updates provided. Through the Closing Date, Aria has not experienced any spread of the disease within its operating and management locations or any material interruptions to its business operations.
NOTE 2 - Summary of Significant Accounting Policies - Predecessor
Basis of Presentation
The consolidated financial statements of Aria have been prepared on the basis of United States generally accepted accounting principles ("US GAAP").
Segment Reporting
Aria reports segment information in 2 segments: RNG and electric operations (Power). Landfill gas fuel source is a common element, though Aria had a new RNG plant that was under construction as of Closing Date that will utilize waste from dairy cattle. Aria managed RNG and electric production as separate operating groups and measured production output in terms of megawatt hours (MWh) for Power projects, and energy content is expressed as MMBtu for RNG. Other segment reporting considerations include:
•There are separate operating and leadership teams for RNG and Power, each of whom have different skill sets. The processes for production are unique.
•Customers are different. Utilities and ISO’s are buyers of electricity and RECs. Municipalities and energy companies are the primary buyers of RNG and RINs.
ARIA ENERGY LLC AND SUBSIDIARIES (Predecessor)
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
•Economics are much stronger with RNG. Prices for both segments are volatile, but based on different drivers.
•Aria operates a small portfolio of Power plants for third parties. Operationally these plants are the same as wholly-owned projects.
•Aria operates RNG plants for its joint venture (JV) Mavrix LLC ("Mavrix"(“GAAP”). These plants are operationallyCertain amounts have been reclassified to conform to the same as wholly-owned plants.
•Construction activity is limited to wholly owned or JV plants. No construction activity is performed for third parties. Construction revenue only exists when building assets for non-consolidated subsidiaries.current presentation.
Use of Estimates
The preparation of the consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect amounts reported in the consolidated financial statements. Actual results could differ from those estimates.
Noncontrolling Interests
Noncontrolling interest represents the portion of equity ownership in subsidiaries that is not attributable to the equity holders of Aria Energy LLC. Noncontrolling interests are initially recorded at transaction price which is equal to their fair value and subsequently the amount is adjusted for the proportionate share of earnings and other comprehensive income attributable to the noncontrolling interests and any dividends or distributions paid to the noncontrolling interests. In the second quarter of 2021, noncontrolling interest was extinguished as part of the sale of LES Project Holdings LLC ("LESPH").
Revenue Recognition
Aria generates revenue from the production and sale of electricity, gas, and their renewable energy attributes, and performance of other landfill energy services. Based on requirements of US GAAP, a portion of revenue is accounted for under Accounting Standards Codification ("ASC")ASC 840, Leases, and a portion under ASC 606,Revenue from Contracts with Customers. Under ASC 840, revenue is recognized generally upon delivery of electricity, gas, and their related renewable Environmental Attributes. Under ASC 606, revenue is recognized upon the transfer of control of promised goods or services to the customer in an amount that reflects the consideration to which is expected to be entitled in exchange for those goods or services. Based on the terms of the power purchase agreements ("PPAs"),PPAs, the amounts recorded under ASC 840 are generally consistent with revenue recognized under ASC 606. For the year-to-date periodthree months ended September 14,March 31, 2021, approximately 36%39% of revenue was accounted for under ASC 606 and 64%61% under ASC 840. For the nine months ended September 30, 2020, approximately 42% of revenue was accounted for under ASC 606 and 58% under ASC 840.
The following tables display Aria’s revenue by major source and by operating segment for the periods July 1 to September 14, 2021 and January 1 to September 14, 2021 and the three and nine months ended September 30, 2020:March 31, 2021:
ARIA ENERGY LLC AND SUBSIDIARIES (Predecessor)
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | July 1 to September 14, 2021 | | July 1 to September 30, 2020 | | January 1 to September 14, 2021 | | January 1 to September 30, 2020 |
RNG, including RINs and LCFSs | $ | 28,125 | | | $ | 18,925 | | | $ | 83,848 | | | $ | 51,818 | |
Gas O&M service | 268 | | | 309 | | | 974 | | | 791 | |
Power, including RECs | 6,591 | | | 11,323 | | | 31,217 | | | 36,280 | |
Electric O&M service | 781 | | | 2,819 | | | 4,211 | | | 7,136 | |
| | | | | | | |
Other | 8 | | | 2,705 | | | 32 | | | 9,950 | |
Total | $ | 35,773 | | | $ | 36,081 | | | $ | 120,282 | | | $ | 105,975 | |
| | | | | | | |
Operating segments | | | | | | | |
RNG | $ | 28,402 | | | $ | 21,939 | | | $ | 84,853 | | | $ | 62,559 | |
Power | 7,371 | | | 14,142 | | | 35,429 | | | 43,416 | |
Total | $ | 35,773 | | | $ | 36,081 | | | $ | 120,282 | | | $ | 105,975 | |
Below is a description of accounting policies for each revenue stream:
Electricity
Aria sells a portion of the electricity it generates under the terms of power purchase agreements or other contractual arrangements which is included in energy revenue. Most PPAs are accounted for as operating leases under ASC 840, as the majority of the output under each PPA is sold to a single offtaker. The PPAs have no minimum lease payments and all of the rental income under these leases is recorded as revenue when the electricity is delivered. PPAs that are not accounted for as leases are considered derivatives. Aria has elected the normal purchase normal sale exception for these contracts, and accounts for these PPAs under ASC 606. Revenue is recognized over time using an output method, as energy delivered best depicts the transfer of goods or services to the customer. Performance obligation for the delivery of energy is generally measured by MWh’s delivered based on contractual prices.
Certain of Aria’s generated electricity is sold through energy wholesale markets (New York Independent System Operator (NYISO), New England Independent System Operator (NEISO), and the Pennsylvania, Jersey, Maryland Independent System Operator (PJM)) into the day-ahead market. These electricity generation revenue streams are accounted for under ASC 606. These electric revenue streams are recognized over time using an output method, as energy delivered best depicts the transfer of goods or services to the customer. Performance obligation for the delivery of energy is generally measured by MWh’s delivered based on contractual prices. Aria also sells its capacity into the month-ahead and three-year ahead markets in the wholesale markets to satisfy system integrity and reliability requirements. Revenue from capacity is recognized under ASC 606 over time using an output method. Capacity, which is a stand-ready obligation to deliver energy when required by the customer, is measured using MWs of capacity.
Gas
Aria sells the gas it generates pursuant to various contractual arrangements which is included in energy revenue. These gas sales are accounted for as operating leases under ASC 840, as the majority of the output under each contract is sold to a single offtaker. These agreements have no minimum lease payments and all of the rental income under these leases is recorded as revenue when the gas is delivered to the customer based on contractual prices.
Aria also has a division that resells biogas it purchases pursuant to various contractual arrangements which is included in energy revenue. This revenue is accounted for under ASC 606. Revenues related to these contracts are recognized at a point in time when control is transferred upon delivery of the biogas. Revenue is recognized on a monthly basis based on the volume of RNG delivered and the price agreed upon with the customer.
ARIA ENERGY LLC AND SUBSIDIARIES (Predecessor)
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Environmental Attributes
Aria also generates revenue through the sale of Environmental Attributes, which is included in energy revenue. Aria’s electric plants generate renewable energy credits, or RECs, as they generate electricity. The majority of Aria’s RECs are generated by plants for which Aria has a PPA to sell all of the outputs (both energy and RECs) to the PPA counterparty and therefore are accounted for as operating leases in accordance with ASC 840, with revenue recognized as the energy and RECs are generated and delivered. For RECs not bundled with a PPA, revenue is recognized under ASC 606 at a point-in-time, when control is transferred. For RECs subject to sales agreements prior to energy generated, control is deemed to be transferred and revenue recognized when related energy is generated even in cases where there is a certification lag as it has been deemed to be perfunctory.
Aria generates renewable fuel credits called renewable identification numbers, or RINs. Pipeline-quality renewable natural gas processed from landfill gas qualifies for RINs when delivered to a compressed natural gas fueling station. RINs are similar to RECs on the electric side in that they reflect the value of renewable energy as a means to satisfy regulatory requirements or goals. They are different in that RINs exist pursuant to a national program and not an individual state program. The majority of Aria’s RINs are generated by plants for which Aria has a PPA to sell all of the outputs and are therefore accounted for as operating leases in accordance with ASC 840, with revenue recognized when the fuel is produced and transferred to a third party.
Construction Type Contracts
Aria, on occasion, enters into contracts to construct energy projects. This contract revenue is recorded under ASC 606 over time, using an input method based on costs incurred.
Operation and Maintenance (O&M)
Aria provides O&M services at projects owned by third parties which are included in Energy revenue on Aria's Condensed Consolidated Statement of Operations. Revenue for these services is recognized under ASC 606. O&M revenue is recognized over time, using the output method, based on the production of electricity or RNG from the project.
PPA and O&M Contract Amortization
Through historical acquisitions, Aria had both above and below-market contracts from PPAs and O&M agreements related to the sale of electricity or delivery of services in future periods for which the fair value has been determined to be more or less than market. The amount above and below-market value is being amortized to revenue over the remaining life of the underlying contract which is included in Energy revenue on Aria's Condensed Consolidated Statement of Operations.
Aria elected to recognize revenue using the right to invoice practical expedient and determined that the amounts invoiced to customers correspond directly with the value to customers and Aria’s satisfaction of the performance obligations to date. Furthermore, with the election of the right to invoice practical expedient, Aria also elects to omit disclosures on the remaining, or unsatisfied performance obligations since the revenue recognized corresponds to the amount that Aria has the right to invoice.
Cash and Cash Equivalents
Aria considers all investments with an original maturity of three months or less when purchased to be cash equivalents. Aria maintains amounts on deposit with various financial institutions, which may exceed federally insured limits. Management periodically evaluates the creditworthiness of those institutions. Aria had not experienced any losses on such deposits.
ARIA ENERGY LLC AND SUBSIDIARIES (Predecessor)
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Accounts Receivable
Accounts receivable are stated at the invoiced or estimated amounts adjusted for any allowance for doubtful accounts. An allowance for doubtful accounts is established based on a specific assessment of all invoices that remain unpaid following normal customer payment periods. There was no allowance for doubtful accounts at September 14, 2021 and December 31, 2020 based on Aria’s history with its existing customers. Payments on accounts receivable balances are typically due and paid within 30 days of invoice.
Inventory
Inventory is stated at the lower of weighted average cost or net realizable value. Inventory consists primarily of engine parts and supplies used in the maintenance of production equipment.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost. Expenditures for major renewals and betterments that extend the useful life of the assets are capitalized and depreciated over the remaining life of the assets. Maintenance and repair costs incurred by Aria are charged to expense as incurred in cost of energy. Changes in the assumption of useful lives of assets could have a significant impact on Aria’s results of operations and financial condition. Upon sale or retirement, the asset cost and related accumulated depreciation are eliminated from the respective accounts and any resulting gain or loss is recognized in income. Interest incurred on funds borrowed to finance capital projects is capitalized until the project under construction is ready for its intended use. There was no interest capitalized for the year-to-date periods ended September 14, 2021 and September 30, 2020.
Depreciation is computed using the straight-line method over the estimated useful lives of the assets. | | | | | | | | |
| | Three Months Ended |
(in thousands) | | March 31, 2021 |
RNG, including RINs and LCFS credits | | $ | 26,481 | |
RNG O&M service | | 339 | |
Power, including RECs | | 13,817 | |
Power O&M service | | 1,830 | |
| | |
Other | | 24 | |
Total | | $ | 42,491 | |
| | |
Operating segments | | |
RNG | | $ | 26,844 | |
Power | | 15,647 | |
Total | | $ | 42,491 | |
Held for Sale
During 2020, Aria enacted a plan to sell LESPH, and accordingly, the business was classified as held for sale through December 31, 2020.sale. An agreement to sell the membership interests of the business subsequently was executed on March 1, 2021. The sale of LESPH was completed on June 10, 2021. Proceeds from the sale were $58.5 million whichand were sent to the lenders of the LESPH debt discussed in Note 6. As discussed further in Note 6, in connection with the sale, Aria was released from its obligations under the LESPH debt and a gain on the extinguishment of debt in the amount of $61.4 million was recorded in conjunction with the sale, which accounts for the proceeds received, the debt and interest payable relieved and settlement of LESPH intercompany balances. Aria recorded an ordinary gain on sale of assets in the amount of $1.3 million.
debt.
The pre-tax net earnings (losses) associated with LEPSH, including the gain on extinguishment of debt and ordinary gain on sale of assets recognized in 2021, included in Aria’s consolidated condensed statement of operations were $67.6 million and $(9.6)$(1.9) million for the year-to-date periodsthree months ended September 14, 2021 and September 30, 2020, respectively, of which $67.3 million and $(9.5) million, respectively, were attributable to Aria.
Impairment of Long-Lived Assets
In accordance with ASC 360, Property, Plant and Equipment (“ASC 360”), property and equipment, and intangible assets with finite useful lives are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset or asset group to future undiscounted cash flows expected to be generated by the asset or asset group. Such estimates are based on certain assumptions, which are subject to uncertainty and may materially differ from actual results. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets.
For purposes of testing for an impairment loss, a long-lived asset or assets shall be grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. The lowest level of cash inflows and outflows largely independent of other assets is generally determined to be a project,
ARIA ENERGY LLC AND SUBSIDIARIES (Predecessor)
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
which represents a single electrical or gas generation facility located at a single landfill site. The group of assets and liabilities at the project level includes property and equipment, intangible assets (relating to gas rights agreements specific to the project site and, if applicable, the power purchase agreement also specific to the project site), and liabilities associated with out of market contracts (out of market power purchase agreements, if applicable).
There were no triggering events related to Aria’s projects in the period ended September 14,March 31, 2021.
Other Noncurrent Assets
The other noncurrent assets as of December 31, 2020 represents long-term deposits with transportation and utility companies.
Debt Origination Costs
Debt origination costs were incurred in connection with various legal, consulting, and financial costs associated with debt financing and are reported net of accumulated amortization. These charges are being amortized over the term of the related debt agreements using the effective interest rate and are recorded as a reduction to long-term debt.
Equity Method Investments
Aria's investments in joint ventures are reported under the equity method. Under this method, Aria records its proportional share of its income or losses of joint ventures as equity investment income, net in the consolidated statements of operations.
Derivative Instruments
Aria applies the provisions of ASC 815, Derivatives and Hedging, (“ASC 815”). ASC 815 requires each derivative instrument to be recorded and recognized on the consolidated balance sheets at fair value, unless they meet the normal purchase/normal sale criteria and are designated and documented as such. Changes in the fair value of derivative instruments were recognized in earnings.
Asset Retirement Obligations
Asset retirement obligations ("AROs") associated with long-lived assets are those for which a legal obligation exists under enacted laws, statutes, and written or oral contracts and for which the timing and/or method of settlement may be conditional on a future event. AROs are recognized at fair value in the period in which they are incurred and a reasonable estimate of fair value can be made. Upon initial recognition of an obligation, Aria capitalizes the asset retirement cost by increasing the carrying amount of the related long-lived asset by the same amount. Over time, the liability is accreted to its expected future value, while the capitalized cost is depreciated over the useful life of the related asset. Accretion expense is included in depreciation, amortization and accretion in the consolidated statements of operations. See note 10 for further disclosures on AROs.
Postretirement Obligations
Postretirement benefits amounts recognized in consolidated financial statements are determined on an actuarial basis. Aria obtains an independent actuary valuation of its postretirement obligation annually as of December 31. To calculate the present value of plan liabilities, the discount rate needs to be determined which is an estimate of the interest rate at which the retirement benefits could be effectively settled. The discount rate is determined using the average effective rate derived through matching of projected benefit payments with the discount rate curve published by Citigroup as of each reporting date. See Note 8 for further disclosures on postretirement obligations.
Other Long-Term Liabilities
Other long-term liabilities are recognized in the consolidated financial statements as obligations of Aria that are due more than one year in the future. Based on a contractual obligation under its Mavrix LLC (Mavrix) operating agreement (as discussed in Note 5), as of September 14, 2021 and December 31, 2020, Aria estimates an earn-out related to the
ARIA ENERGY LLC AND SUBSIDIARIES (Predecessor)
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
performance of the Mavrix joint ventures payable in 2022 in the amount of $1.7 million and $1.4 million, respectively. The maximum earn-out under the operating agreement is $9.55 million.
Comprehensive (Loss) Income
Comprehensive (loss) income consists of net (loss) income and other comprehensive (loss) income. Other comprehensive (loss) income includes certain changes in assets and liabilities recognized directly to equity, such as actuarial gains/losses on Aria’s postretirement plan.
Income Taxes
Aria Energy LLC is a limited liability company taxed as a partnership and therefore no provision for federal income taxes has been made in the consolidated financial statements since taxable income or loss of Aria Energy LLC is required to be reported by the respective members on their individual income tax returns.
One of Aria Energy LLC’s subsidiaries is treated as a corporation for tax purposes. Income taxes of this subsidiary are accounted for under the asset and liability method. This entity has reported tax losses since inception; therefore there continues to be a full valuation allowance at September 14, 2021 and December 31, 2020 recorded against its net deferred tax asset. The entity has recorded no income tax expense for the year-to-date period ended September 14, 2021 and September 30, 2020.
Concentration of Credit Risk
Financial instruments which potentially subject Aria to concentrations of credit risk consist primarily of accounts receivable. Certain accounts receivable are concentrated within entities engaged in the energy industry. These industry concentrations may impact Aria’s overall exposure to credit risk, either positively or negatively, in that the customers may be similarly affected by changes in economic, industry or other conditions. Receivables and other contractual arrangements are subject to collateral requirements under the terms of enabling agreements. However, Aria believes that the credit risk posed by industry concentration is offset by the creditworthiness of its customer base.
Cost of Energy
Cost of energy consists primarily of labor, parts, and outside services required to operate and maintain owned project facilities, electricity consumed in the process of gas production, the transportation of gas or transmission of electricity to the delivery point, and royalty payments to landfill owners as stipulated in the gas rights agreements.
Fair Value Measurements
Fair value is the price at which an asset could be exchanged or a liability transferred in an orderly transaction between knowledgeable, willing parties in the principal or most advantageous market for the asset or liability. Where available, fair value is based on observable market prices or derived from such prices. Where observable prices or inputs are not available, valuation models are applied. These valuation techniques involve some level of management estimation and judgment, the degree of which is dependent on the price transparency for the instruments or market and the instruments’ complexity. The framework for establishing fair value is based on a hierarchy that prioritizes the inputs and valuation techniques used to measure fair value.
Aria employs varying methods and assumptions in estimating the fair value of each class of financial instruments for which it is practicable to estimate fair value. For cash and cash equivalents, accounts receivable and trade accounts payables, the carrying amounts approximate fair value due to the short maturity of these instruments. For long-term debt, the carrying amounts approximate fair value as the interest rates obtained by Aria approximate the prevailing interest rates available to Aria for similar instruments.
In accordance with ASC 820, Fair Value Measurement (“ASC 820”), the hierarchy alluded to above is established that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The hierarchy defines three levels of inputs that may be used to measure fair value:
ARIA ENERGY LLC AND SUBSIDIARIES (Predecessor)
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
In general, fair values determined by Level 1 inputs use quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.
Fair values determined by Level 2 inputs use other inputs that are observable, either directly or indirectly. These Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and other inputs such as interest rates and yield curves that are observable at commonly quoted intervals.
Level 3 inputs are unobservable inputs, including inputs that are available in situations where there is little, if any, market activity for the related asset. These Level 3 fair value measurements are based primarily on management’s own estimates using pricing models, discounted cash flow methodologies, or similar techniques taking into account the characteristics of the asset.
In instances whereby inputs used to measure fair value fall into different levels in the above fair value hierarchy, fair value measurements in their entirety are categorized based on the lowest level input that is significant to the valuation. Aria’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.
NOTE 3 - Property, Plant and Equipment - Predecessor
Property, plant and equipment are summarized as follows:
| | | | | |
(in thousands) | December 31, 2020 |
Buildings | $ | 25,186 | |
Machinery and equipment | 166,191 |
Furniture and fixtures | 1,154 |
Construction in progress | 1,366 |
Total cost | $ | 193,897 | |
Accumulated depreciation | (123,138) | |
Net property, plant and equipment | $ | 70,759 | |
NOTE 4 - Intangible Assets - Predecessor
Intangible assets consist of gas rights agreements, operations and maintenance contracts, power purchase, gas sales and gas purchase agreements that were created as a result of the allocation of the purchase price under business acquisitions based on the future value to Aria and amortized over their estimated useful lives. The gas rights agreements have various renewal terms in their underlying contracts that are factored into the useful lives when amortizing the intangible asset.
Amortizable Intangible Assets
| | | | | | | | | | | | | | | | | |
| December 31, 2020 |
(in thousands) | Gross Carrying Amount | | Accumulated Amortization | | Net |
Gas rights agreements | $ | 217,285 | | | $ | 102,944 | | | $ | 114,341 | |
Operations and maintenance contracts | 3,500 | | | 2,475 | | | 1,025 | |
Gas sales agreements | 32,059 | | | 20,503 | | | 11,556 | |
Total | $ | 252,844 | | | $ | 125,922 | | | $ | 126,922 | |
ARIA ENERGY LLC AND SUBSIDIARIES (Predecessor)
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Details of the intangible assets are summarized below:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Expense |
Type of Contract | | Amortization Line Item | | Remaining Lives | | July 1 to September 14, 2021 | | July 1 to September 30, 2020 | | January 1 to September 14, 2021 | | January 1 to September 30, 2020 |
Gas rights | | Depreciation, amortization and accretion | | 4 to 16 years | | $ | 1,892 | | | $ | 3,777 | | | $ | 6,494 | | | $ | 11,331 | |
Operation and maintenance | | Amortization of intangibles and below-market contracts | | 5 years | | $ | 52 | | | $ | 145 | | | $ | 178 | | | $ | 434 | |
Gas sales | | Amortization of intangibles and below-market contracts | | 1 to 8 years | | $ | 733 | | | $ | 891 | | | $ | 2,515 | | | $ | 2,674 | |
Below-Market Contracts
Due to business acquisitions and asset acquisitions, Aria previously acquired certain below-market contracts, which are classified as noncurrent liabilities on Aria’s consolidated balance sheet as of December 30, 2020. These include:
| | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Gross | | Accumulated | | |
(in thousands) | Liability | | Amortization | | Net |
Gas purchase agreements | $ | 19,828 | | | $ | 14,059 | | | $ | 5,769 | |
For intangibles and below-market contracts, depreciation, amortization and accretion was $7.4 million and $12.2 million for the periods ended September 14, 2021 and September 30, 2020, respectively. Below-market contracts related to the purchase of gas are amortized to cost of energy, and amortization was $1.8 million for both the periods ended September 14, 2021 and September 30, 2020, which was recorded as a decrease to cost of energy.
NOTE 53 - Equity Method Investments - Predecessor
Aria holds 50% interests in two joint ventures accounted for using the equity method – Mavrix and Sunshine Gas Producers, LLC. Prior to the sale of LESPH in June 2021, Aria also held 50% interests in the following four joint ventures: Riverview Energy Systems, LLC, Adrian Energy Systems, LLC, Salem Energy Systems, LLC, and Salt Lake Energy Systems LLC. See Held for Sale section in Note 2 for more discussion on the sale of LESPH.
Under the terms of the Mavrix LLC Contribution Agreement dated September 30, 2017, Aria is required to make an earn-out payment to its JVjoint venture partner holding the other 50% membership (in Mavrix LLC) in an amount up to $9.55 million. As defined in the Contribution Agreement, the payment represents additional consideration for Aria’s equity interest in Mavrix, and the earn-out payment will be based on the performance of certain projects owned by Mavrix through the earn-out period which ends September 30, 2022. No earn-out payment is made until after the end of the earn-out period. Aria has estimated the earn-out payment to be $1.7$1.3 million at September 14,March 31, 2021 and $1.4 million at December 31, 2020, and has recorded these amounts in other long-term liabilities in the respective periods.period.
Summary information on the equity method investments is as follows:
| | | | | |
(in thousands) | DecemberMarch 31, 20202021 |
Assets | $ | 171,288172,331 | |
Liabilities | 13,57012,427 | |
Net assets | $ | 157,718159,904 | |
Company'sAria’s share of equity in net assets | 77,993$ | 78,946 | |
ARIA ENERGY LLC AND SUBSIDIARIES (Predecessor)
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 5 - Equity Method Investments - Predecessor (Continued)
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | July 1 to September 14, 2021 | | July 1 to September 30, 2020 | | January 1 to September 14, 2021 | | January 1 to September 30, 2020 |
Revenue | $ | 25,223 | | | $ | 16,307 | | | $ | 78,125 | | | $ | 41,199 | |
Net income | $ | 13,237 | | | $ | 5,226 | | | $ | 38,512 | | | $ | 12,338 | |
Aria's share of net income | $ | 6,451 | | | $ | 2,558 | | | $ | 19,777 | | | $ | 6,005 | |
NOTE 6 - Long-Term Debt - Predecessor
| | | | | | | | | |
| | | | | Three Months Ended |
(in thousands) | | | | | DecemberMarch 31, 20202021 |
Notes payable - due October 7, 2020Revenue | | | | | $ | 102,83123,599 | |
Term Loan B - due May 2022Net income | | | | | $ | 137,97811,368 | |
Debt origination costs | (1,385)Aria’s share of net income | |
Total | 239,424 | |
Less: Current portion of debt | 102,831 | |
Long-term portion | $ | 136,5935,856 | |
Notes Payable
In October 2010, LESPH entered into a credit agreement with a syndicate of bank lenders (the Banks) that provided for a term note and a working capital commitment (Line of Credit) which is described below. The term note, along with working capital commitment, is collateralized exclusively by the assets of LESPH, and is nonrecourse to Aria Energy LLC. In accordance with the associated credit agreement, the above notes payable were due October 7, 2020, but were unpaid as of December 31, 2020.
Aria enacted a plan to sell LESPH in 2020. On March 1, 2021, Aria entered into a Membership Interest Purchase Agreement (MIPA) for the purpose of selling 100% of the membership interests in LESPH. In accordance with Section 4.02 of the MIPA, the Sellers obligations at closing include the execution of the Lender Release, as defined in the agreement, releasing of Liens and claims with respect to LESPH and its consolidated and non-consolidated subsidiaries, terminating the LESPH credit agreement and discharging the borrowers’ obligations.
The sale of LESPH occurred on June 10, 2021 and the extinguishment of the debt resulted in a gain being recorded equal to the difference between the reacquisition price and the net carrying amount of the debt of $122.6 million ($102.8 million in principal, $19.8 million in unpaid interest). This gain is classified as part of nonoperating income on the Statement of Operations.
Senior Secured Credit Facility Revolver and Term Loan B
Aria Energy LLC and certain subsidiaries (Borrowers) entered into a senior secured credit facility that provides for a $200 million secured term loan, and a $40.2 million secured revolving credit facility, of which $40.0 million can be used for letters of credit. During 2020, the revolving credit maturity date was extended until November 24, 2021. The facility is secured by a first lien security interest in the assets of the Borrowers. Payments on the term loan were due in quarterly installments of $0.5 million that began on September 30, 2015 and continued until the debt was retired as part of the Business Combinations.
ARIA ENERGY LLC AND SUBSIDIARIES (Predecessor)
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 74 - Derivative Instruments - Predecessor
Aria was exposed to certain risks in the normal course of its business operations. The main risks are those relating to the variability of future earnings and cash flows – e.g., market risks, which are managed through the use of derivative instruments. All derivative financial instruments are reported in the consolidated balance sheets at fair value, unless they meet the normal purchase normal sale criteria and are designated and documented as such.
Aria has a natural gas variable to fixed pricedfixed-priced swap agreement with a remaining notional quantity of 789,600 MMBtu as of December 31, 2020. The swap agreementwhich provides for a fixed to variable rate swap calculated monthly, until the termination date of the contract, June 30, 2023. The agreement was intended to manage the risk associated with changing commodity prices. Changes in the fair values of natural gas swap are recognized in gain (loss) on derivative contracts and realized losses are recognized as a component of cost of energy expense as summarized in the table below.
Valuation of the natural gas swap was calculated by discounting future net cash flows that were based on a forward price curve for natural gas over the life of the contract (a Level 2 measurement), with an adjustment for each counterparty's credit rate risk.
On April 6, 2020, Aria entered into an interest rate cap with a total notional amount of $110 million and an effective date of April 30, 2020. The cap agreement provides a fixed cap rate of 1.00% per annum related to the one-month LIBOR and has a termination date of May 31, 2022. The market value at both September 14,March 31, 2021 and December 31, 2020 was valued at zero and all associated fees with this transaction were recorded. Aria made cash payments for the natural gas swap of $0.5$0.2 million and $1.1 million for the period January 1 to September 14, 2021 and for the ninethree months ended September 30, 2020 respectively.March 31, 2021.
| | | | | | | | | |
| | | | | Three Months Ended |
(in thousands) | | | | | DecemberMarch 31, 20202021 |
Natural gas swap liability- unrealized gain (loss) | | | | | $ | 1,268110 | |
| | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | July 1 to September 14, 2021 | | July 1 to September 30, 2020 | | January 1 to September 14, 2021 | | January 1 to September 30, 2020 |
Natural gas swap - unrealized gain (loss) | $ | 574 | | | $ | 261 | | | $ | 1,129 | | | $ | (61) | |
NOTE 85 - Benefit Plans - Predecessor
401(k) Plan
Aria maintains a qualified tax deferred 401(k) retirement plan (the Plan). Under the provisions of the Plan, substantially all employees meeting minimum age and service requirements are entitled to contribute on a before and after-tax basis a certain percentage of their compensation. Aria matches up to 100% of employees’ first 3% contribution and 50% of the employees’ next 2% contribution. Employees vest immediately in their contributions and Aria’s contribution.
Postretirement Obligations
Aria sponsors an unfunded defined benefit health care plan that provides postretirement medical benefits to certain full-time employees who meet minimum age and service requirements.
ARIA ENERGY LLC AND SUBSIDIARIES (Predecessor)
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Net periodic benefit cost recognized in the consolidated statements of comprehensive income was as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | July 1 to September 14, 2021 | | July 1 to September 30, 2020 | | January 1 to September 14, 2021 | | January 1 to September 30, 2020 |
Service cost | $ | 8 | | | $ | 12 | | | $ | 27 | | | $ | 36 | |
Interest cost | 19 | | | 26 | | | 64 | | | 77 | |
Amortization of prior service cost | 2 | | | 3 | | | 8 | | | 9 | |
Recognition of net actuarial loss | 17 | | | 22 | | | 57 | | | 66 | |
Net periodic benefit cost | $ | 46 | | | $ | 63 | | | $ | 156 | | | $ | 188 | |
| | | | | | | | | | | | |
| | | | | | Three Months Ended |
(in thousands) | | | | | | March 31, 2021 |
Service cost | | | | | | $ | 10 | |
Interest cost | | | | | | 20 | |
Amortization of prior service cost | | | | | | 3 | |
Recognition of net actuarial loss | | | | | | 24 | |
Net periodic benefit cost | | | | | | $ | 57 | |
NOTE 9 - Capital - Predecessor
Aria had been authorized to issue three classes of membership units, consisting of Class A units, Class B units and Class C units. The Class A units and the Class B units have the voting interests - voting together as a single class. The Class C units have a nonvoting interest. The Class A units and the Class B units receive all distributions until set Internal Rate of Returns are reached. Aria had been authorized to issue an unlimited number of Class A units and Class B units and had the following units outstanding as of December 31, 2020:
| | | | | | | | | | | | | | | | | | | | |
(in thousands, except price per share) | | December 31, 2020 |
Price per share | | Class A | | Class B | | Class C |
$1.00 | | 441,482 | | | 27,120 | | | — | |
$0.10 | | — | | | — | | | 9 | |
$0.88 | | 11,364 | | | — | | | — | |
Total shares outstanding | | 452,846 | | | 27,120 | | | 9 | |
NOTE 10 - Asset Retirement Obligations - Predecessor
The following table presents the activity for the AROs for the periods ended September 14, 2021 and December 31, 2020:
| | | | | | | | | | | | | | |
(in thousands) | | January 1 to September 14, 2021 | | January 1 to December 31, 2020 |
Balance at beginning of period | | $ | 3,408 | | | $ | 6,536 | |
Accretion expense | | 172 | | | 456 | |
Revision to estimated cash flows | | — | | | — | |
Transfer to liabilities classified as held for sale | | — | | | (3,584) | |
Settlement of asset retirement obligation | | — | | | — | |
Balance at end of period | | $ | 3,580 | | | $ | 3,408 | |
Accretion expense represents the increase in asset retirement obligations over the remaining operational life of the asset and is recognized in depreciation, amortization and accretion.
NOTE 116 - Related Party Transactions - Predecessor
Sales are made to and services are purchased from entities and individuals affiliated through common ownership. Aria provides operations and maintenanceO&M services, and administration and accounting services to their 50% owned joint ventures.
ARIA ENERGY LLC AND SUBSIDIARIES (Predecessor)
NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
ventures. As of December 31, 2020, the accounts receivable from joint venture partners balance was $0.3 million. The following is a summary of transactions with these related parties:
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | July 1 to September 14, 2021 | | July 1 to September 30, 2020 | | January 1 to September 14, 2021 | | January 1 to September 30, 2020 |
Sales of construction services | $ | 8 | | | $ | 2,705 | | | $ | 32 | | | $ | 9,950 | |
Sales of operations and maintenance services | $ | 214 | | | $ | 482 | | | $ | 1,215 | | | $ | 1,332 | |
Sales of administrative and other services | $ | 25 | | | $ | 105 | | | $ | 221 | | | $ | 305 | |
| | | | | | | | | |
| | | | | Three Months Ended |
(in thousands) | | | | | March 31, 2021 |
Sales of construction services | | | | | $ | 24 | |
Sales of operations and maintenance services | | | | | $ | 395 | |
Sales of administrative and other services | | | | | $ | 98 | |
NOTE 127 - Segment Reporting - Predecessor
| | | | | | | | | | | | | | | | | | | | | | | |
For the year-to-date period ended September 14, 2021 | | | | | | | |
(in thousands) | RNG | | Power | | Corporate and Other | | Total |
Net income (loss) | $ | 59,066 | | $ | 66,431 | | $ | (40,977) | | $ | 84,520 |
Depreciation, amortization and accretion | 6,447 | | | 9,467 | | | 34 | | | 15,948 | |
Interest expense | — | | | — | | | 10,729 | | | 10,729 | |
EBITDA | $ | 65,513 | | | $ | 75,898 | | | $ | (30,214) | | | $ | 111,197 | |
Amortization of intangibles and below-market contracts | 2,516 | | | 177 | | | — | | | 2,693 |
Gain on disposal of assets | — | | | (1,347) | | | — | | | (1,347) | |
Net derivative activity | (1,129) | | | — | | | — | | | (1,129) | |
Debt forbearance costs | — | | | — | | | 990 | | | 990 | |
Gain on extinguishment of debt | — | | | (61,411) | | | — | | | (61,411) | |
Costs related to sale of equity | — | | | — | | | 18,629 | | | 18,629 | |
Adjusted EBITDA | $ | 66,900 | | | $ | 13,317 | | | $ | (10,595) | | | $ | 69,622 | |
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | RNG | | Power | | Corporate and Other | | Total |
Three months ended March 31, 2021 | | | | | | | |
Total revenue | $ | 25,953 | | $ | 15,584 | | $ | — | | $ | 41,537 |
Net income (loss) | 16,950 | | 1,503 | | (9,743) | | 8,710 |
Depreciation, amortization and accretion | 2,275 | | | 3,403 | | | 15 | | | 5,693 | |
Interest expense | — | | | — | | | 4,321 | | | 4,321 | |
EBITDA | $ | 19,225 | | | $ | 4,906 | | | $ | (5,407) | | | $ | 18,724 | |
| | | | | | | |
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| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | |
For the nine months ended September 30, 2020 |
(in thousands) | RNG | | Power | | Corporate and Other | | Total |
Net income (loss) | $ | 19,308 | | | $ | (161) | | | $ | (25,218) | | | $ | (6,071) | |
Depreciation, amortization and accretion | 6,729 | | | 16,592 | | | 60 | | | 23,381 | |
Interest expense | — | | | — | | | 14,429 | | | 14,429 | |
EBITDA | $ | 26,037 | | | $ | 16,431 | | | $ | (10,729) | | | $ | 31,739 | |
Amortization of intangibles and below-market contracts | 2,674 | | | 78 | | | — | | | $ | 2,752 | |
Net derivative activity | 61 | | | — | | | — | | | 61 |
| | | | | | | |
| | | | | | | |
Debt forbearance costs | — | | | — | | | 907 | | | 907 |
Costs related to sale of equity | — | | | — | | | 196 | | | 196 |
Adjusted EBITDA | $ | 28,772 | | | $ | 16,509 | | | $ | (9,626) | | | $ | 35,655 | |
ITEM 2. MANAGEMENT'SMANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (As Restated)
The following discussion and analysis should be read in conjunction with the financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q/A.Report. This discussion contains forward-looking statements reflecting our current expectations, estimates, and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the section entitled “Risk Factors” in Part I, Item 1A in the 2021 Annual Report and the sections entitled "Risk Factors"“Risk Factors” in Part II, Item 1A and "Cautionary Note Regarding Forward-Looking Statements"“Forward-Looking Statements” appearing elsewhere in this Quarterly Report.
Overview
Archaea is one of the largest RNG producers in the U.S., with an industry-leading RNG platform primarily focused on capturing and converting waste emissions from landfills and anaerobic digesters into low-carbon RNG and electricity. Biogas is produced by single-celled organisms called archaea which break down organic matter in the absence of oxygen during a process called anaerobic digestion. As of September 30, 2021,March 31, 2022, the Company owns, and/through wholly-owned entities or operatesjoint ventures, a diversified portfolio of 2331 LFG recovery and processing projects across 1218 states, including 13 LFG to electric projects and 1012 operated projects that produce pipeline-quality RNG. See “ – Our Projects” for additional detail.RNG and 19 LFG to renewable electricity projects.
Archaea develops, designs, constructs, and operates RNG facilities. Archaea'sWe have entered into long-term agreements with biogas site hosts which give us the rights to utilize gas produced at their sites and to construct and operate facilities on their sites to produce RNG and renewable electricity. As of March 31, 2022, Archaea’s development portfoliobacklog includes over 3038 cumulative projects, asincluding planned optimizations of September 30, 2021. We intend to upgrade certain operating RNG facilities over time we are exploringand opportunities to convert a majority of ourbuild new RNG facilities on sites with existing renewable electricity facilities into RNG facilities when economically accretive, and we intend to develop and construct theon greenfield development opportunities for which we have gas rights agreements. We are also planning to secure additional RNG development opportunities through long-term agreements with biogas site hosts, and we are evaluating other potential sources of biogas, developing wells for carbon sequestration, and exploring the use of on-site solar-generated electricity to meet energy needs for RNG production.sites.
Our differentiated commercial strategy is focused on selling the majority of our RNG volumes under long-term, fixed-price contracts to creditworthy partners, including utilities, corporations, and universities, helping these entities decarbonizereduce greenhouse gas emissions and achieve decarbonization goals while utilizing their existing gas infrastructure. RNG and renewable electricity generate valuable Environmental Attributes that are ableWe seek to be monetized under international, federal, and state initiatives. Whenever possible, the Company seeks to mitigate our exposure to commodity and Environmental Attribute pricing volatility by selling a majority of our RNG and related Environmental Attributes under long-term contracts which are designed to provide revenue certainty.
RNG has the same chemical composition as traditional natural gas from fossil sources, and the RNG we produce is pipeline-quality and can be used interchangeably with natural gas in any application.
The Business Combinations and Related Transactions
On April 7, 2021, RAC entered into the Aria Merger Agreement and the Archaea Merger Agreement (together with the Aria Merger Agreement, the "Business Combination Agreements"). On September 15, 2021 (the "Closing Date"), RAC completed the Business Combinations to acquire Legacy Archaea and Aria. Following the Business Combinations closing, RAC changed its name from "Rice Acquisition Corp." to "Archaea Energy Inc.," also referred to herein as the "Company." Rice Acquisitions Holdings LLC (RAC Opco) was renamed LFG Acquisition Holdings LLC (“Opco”). In connection with the Business Combinations closing, the Company completed a private placement of 29,166,667 shares of Class A Common Stock for gross proceeds of $300 million.
The Company issued 33.4 million Opco Class A units and 33.4 million shares of Class B Common Stock at the Closing Date to Legacy Archaea Holders to acquire Legacy Archaea. Aria was acquired for total initial consideration of $863.1 million, subject to certain future adjustments set forth in the Aria Merger Agreement (the “Aria Closing Merger Consideration”). The Aria Closing Merger Consideration paid to Aria Holders consisted of cash consideration of $377.1 million and equity consideration in the form of 23.0 million newly issued Opco Class A units and 23.0 million newly issued shares of the Company's Class B Common Stock, par value $0.0001 per share.
Archaea has retained its “up-C” structure, whereby all of the equity interests in Aria and Legacy Archaea are indirectly held by Opco and Archaea’s only assets are its equity interests in Opco.
The Up-C structure allows the Legacy Archaea Holders, the Aria Holders and the Sponsor to retain their equity ownership through Opco, an entity that is classified as a partnership for U.S. federal income tax purposes, in the form of Opco Class A Units, and provides potential future tax benefits for Archaea when those holders of Opco Class A Units ultimately exchange their Opco Class A Units and shares of the Company’s Class B Common Stock for shares of Class A Common Stock in the Company. Opco is considered a VIE for accounting purposes, and the Company, as the sole managing member of Opco, is considered the primary beneficiary. As such, the Company consolidates Opco, and the unitholders that hold economic interest directly at Opco are presented as redeemable noncontrolling interests in the Company's financial statements.
Predecessor and Successor Reporting
Legacy Archaea is considered the accounting acquirer of the Business Combinations for accounting purposes because Legacy Archaea Holders have the largest portion of the voting power of the combined company, Legacy Archaea's executive management comprise the majority of the executive management of the combined company, and the Legacy Archaea Holders appointed the majority of board members exclusive of the independent board members. The Archaea Merger represents a reverse merger and is accounted for as a reverse recapitalization in accordance with GAAP. Under this method of accounting, RAC is treated as the "acquired" company for financial reporting purposes. Accordingly, for accounting purposes, the Archaea Merger is treated as the equivalent of Legacy Archaea issuing shares for the net assets of RAC, accompanied by a recapitalization. The net assets of RAC are stated at historical cost. No goodwill or other intangible assets are recorded. Legacy Archaea is also considered the "Successor". As such, the consolidated assets, liabilities and results of operations prior to the September 15, 2021 reverse recapitalization are those of Legacy Archaea, the accounting acquirer. The consolidated condensed financial statements include the assets, liabilities and results of operations of the Company and its consolidated subsidiaries beginning on September 15, 2021, which includes 16 days of the combined results of the businesses of Legacy Archaea and Aria as operated by the Company after the Business Combination.
The Aria Merger represents an acquisition of a business, and Aria's identifiable assets acquired and liabilities assumed are measured at their acquisition date fair value. Due to Aria's historical operations compared to Legacy Archaea and the relative fair values, Aria was determined to be the "Predecessor". As Predecessor, Aria's historical financial statements have been included to enhance comparability for readers, and we have also included a discussion of the Aria’s operations, financial condition and changes in financial condition for the three and nine months ended September 30, 2021 and 2020, in addition to a discussion of the operations of both Legacy Archaea and Aria from September 15, 2021 through September 30, 2021 for the three and nine months ended September 30, 2021 compared to Aria results for the three and ninemonths ended September 30, 2020.
Factors Affecting the Comparability of Our Financial Results
Our future results of operations will not be comparable to our Successor or our Predecessor’s historical results of operations for the reasons described below:
•The Company's future results of operations and financial position may not be comparable to Legacy Archaea's or Aria’s historical results as a result of the Business Combinations and the Company's ongoing development activities. Our results prior to the closing of the Business Combinations on September 15, 2021 only include Legacy Archaea, the accounting acquirer, whereas our results beginning on September 15, 2021 include the combined operations of Legacy Archaea and Aria as managed by the Company. In addition, both Legacy Archaea and Aria have experienced significant growth and expansion over the last two years.
•Legacy Archaea was formed in November of 2018 and did not have significant assets, liabilities or operations until its acquisition of BioFuels San Bernardino Biogas, LLC in September of 2019, to acquire the landfill gas rights agreements with two landfills located in San Bernardino County, California. Subsequent to this acquisition, Legacy Archaea purchased a 72.2% controlling interest in Gulf Coast Environmental Systems, an original equipment manufacturer of air, water, and soil remediation pollution control systems, in February 2020, and purchased 100% of the outstanding membership interests in PEI Power LLC, a biogas fuel combustion power generating facility in April 2021.
•As a consequence of the Business Combinations, the Company has hired and will need to hire additional personnel and implement procedures and processes to address public company regulatory requirements and customary practices. The Company expects to incur additional annual expenses as a public company that Legacy
Archaea did not historically incur to date for, among other things, directors' and officers' liability insurance, director fees and additional internal and external accounting and legal and administrative resources, including increased audit and legal fees.
•There are differences in the way the Company will finance its operations as compared to the way our Successor or Predecessor financed its operations. The Company received approximately $175 million in net proceeds from the Business Combinations, the PIPE Financing, and debt issuance after payment of the Aria Merger cash consideration and transaction expenses to fund the Company’s future growth projects. Upon consummation of the Business Combination, Archaea Energy Operating LLC (“Archaea Borrower”), entered into a $470 million Revolving Credit and Term Loan Agreement (the “New Credit Agreement”) which provides for a senior secured revolving credit facility (the “Revolver”) with an initial commitment of $250 million and a senior secured term loan credit facility (the “Term Loan” and, together with the Revolver, the “Facilities”) with an initial commitment of $220 million. At the Closing, Archaea Borrower has an outstanding principal balance of approximately $220 million outstanding under the Term Loan, and Archaea Borrower has not drawn on the Revolver but had outstanding letters of credit of approximately $15.8 million.
•As a corporation, Archaea will be subject to federal taxes in the future to the extent the Company generates positive taxable income.
Other Significant Acquisitions
Boyd County Project (Big Run)
On November 10, 2020, Legacy Archaea acquired all the outstanding membership interests of a high-Btu facility that had not previously been properly commissioned to process landfill gas to pipeline specification renewable natural gas in Ashland, Kentucky. In April 2021, the facility commenced commercial operations. It continues to ramp up production.
Project Assai and PEI
On January 6, 2020, Legacy Archaea began the development of its Assai biogas project on the site of the Keystone Sanitary Landfill in Dunmore, Pennsylvania, in the Scranton metro area. Project Assai is the world's largest RNG plant currently under construction and, upon completion, is expected to be the largest LFG-to-RNG facility in the world. Archaea expects Project Assai to commence initial operations in the first quarter of 2022, with production scaling up over time thereafter.
On April 7, 2021, Legacy Archaea completed the acquisition of PEI. PEI's assets include landfill gas rights, a pipeline, and a biogas fuel combustion power generating facility with a combined capacity of approximately 85 MW located in Archbald, Pennsylvania. We intend to transport landfill gas from PEI to Assai in the future.
GCES
On January 14, 2020, Legacy Archaea purchased a controlling position of Gulf Coast Environmental Systems, LLC ("GCES"). Located in Conroe, Texas, GCES is an original equipment manufacturer of air, water, and soil remediation pollution control systems. GCES manufactures equipment that will be used in the Company's RNG projects in addition to selling equipment to third parties.
Our Projects
Archaea has a base of operational assets today and a robust pipeline of RNG development opportunities. As of September 30, 2021, we own and operate 23 projects, 10 of which are RNG projects and 13 of which are renewable electricity (“Power”) projects. Prior to the consummation of the Business Combinations, the RNG projects were included in Archaea’s or Aria’s RNG operating segment, and the Renewable Electricity projects were included in Aria’s Power operating segment, except for the PEI Power project in Archbald, PA, which was included in Archaea’s Power operating segment. Over the next several years, we intend to convert certain current LFG-to-electricity projects to RNG projects and upgrade certain existing RNG projects. These facilities already have gas development agreements in place in addition to site leases, zoning, air permits, and much of the critical infrastructure that is needed to develop RNG projects. We also plan to develop and construct our portfolio of greenfield development opportunities, for which we also already have gas development agreements in place. Our development portfolio as of September 30, 2021 includes over 30 cumulative
upgrade, conversion, and greenfield projects, and we are planning to secure additional RNG development opportunities through long-term agreements with biogas site hosts.
RNG Projects
| | | | | | | | | | | |
Site | | Location |
Butler | | David City, NE |
Boyd County Landfill | | Ashland, KY |
Canton (JV) | | Canton, MI |
KC LFG | | Johnson County, KS |
North Shelby (JV) | | Millington, TN |
Oklahoma City | | Oklahoma City, OK |
SE Oklahoma City (JV) | | Oklahoma City, OK |
Seneca Gas | | Waterloo, NY |
South Shelby (JV) | | Memphis, TN |
SWACO | | Grove City, OH |
Renewable Electricity Projects
| | | | | | | | | | | |
Site | | Location |
Colonie | | Cohoes, NY |
County Line | | Argos, IN |
DANC | | Rodman, NY |
Erie | | Erie, CO |
Fulton | | Johnstown, NY |
Hernando County | | Brooksville, FL |
Model City | | Youngstown, NY |
Modern | | Youngstown, NY |
Ontario | | Stanley, NY |
PEI Power | | Archbald, PA |
Sarasota | | Nokomis, FL |
Seneca Power | | Waterloo, NY |
Sunshine Canyon (JV) | | Sylmar, CA |
Key Factors Affecting Operating Results
The Company's performance and future success depend on several factors that present significant opportunities but also pose risks and challenges, including those discussed below and in the section of Archaea's most recently filed registration statement entitled "Risk Factors."
Successful Development and Operation of Projects
The Company's business strategy includes growth primarily through the upgrade and expansion of existing RNG projects, conversion of landfill gas to electric projects to RNG projects, development and construction of greenfield RNG development projects for which we already have gas development agreements in place, and the procurement of landfill gas rights to develop additional greenfield RNG projects. The Company is actively considering expansion into other lines of business, including anaerobic digesters, carbon sequestration, and producing on-site renewable electricity for our projects.
Until commercial RNG operations commenced in the fiscal quarter ended June 30, 2021, Legacy Archaea’s revenues were derived primarily from the sale of customized pollution control systems to third-party customers. With the acquisition of Aria and as our RNG and other projects continue to become commercially operational, the Company expects that a majority of our revenues will be generated from the sale of RNG and renewable electricity, primarily under long-term off-take agreements, along with the Environmental Attributes that are derived from these products. Following the Business
Combinations, until the Company can generate sufficient revenue from RNG, renewable electricity and Environmental Attributes, the Company is expected to primarily finance its project development activities with its existing cash and financing arrangements currently in place. See "Liquidity and Capital Resources - New Credit Facility," for further discussion of our existing financing arrangements. The amount and timing of the future funding requirements will depend on many factors, including the pace and results of our acquisitions and project development efforts.
Market Trends and Exposure to Market-Based Pricing Fluctuations
Future revenues will depend to a substantial degree upon the demand for RNG, renewable electricity and Environmental Attributes, all of which are affected by a number of factors outside our control. To manage exposure to market-based pricing fluctuations, the Company will sell RNG primarily under long-term off-take agreements with fixed pricing to counterparties with strong credit profiles. Archaea's goal is to contract a majority of our RNG volumes under long-term fixed price off-take agreements. The credit profiles of the buyers of RNG are subject to change and are outside our control. Future expenses will depend to a substantial degree upon electricity prices and the costs of raw materials and labor. These costs, too, are subject to a number of factors outside our control.
Regulatory Landscape
We operate in an industry that is subject to and currently benefits from environmental regulations. Government policies can increase the demand for our products by providing market participants with incentives to purchase RNG, renewable electricity and Environmental Attributes. These government policies are continuously being modified, and adverse changes in such policies could have the effect of reducing the demand for our products. Government regulations applicable to our renewable energy projects have generally become more stringent over time. Complying with any new government regulations may result in significant additional expenses or related development costs for us.
Seasonality
Revenues generated from our power projects in the northeast United States, all of which sell electricity at market prices, are affected by warmer and colder weather, and therefore a portion of our quarterly operating results and cash flows are affected by pricing changes due to regional temperatures. Our energy production can also be affected during the summer months, as very warm temperatures can dry out a landfill if the landfill owner is unable to keep the landfill covered, which in turn reduces the landfill gas generated at the site. The weather during colder months affects power pricing and revenues due to the direct effect of natural gas pricing in the northeastern United States and its effect on supply during these months. These seasonal variances are managed in part by our current and expected future long-term off-take agreements at fixed prices.
Impacts of COVID-19
To date, the COVID-19 pandemic and preventative measures taken to contain or mitigate the pandemic have caused, and are continuing to cause, business slowdowns or shutdowns in affected areas and significant disruptions in the financial markets both globally and in the United States.
In response to the COVID-19 pandemic and related mitigation measures, the Company began implementing changes in its business in March 2020 to protect its employees and customers, and to support appropriate health and safety protocols. These measures resulted in additional costs, which we expect will continue through 2021 as we continue to work to address employee safety. As of the date of this Quarterly Report, such business changes and additional costs have not been, individually or in the aggregate, material to us. We are considered an essential company under the U.S. Federal Cybersecurity and Infrastructure Security Agency guidance and the various state or local jurisdictions in which we operate.
Certain third parties with whom we engage, including project partners, third-party manufacturers and suppliers, and regulators with whom we conduct business, have adjusted their operations and are assessing future operational and project needs in light of the COVID-19 pandemic. If these third parties experience shutdowns or continued business disruptions, our ability to conduct our business in the manner and on the timelines presently planned could be materially and adversely affected. The pandemic could also cause disruptions in our supply chain due to transportation delays, travel restrictions, raw material cost increases, and shortages and closures of businesses or facilities. It may also cause delays in construction and other capital expenditures at our projects, obtaining regulatory approvals, and collecting our receivables for our products and services.
The duration and extent of the impact from the COVID-19 pandemic depend on future developments that cannot be accurately predicted at this time, such as the severity and transmission rate of the virus and related variants, the extent and effectiveness of containment actions and the impact of these and other factors on our employees, customers, suppliers, and distributors.
Results of Operations
Basis of Presentation
Our revenues are generated from the production and sale of RNG and renewable electricity, along with the Environmental Attributes that we are able to derive from these products. RNG has the same chemical composition as natural gas from fossil sources, but has unique Environmental Attributes associated with it due to its origination from low-carbon, renewable sources, and we are able to monetize these attributes. The RNG we process is pipeline-quality and can be used interchangeably with natural gas in any application and existing gas infrastructure. The Environmental Attributes that we sell are composed of RINs and state low-carbon fuel credits, which are generated from use of RNG as a transportation fuel, as well as from RECs generated from the conversion of biogas to renewable electricity. In addition to revenues generated from our product sales, we also generate revenues by providing O&M services to certain of our project and biogas site partners.
The Company reports segment information in two segments: RNG and renewable electricity generation ("Power"). Prior to the Business Combinations, the Company managed RNG as its primary business operations, which is to construct and develop biogas facilities on landfill sites for conversion to RNG. Our Power segment generates revenue by selling renewable electricity and associated Environmental Attributes. In addition, we hold interests in other entities that are accounted for using the equity method of accounting, including Mavrix, which owns and operates four separate RNG facilities included in the RNG segment, and the Sunshine electric project included in the Power segment. We expect our future growth to be driven primarily by additional projects within the RNG segment and we expect to convert the majority of our landfill gas to electric projects to RNG projects over time.
Key Metrics
Management regularly reviews a number of operating metrics and financial measurements to evaluate our performance, measure our growth and make strategic decisions. In addition to traditional GAAP performance and liquidity measures, such as revenue, cost of revenue, net income and cash provided by operating activities, we also consider MWh and MMBtu sold, and Adjusted EBITDA in evaluating our operating performance. Each of these metrics is discussed below.
Key Components of Results of Operations
As a result of the Business Combinations, prior year amounts are not comparable to current year amounts or expected future trends. The historical financial statements included herein are the financial statements of Legacy Archaea for three months and nine months ended September 30, 2020.
Revenue
The Company generates revenues from the production and sales of RNG, Power, renewable energy Environmental Attributes, as well as the performance of other landfill energy operations and maintenance (“O&M”) services. The Company manufactures customized pollution control equipment and performs associated maintenance agreement services. Whenever possible, we seek to mitigate our exposure to commodity and Environmental Attribute pricing volatility. We seek to sell a significant portion of our RNG production volumes under long-term, fixed-price arrangements with creditworthy partners. We sell a portion of our volumes under short-term agreements, and many of these volumes generate Environmental Attributes which we also monetize.
Until commercial RNG operations for Legacy Archaea commenced in the fiscal quarter ended June 30, 2021, revenues were historically comprised of sales of customized pollution control equipment and maintenance agreement services. Revenues in Legacy Archaea's RNG segment commenced in the second quarter of 2021 with commercial operations at our Boyd County facility, and increased in the third quarter of 2021 due to the Business Combinations and the inclusion of Aria for 16 days in the Company’s results. Revenues in our REG segment commenced with the PEI acquisition in the second quarter of 2021, and increased in the third quarter of 2021 due to the Business Combinations and the inclusion of Aria for 16 days in the Company’s results.
Cost of operations
Cost of operations is comprised primarily of labor, parts and outside services required to operate and maintain equipment utilized in generating energy from our owned project facilities and from our landfill sources. Other costs directly related to the production of electricity and RNG are transportation costs associated with moving gas into pipelines, transmission costs of moving power between the ISOs, electricity consumed in the process of gas production, and royalty payments to landfill owners as stipulated in our gas rights agreements. Our payments to biogas site hosts are primarily in the form of royalties based on realized revenues or, in some select cases, based on production volumes.
Prior to the Business Combinations, cost of operations was historically comprised primarily of personnel compensation and benefits, insurance and raw materials, and parts and components for manufacturing equipment for sale.
Environmental Attributes are a form of government incentive and not a result of the physical attributes of the biogas or electricity production. Therefore, no cost is allocated to the Environmental Attribute when it is generated, regardless of whether it is transferred with the biogas or electricity produced or held by the Company. Additionally, Environmental Attributes, once obtained through the production and sale of biogas or electricity, may be separated and sold separately.
Cost of operations also includes depreciation, amortization, and accretion expense on our power and gas processing plants, amortization of intangible assets relating to our gas and power rights agreements, and the accretion of our asset retirement obligations. Depreciation and amortization is recognized using the straight-line method over the underlying assets' useful life. Accretion expense is recognized based on the effective yield method.
General and administrative expenses
General and administrative expenses consist primarily of personnel-related costs (including salaries, bonuses, benefits, and share-based compensation) for our executive, finance, human resource, and administrative departments and fees for third-party professional services, including consulting, legal and accounting services. In addition, we allocate a portion of overhead costs, including leasing expenses, utilities, and worker's compensation premiums, to the general and administrative expenses based on headcount. No depreciation or amortization expenses are allocated to general and administrative expenses.
We expect our general and administrative expenses to increase for the foreseeable future as we scale headcount with the growth of our business, and as a result of operating as a public company, including compliance with the rules and regulations of the SEC, legal, audit, additional insurance expenses, investor relations activities and other administrative and professional services.
Equity earnings
We hold interests in other entities that are accounted for using the equity method of accounting, including Mavrix, which owns and operates four separate RNG facilities, and the Sunshine electric project.
Successor Comparison of the Three and Nine Months Ended September 30, 2021 and 2020
The following discussion pertains to our results of operations, financial condition, and changes in financial condition of the Successor, which includes only Legacy Archaea for dates prior to September 15, 2021 and the operations of both Legacy Archaea and Aria from September 15, 2021 through September 30, 2021. Any increases or decreases "for the three months ended September 30, 2021" refer to the comparison of the three months ended September 30, 2021, to the three months ended September 30, 2020, and any increases or decreases "for the nine months ended September 30, 2021" refer to the comparison of the nine months ended September 30, 2021, to the nine months ended September 30, 2020.
In 2020, Legacy Archaea did not have operational assets and as such, the Power and RNG segments did not exist. As such, any segment comparison would not be informative and has not been included for comparison purposes.
Set forth below is a summary of volumes sold for the three and nine months ended September 30, 2021 and 2020.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
| 2021 | | 2020 | | 2021 | | 2020 |
RNG sold (MMBtu) | 320,265 | | | — | | | 378,730 | | | — | |
Electricity sold (MWh) | 77,228 | | | — | | | 164,307 | | | — | |
Volumes increased in 2021 compared to 2020 due to the commencement of commercial operations in April 2021 at our Boyd County facility, the purchase of the PEI power assets in April 2021, and the acquisition of Aria.
Set forth below is a summary of selected financial information for the three and nine months ended September 30, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | 2021 | | 2020 | | $ Change | | 2021 | | 2020 | | $ Change |
| (As Restated) | | | | (As Restated) | | (As Restated) | | | | (As Restated) |
Revenues | $ | 11,986 | | | $ | 1,904 | | | $ | 10,082 | | | $ | 18,768 | | | $ | 4,496 | | | $ | 14,272 | |
Costs of operations | 13,235 | | | 1,288 | |
| 11,947 | | | 19,678 | | | 2,678 | | | 17,000 | |
| | | | | | | | | | | |
Equity investment income (loss) | 879 | | | — | | | 879 | | | 879 | | | — | | | 879 | |
General and administrative expenses | 11,889 | | | 1,205 | | | 10,684 | | | 22,933 | | | 3,652 | | | 19,281 | |
Operating income (loss) | $ | (12,259) | | | $ | (589) | | | $ | (11,670) | | | $ | (22,964) | | | $ | (1,834) | | | $ | (21,130) | |
Other income (expense), net | (11,918) | | | (13) | | | (11,905) | | | (11,642) | | | 15 | | | (11,656) | |
Net income (loss) | $ | (24,177) | | | $ | (602) | | | $ | (23,575) | | | $ | (34,606) | | | $ | (1,819) | | | $ | (32,787) | |
Revenues
Revenue increased for the three month period ended September 30, 2021 due to the commencement of commercial operations in April 2021 at our Boyd County facility, the purchase of the PEI power assets, and the acquisition of Aria, offset by a reduction of GCES third-party sales.
Revenue increased for the nine month period ended September 30, 2021 due to the commencement of commercial operations in April 2021 at our Boyd County facility, the purchase of the PEI power assets, and the acquisition of Aria, offset by a reduction of GCES third-party sales.
Cost of Operations
Costs of operations increased for the three month period ended September 30, 2021 due to the commencement of commercial operations in April 2021 at our Boyd County facility, the purchase of the PEI power assets, and the acquisition of Aria, offset by a reduction of GCES costs associated with reduced third-party sales.
Costs of operations increased for the nine month period ended September 30, 2021 due to the commencement of commercial operations in April 2021 at our Boyd County facility, and the purchase of the PEI power assets, and the acquisition of Aria.
General and Administrative Expenses
General and administrative expenses increased for the three and nine month periods ended September 30, 2021 due to merger related expenses related to additional legal costs, contractors and consultants, additional general and administrative staff as our business has expanded, and stock compensation expense.
Other Income (Expense)
Other income (expense) increased primarily attributed to the increase in fair value of the warrant liabilities from the date of the Business Combinations through September 30, 2021 resulting in a loss of $10.4 million.
Adjusted EBITDA
Adjusted EBITDA is calculated by taking net income (loss) attributable to Class A Common Stock, before taxes, interest expense, and depreciation, amortization and accretion, and adjusting for the effects of certain non-cash items, other non-operating income or expense items, and other items not otherwise predictive or indicative of ongoing operating performance, including gains and losses on disposal of assets, impairment charges, debt forbearance costs, changes in the fair value of derivatives, non-cash compensation expense, and non-recurring costs related to our business combinations. We believe the exclusion of these items enables investors and other users of our financial information to assess our sequential and year-over-year performance and operating trends on a more comparable basis and is consistent with management’s own evaluation of performance.
Adjusted EBITDA is commonly used as a supplemental financial measure by our management and external users of our consolidated financial statements to assess the financial performance of our assets without regard to financing methods, capital structures, or historical cost basis. Adjusted EBITDA is not intended to represent cash flows from operations or net income (loss) as defined by US GAAP and is not necessarily comparable to similarly titled measures reported by other companies.
We believe Adjusted EBITDA provides relevant and useful information to management, investors, and other users of our financial information in evaluating the effectiveness of our operating performance in a manner that is consistent with management’s evaluation of financial and operating performance.
The table below sets forth the reconciliation of Net income (loss) to Adjusted EBITDA:
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended September 30, | | Nine Months Ended September 30, |
(in thousands) | 2021 | | 2020 | | 2021 | | 2020 |
| (As Restated) | | | | (As Restated) | | |
Net income (loss) | $ | (24,177) | | | $ | (602) | | | $ | (34,606) | | | $ | (1,819) | |
Adjustments: | | | | | | | |
Interest expense | 1,586 | | | — | | | 1,606 | | | — | |
Depreciation, amortization and accretion | 3,142 | | | 34 | | | 4,077 | | | 101 | |
EBITDA | $ | (19,449) | | $ | (568) | | $ | (28,923) | | $ | (1,718) |
Net derivative activity | 10,413 | | | — | | | 10,413 | | | — | |
Amortization of intangibles and below-market contracts | (205) | | | — | | | (205) | | | — | |
Amortization of equity method investments basis difference | 428 | | | — | | | 428 | | | — | |
Share-based compensation | 2,708 | | | — | | | 2,886 | | | — | |
Acquisition transaction costs | 2,748 | | | — | | | 2,748 | | | — | |
Adjusted EBITDA | $ | (3,357) | | $ | (568) | | $ | (12,653) | | $ | (1,718) |
Predecessor Discussion
Key Components of Results of Operations
Energy Revenue
A significant majority of Aria's owned projects operate under long-term off-take agreements with investment grade and other creditworthy counterparties that have a weighted average remaining life (based on design capacity) of approximately five years for power projects and approximately ten years for RNG projects as of September 14, 2021. Power that is not covered by long-term off-take agreements is sold either under short-term bilateral agreements or in the wholesale markets. For electricity, these are markets organized and maintained by ISOs and RTOs (e.g., NYISO in New York, ISO-NE in New England and PJM Interconnection, L.L.C. (“PJM”) in the eastern United States). These ISOs and RTOs are well established organizations, regulated by states and FERC. For power sold in the wholesale markets, Aria schedules the output in the day-ahead markets and receives the market price determined by the ISO or RTO through balancing the supply and demand for each day. In most cases Aria implements an optimization of the output sold in wholesale markets by using transmission to move the power into the ISO which offers better prices for RECs.
For RNG, Aria has contracts with long-term off-take agreements with creditworthy counterparties. Some contracts have fixed price off-take arrangements while the remaining sell natural gas and renewable attributes and are subject to market price changes.
Aria also generates revenue through the sale of Environmental Attributes. These Environmental Attributes include RECs, RINs and LCFS credits created from the sale of electricity and RNG as a transportation fuel. In most cases, RECs are sold to competitive energy suppliers or utilities. RINs are generally sold to energy companies, and Aria includes revenues from the sale of these renewable attributes in energy related products revenue. REC revenue is recognized at the time power is produced where an active market and a sales agreement exists for the credits. RIN revenue is recognized when the fuel is produced or transferred to a third party where a sales agreement exists.
Construction Revenue
Construction revenue is derived from the installation of RNG plants owned by the nonconsolidated joint ventures. Aria recognizes revenue over time based on costs incurred and a fixed profit mark-up per construction agreement. Any intercompany profit is eliminated.
Cost of Energy
Cost of energy is comprised primarily of labor, parts and outside services required to operate and maintain equipment utilized in generating energy from project facilities and landfill sources. Other costs directly related to the production of electricity and RNG are transportation costs associated with moving gas into pipelines, transmission costs of moving power between the ISOs, electricity consumed in the process of gas production, and royalty payments to landfill owners as stipulated in gas rights agreements.
Cost of Construction
Cost of construction is comprised primarily of labor, equipment and other costs associated with construction contracts revenue incurred to date.
General and Administrative Expenses
General and administrative expenses include offices rentals and costs relating to labor, legal, accounting, treasury, information technology, insurance, communications, human resources, procurement, utilities, property taxes, permitting and other general costs.
Gain (Loss) on Derivative Contracts
Aria used interest rate swaps and caps to manage the risk associated with interest rate cash flows on variable rate borrowings. Changes in the fair values of interest rate swaps and realized losses were recognized as a component of interest expense. The interest rate swaps were measured at fair value by discounting the net future cash flows using the forward LIBOR curve with the valuations adjusted by the counterparties’ credit default hedge rate.
Changes in the fair values of natural gas swap are recognized in gain (loss) on derivative contracts and realized losses are recognized as a component of cost of energy expense. Valuation of the natural gas swap was calculated by discounting future net cash flows that were based on a forward price curve for natural gas over the life of the contract, with an adjustment for the counterparty’s credit default hedge rate.
Predecessor Comparison of the Three and Nine Months Ended September 14, 2021 and September 30, 2020
The following discussion pertains to the predecessor results of operations, financial condition, and changes in financial condition. Any increases or decreases "for the three month period ended September 14, 2021" refer to the comparison of the period from July 1, 2021 to September 14, 2021, to the three months ended September 30, 2020, and any increases or decreases "for the nine month period ended September 14, 2021" refer to the comparison of the period from January 1, 2021 to September 14, 2021, to the nine months ended September 30, 2020.
Set forth below is a summary of Aria's volumes sold for the three and nine months ended September 14, 2021 and September 30, 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
| July 1 to September 14, 2021 | | July 1 to September 30, 2020 | | January 1 to September 14, 2021 | | January 1 to September 30, 2020 |
RNG sold (MMBtu) | 1,713,637 | | | 1,547,966 | | | 5,020,959 | | | 4,407,358 | |
Electricity sold (MWh) | 144,361 | | | 285,164 | | | 650,286 | | | 881,383 | |
RNG volumes increased for the three and nine months ended September 14, 2021 compared to 2020 primarily due to the South Shelby facility. Power volumes decreased for the three and nine months ended September 14, 2021 compared to 2020 due the sale of LESPH in June 2021.
Set forth below is a summary of Aria's certain financial information for the three and nine months ended September 14, 2021 and September 30, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | July 1 to September 14, 2021 | | July 1 to September 30, 2020 | | $ Change | | January 1 to September 14, 2021 | | January 1 to September 30, 2020 | | $ Change |
Revenues | $ | 34,988 | | | $ | 35,164 | | | $ | (176) | | | $ | 117,589 | | | $ | 103,223 | | | $ | 14,366 | |
Costs of operations | 19,817 | | | 27,383 | | | (7,566) | | | 72,269 | | | 85,877 | | | (13,608) | |
Equity investment income (loss) | 6,451 | | | 2,558 | | | 3,893 | | | 19,777 | | | 6,005 | | | 13,772 | |
General and administrative expenses | 20,678 | | | 5,303 | | | 15,375 | | | 33,737 | | | 14,934 | | | 18,803 | |
Operating income (loss) | $ | 944 | | | $ | 5,036 | | | $ | (4,092) | | | $ | 32,707 | | | $ | 8,417 | | | $ | 24,290 | |
Other income (expense), net | (1,478) | | | (4,504) | | | 3,026 | | | 51,813 | | | (14,488) | | | 66,301 | |
Net income (loss) | $ | (534) | | | $ | 532 | | | $ | (1,066) | | | $ | 84,520 | | | $ | (6,071) | | | $ | 90,591 | |
Revenues
Revenue decreased by $0.2 million for the three months ended September 14, 2021 as a result of sale of LESPH (part of the Power segment) in June 2021, lower construction revenue and fewer days in the 2021 comparative period, partially offset by higher RIN and power commodity prices. Revenue increased by $14.4 million for the nine months ended September 14, 2021 as result of higher RIN, natural gas, and power commodity pricing, partially offset by lower LESPH revenue as a result of its sale in June 2021 and lower construction revenue.
Cost of Operations
Cost of operations decreased by $7.6 million for the three month period ended September 14, 2021 as a result of sale of LESPH in June 2021, lower construction cost and fewer days in the comparative period partially offset by higher royalty costs. Cost of operations decreased $13.6 million for the nine month period ended September 14, 2021 as result of the sale of LESPH and fewer days compared to the nine month period ended September 30, 2020, partially offset by higher royalty costs.
Equity Investment Income (Loss), Net
Equity investment income increased by $3.9 million for the three month period ended September 14, 2021, and $13.8 million for the nine month period ended September 14, 2021 as a result of Mavrix income being higher, RIN and gas pricing, and the addition of the South Shelby RNG facility.
General and Administrative Expenses
General and administrative expenses increased by $15.4 million for the three month period ended September 14, 2021, and $18.8 million for the nine month period ended September 14, 2021 as a result of merger-related legal, consulting, and personnel costs.
Other Income (Expense), Net
Other income (expense), net increased by $3.0 million for the three month period ended September 14, 2021 as a result of less interest expense due to the repayment of debt associated with LESPH in June 2021. Other income (expense), net increased by $66.3 million for the nine month period ended September 14, 2021 as result of the gain on extinguishment of debt associated with the LESPH sale.
Liquidity and Capital Resources (Successor)
Sources and Uses of Funds
Legacy Archaea historically funded its operations and growth with equity and debt financing. The Company's primary uses of cash have been to fund construction of RNG facilities and acquisitions of complementary businesses and landfill gas rights. Following the Business Combinations, and until the Company can generate sufficient cash flow, the Company is expected to primarily finance its project development activities with cash on hand from proceeds from the Business Combinations and available funding under our credit facility as discussed below under "New Credit Facility." The amount and timing of the future funding requirements will depend on many factors, including the pace and results of our acquisitions and project development efforts. We expect that existing cash and cash equivalents, positive cash flows from operations and available borrowings under our credit facility will be sufficient to support our working capital, capital expenditures and other cash requirements for at least the next twelve months and, based on our current expectations, for the foreseeable future thereafter.
Cash
As of September 30, 2021, Archaea had $153.6 million of unrestricted cash and cash equivalents on the balance sheet, and $203.0 million working capital, which together are expected to provide ample liquidity to fund our current operations and near-term development projects. As of September 30, 2021, we also had $17.2 million of restricted cash for payment primarily of construction-related costs for the Assai biogas project.
In November 2021, we issued a redemption notice to the holders of our Public Warrants. We will redeem all of our Public Warrants to purchase shares of our Class A Common Stock, that remain outstanding at 5:00 p.m., New York City time, on December 6, 2021 for a redemption price of $0.10 per Public Warrant. The Public Warrants were issued under the Warrant Agreement, dated October 21, 2020, by and among the Company, LFG Acquisition Holdings LLC and Continental Stock Transfer & Trust Company, as warrant agent, as part of the units sold in the IPO. To minimize dilution to its existing stockholders as a result of warrant exercises, the Company intends to use any cash proceeds received from exercises of its warrants to repurchase shares of Class A Common Stock from Aria Renewable Energy Systems LLC at a price of $17.65 per share. For more information regarding our warrants and the redemption notice, see Note 11—Derivative Instruments to our Consolidated Condensed Financial Statements included herein.
New Credit Facility
On the Closing Date and upon consummation of the Business Combinations, Archaea Energy Operating LLC, a Delaware limited liability company (f/k/a LFG Buyer Co, LLC) (“Archaea Borrower”), entered into a $470 million Revolving Credit and Term Loan Agreement (the “New Credit Agreement”) with a syndicate of lenders co-arranged by Comerica Bank. The New Credit Agreement provides for a senior secured revolving credit facility (the “Revolver”) with an initial commitment of $250 million and a senior secured term loan credit facility (the “Term Loan” and, together with the Revolver, the “Facilities”) with an initial commitment of $220 million. Pursuant to the New Credit Agreement, Archaea Borrower has the ability, subject to certain conditions, to draw upon the Revolver on a revolving basis up to the amount of the Revolver then in effect. On the Closing Date, the Company received total proceeds of $220 million under the Term Loan. As of September 30, 2021, the Company has outstanding borrowings under the Term Loan of $220 million at an effective interest rate of 3.34% and has not drawn on the Revolver. As of September 30, 2021, the Company had issued letters of credit
under the New Credit Agreement of $14.7 million, and thus reducing the borrowing capacity of the Revolver to $235.3 million.
Prior to the Archaea Merger, Legacy Archaea had certain other secured promissory notes and credit facilities in place which were extinguished at the Closing of the Business Combinations.
Summarized Cash Flows for the Nine Months Ended September 30, 2021 and 2020
| | | | | | | | | | | |
| Nine months Ended September 30, |
(in thousands) | 2021 | | 2020 |
Cash used in operating activities | $ | (54,710) | | | $ | (2,820) | |
Cash used in investing activities | $ | (587,372) | | | $ | (18,707) | |
Cash provided by financing activities | $ | 811,386 | | | $ | 21,841 | |
Net increase in cash, cash equivalents and restricted cash | $ | 169,304 | | | $ | 314 | |
Cash Used in Operating Activities
The Company’s generates cash from revenues and uses cash in its operating activities and for selling, general and administrative expenses.
Total cash used in operating activities increased by $51.9 million for the nine months ended September 30, 2021, which was primarily related to higher general and administrative expenses, increases in employee cost as we continue to build our business, and operating costs associated with the additions of Boyd County and PEI. Changes in other working capital accounts were approximately $40.6 million and related to timing of payable payments and combined company insurance programs.
Cash Used in Investing Activities
We continue to have significant cash outflows for investing activities as we expand our business and develop projects.
Total cash used in investing activities was $587.4 million for the nine months ended September 30, 2021. Excluding the Aria Merger, we spent $86 million on development activities and $31 million related to the PEI acquisition, which primarily consisted of a pipeline that will transport gas to our Assai facility. Development activities in 2021 are related to construction at our various plants, including Assai and the Boyd County facility.
Cash used in investing activities of $18.7 million for the nine months ended September 30, 2020 was primarily comprised of acquiring a majority position in GCES, acquiring biogas rights, and construction at the Assai project.
Cash Provided by Financing Activities
The results of our cash provided by financing activities is primarily attributable to cash proceeds from the Business Combinations, including the PIPE Financing and proceeds from the RAC trust account, and borrowings from long-term debt under the 3.75% Notes, the 4.47% Notes and the New Credit Agreement, offset by certain debt repayments. This resulted in net cash proceeds of $810.9 million.
Cash provided by financing activities of $21.8 million for the nine months ended September 30, 2020 was comprised primarily of equity financing.
Operating Leases
The Company has entered into warehouse and office leases with third parties for periods ranging from one to three years. The Company also entered into a related-party office lease as a result of its acquisition of interest GCES in 2020. During the nine months ended September 30, 2021, the Company paid $0.2 million under this related-party lease which expires in May 2022.
Long Term Debt
Assai Energy 3.75% and 4.47% Senior Secured Notes
On January 15, 2021, Assai Energy, LLC (“Assai”) entered into a senior secured note purchase agreement with certain investors for the purchase of $72.5 million in principal amount of 3.75% Senior Secured Notes (the "3.75% Notes"). Interest on the 3.75% Notes is payable quarterly in arrears on each payment date and mature on September 30, 2031. On April 5, 2021, Assai entered into an additional senior secured note purchase agreement with certain investors for the purchase of $60.8 million in principal amount of its 4.47% Senior Secured Notes (the "4.47% Notes" and, together with the 3.75% Notes, collectively the “Assai Notes”). Interest is payable quarterly in arrears on each payment date, and the 4.47% Notes mature on September 30, 2041. As of September 30, 2021, Assai received total proceeds of $127.4 million from the Assai Notes of which approximately $30 million was used to complete the acquisition of PEI. The remaining proceeds are expected to be used to fund the continued development of Project Assai.
Wilmington Trust, National Association is the collateral agent for the secured parties for the Assai Notes. The Assai Notes are secured by all Assai plant assets and plant revenues and a pledge of the equity interests of Assai. Cash received from the Assai Notes is restricted for use on Assai related costs and cannot be used for general corporate purposes.
New Credit Facilities
On the Closing Date and upon consummation of the Business Combinations, Archaea Energy Operating LLC, a Delaware limited liability company (f/k/a LFG Buyer Co, LLC) (“Archaea Borrower”), entered into a $470 million Revolving Credit and Term Loan Agreement (the “New Credit Agreement”) with a syndicate of lenders co-arranged by Comerica Bank. The New Credit Agreement provides for a senior secured revolving credit facility (the “Revolver”) with an initial commitment of $250 million and a senior secured term loan credit facility (the “Term Loan” and, together with the Revolver, the “Facilities”) with an initial commitment of $220 million. Pursuant to the New Credit Agreement, Archaea Borrower has the ability, subject to certain conditions, to draw upon the Revolver on a revolving basis up to the amount of the Revolver then in effect. On the Closing Date, the Company received total proceeds of $220 million under the Term Loan. As of September 30, 2021, the Company has outstanding borrowings under the Term Loan of $220 million at an effective interest rate of 3.34% and has not drawn on the Revolver. As of September 30, 2021, the Company had issued letters of credit under the New Credit Agreement of $14.7 million, and thus reducing the borrowing capacity of the Revolver to $235.3 million.
Debt activity from December 31, 2020 through September 30, 2021 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | December 31, 2020 | | Borrowings | | Repayments | | September 30, 2021 |
Comerica Bank - Specific Advance Facility Note | $ | 4,319 | | | $ | 675 | | | $ | (4,994) | | | $ | — | |
Comerica Bank - Previous Revolver | — | | | 12,478 | | | (12,478) | | | — | |
Comerica Term Loan | 12,000 | | | — | | | (12,000) | | | — | |
New Credit Agreement - Term Loan | — | | | 220,000 | | | — | | | 220,000 | |
New Credit Agreement - Revolver | — | | | — | | | — | | | — | |
Wilmington Trust - 4.47% Term Note (1) | — | | | 60,828 | | | — | | | 60,828 | |
Wilmington Trust - 3.75% Term Note (1) | — | | | 66,558 | | | — | | | 66,558 | |
Promissory Notes | — | | | 30,000 | | | (30,000) | | | — | |
Kubota Corporation - Term Notes | 46 | | | — | | | (46) | | | — | |
Total | $ | 16,365 | | | $ | 390,539 | | | $ | (59,518) | | | $ | 347,386 | |
(1) Borrowings were used primarily for construction of the Assai facility.
See Note 10 - Debt in the Notes to Consolidated Financial Statements under Part I, Item 1 of this Form 10-Q/A for additional information on the Company's Debt Instruments.
Contractual Obligations
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
|
| | Payments Due by Periods |
(in thousands) | Total | | Remainder 2021 | | 2022 - 2023 | | 2024 - 2025 | | Thereafter |
Operating leases | $ | 975 | | | $ | 207 | | | $ | 747 | | | $ | 21 | | | $ | — | |
Biogas rights and contracts commitments | 40,192 | | | 794 | | | 10,060 | | | 5,950 | | | 23,388 | |
Long-term debt | 347,386 | | | 1,375 | | | 29,860 | | | 34,969 | | | 281,182 | |
Total contractual obligations | $ | 388,553 | | | $ | 2,376 | | | $ | 40,667 | | | $ | 40,940 | | | $ | 304,570 | |
Significant Accounting Policies
This management's discussion and analysis of financial condition and results of operations are based on our consolidated financial statements. Our financial statements have been prepared in conformity with GAAP. For a discussion of our significant accounting policies, see Note 2 - Basis of Presentation and Summary of Significant Accounting Policies.
Critical Accounting Policies and Estimates
The preparation of these financial statements requires us to make estimates and judgments that affect the reported amount of assets, liabilities, revenues and expenses and related disclosure of contingent assets and liabilities. The estimates and assumptions used in our financial statements are based upon management's evaluation of the relevant facts and circumstances as of the date of the financial statements. We evaluate our estimates on an ongoing basis. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. The results form the basis for judgments we make about the carrying values of assets and liabilities that are not readily apparent from other sources. Because these estimates can vary depending on the situation, actual results may differ from the estimates and assumptions used in preparing the financial statements.
We identify the most critical accounting policies as those that are the most pervasive and important to the portrayal of our financial position and results of operations and that require the most difficult, subjective and/or complex judgments by management regarding estimates about matters that are inherently uncertain. Our critical accounting policies are associated with revenue recognition, acquisition accounting, and the judgment used in determining the fair value of identified assets acquired and liabilities assumed.
Revenue Recognition
We recognize revenue in accordance with ASC 606, "Revenue from Contracts with Customers" or in accordance with ASC 840, "Leases" depending on the terms of the related sales agreements. In accordance with ASC 606, revenue is recognized when promised goods or services are transferred to customers in an amount that reflects the consideration to which Archaea expects to be entitled in exchange for those goods or services.Under ASC 840, lease revenue is recognized generally upon delivery of RNG, electricity and related renewable Environmental Attributes.
Our revenues are comprised of sales of renewable electricity generation (Power), renewable natural gas (RNG), renewable energy attributes, and customized pollution control equipment and maintenance agreement services. All revenue is recognized when (or as) the Company satisfies its performance obligation(s) under the contract by transferring the promised product or service either when (or as) its customer obtains control of the product or service. A performance obligation is a promise in a contract to transfer a distinct product or service to a customer. A contract's transaction price is allocated to each distinct performance obligation. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring its products or services.
RNG
Our RNG production started during 2021 as a result of the acquisition of Aria in connection to the Business Combinations and the commencement of operations in April 2021 at the Boyd County facility. We have long-term off-take contracts with creditworthy counterparties. Mostcounterparties for the sale of RNG and related Environmental Attributes. Certain long-term off-take contracts arewere accounted for as operating leases prior to January 1, 2022 and have no minimum lease payments, and all of thepayments. The rental income under these leases iswas recorded as revenue when the RNG iswas delivered to the customer. RNG not covered by off-take contracts areis sold under short-term market based contracts. When the performance obligation is satisfied through the delivery of RNG to the customer, revenue is recognized. We usually receive payments from the sale of RNG production within one month after delivery.
We also earn revenue by selling Environmental Attributes known as renewable identification numbers (RINs),RINs, which are generated when producing and selling RNG. The majority ofRNG as transportation fuel. These RINs are generated by plants for which we have off-take agreementsable to sell all ofbe separated and sold independently from the outputsRNG produced. When the RNG and RIN are therefore accounted for as operating leases, andsold on a bundled basis under the same contract, revenue is recognized when the fuelRNG is produced and the RNG and associated RIN are transferred to a third party. The remaining RIN sales were under short-term contracts independent from RNG sales, and revenue is recognized when the RIN is transferred to a third party. We also generate and sell LCFS credits at some of our RNG projects through offtakeoff-take contracts similar to RINs. LCFS is state level program administered by California Air Resources Board (CARB).the CARB. LCFS credits are generated as the RNG is sold as vehicle fuel in California.
There is a general lag in the generation and sale of RINRINs and LCFS credits subsequent to a facility being placed into operation. While each new facility is eligible to register under the federal Renewable Fuel Standard ("RFS"(“RFS”) upon initial production and pipeline injection, Archaea has external parties certify its plants under the EPA’s voluntary Quality Assurance Plan (“QAP”) in order to maximize the value of its D3 RINs. The initial QAP review generally requires evaluation of up to 90 days of operational data prior to achieving Q-RIN status. Once registration is obtained from the EPA and Q-RIN status achieved, Archaea can generate RINs. RINs are generated monthly for the previous month of production, after which the RINs may be sold. Quarterly and annual reports are required to maintain RFS registration and Q-RIN status for each facility.
LCFS registration requires a minimum of 90 days operational data for a provisional pathway application. Following the application submission, there is a mandatory third-party validation period ranging from three to six months. During this time, LCFS credits can be generated for the facility using a temporary carbon intensity (CI)(“CI”) score, which is typically
higher than the expected certified CI for our facilities. Following successful pathway validation, the facility is eligible to generate LCFS credits using the new provisional CI score. LCFS credits are generated on a quarterly basis for the previous quarter of production. Credits are then available to be sold. Quarterly and annual reports are required to maintain LCFS registration and certified CI for each facility.
PowerOur Segments
The Company'sCompany reports segment information in two segments: RNG and Power. Prior to the Business Combinations, the Company managed RNG as its primary business operations, which is to construct and develop biogas facilities on landfill sites for production of RNG. Our Power production started duringsegment generates revenue by selling renewable electricity and associated Environmental Attributes. We expect our future growth to be driven primarily by additional projects within the RNG segment, and we expect to build new RNG facilities on our sites with existing LFG to renewable electricity projects over time.
In addition, we hold interests in other entities that are accounted for using the equity method of accounting, including Mavrix LLC, which owns and operates five separate RNG facilities, and Saturn Renewables, LLC, which owns gas rights at two landfills, both of which are included in the RNG segment, as well as the Sunshine electric project included in the Power segment.
The Business Combinations
On September 15, 2021, RAC completed the Business Combinations to acquire Legacy Archaea and Aria. Following the Closing, RAC changed its name from “Rice Acquisition Corp.” to “Archaea Energy Inc.,” and Rice Acquisitions Holdings LLC was renamed “LFG Acquisition Holdings LLC” (also referred to herein as a result“Opco”).
The Company and Opco issued 33.4 million Class A Opco Units and 33.4 million shares of Class B Common Stock on the acquisitionClosing Date to Legacy Archaea Holders to acquire Legacy Archaea. Aria was acquired for total initial consideration of $863.1 million, which was reduced by $1.9 million in March 2022 for the final adjustment under the terms set forth in the Aria Merger Agreement. The initial Aria Merger consideration consisted of cash consideration of $377.1 million paid to Aria Holders and equity consideration in the form of 23.0 million Class A Opco Units and 23.0 million shares of Class B Common Stock. In addition, $91.1 million of Aria debt was repaid in connection with the Aria Merger.
Archaea has retained its “up-C” structure, whereby all of the equity interests in Aria and Legacy Archaea are indirectly held by Opco and Archaea Energy Inc.’s only assets are its equity interests in Opco. The up-C structure allows the Legacy Archaea Holders, the Aria Holders, and the Sponsor to retain their equity ownership through Opco, an entity that is classified as a partnership for U.S. federal income tax purposes, in the form of Class A Opco Units, and provides potential future tax benefits for Archaea when those holders of Class A Opco Units ultimately exchange their Class A Opco Units and shares of Class B Common Stock for shares of Class A Common Stock. Opco is considered a VIE for accounting purposes, and the Company, as the sole managing member of Opco, is considered the primary beneficiary. As such, the Company consolidates Opco, and the unitholders that hold economic interests directly at Opco are presented as redeemable noncontrolling interests in the Company’s financial statements.
Holders of Class A Opco Units (other than Archaea) have a redemption right, subject to certain limitations, to redeem Class A Opco Units (and a corresponding number of shares of Class B Common Stock) for, at Opco’s option, (i) shares of Class A Common Stock on a one-for-one basis, subject to adjustment for stock splits, stock dividends, reorganizations, recapitalizations and the like, or (ii) a corresponding amount of cash.
Predecessor and Successor Reporting
Legacy Archaea is considered the accounting acquirer of the Business Combinations for accounting purposes, and the acquisition of PEI Power LLC. A significant portion of the electricity generatedArchaea Merger represents a reverse merger and is sold and delivered under the terms of Power Purchase Agreements ("PPAs") or other contractual arrangements. Revenue is recognized upon the amount of electricity delivered at rates specified under the contracts. Most PPAs are accounted for as operating leases, have no minimum lease payments,a reverse recapitalization in accordance with GAAP. Under this method of accounting, RAC is treated as the acquired company for financial reporting purposes. Accordingly, for accounting purposes, the Archaea Merger is treated as the equivalent of Legacy Archaea issuing shares for the net assets of RAC, accompanied by a recapitalization.
Legacy Archaea is considered the “Successor.” As such, the consolidated assets, liabilities and allresults of operations prior to the rental income under these leases is recorded as revenue whenSeptember 15, 2021 reverse recapitalization are those of Legacy Archaea (the accounting acquirer), and the Company’s consolidated financial statements include the assets, liabilities and results of operations of Aria beginning on September 15,
electricity is delivered. PPAs that are2021.
The Aria Merger represents a business combination in which Aria was determined to be the acquired company. Due to Aria’s historical operations compared to Legacy Archaea and the relative fair values, Aria was determined to be the “Predecessor.” Aria’s consolidated statement of operations, consolidated statement of comprehensive income, and consolidated statement of cash flow for the three months ended March 31, 2021 have been included in Item 1. Financial Statements of this Report to enhance comparability for readers.
Factors Affecting the Comparability of Our Financial Results
Our results of operations will not accountedbe comparable to our Successor or our Predecessor’s historical results of operations for the reasons described below:
•The Company’s results of operations and financial position may not be comparable to Legacy Archaea’s or Aria’s historical results as leases are considered derivativesa result of the Business Combinations and the Company’s ongoing development activities. Our results prior to the closing of the Business Combinations on September 15, 2021 only include Legacy Archaea, the accounting acquirer, whereas our results beginning on September 15, 2021 include the combined operations of Legacy Archaea and Aria as managed by the Company. In addition, both Legacy Archaea and Aria have experienced significant growth and expansion over the last two years, and the Company has electedexpects to continue to grow significantly through organic growth projects and acquisitions, including the normal purchase normal sale exception for these contracts, forexpected INGENCO acquisition and the Lightning JV described in greater detail in “—Recent Events” below. In addition to significant growth and expansion in operations, the Company expects to raise a significant amount of capital through financing transactions to fund a portion of that growth, which revenue is recognized when electricity is delivered. Power not covered by PPAs is typically sold under a market-based contract with a regional transmission organization or inmay also impact the wholesale markets. When the performance obligation is satisfied through the deliverycomparability of Powerour historical results to the customer, revenue is recognized. We receive payments from the sale of Power production within one month after delivery.our future results.
The Company also earns revenue through the sale of Environmental Attributes known as renewable energy credits (RECs), which are generated when producing and selling Power. For REC sales that were under contracts independent from REG sales, revenue is recognized when the REC is transferred to a third party. For REC sales that the contract bundled with Power sales, revenue is recognized at the time REG is produced when an active market and a sales agreement exist for the credits.
Equipment and Related Services
Our performance obligations related to the sales of equipment are satisfied over time. We measure the progress of these arrangements using an input method based on costs incurred. Our performance obligations related to the sales of services related to equipment are satisfied over time because the customer simultaneously receives and consumes the benefits provided by our performance as it performs.
Below-Market Contract Amortization
•As a result of the Business Combinations, and subsequent acquisitions, joint ventures and other transactions, the Company has hired and will need to hire additional personnel and implement procedures and processes to address expanded facilities, as well as public company regulatory requirements and customary practices. The Company expects to incur additional annual expenses as a public company that Legacy Archaea and Aria did not historically incur for, among other things, directors’ and officers’ liability insurance, director fees and additional internal and external accounting and legal and administrative resources, including increased audit and legal fees.
•As a corporation, the Company is subject to U.S. federal income and applicable state taxes to the extent it generates positive taxable income. Legacy Archaea and Aria and their subsidiaries (with the exception of one partially-owned subsidiary which filed income tax returns as a C corporation) are and were generally not subject to U.S. federal income tax at an entity level. Accordingly, the net income in Legacy Archaea and Aria’s historical financial statements does not reflect the full tax expense the Company would have incurred if it were subject to U.S. federal income tax at an entity level during such periods.
Recent Events
Operational Highlights
Below are key recent development and operational events:
▪Produced first pipeline-quality RNG and achieved commercial operations at the Soares dairy digester facility in January 2022, successfully completing the first of four dairy projects within its 50%-owned Mavrix, LLC joint venture with BP Products North America Inc. and demonstrating that the Company’s capabilities extend to anaerobic digestion projects.
▪Completed maintenance activities including an electrical overhaul and plant redundancy updates at the Assai RNG facility in February, which resulted in a brief outage but has achieved over 99% uptime and over 95% methane recovery since early March 2022. Assai also received approval to utilize gas flows from the Alliance landfill in early May 2022.
▪Upgraded membranes and tuned the nitrogen rejection unit (“NRU”) at the Seneca RNG facility, resulting in an approximate 10% increase in methane recovery. Membrane and NRU upgrades are key components of the Archaea V1 plant design.
▪Added 53 high-quality RNG development projects to the Company’s RNG development backlog year to date, which today includes 88 RNG development projects for which gas rights agreements are in place or are expected to be in place subsequent to the closing of the INGENCO acquisition, in alignment with the Company’s long-term growth strategy and goal to increase estimated long-term annual earnings power.
INGENCO Acquisition
On April 26, 2022, a wholly owned subsidiary of the Company, Archaea Infrastructure, LLC, entered into a definitive purchase and sale agreement (the “INGENCO Purchase Agreement”) to purchase INGENCO, which owns 14 LFG to renewable electricity facilities. The acquisition includes gas rights for the LFG to energy sites, which have a number of existing long-term agreements in place. The Company expects to build RNG facilities on 11 INGENCO sites over time.
The consideration paid to the seller will consist of approximately $215 million in cash, subject to certain customary adjustments pursuant to the terms and conditions of the INGENCO Purchase Agreement. Archaea expects to finance the acquisition of INGENCO, subject to market conditions and other factors, via one or more capital markets transactions or private financing transactions.
The closing of the transaction, which is expected on or after July 1, 2022, is subject to the satisfaction or waiver of customary closing conditions, including, among others, (a) the expiration, termination or waiver of all applicable waiting periods under (i) the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and (ii) Schedule 2 of the PJM Interconnection, L.L.C. (“PJM”) Open Access Transmission Tariff and (b) the receipt or submission, as applicable, of certain approvals, filings and notices, including those required by the Federal Energy Regulatory Commission and PJM.
Lightning JV
On May 5, 2022, the Company and Republic announced the formation of the Lightning JV to develop 39 RNG projects across the U.S. that will be located at various landfill sites owned or operated by Republic. The joint venture will develop and construct RNG facilities that will convert LFG into pipeline-quality RNG that can be used for a variety of applications.
Pursuant to the terms of the contribution agreement, dated May 4, 2022 (the “Contribution Agreement”), a wholly owned subsidiary of the Company, Zeus Renewables LLC (“Zeus”), and a wholly owned subsidiary of Republic, Republic Services Renewable Energy, LLC (“Investco”), will contribute approximately $780 million and $300 million, respectively, over approximately five years to six years in exchange for newly issued limited liability company interests of the Lightning JV (the “Lightning JV Membership Interests”), with the initial capital contribution occurring within 60 days of the date of the Contribution Agreement, subject to the terms and conditions thereof (the “Lightning JV Initial Funding Date”). The Lightning JV Membership Interests will be issued on the Lightning JV Initial Funding Date, with Zeus and Investco holding 60% and 40%, respectively, of the outstanding Lightning JV Membership Interests. Cash on hand from operations of the Lightning JV (less certain customary reserves) will be distributed quarterly to Zeus and Investco, as the members, in accordance with their membership percentages, and if, as of December 31, 2026, all approved projects (excluding any subsequently abandoned) have achieved their commercial operations date, then the Lightning JV will distribute all unused capital contributions to Zeus and Investco in proportion to their capital contributions.
The Lightning JV, Investco and Archaea Operating LLC, a wholly owned subsidiary of the Company, have entered into certain other arrangements relating to the Lightning JV that govern, among other things, the grant by Republic of landfill gas rights and real property rights at 39 of Republic’s landfills to the Lightning JV, the process and timeline for development at those landfills by the Lightning JV, the production and sale of RNG and related Environmental Attributes by the Lightning JV, the payment of royalties to Republic and, in exchange for a fee to be paid to Archaea Operating LLC, engineering, procurement, construction management services and operation and maintenance services to be provided to the Lightning JV.
Key Factors Affecting Operating Results
The Company’s business strategy includes growth primarily through the upgrade and expansion of existing RNG production facilities, building new RNG production facilities at sites of our existing LFG to renewable electricity production facilities, development and construction of greenfield RNG development projects for which we already have below-market contractsgas development agreements in place, and the procurement of LFG rights and LFG to renewable electricity production facilities to develop additional RNG projects. We are also evaluating other potential sources of biogas and exploring the development of wells for carbon sequestration, the use of on-site solar-generated electricity to meet energy needs for RNG
production, and the use of RNG as a feedstock for low-carbon hydrogen.
The Company’s performance and future success depend on several factors that present significant opportunities but also pose risks and challenges. For information regarding the key factors affecting our performance and future success, see “Key Factors Affecting Operating Performance” within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the 2021 Annual Report. In addition to those discussed in Part I, Item 1A. “Risk Factors” of the 2021 Annual Report, these factors include: the demand for RNG, renewable electricity and Environmental Attributes;electricity prices and the costs of raw materials and labor; the regulatory landscape, which affects demand for our products by providing market participants with incentives to purchase RNG, renewable electricity and Environmental Attributes and which may also affect our development or operating costs; and seasonality.
Results of Operations
Key Metrics
Management regularly reviews a number of operating metrics and financial measurements to evaluate our performance, measure our growth and make strategic decisions. In addition to traditional GAAP performance and liquidity measures, such as revenue, cost of sales, net income and cash provided by operating activities, we also consider MMBtu and MWh sold and Adjusted EBITDA in evaluating our operating performance. Each of these metrics is discussed below under “ – Comparison of the Three Months Ended March 31, 2022 and 2021.”
Key Components of Results of Operations
See “Key Components” within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the 2021 Annual Report for information regarding the key components of our results of operations, which are revenue, cost of sales, general and administrative expenses and equity earnings.
Comparison of the Three Months Ended March 31, 2022 and 2021
The following discussion pertains to the results of operations, financial condition, and changes in financial condition of the Successor. For the three months ended March 31, 2021, Legacy Archaea (the Successor) did not have operational RNG assets. Until commercial RNG operations for Legacy Archaea commenced in the fiscal quarter ended June 30, 2021, revenues were historically comprised of sales of customized pollution control equipment and maintenance agreement services. As such, to provide more meaningful comparisons, the following discussion also compares certain of the Company’s operating results for the three months ended March 31, 2022 to the combined operating results of Legacy Archaea and Aria for the three months ended March 31, 2021.Such combined information (which is referred to in this Report as “on a combined basis”) is the sum of the historical financial results of Legacy Archaea and Aria and does not include the impact of purchase accounting.
In this section, any increases or decreases “for the three months ended March 31, 2022” refer to the comparison of the three March 31, 2022, to the three months ended March 31, 2021.
As noted above, for the three months ended March 31, 2021, Legacy Archaea did not have operational RNG or Power assets and thus, the RNG and Power segments did not exist. As such, any segment comparison would not be informative and has not been included for comparison purposes.
Volumes Sold
For the three months ended March 31, 2022, the Company sold 1,261,694 MMBtu of RNG and 147,456 MWh of electricity (excluding volumes sold by the Company’s equity method investments). During the three months ended March 31, 2021, the Company did not have operational RNG or Power assets and thus did not sell any RNG or electricity. On a combined basis, during the three months ended March 31, 2021, the Company sold 1,021,513 MMBtu of RNG and 104,524 MWh of electricity (excluding volumes sold by the Company’s equity method investments). Volumes increased for the three months ended March 31, 2022 compared to the three months ended March 31, 2021 on a combined basis due to the commencement of commercial operations in April 2021 at our Boyd County RNG facility, the purchase of the PEI power assets in April 2021, the acquisition of additional LFG to renewable electricity facilities, and the commencement of commercial operations at our Assai facility, offset by downtime at certain facilities related to winter weather.
Set forth below is a summary of selected financial information for the three months ended March 31, 2022 and 2021:
| | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Three Months Ended March 31, |
(in thousands) | | | | | | | 2022 | | 2021 | | $ Change |
Revenues and other income | | | | | | | $ | 56,900 | | | $ | 1,654 | | | $ | 55,246 | |
Costs of sales | | | | | | | 42,692 | | | 1,210 | | | 41,482 | |
| | | | | | | | | | | |
Equity investment income (loss) | | | | | | | 1,429 | | | — | | | 1,429 | |
General and administrative expenses | | | | | | | 26,355 | | | 3,158 | | | 23,197 | |
Operating income (loss) | | | | | | | (10,718) | | | (2,714) | | | (8,004) | |
Other income (expense), net | | | | | | | (22,454) | | | 215 | | | (22,669) | |
Net income (loss) | | | | | | | $ | (33,172) | | | $ | (2,499) | | | $ | (30,673) | |
Revenues and Other Income
Revenues and other income were approximately $56.9 million for the three months ended March 31, 2022 as compared to $1.7 million for the three months ended March 31, 2021, an increase of $55.2 million. The increased revenues are primarily attributable to the acquisition of Aria resulting in a $47.7 million increase, the strong market pricing of Environmental Attributes, natural gas, and electricity, the commencement of commercial operations in April 2021 at our Boyd County RNG facility, the purchase of the PEI power assets and other LFG to renewable electricity facilities, and the commencement of commercial operations at our Assai RNG facility, partially offset by downtime at certain facilities related to winter weather and a reduction of pollution control equipment sales.
Revenues and other income increased for the three months ended March 31, 2022 as compared to the revenue and other income for the three months ended March 31, 2021 on a combined basis primarily due to increased sales volumes from agreementsthe commencement of commercial operations in April 2021 at our Boyd County RNG facility, the purchase of the PEI power assets and other LFG to renewable electricity facilities, the commencement of commercial operations at our Assai RNG facility, and the increased market pricing of Environmental Attributes and natural gas during the three months ended March 31, 2022.
Cost of Sales
Costs of sales increased by $41.5 million for the three months ended March 31, 2022 as compared to $1.2 million for the three months ended March 31, 2021, primarily due to the acquisition of Aria resulting in a $33.6 million increase, the commencement of commercial operations in April 2021 at our Boyd County RNG facility, the purchase of the PEI power assets and other LFG to renewable electricity facilities, and the commencement of commercial operations at our Assai RNG facility.
Costs of sales increased for three months ended March 31, 2022 compared to the three months ended March 31, 2021 on a combined basis primarily due to operational costs at PEI, Boyd County, and Assai as well as increased depreciation and amortization expense as a result of those operations and the step-up in value of the Aria assets due to purchase accounting.
General and Administrative Expenses
General and administrative expenses was $26.4 million for the three months ended March 31, 2022, an increase of $23.2 million compared to the three months ended March 31, 2021, and the increase is primarily due to higher employee costs associated with higher headcount, contractors and consultants as our business has expanded and we became a public company. Additionally, first quarter 2022 expenses include severance related costs including accelerated stock compensation expense of $8.8 million, other stock compensation expense of $2.3 million, and $2.4 million of costs related to the sale of RNG in future periods for which the fair value has been determined to be less than market that are being amortized to revenue over the remaining life of the underlying contract.
Acquisition Accounting
The Company applies ASC 805, Business Combinations, when accounting for acquisitions, with identifiable assets acquired, liabilities assumedAres Secondary Offering and noncontrolling interest, if applicable, recorded at their estimated fair values at the acquisition date. Significant judgment is requiredof INGENCO.
Other Income (Expense)
Other expense was $22.5 million for the three months ended March 31, 2022 as compared to other income of $0.2 million for the three months ended March 31, 2021, primarily due to the increase in determininginterest expense of $2.6 million and the acquisition dateincrease in fair value of the warrant liabilities for the three months ended March 31, 2022 for the remaining Private Placement Warrants resulting in a loss of $24.0 million.
Adjusted EBITDA
Adjusted EBITDA is calculated by taking net income (loss) before taxes, interest expense, and depreciation, amortization and accretion, and adjusting for the effects of certain non-cash items, other non-operating income or expense items, and other items not otherwise predictive or indicative of ongoing operating performance, including net derivatives activity, certain acquisition and other transaction expenses, severance expenses and non-cash share-based compensation expense. We believe the exclusion of these items enables investors and other users of our financial information to assess our sequential and quarter-over-quarter performance and operating trends on a more comparable basis and is consistent with management’s own evaluation of performance.
Adjusted EBITDA also includes adjustments for equity method investment basis difference amortization and the depreciation and amortization expense included in our equity earnings from our equity method investments. These adjustments should not be understood to imply that we have control over the related operations and resulting revenues and expenses of our equity method investments. We do not control our equity method investments; therefore, we do not control the earnings or cash flows of such equity method investments. The use of Adjusted EBITDA, including adjustments related to equity method investments, as an analytical tool should be limited accordingly.
Adjusted EBITDA is commonly used as a supplemental financial measure by our management and external users of our consolidated financial statements to assess the financial performance of our assets without regard to financing methods, capital structures, or historical cost basis. Adjusted EBITDA is not intended to represent cash flows from operations or net income (loss) as defined by GAAP and is not necessarily comparable to similarly titled measures reported by other companies.
We believe Adjusted EBITDA provides relevant and useful information to management, investors, and other users of our financial information in evaluating the effectiveness of our operating performance in a manner that is consistent with management’s evaluation of financial and operating performance.
The table below sets forth the reconciliation of Net income (loss) to Adjusted EBITDA:
| | | | | | | | | | | | | | | | | |
| | | | | Three Months Ended March 31, |
(in thousands) | | | | | 2022 | | 2021 |
Net income (loss) | | | | | $ | (33,172) | | | $ | (2,499) | |
Adjustments | | | | | | | |
Interest expense | | | | | 2,653 | | | 6 | |
Depreciation, amortization and accretion | | | | | 12,490 | | | 49 | |
| | | | | | | |
EBITDA | | | | | (18,029) | | | (2,444) | |
Net derivative activity | | | | | 19,915 | | | — | |
Amortization of intangibles and below-market contracts | | | | | (1,103) | | | — | |
Amortization of equity method investments basis difference | | | | | 2,571 | | | — | |
Depreciation and amortization adjustments for equity method investments | | | | | 1,594 | | | — | |
Income tax expense for equity method investments | | | | | 1,543 | | | — | |
Share-based compensation expense | | | | | 5,753 | | | 32 | |
Acquisition and other transaction costs and severance costs (1) | | | | | 8,335 | | | — | |
| | | | | | | |
Adjusted EBITDA | | | | | $ | 20,579 | | $ | (2,412) |
__________________________________________(1) Other transaction costs include expenses related to certain joint ventures and the Ares Secondary Offering.
Liquidity and Capital Resources
Sources and Uses of Funds
The Company’s primary uses of cash have been to fund construction of RNG facilities and acquisitions of complementary businesses and assets and LFG rights. The Company is expected to primarily finance its project development activities with cash on hand from the proceeds of the Business Combinations, available funding under our credit facility as discussed below under “New Credit Facilities,” and additional debt or equity issuances to the extent needed and available. The
amount and timing of the future funding requirements will depend on many factors, including the pace and results of our acquisitions and project development efforts. As discussed in “—Recent Events,” the Company has significantly expanded and accelerated the pace of developing its project backlog. The Company is in the process of optimizing the pace and timing of its long-term project development backlog as a result of recent additions to its backlog related to the Lightning JV and the acquisition of INGENCO. Although the Company continues to expect capital investments of approximately $130 million during 2022 for projects expected to be placed into service in 2022, total capital expenditures for 2022 is expected to increase as a result of these recent additions to the Company’s backlog. The Company expects to fund the acquisition of INGENCO, the initial capital contribution to the Lightning JV, and certain additional capital expenditures related to incremental RNG development projects with one or more capital markets transactions or private financing transactions.
As of March 31, 2022, we had the cash balance described in the paragraph below and approximately $349.2 million of outstanding indebtedness, including $217.3 million of outstanding borrowings under the Term Loan and $132.0 million outstanding on our Assai Notes (as defined below), and also had $230.1 million of available borrowing capacity under the Revolver as of March 31, 2022. In April and early May 2022, we drew down a total of $40.0 million under the Revolver to provide funding for ongoing operations and capital expenditures. Following these draw downs, available borrowing capacity under the Revolver was $190.6 million. Assuming market conditions are sufficient to complete our expected capital markets transactions or private financing transactions, we expect that existing cash and cash equivalents, positive cash flows from operations, our expected financing transactions, and available borrowings under the Revolver will be sufficient to support our current working capital needs, capital expenditures and other cash requirements for at least the next twelve months.
Further accelerating our growth plans may require additional cash requirements, which would likely be funded with additional debt or equity issuances. We may, to the extent market conditions are favorable, incur additional debt or issue equity securities to, among other things, finance future acquisitions of businesses, assets, or biogas rights, fund development of projects in our backlog, respond to competition, or for general corporate purposes. The Company cannot predict with certainty the timing, amount and terms of any future issuances of any such securities or whether they occur at all. See “Risk Factors—A key component of our growth strategy is expanding our backlog of high-quality development projects, including through acquisitions, joint ventures and other strategic transactions, which present certain risks and uncertainties. We have limited operating experience at our current scale of operations and have plans to implement significant future growth, including two recently announced significant transactions, the INGENCO acquisition expected to close on or after July 1, 2022 and the Lightning JV, which are expected to significantly expand our growth trajectory and our capital requirements in the near term and longer term. If we are unable to manage or finance our growth effectively, our financial performance may suffer.” in Part II, Item 1A in this Report.
Cash
As of March 31, 2022, Archaea had $30.8 million of unrestricted cash and cash equivalents included in $30.0 million of total working capital, which together are expected to provide ample liquidity to fund our current operations and a portion of our near-term development projects. As of March 31, 2022, we also had $8.9 million of restricted cash for permitted payments and required reserves related to the Assai RNG facility, including future principal and interest payment for the Assai Notes.
New Credit Facilities
On the Closing Date and upon consummation of the Business Combinations, Archaea Borrower entered into a $470 million New Credit Agreement with a syndicate of lenders co-arranged by Comerica Bank. The New Credit Agreement provides for the Revolver with an initial commitment of $250 million and a Term Loan with an initial commitment of $220 million. Pursuant to the New Credit Agreement, Archaea Borrower has the ability, subject to certain conditions, to draw upon the Revolver on a revolving basis up to the amount of the Revolver then in effect. On the Closing Date, the Company received total proceeds of $220 million under the Term Loan. As of March 31, 2022, the Company has outstanding borrowings under the Term Loan of $217.3 million at an effective interest rate of 3.48% and has not drawn on the Revolver. As of March 31, 2022, the Company had issued letters of credit under the New Credit Agreement of $19.9 million, and thus reducing the borrowing capacity of the Revolver to $230.1 million. Under the Company’s base 2022 capital expenditure budget, we expect to utilize a portion of available capacity under the Revolver to fund our near-term development projects.
See “Note 10 - Debt” in this Report for additional information on the Revolver and the Term Loan.
Assai Energy 3.75% and 4.47% Senior Secured Notes
On January 15, 2021, Assai Energy, LLC (“Assai”) entered into a senior secured note purchase agreement with certain investors for the purchase of $72.5 million in principal amount of 3.75% Senior Secured Notes (the “3.75% Notes”). Interest on the 3.75% Notes is payable quarterly in arrears on each payment date and mature on September 30, 2031. On April 5, 2021, Assai entered into an additional senior secured note purchase agreement with certain investors for the purchase of $60.8 million in principal amount of its 4.47% Senior Secured Notes (the “4.47% Notes” and, together with the 3.75% Notes, the “Assai Notes”). Interest is payable quarterly in arrears on each payment date, and the 4.47% Notes mature on September 30, 2041.
Summarized Cash Flows for the Three Months Ended March 31, 2022 and 2021:
| | | | | | | | | | | |
| Three Months Ended March 31, |
(in thousands) | 2022 | | 2021 |
Cash provided by (used in) operating activities | $ | 18,469 | | | $ | (2,358) | |
Cash used in investing activities | $ | (66,519) | | | $ | (32,346) | |
Cash provided by (used in) financing activities | $ | (5,343) | | | $ | 58,075 | |
Net increase in cash, cash equivalents and restricted cash | $ | (53,393) | | | $ | 23,371 | |
Cash Provided by (Used in) Operating Activities
The Company generates cash from revenues and uses cash in its operating activities and for general and administrative expenses.
Total cash provided by operating activities increased by $20.8 million for the three months ended March 31, 2022, which was primarily related to higher revenues, offset in part by higher cost of energy associated with the increased level of operations and higher general and administrative expenses due to increases in employee costs as we continue to build our business. Changes in other working capital accounts were approximately $11.6 million and related to the timing of revenue receipts, payable payments and company insurance programs.
Cash Used in Investing Activities
We continue to have significant cash outflows for investing activities as we expand our business, make acquisitions, and develop projects. Total cash used in investing activities was $66.5 million for the three months ended March 31, 2022. We spent $61.4 million on development activities and $7.0 million, net of cash acquired, primarily related to the acquisition of landfill gas right assets. Development activities in the three months ended March 31, 2022 are related to supply chain purchases, deposits on long-lead items, and liabilities assumed, predominantlyconstruction at our various plants, including additional costs at Assai. We also made contributions to equity method investments totaling $4.0 million and received return of investment in equity method investments of $4.1 million.
Cash used in investing activities of $32.3 million for the three months ended March 31, 2021 was primarily attributable to acquiring biogas rights, and construction at the Assai production facility and the Boyd County facility.
Cash Provided by (Used in) Financing Activities
Cash used in financing activities for three months ended March 31, 2022 is primarily attributable to scheduled repayments of long-term debt and payment of contingent consideration related to the Boyd County acquisition resulting in net cash payments of $4.4 million.
Cash provided by financing activities of $58.1 million for the three months ended March 31, 2021 was comprised primarily of equity financing.
Material Cash Requirements
Commercial Contractual Commitments
The Company has various long-term contractual commitments pertaining to certain of its biogas rights agreements that
include annual minimum royalty and landfill gas rights payments. Annual minimum royalty and landfill gas rights payments generally begin when production commences and continue through the period of operations. As of March 31, 2022, the expected annual minimum royalty and landfill gas rights payments are approximately $8.0 million, and the annual commitment will increase as production commences from new facilities under development with respectbiogas rights agreements that include minimum payment terms.
The Company has purchase commitments related to property, plantconstruction services and equipment purchases for the development and intangible assets consistingupgrade of biogas contracts, trade namesfacilities of $180.8 million as of March 31, 2022, with expected cash payments of $141.3 million and customer relationships. Evaluations include numerous inputs, including forecasted cash flows that incorporate$39.5 million in remainder of 2022 and 2023, respectively.
Acquisitions and Other Strategic Transactions
On April 26, 2022, the specific attributesCompany entered into a definitive purchase and sale agreement to acquire INGENCO for $215 million in cash. Such acquisition is expected to be consummated on or after July 1, 2022.
On May 5, 2022, the Company and Republic announced the formation of each asset including age, useful life, equipment condition and technology, and current replacement costs for similar assets. Other key inputs that require judgment include discount rates, comparable market transactions, estimated useful lives and probability of future transactions.the Lightning JV. The Company evaluates all available information, as well as all appropriate methodologies, when determiningand Republic have agreed to contribute to the fair valueLightning JV approximately $780 million and $300 million, respectively, over approximately five to six years, with the initial capital contribution (which is expected to be approximately $196 million by the Company) occurring within 60 days of the date of the Contribution Agreement, subject to the terms and conditions thereof. The contributions to the Lightning JV are subject to annual budget approval by the Lightning JV’s board of directors and are further subject to actual amounts spent by the Lightning JV through the completion of development of RNG projects.
Critical Accounting Policies and Estimates
The preparation of the Company’s financial statements in accordance with GAAP requires us to make estimates and judgments that affect the reported amount of assets, acquired, liabilities, assumed,revenues and noncontrolling interest, if applicable,expenses and related disclosure of contingent assets and liabilities. The estimates and assumptions used in our financial statements are based upon management’s evaluation of the relevant facts and circumstances as of the date of the financial statements. We evaluate our estimates on an ongoing basis. Because these estimates can vary depending on the situation, actual results may differ from the estimates and assumptions used in preparing the financial statements.
The Company considers critical accounting estimates to be those that involve a business combination. In addition, oncesignificant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the appropriate fair values are determined,Company’s financial condition or results of operations. See “Significant Accounting Policies - Critical Accounting Policies and Estimates” included within “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company must determine2021 Annual Report for a discussion of our critical accounting estimates; there have been no material changes to the remaining useful life for property, plant and equipment and the amortization period and method of amortization for each finite-lived intangible asset.Company’s critical accounting estimates as disclosed therein.
Recent Accounting Pronouncements
For a description of the Company’s recently adopted accounting pronouncements and recently issued accounting standards not yet adopted, see Note“Note 3 - Recently Issued and Adopted Accounting Standards of the consolidated financial statements appearingStandards” in this Form 10-Q/A.
Off-Balance Sheet Arrangements
As of September 30, 2021, the Company did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K.Report.
Inflation
The Company does not believe that inflation had a material impact on our business, revenues or operating results during the periods presented.
If inflationary trends continue, our business and operating results could be adversely affected.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As a smaller reporting company, we are not required to provide the information required by this Item. However, we note that we are exposed to market risks in the ordinary course of our business. Market risk is the potential loss that may result from market changes associated with our power generation or with an existing or forecasted financial or commodity transaction. These risks primarily consist of commodity price risk, specifically electricity and renewable natural gas,RNG, counterparty credit risk and interest rate risk.
Commodity Price Risk
Changes See “Quantitative and Qualitative Disclosures About Market Risk” in energy commodity prices, such as natural gas and wholesale electricity prices, could significantly affect our revenues and expenses. We seek to contract a majority of our RNG volumes under long-term fixed price off-take agreements. We believe these fixed-price arrangements will reduce ourPart II, Item 7A in the 2021 Annual Report on Form 10-K for more information. Our exposure to fluctuating energy and commodity prices, as well as the fluctuating pricesmarket risk has not materially changed since December 31, 2021.
Counterparty Credit Risk
Credit risk relates to the risk of loss resulting from non-performance or non-payment by counterparties pursuant to the terms of their contractual obligations. We monitor and manage credit risk through credit policies that include: (i) an established credit approval process, and (ii) the use of credit mitigation measures such as prepayment arrangements or volumetric limits. Risks surrounding counterparty performance and credit could ultimately impact the amount and timing of expected cash flows. We seek to mitigate counterparty risk by having a diversified portfolio of counterparties. One of our major customers is BP, a partner in our Mavrix joint venture, and has historically represented approximately 30% to 50% of legacy Aria revenues.
Interest Rate Risk
We are exposed to fluctuations in interest rates through our issuance of variable rate debt. Exposures to interest rate fluctuations may be mitigated by entering into derivative instruments known as interest rate swaps, caps, collars and put or call options. These contracts reduce exposure to interest rate volatility and may result in primarily fixed rate debt obligations when taking into account the combination of variable rate debt and the interest rate derivative instrument. Our risk management policies allow us to reduce interest rate exposure from variable rate debt obligations.
ITEM 4. CONTROLS AND PROCEDURES
Management’s Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and ChiefPrincipal Financial Officer, we conducted an evaluation ofevaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of September 30, 2021.March 31, 2022. Based upon that evaluation, our Chief Executive Officer and ChiefPrincipal Financial Officer have concluded that our disclosure controls and procedures were not effective as of September 30, 2021, becausethe end of athe period covered by this Report based on the material weakness in our internal control over financial reporting. reporting described below.
Previously Reported Material Weakness
The material weakness resulted from an ineffective risk assessment process, which led to improperly designed controls over the Company’s financial statement close process. A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Management concluded that this deficiency in internal control over financial reporting related to an inadequate understanding of the impact of consolidation entries by certain individuals. This failure led to a duplicate entry that constituted a material weakness as defined in the SEC regulations. This material weakness resulted in the misstatement of general and administrative expenses and accounts payable - trade and in the restatement of the unaudited consolidated financial statements for the interim period ended September 30, 2021.
We performed additional analysis and procedures with respect to accounts impacted by the material weakness in order to conclude that our unaudited consolidated financial statements in this Amendment No. 1 on Form 10-Q/A as of September 30, 2021,Report, and for the three and nine months ended September 30,March 31, 2022 and 2021, and 2020, are fairly presented, in all material respects, in accordance with GAAP.
Under “Changes to Internal Controls” below, we describe our remediation plan to address the identified material weakness. Remediation PlanManagement’s Annual Report on Internal Control over Financial Reporting
The CompanyManagement is remediating this material weakness by enhancing training of our staff, following stricter journal entry approval workflows,responsible for designing, implementing, and requiring certain account reconciliationsmaintaining adequate internal control over financial reporting, as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Internal control over financial reporting, no matter how well designed, has inherent limitations. Therefore, even those systems determined to be completedeffective can provide only reasonable assurance with respect to financial statement preparation and approved prior topresentation. Further, because of changes in conditions, the issuanceeffectiveness of internal control over financial statements. In addition, the Company will improve our analytical review procedures and perform such procedures and related variance explanations at a more detailed level.
Changes to Internal Controlsreporting may vary over time.
As discussed elsewhere in this Amendment No. 1 on QuarterlyPart I, Item 1A “Risk Factors” in the 2021 Annual Report, on Form 10-Q/A, the Company completed the Business Combinations on September 15, 2021 pursuant to which the Company completed a reverse recapitalization with RAC and acquired Aria. Prior to the Business Combinations, RAC was a special purpose acquisition company formed for the purpose of effecting a merger, capital stock exchange, asset acquisition, stock purchase, reorganization, or other similar Business Combinationbusiness combination with one or more target businesses. As a result, previously existing internal controls are no longer applicable or comprehensive enough as of the assessment date as the Company’s operations prior to the Business Combinations were insignificant compared to those of the consolidated entity post-Business Combinations. Accordingly, we are excluding management’s report on internal control over financial reporting pursuant to Section 215.02 of the SEC Division of Corporation Finance’s Regulation S-K Compliance & Disclosure Interpretations. We are in the process of reviewing, re-designing, and in some cases designing our internal controls over financial reporting for the post-Business Combinations. Because of this, the design and ongoing development of the Company’s framework for implementation and evaluation of internal control over financial reporting is in its preliminary stages.
Changes to Internal Controls
The design and implementation of internal controls over financial reporting for the Company'sCompany’s post-Business Combinations has required and will continue to require significant time and resources from management and other personnel. The changes to our internal control over financial reporting commenced during the period covered by this reportReport and after will materially affect, or are reasonably likely to materially affect, our internal control over financial reporting by establishing new controls and procedures appropriate to the operating business we have become as a result of the Business Combinations.
The Company is remediating the previously reported material weakness by enhancing training of our staff, following stricter journal entry approval workflows, and requiring certain account reconciliations to be completed and approved prior to the issuance of financial statements. In addition, the Company will improve its analytical review procedures and perform such procedures and related variance explanations at a more detailed level.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, the Company is party to certain legal actions and claims arising in the ordinary course of business. While the outcome of these events cannot be predicted with certainty, management does not currently expect these matters to have a materially adverse effect on the financial position or results of operations of the Company.
ITEM 1A. RISK FACTORS
As a smaller reporting company, we are not required to disclose anyOther than the risk factors set forth below, there have been no material changes fromor updates to our risk factors asthat were previously disclosed in RAC’s Annual Report on Form 10-K/A for the period ended December 31, 2020. However, for a discussion of risk factors applicable to us, please refer to the Registration Statement on Form S-1 (File No. 333-260094), originally filed by the Company with the SEC on October 6, 2021, as subsequently amended on October 18, 2021 and declared effective by the SEC on October 21, 2021. As a result of the closing of the Business Combinations on September 15, 2021, the risk factors previously discussed“Risk Factors” in Part I, Item 1A.1A of the 2021 Annual Report.
A key component of our growth strategy is expanding our backlog of high-quality development projects, including through acquisitions, joint ventures and other strategic transactions, which present certain risks and uncertainties. We have limited operating experience at our current scale of operations and have plans to implement significant future growth, including two recently announced significant transactions, the INGENCO acquisition expected to close on or after July 1, 2022 and the Lightning JV, which are expected to significantly expand our growth trajectory and our capital requirements in the near term and longer term. If we are unable to manage or finance our growth effectively, our financial performance may suffer.
In April 2022, we entered into an agreement to acquire INGENCO, which is expected to be consummated on or after July 1, 2022, and in May 2022, we and Republic formed a joint venture. We expect to continue considering acquisitions and other strategic transactions in the future and expect that such transactions will continue to be a key component of our near-term growth strategy. Some of our projections and expectations and, in part, our success are based on our ability to complete and integrate such transactions and recognize the anticipated financial, strategic and operational benefits thereof.
Pending, recent or future acquisitions, joint ventures and other strategic transactions may negatively impact our business, financial condition, results of operations, cash flows and prospects because (i) we may have difficulty managing our growth; (ii) we may assume liabilities of an acquired business (e.g., environmental, litigation or tax), including liabilities that were unknown at the time of the acquisition, that pose future risks to our working capital needs, cash flows and profitability, and we may be subject to risks beyond our estimates or what was disclosed to us; (iii) such acquisitions and transactions could divert management’s attention and other resources from our existing business; and (iv) substantial transaction costs to complete such acquisitions and transactions may be incurred and such costs may exceed the estimated financial and operational benefits. Further, the businesses or assets that we acquire, or our joint ventures or other strategic transactions, may not achieve anticipated revenue, production, earnings or cash flows, and we may be unable to fully realize all of the anticipated benefits and synergies from recent, pending and future strategic transactions. See “Risk Factors”Factors—Risks Related to the Business and Industry of RAC’sthe Company—Acquiring existing projects involves numerous risks.” in Part I, Item 1A in the 2021 Annual Report Form 10-K/Afor additional risks relating to acquisitions.
In addition, such acquisitions and transactions may require increases in working capital and capital expenditure investments to fund their growth, and to facilitate or fund such acquisitions and transactions, we may incur or assume substantial additional indebtedness or issue equity securities. The completion of the acquisition of INGENCO and the development of the projects in accordance with the terms of the Lightning JV agreement will require significant additional capital. The purchase price for the period ended December 31, 2020 no longer apply.pending acquisition of INGENCO is $215 million in cash (subject to customary adjustments at closing), and the Lightning JV will require cash capital contributions from us of approximately $780 million over approximately five to six years (including approximately $196 million which is expected to be funded within 60 days of the date of the Contribution Agreement, subject to the terms and conditions thereof). We expect to fund the acquisition of INGENCO, the initial capital contribution to the Lightning JV, and certain incremental development costs associated with the Lightning JV and INGENCO RNG development projects through one or more capital markets transactions or private financing transactions. However, such financing may not be available in amounts or on terms acceptable to us, if at all. If we are unable to obtain financing needed for pending or future acquisitions or other strategic transactions, we may not be able to consummate such transactions and may be required to delay, reduce the scope of, or eliminate such activities or growth initiatives. In addition, if either member of the Lightning JV fails to make its annual capital contribution to the Lightning JV on a timely basis, the other member may elect to loan such amount and may also elect to treat such loan as a capital contribution to the Lightning JV in an amount equal to twice the amount loaned, thereby decreasing the failing member’s membership interest in the Lightning JV.
The Lightning JV is a joint venture and our investment could be adversely affected by our lack of sole decision-making authority and restrictions on transfer relating to the Lightning JV. The Lightning JV may also impair our operating flexibility and subject us to risks not present in investments that do not involve co-ownership.
Although we have the right to appoint three of the five persons to serve on the board of directors of the Lightning JV, the limited liability company agreement of the Lightning JV (the “Lightning JV LLC Agreement”) contains certain protective provisions requiring the approval of a supermajority vote of at least 80% of the directors to take certain actions, including, among other items, the incurrence of debt by the Lightning JV, amending the terms of the Lightning JV LLC Agreement, and approving or amending the annual budget of the Lightning JV. In addition, certain fundamental decisions involving the Lightning JV, such as approving any liquidation, dissolution, windup, commencement of bankruptcy or insolvency proceedings, sale, merger or disposition of all of the assets of the Lightning JV, initial public offering or application for listing on a stock exchange of the Lightning JV, require a vote of at least 90% of the directors. Thus, our investment in the Lightning JV involves risks that are not present when we are able to exercise sole control over an asset, including certain major decisions requiring supermajority decision-making beyond our sole control and are subject to agreement with Republic. Differences in views between us and Republic may result in delayed decisions or failures to agree on major matters, such as large expenditures or the construction or acquisition of assets, and delayed decisions and disagreements could adversely affect the business and operations of the Lightning JV, and, in turn, our business, operations and financial results.
In addition, the members of the Lightning JV are subject to transfer restrictions with respect to their membership interests in the Lightning JV, including consent rights of the other member of the Lightning JV and a right of first offer for the other (non-transferring) member, which may make it more difficult to sell such interests in the future. In addition, Republic has a right of first offer with respect to sales of certain assets from the Lightning JV. The terms of the Lightning JV also allow Republic to require us to take certain actions in the event we undergo certain changes of control, which could result in the termination of certain contractual agreements with Archaea Operating LLC or could result in us being forced to sell all of our membership interests in the Lightning JV to Republic at fair market value or at an otherwise specified value in the Lightning JV LLC Agreement or spin off the entity through which we participate in the Lightning JV.
Moreover, the Lightning JV, like joint ventures generally, could impair our operating flexibility and subject us to risks not present in investments that do not involve co-ownership. The Lightning JV LLC Agreement allows Republic, in certain circumstances, to terminate its master landfill gas development agreement with the Lightning JV, which, among other things, governs the grant by Republic of landfill gas and real property rights at its landfills to the Lightning JV. The Lightning JV LLC Agreement also allows Republic to terminate an individual LFG project of the Lightning JV in certain circumstances, including the failure of the LFG project to complete project milestones or commence commercial operations within the agreed-upon timeframe or satisfy certain other commercial obligations. We may also be liable for liquidated damages under the master engineering, procurement and construction agreement between the Lightning JV and Archaea Operating LLC for failure to meet specified commercial operations dates or operating metrics. Furthermore, the Lightning JV may establish separate financing arrangements that contain restrictive covenants that may limit or restrict the entity’s ability to make cash distributions to the members of Lightning JV under certain circumstances. Additionally, from time to time, the Lightning JV may be involved in disputes or legal proceedings which may negatively affect the Lightning JV or our investment. See “Risk Factors—Risks Related to the Business and Industry of the Company—We currently own, and in the future may acquire, certain assets through joint ventures. As operating partner for some of our joint venture projects, we are exposed to counterparty credit risk, and as non-operating partner for other joint venture projects, we have limited control over management decisions and our interests in such assets may be subject to transfer or other related restrictions.” in Part I, Item 1A in the 2021 Annual Report for additional risks associated with joint ventures.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
We had no sales of unregistered equity securities during the period covered by this Quarterly Report on Form 10-Q/A that were not previously reported in a Current Report on Form 8-K.None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
The following is a list of exhibits filed as part of this Quarterly Report on Form��10-Q/A.Report.
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Exhibit Number | | Description |
2.1+ | | Business CombinationAria Merger Agreement dated as of April 7, 2021, by and among LFG Buyer Co, LLC, Inigo Merger Sub, LLC, LFG Intermediate Co, LLC, Rice Acquisition Holdings LLC, Aria Energy LLC, Aria Renewable Energy Systems LLC, solely in its capacity as representative of the Company Unitholders (as defined therein), and solely for purposes of Section 2.2, Article IV, Article V, Article VI and Article XI, Rice Acquisition Corp. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K, filed with the SEC on April 8, 2021). |
2.2+ | | Amendment No. 1 to Business Combination Agreement, dated as of May 12, 2021, to the Business Combination Agreement, dated as of April 7, 2021, by and among LFGthe RAC Buyer, Co, LLC, Inigo Merger Sub, LLC, LFG Intermediate Co, LLC, Rice Acquisition Holdings LLC, Aria Energy LLC, Aria Renewable Energy Systems LLC, solely in its capacity as representative ofand the Company Unitholders (as defined therein), and solely for purposes of Section 2.2, Article IV, Article V, Article VI and Article XI, Rice Acquisition Corp.Equityholder Representative (incorporated by reference to Exhibit 2.3 to the Company’s Quarterly Report on Form 10-Q, filed with the SEC on August 13, 2021). |
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Exhibit Number | | Description |
2.3+ | | Amendment No. 2 to the Business Combination Agreement, dated as of June 11, 2021, to the Business Combination Agreement, dated as of April 7, 2021, by and among LFGthe RAC Buyer, Co, LLC, Inigo Merger Sub, LLC, LFG Intermediate Co, LLC, Rice Acquisition Holdings LLC, Aria Energy LLC, Aria Renewable Energy Systems LLC, solely in its capacity as representative ofand the Company Unitholders (as defined therein), and solely for purposes of Section 2.2, Article IV, Article V, Article VI and Article XI, Rice Acquisition Corp.Equityholder Representative (incorporated by reference to Exhibit 2.4 to the Company’s Quarterly Report on Form 10-Q, filed with the SEC on August 13, 2021). |
2.4+ | | Amendment No. 3 to the Business Combination Agreement, dated as of August 3, 2021, to the Business Combination Agreement, dated as of April 7, 2021, by and among LFGthe RAC Buyer, Co, LLC, Inigo Merger Sub, LLC, LFG Intermediate Co, LLC, Rice Acquisition Holdings LLC, Aria Energy LLC, Aria Renewable Energy Systems LLC, solely in its capacity as representative ofand the Company Unitholders (as defined therein), and solely for purposes of Section 2.2, Article IV, Article V, Article VI and Article XI, Rice Acquisition Corp.Equityholder Representative (incorporated by reference to Exhibit 2.5 to the Company’s Quarterly Report on Form 10-Q, filed with the SEC on August 13, 2021). |
2.5+ | | Business CombinationArchaea Merger Agreement dated as of April 7, 2021, by and among LFG Buyer Co, LLC, Fezzik Merger Sub, LLC, LFG Intermediate Co, LLC, Rice Acquisition Holdings LLC, Archaea Energy LLC, Archaea Energy II LLC and solely for purposes of Section 2.2, Article IV, Article V, Article VI and Article XI, Rice Acquisition Corp. (incorporated by reference to Exhibit 2.2 to the Company’s Current Report on Form 8-K, filed with the SEC on April 8, 2021). |
2.6+ | | Amendment No. 1 to the Business Combination Agreement, dated as of May 12, 2021, to the Business Combination Agreement, dated as of April 7, 2021, by and among LFGthe RAC Buyer Co, LLC, Fezzik Merger Sub, LLC, LFG Intermediate Co, LLC, Rice Acquisition Holdings LLC, Archaea Energy LLC,and Archaea Energy II, LLC and solely for purposes of Section 2.2, Article IV, Article V, Article VI and Article XI, Rice Acquisition Corp. (incorporated by reference to Exhibit 2.6 to the Company’s Quarterly Report on Form 10-Q, filed with the SEC on August 13, 2021). |
3.1 | | |
3.2 | | |
3.3 | | |
10.1+10.1# | | |
10.2+ | | |
10.3# | | |
10.4# | | |
10.5# | | |
10.6+ | | Revolving Credit and Term Loan Agreement, dated as of September 15, 2021, by and among Comerica Bank as Administrative Agent, Joint Lead Arranger and Sole Bookrunner, Citizens Bank, N.A. as Joint Lead Arranger, the co-syndication agents named therein and Archaea Energy Operating LLC and LFG Holdings LLC, as borrowers (incorporated by reference to Exhibit 10.17 to the Company’s Current Report on Form 8-K, filed with the SEC on September 21, 2021)February 10, 2022). |
31.1* | | |
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Exhibit Number | | Description |
31.2* | | |
32.1** | | |
32.2** | | |
101.INS | | Inline XBRL Instance Document. |
101.SCH | | Inline XBRL Taxonomy Extension Schema Document. |
101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document. |
101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
__________________________________________+ The Company agrees to furnish supplementally to the SEC a copy of any omitted schedule or exhibit upon the request of the SEC in accordance with Item 601(a)(5) of Regulation S-K.
# Management contract or compensatory plan or arrangement.
*Filed herewith.
** Furnished herewith.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto authorized.
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| ARCHAEA ENERGY INC. |
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Date: December 29, 2021May 13, 2022 | By: | /s/ Chad Bellah |
| | Chad Bellah |
| | Chief Accounting Officer (Principal Financial Officer and Principal Accounting Officer) |