ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with the financial statements and related notes included elsewhere in this Annual Report on Form 10-K. 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 sections entitled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” appearing elsewhere in this Annual 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. As of December 31, 2021, the Company owns, through wholly-owned entities or joint ventures, a diversified portfolio of 29 LFG recovery and processing projects across 18 states, including 11 operated projects that produce pipeline-quality RNG and 18 LFG to renewable electricity projects. See “ – Our Production Facilities and Projects” for additional detail.
Archaea designs, constructs, and operates RNG facilities. We 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 December 31, 2021, Archaea's development backlog includes 35 cumulative
projects, including planned upgrades of certain operating RNG facilities over time, opportunities to convert most of our renewable electricity facilities into RNG facilities, and greenfield RNG development opportunities.
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 reduce greenhouse gas emissions and achieve decarbonization goals while utilizing their existing gas infrastructure. We seek 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.
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 for the sale of RNG and related Environmental Attributes. Certain long-term off-take contracts are accounted for as operating leases and have no minimum lease payments. The rental income under these leases is recorded as revenue when the RNG is delivered to the customer. RNG not covered by off-take contracts is 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 RINs, which are generated when producing and selling RNG. These RINs are able to be separated and sold independent from the RNG produced. When the RNG and RIN are sold on a bundled basis under the same contract, revenue is recognized when the RNG 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 off-take contracts similar to RINs. LCFS is state level program administered by 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 RIN 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”) upon initial production and pipeline injection, Archaea has external parties certify its plants under 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) 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.
The Business Combinations and Related Transactions
On April 7, 2021, RAC entered into the Business Combination Agreements. On 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 was renamed “LFG Acquisition Holdings LLC,” also referred to herein as “Opco.” In connection with the Business Combinations closing, the Company completed a private placement of 29,166,667 shares of Class A Common Stock and 250,000 warrants (each warrant exercisable for one share of Class A Common Stock at a price of $11.50) for gross proceeds of $300 million.
The Company and Opco issued 33.4 million Class A Opco Units and 33.4 million shares of Class B Common Stock on 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 consisted of cash consideration of $377.1 million paid to Aria Holders and equity consideration in the form
of 23.0 million newly issued Class A Opco Units and 23.0 million newly issued shares of the Company’s Class B Common Stock, par value $0.0001 per share, and $91.1 million for repayment of Aria debt.
Archaea has retained its “up-C” structure, whereby all of the equity interests in Aria and Legacy Archaea are indirectly held by Opco and the Company’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 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 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 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 financial statements include the assets, liabilities and results of operations of the Company and its consolidated subsidiaries beginning on September 15, 2021, which includes approximately 3.5 months of the combined results of the businesses of Legacy Archaea and Aria as operated by the Company after the Closing Date through December 31, 2021.
The Aria Merger represents a business combination in which Aria was determined to be the acquiree, and Aria’s identifiable assets acquired and liabilities assumed are measured at their acquisition date fair value. Additionally, 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 period January 1 to September 14, 2021 and the year ended December 31, 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, and the Company expects to continue to grow significantly through organic growth projects and acquisitions.
•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 LFG rights agreements with two landfills located in San Bernardino County, California. Subsequent to this acquisition, Legacy Archaea purchased a 72.2% controlling interest in GCES, an original equipment manufacturer of air, water, and soil remediation pollution control systems, in February 2020, and after the Business Combinations, the Company acquired an additional 27.8% controlling interest to obtain 100% ownership of GCES. In November 2020, Legacy Archaea acquired all of the outstanding membership interests in the Boyd County LFG to RNG facility in Ashland, Kentucky. In April 2021, Legacy Archaea purchased 100% of the outstanding membership interests in PEI Power LLC (“PEI”), a biogas fuel combustion power generating facility in Archbald, PA.
•As a result 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 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, which were primarily through equity and project debt financing. 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 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 $220.0 million. As of December 31, 2021, we had approximately $352.0 million of outstanding indebtedness, including $218.6 million of outstanding borrowings under the Term Loan and $133.4 million outstanding on our Assai Notes, and also had $235.8 million of available borrowing capacity and outstanding letters of credit of $14.2 million as of December 31, 2021 under the Revolver. The Company expects to fund our 2022 capital program through its project development activities with cash on hand from the proceeds of the Business Combinations and available funding under our credit facility as discussed below under “New Credit Facility.” Further, the Company may also determine to issue long-term debt securities to fund a portion of its capital program if market conditions allow. The Company cannot predict with certainty the timing, amount and terms of any future issuances of any such debt securities or whether they occur at all. 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 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 consolidated and combined net income in Legacy Archaea and Aria’s historical financial statements for periods prior to the consummation of the Business Combinations 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.
Other Significant Acquisitions
Boyd County Project
On November 10, 2020, Legacy Archaea acquired all the outstanding membership interests of a high-Btu facility in Ashland, Kentucky that had not previously been properly commissioned to process LFG to pipeline specification RNG. In April 2021, the facility commenced commercial operations.
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. Assai commenced commercial operations on December 30, 2021, with production expected to scale up over several months. Assai is the highest capacity operational RNG facility in the world.
On April 7, 2021, Legacy Archaea completed the acquisition of PEI. PEI’s assets include LFG 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 LFG from the associated landfill at PEI to Assai in the future.
GCES
On January 14, 2020, Legacy Archaea purchased a controlling position of GCES. Historically 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. As of December 31, 2021, the Company has obtained 100% ownership of GCES. In 2022, GCES will relocate its production facility to a new location within the Houston metroplex.
LFG to Electricity Facilities
On October 28, 2021, Archaea acquired all the outstanding membership interests in Frontier Operation Services, LLC and JL-E Financial Holdings, LLC, which own and operate four LFG to renewable electricity facilities located in Winterville, Georgia; Rochelle, Illinois; Graham, Washington; and Smithfield, North Carolina.
Our Production Facilities and Projects
Archaea has a broad base of operational production facilities and a robust backlog of RNG development opportunities. As of December 31, 2021, we own, through wholly-owned entities or joint ventures, a diversified portfolio of 29 LFG recovery and processing facilities across 18 states, including 11 operated facilities that produce pipeline-quality RNG and 18 LFG to renewable electricity production facilities, including one non-operated facility and one facility that is not operational. Prior to the consummation of the Business Combinations, the RNG projects were included in Legacy Archaea’s or Aria’s RNG operating segment, and Power projects were included in Aria’s Power operating segment, except for the PEI project, which was included in Legacy Archaea’s Power operating segment. Over the next several years, we intend to convert certain current LFG to renewable electricity production facilities to RNG production facilities and upgrade certain existing RNG production facilities. These facilities have existing 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 backlog as of December 31, 2021 includes 35 cumulative upgrade, conversion, and greenfield projects, and we are planning to secure additional RNG development opportunities through long-term agreements with biogas site hosts. Additional production facility and project data is provided in Item 1. Business of this Annual Report on Form 10-K.
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 Item 1A. “Risk Factors” of this Annual Report on Form 10-K.
The Company’s business strategy includes growth primarily through the upgrade and expansion of existing RNG production facilities, conversion of LFG to renewable electricity production facilities to RNG production facilities, development and construction of greenfield RNG development projects for which we already have gas development agreements in place, and the procurement of LFG rights to develop additional greenfield 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.
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 seeks to sell a majority of expected RNG production volumes under long-term off-take agreements with fixed pricing to counterparties with strong credit profiles. 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. For more information, see our risk factor titled “Existing regulations and policies, and future changes to these regulations and policies, may present technical, regulatory and economic barriers to the generation, purchase and use of renewable energy, and may adversely affect the market for credits associated with the production of renewable energy.” 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
To some extent, we experience seasonality in our results of operations. Short-term sales of RNG may be impacted by higher consumption of vehicle fuels by some of our customers in the summer months, when buses and other fleet vehicles use more fuel to power their air conditioning systems, which typically translates to an increased volume of fuel delivered in the summer months. In addition, natural gas commodity prices tend to be higher in the fall and winter months, due to increased overall demand for natural gas for heating during these periods.
Revenues generated from our renewable electricity projects in the northeast U.S., 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. These seasonal variances are managed in part by certain off-take agreements at fixed prices.
Cold weather can cause our plants to experience freeze-offs and power outages, resulting in more downtime than under warm weather conditions. Shipping delays for replacement parts and construction materials may also be more frequent during the winter months leading to incremental downtime or construction delays. In addition, lower ambient temperatures result in lower biogas production from our anaerobic digesters and may result in changes to landfill gas composition during the winter months which have the potential to cause incremental downtime. 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 LFG generated at the site.
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 2022 as we continue to work to address employee safety. As of the date of this Annual 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.
Several vaccines have been authorized for use against COVID-19 in the United States and internationally. As a result of distribution of the vaccines, various federal, state and local governments have begun to ease the movement restrictions and public health initiatives while continuing to adhere to enhanced safety measures, such as physical distancing and face mask protocols. However, uncertainty continues to exist regarding the severity and duration of the pandemic, the speed and effectiveness of vaccine and treatment developments and deployment, potential mutations of COVID-19, and the effect of actions taken and that will be taken to contain COVID-19 or treat its effect, among others. As a result, we remain uncertain of the ultimate effect COVID-19 could have on our business and operations.
Results of Operations
Basis of Presentation
Our revenues are primarily generated from the production and sale of RNG and renewable electricity along with the Environmental Attributes. RNG and renewable electricity generate valuable Environmental Attributes that can be monetized under international, federal, and state initiatives. The Environmental Attributes that we derive and sell include RINs and state low-carbon fuel credits, which are generated from the conversion of biogas to RNG which is used as a transportation fuel, as well as from RECs generated from the conversion of biogas to renewable electricity. Our RINs, RECs, and LCFS are sold with the sale of RNG and renewable electricity or sold separately. In addition to revenues generated from our product sales, we also generate revenues by providing O&M services to certain of our JV production facilities and biogas site partners and by constructing and selling equipment through our GCES subsidiary.
The Company 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 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 LFG to renewable electricity 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 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.
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 the year ended December 31, 2020.
Revenue
The Company generates revenues from the production and sales of RNG, Power, and Environmental Attributes, as well as the performance of other landfill energy O&M services and the sale of customized pollution control equipment and 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 also sell a portion of our volumes under short-term agreements, and many of these volumes generate Environmental Attributes that 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 beginning in September 2021 due to the Business Combinations and the inclusion of Aria for approximately 3.5 months in the Company’s results for the year ended December 31, 2021. Revenues in our
Power segment commenced with the PEI acquisition in the second quarter of 2021, and increased beginning in September 2021 due to the Business Combinations and the inclusion of Aria effective September 15, 2021 in the Company’s results.
Cost of Sales
Cost of sales is comprised primarily of royalty payments to landfill owners as stipulated in our gas rights agreements and 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, and electricity consumed in the process of gas production. 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 sales 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 sales 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, marketing, IT and other administrative departments and fees for third-party professional services, including consulting, legal and accounting services. These expenses also include insurance, software, and other corporate related costs. 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, the Sunshine electric project, and Saturn Renewables, LLC, which owns gas rights at two landfills.
Successor Comparison of the Year Ended December 31, 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 December 31, 2021. Any increases or decreases “for the year ended December 31, 2021” refer to the comparison of the year ended December 31, 2021, to the year ended December 31, 2020.
In 2020, Legacy Archaea did not have operational assets and as such, 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.
Set forth below is a summary of volumes sold for the years ended December 31, 2021 and 2020:
| | | | | | | | | | | | | | | |
| | | | | 2021 | | 2020 |
RNG sold (MMBtu) | | | | | 1,482,124 | | | — | |
Electricity sold (MWh) | | | | | 309,083 | | | — | |
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. The volumes sold table above excludes volumes sold by the Company's equity method investments.
Set forth below is a summary of selected financial information for the years ended December 31, 2021 and 2020:
| | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | | | | | | 2021 | | 2020 | | $ Change |
Revenues and other income | | | | | | | $ | 77,126 | | | $ | 6,523 | | | $ | 70,603 | |
Costs of sales | | | | | | | 62,513 | | | 4,889 | | | 57,624 | |
| | | | | | | | | | | |
Equity investment income (loss) | | | | | | | 5,653 | | | — | | | 5,653 | |
General and administrative expenses | | | | | | | 43,827 | | | 4,371 | | | 39,456 | |
Operating income (loss) | | | | | | | (23,561) | | | (2,737) | | | (20,824) | |
Other income (expense), net | | | | | | | (7,360) | | | 501 | | | (7,861) | |
Net income (loss) | | | | | | | $ | (30,921) | | | $ | (2,236) | | | $ | (28,685) | |
Revenues and Other Income
Revenues and other income were approximately $77.1 million for the year ended December 31, 2021, an increase of $70.6 million. The increased revenues are primarily attributable 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 resulting in a $57.7 million increase, partially offset by a reduction of pollution control equipment sales.
Cost of Sales
Costs of sales increased by $57.6 million for the year ended December 31, 2021 primarily 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 resulting in a $38.5 million increase.
Equity Investment Income (Loss)
Equity investment income increased due to the acquisition of Aria resulting in ownership in Mavrix and Sunshine Canyon joint ventures.
General and Administrative Expenses
General and administrative expenses increased by $39.5 million for the year ended December 31, 2021 primarily due to merger related expenses related to additional legal costs, contractors and consultants, additional general and administrative staff as our business has expanded and we became a public company, and stock compensation expense.
Other Income (Expense)
Other expense increased by $7.9 million primarily due to the increase in interest expense of $4.8 million and the increase in fair value of the warrant liabilities from the date of the Business Combinations through either the date of exercise, if applicable, or December 31, 2021 for the remaining Private Placement Warrants resulting in a loss of $3.0 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,
non-cash share-based 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 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:
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(in thousands) | | | | | 2021 | | 2020 |
Net income (loss) | | | | | $ | (30,921) | | | $ | (2,236) | |
Adjustments: | | | | | | | |
Interest expense | | | | | 4,797 | | | 20 | |
Depreciation, amortization and accretion | | | | | 16,025 | | | 137 | |
EBITDA | | | | | (10,099) | | (2,079) |
Net derivative activity | | | | | 3,727 | | | — | |
Amortization of intangibles and below-market contracts | | | | | (1,479) | | | — | |
Amortization of equity method investments basis difference | | | | | 3,068 | | | — | |
Depreciation and amortization adjustments for equity method investments | | | | | 1,745 | | | — | |
Share-based compensation | | | | | 5,071 | | | — | |
Acquisition transaction costs | | | | | 3,045 | | | — | |
Actuarial (gain) loss on postretirement plan | | | | | (917) | | — |
Adjusted EBITDA | | | | | $ | 4,161 | | $ | (2,079) |
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 of approximately 5 years for Power projects and approximately 10 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 long-term off-take agreements with creditworthy counterparties. Some contracts have fixed price off-take arrangements, while the remaining sell natural gas and Environmental 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 Environmental Attributes in Energy revenue. REC revenue is recognized at the time power is produced where an active market exists and a sales agreement is in place for the credits. RIN revenue is recognized when the fuel is produced or transferred to a third party when a sales agreement is in place.
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 London Inter-Bank Offered Rate (“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 Period From January 1 to September 14, 2021 and the Year Ended December 31, 2021
The following discussion pertains to the Predecessor results of operations, financial condition, and changes in financial condition. Any increases or decreases “for the period from January 1 to September 14, 2021” refer to the comparison of the period from January 1 to September 14, 2021, to the year ended December 31, 2020.
Set forth below is a summary of Aria's volumes sold for the period from January 1 to September 14, 2021 and the year ended December 31, 2020 (excluding volumes sold by Aria's equity method investments):
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| | | | | January 1 to September 14, 2021 | | Year Ended December 31, 2020 |
RNG sold (MMBtu) | | | | | 2,983,816 | | | 4,325,757 | |
Electricity sold (MWh) | | | | | 469,299 | | | 863,959 | |
RNG volumes decreased for the period from January 1 to September 14, 2021 compared to the year ended December 31, 2020 primarily due to the shorter operating period and scheduled maintenance at the KC LFG and SWACO facilities. Power volumes decreased for the period from January 1 to September 14, 2021 compared to the year ended December 31, 2020 primarily due the shorter operating period and the sale of LES Project Holdings LLC (“LESPH”) in June 2021.
Set forth below is a summary of Aria's certain financial information for the period from January 1 to September 14, 2021 and the year ended December 31, 2020:
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(in thousands) | | | | | | | January 1 to September 14, 2021 | | Year Ended December 31, 2020 | | $ Change |
Revenues and other income | | | | | | | $ | 117,589 | | | $ | 138,881 | | | $ | (21,292) | |
Costs of sales | | | | | | | 72,269 | | | 112,590 | | | (40,321) | |
Equity investment income (loss) | | | | | | | 19,777 | | | 9,298 | | | 10,479 | |
General and administrative expenses | | | | | | | 33,737 | | | 20,782 | | | 12,955 | |
Operating income (loss) | | | | | | | 32,707 | | | (10,486) | | | 43,193 | |
Other income (expense), net | | | | | | | 51,813 | | | (19,437) | | | 71,250 | |
Net income (loss) | | | | | | | $ | 84,520 | | | $ | (29,923) | | | $ | 114,443 | |
Revenues and Other Income
Revenue and other income decreased by $21.3 million for the period from January 1 to September 14, 2021 as result of the shorter operating period, lower LESPH revenue as a result of its sale in June 2021 and lower construction revenue, partially offset by higher RIN, natural gas, and power commodity pricing.
Cost of Sales
Cost of sales decreased $40.3 million for the period from January 1 to September 14, 2021 as result of the shorter operating period and the sale of LESPH, partially offset by higher royalty costs.
Equity Investment Income (Loss), Net
Equity investment income increased by $10.5 million for the period from January 1 to September 14, 2021 as a result of Mavrix income being higher, RIN and gas pricing, and the addition of the South Shelby RNG facility, partially offset by the effect of the shorter operating period.
General and Administrative Expenses
General and administrative expenses increased by $13.0 million for the period from January 1 to September 14, 2021 as a result of merger-related legal, consulting, and personnel costs.
Other Income (Expense), Net
Other income (expense), net increased by $71.3 million for the period from January 1 to 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 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 Facility,” and, if we accelerate our growth plans, additional debt or share issuances. Further, the Company may also determine to issue long-term debt securities to fund a portion of its capital program if market conditions allow. The Company cannot predict with certainty the timing, amount and terms of any future issuances of any such debt securities or whether they occur at all. 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. Under the Company's base 2022 capital expenditure budget, we expect to allocate $130 million to fund optimization projects and new build projects that are expected to be completed in 2022. As of December 31, 2021, we had the cash balance described in the paragraph below and approximately $352.0 million of outstanding indebtedness, including $218.6 million of outstanding borrowings under the Term Loan and $133.4 million outstanding on our Assai Notes, and also had $235.8 million of available borrowing capacity under the Revolver. 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. Accelerating our growth plans may require additional cash requirements, which would likely be funded with debt or share issuances. We may, to the extent market conditions are favorable, incur additional debt 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 financial reasons alone.
Cash
As of December 31, 2021, Archaea had $77.9 million of unrestricted cash and cash equivalents included in $91.7 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 December 31, 2021, we also had $15.2 million of restricted cash for payment primarily of construction-related costs for the Assai RNG facility.
In November 2021, we issued a redemption notice to the holders of our Redeemable Warrants. During the redemption period ending in December 2021, we received total proceeds of $107.7 million from the exercise of Redeemable Warrants.
To minimize dilution to our existing stockholders as a result of warrant exercises, we used cash proceeds received from exercises of Redeemable Warrants to repurchase 6,101,449 shares of Class A Common Stock from Aria Renewable Energy Systems LLC at a pre-negotiated price of $17.65 per share for a total cost of $107.7 million.
For more information regarding our warrants and the redemption notice, see “Note 13 - Derivatives Instruments” to our Consolidated Financial Statements included herein.
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 December 31, 2021, the Company has outstanding borrowings under the Term Loan of $218.6 million at an effective interest rate of 3.35% and has not drawn on the Revolver. As of December 31, 2021, the Company had issued letters of credit under the New Credit Agreement of $14.2 million, and thus reducing the borrowing capacity of the Revolver to $235.8 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.
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 Years Ended December 31, 2021 and 2020:
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(in thousands) | 2021 | | 2020 |
Cash used in operating activities | $ | (28,112) | | | $ | (5,834) | |
Cash used in investing activities | $ | (694,551) | | | $ | (42,319) | |
Cash provided by financing activities | $ | 814,233 | | | $ | 49,226 | |
Net increase in cash, cash equivalents and restricted cash | $ | 91,570 | | | $ | 1,073 | |
Cash 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 used in operating activities increased by $22.3 million for the year ended December 31, 2021, which was primarily related to higher general and administrative expenses due to increases in employee costs 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 $24.7 million and related to the timing of revenue receipts, 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 $694.6 million for the year ended December 31, 2021. In addition to the Aria Merger, we spent $147.3 million on development activities and $61.8 million, net of cash acquired, primarily related to the acquisition of a pipeline that will transport gas to our Assai facility and the acquisition of four operating LFG to renewable electricity facilities. Development activities in 2021 are related to construction at our various plants, including Assai and the Boyd County facility, as well as biogas rights acquisitions of $7.8 million. We also made contributions to equity method investments totaling $22.2 million. For the year ended December 31, 2021, cash used in investing activities by Aria and Legacy Archaea, together, was $242.0 million, including purchases of property, plant and equipment totaling $141.8 million, primarily related to the development of our Assai and Boyd County RNG facilities, purchases of equipment for future development projects and certain asset acquisitions. Also during the year ended December 31, 2021, Aria and Legacy Archaea acquired certain assets for $61.8 million, acquired biogas rights for $7.8 million, and contributed $30.6 million into equity method investments. During the quarter ended December 31, 2021, purchases of property, plant and equipment totaled $51.3 million, which were primarily related to the development of our Assai facility and equipment purchased for future development projects.
Cash used in investing activities of $42.3 million for the year ended December 31, 2020 was primarily attributable to acquiring a majority position in GCES, acquiring biogas rights, and construction at the Assai production facility.
Cash Provided by Financing Activities
The results of 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, 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 $815.9 million. In addition, total proceeds of $107.7 million from the exercise of Redeemable Warrants were used to repurchase 6,101,449 shares of Class A Common Stock from Aria Renewable Energy Systems LLC.
Cash provided by financing activities of $49.2 million for the year ended December 31, 2020 was comprised primarily of equity financing.
Operating Leases
The Company has entered into various operating leases for our corporate headquarters, other office space, warehouse, and facilities with third parties for periods ranging from one to eleven years. The Company also entered into a related-party office lease as a result of its acquisition of interest GCES in 2020. During the year ended December 31, 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 Energy”) 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, and the 3.75% Notes mature on September 30, 2031. On April 5, 2021, Assai Energy 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, and the 4.47% Notes mature on September 30, 2041. As of December 31, 2021, Assai Energy received total proceeds of $133.4 million from the Assai Notes of which approximately $30 million was used to complete the acquisition of PEI. The remaining proceeds were used to fund the development of our Assai production facility.
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 Energy. 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 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 December 31, 2021, the Company has outstanding borrowings under the Term Loan of $218.6 million at an effective interest rate of 3.35% and has not drawn on the Revolver. As of December 31, 2021, the Company had issued letters of credit under the New Credit Agreement of $14.2 million, and thus reducing the borrowing capacity of the Revolver to $235.8 million.
Debt activity for the year ended December 31, 2021 is as follows:
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(in thousands) | December 31, 2020 | | Borrowings | | Repayments | | December 31, 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 | | | (1,375) | | | 218,625 | |
New Credit Agreement - Revolver | — | | | — | | | — | | | — | |
Wilmington Trust - 4.47% Term Note (1) | — | | | 60,828 | | | — | | | 60,828 | |
Wilmington Trust - 3.75% Term Note (1) | — | | | 72,542 | | | — | | | 72,542 | |
Promissory Notes | — | | | 30,000 | | | (30,000) | | | — | |
Kubota Corporation - Term Notes | 46 | | | — | | | (46) | | | — | |
Total | $ | 16,365 | | | $ | 396,523 | | | $ | (60,893) | | | $ | 351,995 | |
_________________________________
(1) Borrowings were used primarily for construction of the Assai facility.
See “Note 11 - Debt” in the Notes to Consolidated Financial Statements for additional information on the Company's debt instruments.
Material Cash Requirements
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. For 2022, the expected annual minimum royalty and landfill gas rights payments are $5.4 million, and the annual commitment will
increase as production commences from new facilities under development with biogas rights agreements that include minimum payment terms.
The Company has purchase commitments related to construction services and equipment purchases for the development and upgrade of facilities of $177.7 million as of December 31, 2021, with expected cash payments of $174.7 million and $3.0 million in 2022 and 2023, respectively.
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 acquisition accounting and the judgment used in determining the fair value of identified assets acquired and liabilities assumed.
Accounting for Business Combinations
The Company applies Accounting Standards Codification (“ASC”) 805, Business Combinations, when accounting for acquisitions of a business under GAAP. Identifiable assets acquired, liabilities assumed and noncontrolling interest, if applicable, are recorded at their estimated fair values at the acquisition date. Significant judgment is required in determining the acquisition date fair value of the assets acquired and liabilities assumed, predominantly with respect to property, plant and equipment and intangible assets consisting of biogas contracts, existing purchase and sales contracts, trade names and customer relationships. Evaluations include numerous inputs, including forecasted cash flows that incorporate the specific attributes of each asset including future natural gas and electric prices, future Environmental Attribute pricing, cost inflation factors, and discount rates. For property, plant, and equipment, we consider the remaining useful life of equipment, current replacement costs for similar assets, and comparable market transactions. The Company evaluates all available information, as well as all appropriate methodologies, when determining the fair value of assets acquired, liabilities assumed, and noncontrolling interest, if applicable, in a business combination. In addition, once the appropriate fair values are determined, the Company must determine the remaining useful life for property, plant and equipment and the amortization period and method of amortization for each finite-lived intangible asset. The estimates of fair values of assets impact future depreciation and amortization and the initial amount of goodwill recorded.
Recent Accounting Pronouncements
For a description of the Company’s recently adopted accounting pronouncements and recently issued accounting standards not yet adopted, see “Note 3 - Recently Issued and Adopted Accounting Standards” of the consolidated financial statements appearing in this Annual Report Form on 10-K.
Inflation
The Company does not believe that inflation had a material impact on our business, revenues or operating results during the periods presented.
ITEM 8. FINANCIAL INFORMATION AND SUPPLEMENTARY DATA
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Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors
Archaea Energy Inc.:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Archaea Energy Inc. and subsidiaries (the Company) as of December 31, 2021 and 2020, the related consolidated statements of operations, equity, and cash flows for each of the years in the two-year period ended December 31, 2021, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2021.
Philadelphia, Pennsylvania
March 18, 2022
ARCHAEA ENERGY INC.
Consolidated Balance Sheets
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(in thousands, except shares and per share data) | December 31, 2021 | | December 31, 2020 |
ASSETS |
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Current Assets |
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Cash and cash equivalents | $ | 77,860 | | | $ | 1,496 | |
Restricted cash | 15,206 | | | — | |
Accounts receivable, net | 37,010 | | | 1,780 | |
Inventory | 9,164 | | | — | |
Prepaid expenses and other current assets | 21,225 | | | 4,730 | |
Total Current Assets | 160,465 | | | 8,006 | |
Property, plant and equipment, net | 350,583 | | | 52,368 | |
Intangible assets, net | 638,471 | | | 8,693 | |
Goodwill | 29,211 | | | 2,754 | |
Equity method investments | 262,738 | | | — | |
Other non-current assets | 9,721 | | | 2,460 | |
Total Assets | $ | 1,451,189 | | | $ | 74,281 | |
LIABILITIES AND EQUITY | | | |
Current Liabilities | | | |
Accounts payable - trade | $ | 11,096 | | | $ | 14,845 | |
Current portion of long-term debt, net | 11,378 | | | 1,302 | |
Accrued and other current liabilities | 46,279 | | | 8,270 | |
Total Current Liabilities | 68,753 | | | 24,417 | |
Long-term debt, net | 331,396 | | | 14,773 | |
Derivative liabilities | 67,424 | | | — | |
Below-market contracts | 142,630 | | | — | |
Asset retirement obligations | 4,677 | | | 306 | |
Other long-term liabilities | 5,316 | | | 3,294 | |
Total Liabilities | 620,196 | | | 42,790 | |
Commitments and Contingencies | | | |
Redeemable Noncontrolling Interests | 993,301 | | | — | |
Equity | | | |
Members' Equity | — | | | 34,930 | |
Members' Accumulated Deficit | — | | | (4,156) | |
Stockholders' Equity | | | |
Preferred stock, $0.0001 par value; 10,000,000 authorized; none issued and outstanding | — | | | — | |
Class A common stock, $0.0001 par value; 900,000,000 shares authorized; 65,122,200 shares issued and outstanding as of December 31, 2021 and no shares issued and outstanding as of December 31, 2020 | 7 | | | — | |
Class B common stock, $0.0001 par value; 190,000,000 shares authorized; 54,338,114 shares issued and outstanding as of December 31, 2021 and no shares issued and outstanding as of December 31, 2020 | 5 | | | — | |
Additional paid in capital | — | | | — | |
Accumulated deficit | (162,320) | | | — | |
Total Stockholders' Equity | (162,308) | | | — | |
Nonredeemable noncontrolling interests | — | | | 717 | |
Total Equity | (162,308) | | | 31,491 | |
Total Liabilities, Redeemable Noncontrolling Interests and Equity | $ | 1,451,189 | | | $ | 74,281 | |
The accompanying notes are an integral part of these consolidated financial statements.
57
ARCHAEA ENERGY INC.
Consolidated Statements of Operations
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(in thousands, except shares and per share data) | | | | | 2021 | | 2020 |
Revenues and Other Income | | | | |
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Energy revenue | | | | | $ | 67,871 | | | $ | — | |
Other revenue | | | | | 5,817 | | | 6,523 | |
Amortization of intangibles and below-market contracts | | | | | 3,438 | | | — | |
Total Revenues and Other Income | | | | | 77,126 | | | 6,523 | |
Equity Investment Income, Net | | | | | 5,653 | | | — | |
Cost of Sales | | | | | | | |
Cost of energy | | | | | 41,626 | | | — | |
Cost of other revenues | | | | | 4,862 | | | 4,752 | |
Depreciation, amortization and accretion | | | | | 16,025 | | | 137 | |
Total Cost of Sales | | | | | 62,513 | | | 4,889 | |
General and administrative expenses | | | | | 43,827 | | | 4,371 | |
Operating Income (Loss) | | | | | (23,561) | | | (2,737) | |
Other Income (Expense) | | | | | | | |
Interest expense, net | | | | | (4,797) | | | (20) | |
Gain (loss) on derivative contracts | | | | | (3,727) | | | — | |
Other income (expense) | | | | | 1,164 | | | 521 | |
Total Other Income (Expense) | | | | | (7,360) | | | 501 | |
Income (Loss) Before Income Taxes | | | | | (30,921) | | | (2,236) | |
Income tax benefit | | | | | — | | | — | |
Net Income (Loss) | | | | | (30,921) | | | (2,236) | |
Net income (loss) attributable to nonredeemable noncontrolling interests | | | | | (712) | | | 236 | |
Net income (loss) attributable to Legacy Archaea | | | | | (18,744) | | | (2,472) | |
Net income (loss) attributable to redeemable noncontrolling interests | | | | | (6,312) | | | — | |
Net Income (Loss) Attributable to Class A Common Stock | | | | | $ | (5,153) | | | $ | — | |
Net income (loss) per Class A common share: | | | | | | | |
Net income (loss) – basic (1) | | | | | $ | (0.09) | | | $ | — | |
Net income (loss) – diluted (1) | | | | | $ | (0.09) | | | $ | — | |
Weighted average shares of Class A Common Stock outstanding: | | | | | | | |
Basic (1) | | | | | 56,465,786 | | | — | |
Diluted (1) | | | | | 56,465,786 | | | — | |
(1) Class A Common Stock is outstanding beginning September 15, 2021 due to the reverse recapitalization transaction as described in Note 4.
The accompanying notes are an integral part of these consolidated financial statements.
58
ARCHAEA ENERGY INC.
Consolidated Statements of Equity
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Total Equity |
|
|
| | | | | | | Total Stockholders' Equity | | | | |
(in thousands) | Redeemable Noncontrolling Interests | | Members' Equity |
| Members' Accumulated Deficit | | Class A Common Stock |
| Class B Common Stock |
| Additional Paid-in Capital |
| Accumulated Deficit |
| Nonredeemable Noncontrolling Interests |
| Total Equity |
Balance - January 1, 2020 | $ | — | | | $ | 2,470 | | | $ | (1,683) | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | 787 | |
Net income (loss) | — | | | — | | | (2,473) | | | — | | | — | | | — | | | — | | | 237 | | | (2,236) | |
Members' equity contributions | — | | | 32,460 | | | — | | | — | | | — | | | — | | | — | | | — | | | 32,460 | |
Noncontrolling interest in acquired business acquisition | — | | | — | | | — | | | — | | | — | | | — | | | — | | | 480 | | | 480 | |
Balance - December 31, 2020 | — | | | 34,930 | |
| (4,156) | | | — | |
| — | |
| — | |
| — | |
| 717 | |
| 31,491 | |
Net income (loss) prior to Closing | — | | | — | |
| (18,744) | | | — | |
| — | |
| — | |
| — | |
| (534) | |
| (19,278) | |
Members' equity contributions | — | | | 70 | |
| — | | | — | |
| — | |
| — | |
| — | |
| — | |
| 70 | |
Share-based compensation expense prior to Closing | — | | | 2,349 | |
| — | | | — | |
| — | |
| — | |
| — | |
| — | |
| 2,349 | |
Reclassification in connection with reverse recapitalization | — | | | (37,349) | | | 22,900 | | | — | | | 3 | | | 37,346 | | | (22,900) | | | — | | | — | |
Net cash contribution from the reverse recapitalization and PIPE Financing, net of warrant liability | — | | | — | |
| — | | | 5 | |
| 1 | |
| 346,266 | | | — | |
| — | |
| 346,272 | |
Issuance of Class B Common Stock in Aria Merger | — | | | — | |
| — | | | — | |
| 2 | |
| 394,908 | |
| — | |
| — | |
| 394,910 | |
Reclassification to redeemable noncontrolling interest | 408,762 | | | — | | | — | | | — | | | — | | | (431,662) | | | 22,900 | | | — | | | (408,762) | |
Warrant exercises | — | | | — | | | — | | | 1 | | | — | | | 193,540 | | | — | | | — | | | 193,541 | |
Exchange of Class A Opco Units and Class B Common Stock for Class A Common Stock | (132,720) | | | — | | | — | | | 1 | | | (1) | | | 132,720 | | | — | | | — | | | 132,720 | |
Retirement of Class A Common Stock | — | | | — | | | — | | | — | | | — | | | — | | | (107,690) | | | — | | | (107,690) | |
Share-based compensation expense | — | | | — | | | — | | | — | | | — | | | 2,721 | | | — | | | — | | | 2,721 | |
Shares withheld for taxes on net settled awards | — | | | — | | | — | | | — | | | — | | | (950) | | | — | | | — | | | (950) | |
Net income (loss) after Closing | (6,312) | | | — | | | — | | | — | | | — | | | — | | | (5,153) | | | (178) | | | (5,331) | |
Acquisition of nonredeemable noncontrolling interests | — | | | — | | | — | | | — | | | — | | | (795) | | | — | | | (5) | | | (800) | |
Adjustment of redeemable noncontrolling interests to redemption amount | 723,571 | | | — | | | — | | | — | | | — | | | (674,094) | | | (49,477) | | | — | | | (723,571) | |
Balance - December 31, 2021 | $ | 993,301 | | | $ | — | |
| $ | — | | | $ | 7 | |
| $ | 5 | |
| $ | — | |
| $ | (162,320) | |
| $ | — | |
| $ | (162,308) | |
The accompanying notes are an integral part of these consolidated financial statements.
59
ARCHAEA ENERGY INC.
Consolidated Statements of Cash Flows
| | | | | | | | | | | |
| Year Ended December 31, |
(in thousands) | 2021 |
| 2020 |
Cash flows from operating activities |
|
|
|
Net income (loss) | $ | (30,921) | |
| $ | (2,236) | |
Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | |
| |
Depreciation, amortization and accretion expense | 16,025 | |
| 137 | |
Amortization of debt issuance costs | 1,309 | |
| — | |
Amortization of intangibles and below-market contracts | (1,479) | |
| — | |
Bad debt expense | 353 | |
| 76 | |
Return on investment in equity method investments | 8,273 | |
| — | |
Equity in earnings of equity method investments | (5,653) | |
| — | |
Total (gains) losses on derivatives, net | 3,727 | |
| — | |
Net cash received in settlement of derivatives | 80 | | | — | |
Forgiveness of Paycheck Protection Loan | (201) | |
| (491) | |
Stock-based compensation expense | 5,071 | |
| — | |
| | | |
Changes in operating assets and liabilities: | |
| |
Accounts receivable | (6,940) | |
| (1,385) | |
Inventory | (149) | |
| — | |
Prepaid expenses and other current assets | (7,660) | |
| (3,252) | |
Accounts payable - trade | (211) | |
| (246) | |
Accrued and other liabilities | 276 | |
| 1,563 | |
Other non-current assets | (4,231) | | | — | |
Other long-term liabilities | (5,781) | | | — | |
Net cash used in operating activities | (28,112) | |
| (5,834) | |
Cash flows from investing activities | |
| |
Acquisition of Aria, net of cash acquired | (463,334) | |
| — | |
Acquisition of assets and businesses, excluding Aria | (61,830) | |
| (14,249) | |
Additions to property, plant and equipment | (139,467) | |
| (20,169) | |
Purchases of biogas rights | (7,802) | |
| (7,901) | |
Contributions to equity method investments | (22,175) | |
| — | |
Return of investment in equity method investments | 57 | |
| — | |
Net cash used in investing activities | (694,551) | |
| (42,319) | |
Cash flows from financing activities | |
| |
Borrowings on line of credit agreement | 12,478 | |
| — | |
Repayments on line of credit agreement | (12,478) | |
| — | |
Proceeds from long-term debt, net of issuance costs | 367,930 | |
| 16,075 | |
Repayments of long-term debt | (48,415) | |
| — | |
Proceeds from PPP Loan | — | |
| 691 | |
Proceeds from reverse recapitalization and PIPE Financing | 496,425 | |
| — | |
Capital contributions | 70 | |
| 32,460 | |
Proceeds from Warrant exercises for Class A Common Stock | 107,663 | | | — | |
Repurchase of Class A Common Stock | (107,690) | | | — | |
Taxes paid on net share settled stock-based compensation awards | (950) | | | — | |
Acquisition of nonredeemable noncontrolling interest | (800) | |
| — | |
Net cash provided by financing activities | 814,233 | |
| 49,226 | |
Net increase (decrease) in cash, cash equivalents and restricted cash | 91,570 | |
| 1,073 | |
Cash, cash equivalents and restricted cash - beginning of period | 1,496 | |
| 423 | |
Cash, cash equivalents and restricted cash - end of period | $ | 93,066 | |
| $ | 1,496 | |
| | | |
Supplemental cash flow information | |
| |
Cash paid for interest (1) | $ | 3,903 | |
| $ | 44 | |
Non-cash investing activities | |
| |
Accruals of property, plant and equipment and biogas rights incurred but not paid | $ | 20,296 | |
| $ | 17,542 | |
(1) Net of capitalized interest of $7.9 million and $0.6 million for the years ended December 31, 2021 and 2020, respectively.
The accompanying notes are an integral part of these consolidated financial statements.
60
ARCHAEA ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Organization and Description of Business
Archaea Energy Inc. (“Archaea”), a Delaware corporation (formerly named Rice Acquisition Corp.), 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. As of December 31, 2021, Archaea owns, through wholly-owned entities or joint ventures, a diversified portfolio of 29 LFG recovery and processing facilities across 18 states, including 11 operated facilities that produce pipeline-quality RNG and 18 LFG to renewable electricity production facilities, including one non-operated facility and one facility that is not operational.
Archaea develops, designs, constructs, and operates RNG facilities. Archaea has entered into long-term agreements with biogas site hosts which grant the rights to utilize gas produced at their sites and to construct and operate facilities on their sites to produce RNG and renewable electricity.
On September 15, 2021, Archaea consummated the previously announced business combinations pursuant to (i) the Business Combination Agreement, dated April 7, 2021 (as amended, the “Aria Merger Agreement”), by and among Rice Acquisition Corp., a Delaware corporation (“RAC”), Rice Acquisition Holdings LLC, a Delaware limited liability company and direct subsidiary of RAC (“RAC Opco”), LFG Intermediate Co, LLC, a Delaware limited liability company and direct subsidiary of RAC Opco (“RAC Intermediate”), LFG Buyer Co, LLC, a Delaware limited liability company and direct subsidiary of RAC Intermediate (“RAC Buyer”), Inigo Merger Sub, LLC, a Delaware limited liability company and direct subsidiary of RAC Buyer (“Aria Merger Sub”), Aria Energy LLC, a Delaware limited liability company (“Aria”), and Aria Renewable Energy Systems LLC, a Delaware limited liability company, pursuant to which, among other things, Aria Merger Sub was merged with and into Aria, with Aria surviving the merger and becoming a direct subsidiary of RAC Buyer, on the terms and subject to the conditions set forth therein (the transactions contemplated by the Aria Merger Agreement, the “Aria Merger”), and (ii) the Business Combination Agreement, dated April 7, 2021 (as amended, the “Archaea Merger Agreement” and, together with the Aria Merger Agreement, the “Business Combination Agreements”), by and among RAC, RAC Opco, RAC Intermediate, RAC Buyer, Fezzik Merger Sub, LLC, a Delaware limited liability company and direct subsidiary of RAC Buyer (“Archaea Merger Sub”), Archaea Energy LLC, a Delaware limited liability company, and Archaea Energy II LLC, a Delaware limited liability company (“Legacy Archaea”), pursuant to which, among other things, Archaea Merger Sub was merged with and into Legacy Archaea, with Legacy Archaea surviving the merger and becoming a direct subsidiary of RAC Buyer, on the terms and subject to the conditions set forth therein (the transactions contemplated by the Archaea Merger Agreement, the “Archaea Merger” and, together with the Aria Merger, the “Business Combinations”). As further discussed in “Note 4 - Business Combinations and Reverse Recapitalization,” Legacy Archaea was determined to be the accounting acquirer of the Business Combinations, and Aria was determined to be the predecessor to the Company. Unless the context otherwise requires, “the Company,” “we,” “us,” and “our” refer, for periods prior to the completion of the Business Combinations, to Legacy Archaea and its subsidiaries and, for periods upon or after the completion of the Business Combinations, to Archaea Energy Inc. and its subsidiaries, including Legacy Archaea and Aria Energy LLC.
Archaea has retained its “up-C” structure, whereby (i) all of the equity interests in Aria and Legacy Archaea are held indirectly by Opco through RAC Buyer and RAC Intermediate, (ii) Archaea’s only assets are its equity interests in Opco, and (iii) Sponsor, Atlas, the RAC independent directors, the Legacy Archaea Holders and the Aria Holders own economic interests directly in Opco. In connection with the consummation of the Business Combinations, Rice Acquisition Holdings LLC was renamed LFG Acquisition Holdings LLC. In accordance with ASC 810 - Consolidation, Opco is considered a VIE with Archaea as its sole managing member and primary beneficiary. As such, Archaea consolidates Opco, and the remaining unitholders that hold economic interests directly in Opco are presented as redeemable noncontrolling interests on the Company’s financial statements.
Opco issued additional Class A Opco Units as part of the consideration in the Business Combinations. Subsequent to the Business Combinations, transactions impacting the ownership of Class A Opco Units resulted from Redeemable Warrant exercises, repurchases from Aria Renewable Energy Systems LLC, redemption of certain other Class A Opco Units in exchange for Class A Common Stock, and issuances related to vested RSUs. The ownership structure of Opco upon closing of the Business Combinations and as of December 31, 2021, which gives rise to the redeemable noncontrolling interest at Archaea, is as follows:
ARCHAEA ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 | | September 15, 2021 |
Equity Holder | Class A Opco Units | | % Interest | | Class A Opco Units | | % Interest |
Archaea | 65,122,200 | | | 54.5 | % | | 52,847,195 | | | 45.9 | % |
Total controlling interests | 65,122,200 | | | 54.5 | % | | 52,847,195 | | | 45.9 | % |
Aria Holders | 15,056,379 | | | 12.6 | % | | 23,000,000 | | | 20.0 | % |
Legacy Archaea Holders | 33,350,385 | | | 27.9 | % | | 33,350,385 | | | 29.0 | % |
Sponsor, Atlas and RAC independent directors | 5,931,350 | | | 5.0 | % | | 5,931,350 | | | 5.2 | % |
Total redeemable noncontrolling interests | 54,338,114 | | | 45.5 | % | | 62,281,735 | | | 54.1 | % |
Total | 119,460,314 | | | 100.0 | % | | 115,128,930 | | | 100.0 | % |
Holders of Class A Opco Units other than Archaea have the right (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.
NOTE 2 - Basis of Presentation and Summary of Significant Accounting Policies
Basis of Presentation
These consolidated financial statements and notes are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and in accordance with the rules and regulations of the SEC. These financial statements reflect all adjustments that are, in the opinion of management, necessary to present fairly the results for the periods presented. The Company's accounting policies conform to GAAP and have been consistently applied in the presentation of financial statements. The Company's consolidated financial statements include all wholly-owned subsidiaries and all variable interest entities with respect to which the Company determined it is the primary beneficiary.
The Archaea Merger with RAC was accounted for as a reverse recapitalization with Legacy Archaea deemed the accounting acquirer, and therefore, there was no step-up to fair value of any RAC assets or liabilities and no goodwill or other intangible assets were recorded. The Aria Merger was accounted for using the acquisition method of accounting with Aria deemed to be the acquiree for accounting purposes. The Company also determined that Aria is the Company's predecessor and therefore has included the historical financial statements of Aria as predecessor beginning on page 93. The Company recorded the fair value of the net assets acquired from Aria as of the Business Combination Closing Date, and goodwill was recorded. See “Note 4 - Business Combinations and Reverse Recapitalization” for additional information regarding the Archaea Merger and Aria Merger. Principles of Consolidation
The consolidated financial statements include the assets, liabilities and results of operations of the Company and its consolidated subsidiaries beginning on September 15, 2021, which includes approximately 3.5 months of the combined results of the businesses of Legacy Archaea and Aria as operated by the Company after the Business Combination for the year ended December 31, 2021. 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 Company has determined that Opco is a VIE and the Company is the primary beneficiary. Therefore, the Company consolidates Opco, and ownership interests of Opco not owned by the Company are reflected as redeemable noncontrolling interests due to certain features of the redemption right. See “Note 16 - Redeemable Noncontrolling Interest and Stockholders' Equity.” Entities that are majority-owned by Opco are consolidated. Certain investments in entities are accounted for as equity method investments and included separately in the Company’s consolidated balance sheets.
All intercompany balances and transactions have been eliminated.
ARCHAEA ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Emerging Growth Company
The Company is an “emerging growth company,” as defined in Section 2(a) of the Securities Act, as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”), and it may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in its periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
Further, Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards. The JOBS Act provides that an emerging growth company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such an election to opt out is irrevocable. The Company has elected not to opt out of such extended transition period, which means that when a standard is issued or revised and it has different application dates for public or private companies, the Company, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard.
This may make the comparison of the Company’s consolidated financial statements with another public company that is neither an emerging growth company nor an emerging growth company that has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used. The Company will re-evaluate its status as an emerging growth company in June 2022 at which time it may no longer qualify as an emerging growth company.
Use of Estimates
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, as well as contingent assets and liabilities. The estimates and assumptions used in the accompanying financial statements are based upon management’s evaluation of the relevant facts and circumstances as of the date of the financial statements. Actual results may differ from the estimates and assumptions used in preparing the accompanying consolidated financial statements.
Noncontrolling and Redeemable Noncontrolling Interest
Noncontrolling interest represents the portion of equity ownership in subsidiaries that is not attributable to the stockholders’ equity of the Company. Noncontrolling interests are initially recorded at the transaction price which is equal to their fair value, and the amount is subsequently 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. Effective with the consummation of the Business Combinations, noncontrolling interest includes the economic interest of Class A Opco Units not owned by the Company, which has been classified as redeemable noncontrolling interest due to certain provisions that allow for cash settlement of the redemption right at the Company’s election. See “Note 16 - Redeemable Noncontrolling Interest and Stockholders' Equity.”
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or the price paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements are based upon inputs that market participants use in pricing an asset or liability, which are characterized according to a hierarchy that prioritizes those inputs based on the degree to which they are observable. Observable inputs represent market data obtained from independent sources, whereas unobservable inputs reflect a company's own market assumptions, which are used if observable inputs are not reasonably available without undue cost and effort. The fair value input hierarchy level to which an asset or liability measurement in its entirety falls is determined based on the lowest level input that is significant to the measurement in its entirety.
ARCHAEA ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The three input levels of the fair value hierarchy are as follows:
•Level 1 inputs use quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.
•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.
The Company’s assessment of the significance of particular inputs to these fair value measurements requires judgment and considers factors specific to each asset or liability.
The Company’s financial assets and liabilities are classified based on the lowest level of input that is significant for the fair value measurement. The Company reflects transfers between the three levels at the beginning of the reporting period in which the availability of observable inputs no longer justifies classification in the original level.
Revenue Recognition
The Company generates revenues from the production and sales of RNG, Power, and associated Environmental Attributes, as well as the performance of other landfill energy O&M services. The Company also manufactures and sells customized pollution control equipment and performs associated maintenance agreement services. Based on requirements of GAAP, a portion of revenue is accounted for under ASC 840 - Leases and a portion under ASC 606 - Revenue from Contracts with Customers. Under ASC 840, lease revenue is recognized generally upon delivery of RNG and electricity. Under ASC 606, 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, including RNG, electricity and their related Environmental Attributes. 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. Based on the terms of the related sales agreements, the amounts recorded under ASC 840 as lease revenue are generally consistent with revenue recognized under ASC 606.
RNG
The Company’s RNG production commenced in 2021 at its Boyd County facility and has expanded with the acquisition of Aria, which at the time of the Business Combinations owned and operated nine RNG facilities, and with the achievement of commercial operations at the Assai facility in December 2021. The Company has long-term off-take contracts with creditworthy counterparties for the sale of RNG and related Environmental Attributes. Certain long-term off-take contracts for current production are accounted for as operating leases and have no minimum lease payments. The rental income under these leases is recorded as revenue when the RNG is delivered to the customer. RNG not covered by off-take contracts is sold under short-term market-based contracts. When the performance obligation is satisfied through the delivery of RNG to the customer, revenue is recognized. The Company receives payments from the sale of RNG production within one month after delivery.
The Company also earns revenue by selling Environmental Attributes, including RINs and LCFS credits, which are generated when producing and selling RNG for use in certain transportation markets. These Environmental Attributes are able to be separated and sold independent from the RNG produced, therefore, no cost is allocated to the Environmental Attributes when they are generated. When the RNG and RIN are sold on a bundled basis under the same contract, revenue is recognized when the RNG is produced and the RNG and associated RIN are transferred to a third party. For RIN and LCFS sales that are under contracts independent from RNG sales, revenue is recognized when the RIN or LCFS is transferred to a third party.
ARCHAEA ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Power
The Company’s Power production commenced in April 2021 following the acquisition of PEI and has expanded as a result of the acquisition of Aria, which at the time of the Business Combinations owned, and in most cases operated, twelve LFG to renewable electricity facilities, and the subsequent acquisition of four additional LFG to electricity facilities. A significant portion of the electricity generated is sold and delivered under the terms of PPAs or other contractual arrangements. Revenue is recognized based upon the amount of electricity delivered at rates specified under the contracts. Certain PPAs are accounted for as operating leases and have no minimum lease payments. All of the rental income under these leases is recorded as revenue when the electricity is delivered. Power not covered by PPAs is typically sold under a market-based contract with an RTO or in the wholesale markets. When the performance obligation is satisfied through the delivery of Power to the customer, revenue is recognized. The Company receives payments from the sale of power production within one month after delivery.
Electricity is also sold through energy wholesale markets (NYISO, ISO-NE, and PJM) into the day-ahead market. Revenue is recognized based upon the amount of electricity delivered into the day-ahead market and the day-ahead market’s clearing prices.
The Company also sells capacity into the month-ahead and three-year ahead markets in the wholesale markets noted above. Capacity revenues are recognized when contractually earned and consist of revenues billed to a third party at a negotiated contract price for making installed generation capacity available to satisfy system integrity and reliability requirements.
The Company also earns revenue by selling RECs, which are generated when producing and selling Power generated from renewable energy. These RECs are able to be separated and sold independent from the Power produced, therefore, no cost is allocated to the RECs when they are generated. For REC sales that are under contracts independent from Power sales, revenue is recognized when the REC is transferred to a third party. For REC sales that are bundled with Power sales, revenue is recognized at the time Power is produced when a sales agreement exists for the RECs.
Operation and Maintenance (“O&M”)
The Company also generates revenues by providing O&M services at projects owned by third parties which are also included in Energy revenue. In addition, the Company also provides O&M services at projects owned by its equity method investment, Mavrix. Revenue for these services is recognized upon the services being provided following contractual arrangements primarily based on the production of RNG or Power from the project.
Equipment and Associated Services
The Company’s performance obligations related to the sales of equipment are satisfied over time because the Company’s performance under each customer contract produces 1) an asset with no alternative future use to the entity, because each products solution is customized to the specific needs of each customer and 2) the Company has an enforceable right to payment under the customer termination provisions for convenience. The Company measures progress under these arrangements using an input method based on costs incurred.
The Company’s performance obligations related to the sales of the associated services are satisfied over time because the customer simultaneously receives and consumes the benefits provided by the Company’s performance as it performs. The Company elected to recognize the sales of the associated services using the “right-to-invoice” practical expedient.
See “Note 5 - Revenues” for further discussion.
Business Combinations
For business combinations that meet the accounting definition of a business, the Company determines and allocates the purchase price of an acquired company to the tangible and intangible assets acquired, the liabilities assumed, and noncontrolling interest, if applicable, as of the date of acquisition at fair value. Fair value may be estimated using comparable market data, a discounted cash flow method, or a combination of the two. In the discounted cash flow method, estimated future cash flows are based on management’s expectations for the future and can include estimates of future
ARCHAEA ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
biogas production, commodity prices, operating and development costs, and a risk-adjusted discount rate. Revenues and costs of the acquired companies are included in the Company's operating results from the date of acquisition.
The Company uses its best estimates and assumptions as part of the purchase price allocation process to accurately value assets acquired and liabilities assumed at the acquisition date, and these estimates and assumptions are inherently uncertain and subject to refinement during the measurement period not to exceed one year from the acquisition date. As a result, any adjustment identified subsequent to the measurement period is included in operating results in the period in which the amount is determined. The Company’s acquisitions are discussed in “Note 4 - Business Combinations and Reverse Recapitalization.”
Restricted Cash
The Company maintains escrow accounts under the terms of the Assai Energy 3.75% Senior Secured Notes and the Assai Energy 4.47% Senior Secured Notes. See “Note 11 - Debt.” The escrow accounts are legally restricted disbursement accounts for payment of construction-related costs for the Assai biogas project, as well as for future interest and principal payments to the secured investors, future royalty payments, and other reserve payments related to operating expenses. Due to these arrangements, the Company has classified the amounts in escrow as restricted cash.
Accounts Receivable and Allowance for Doubtful Accounts
The Company recognizes accounts receivable at invoiced amounts and maintains a valuation allowance for accounts where collectability is in question. The carrying amount of accounts receivable represents the amount management expects to collect from outstanding balances. Credit is extended to all qualified customers under various payment terms with no collateral required. There were no material credit allowances as of December 31, 2021 or 2020.
Inventory
Inventory is stated at the lower of weighted average cost or net realizable value. Inventory consists primarily of manufacturing parts and supplies used in the maintenance of production equipment.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, net of accumulated depreciation and impairments. Depreciation is recognized using the straight-line method at rates based on the estimated useful lives of the various classes of property, plant and equipment. Estimates of useful lives are based upon a variety of factors including durability of the asset, the amount of usage that is expected from the asset, the period of the associated landfill gas rights agreement, and the Company’s business plans for the asset, including planned conversions from Power to RNG facilities. When the underlying cost of particular components are not determinable, such as through an acquisition, an economic life for the entire facility is determined. When the value of the components are known, the estimated useful lives of our property and equipment are generally as follows: machinery and equipment, 5 to 30 years; buildings and improvements, 20 to 30 years; computer software and hardware, 1 to 5 years; and other furniture and fixtures, 3 to 5 years. Land is not depreciated.
Costs associated with the construction of biogas facilities are capitalized during the construction period and include direct costs such as engineering, pipeline and plant construction, wages and benefits, consulting, equipment, and other overhead costs. When a biogas plant is placed in service, the costs associated with the biogas plant will be transferred from construction in progress to property, plant and equipment and depreciated over its expected useful life.
Costs of improvements that extend the lives of existing properties are capitalized, whereas maintenance and repairs are expensed as incurred.
Impairment of Long-Lived Assets
The Company reviews long-lived assets, such as property, plant, equipment and biogas rights, for impairment when events or changes in circumstances indicate that the carrying value of such assets may not be recoverable. In performing this review, undiscounted future cash flows associated with the long-lived asset or group of long-lived assets are estimated at
ARCHAEA ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets. If the Company determines that the undiscounted cash flows from an asset are less than the carrying amount of the asset, the impairment expense to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value of the asset.
Equity Method Investments
Investments in entities that the Company does not control or VIEs in which the Company is not the primary beneficiary are accounted for using the equity method of accounting. Under this method, the Company records its proportional share of equity earnings or losses in the consolidated statements of operations. Investments are increased by additional contributions and earnings and are reduced by equity losses and distributions. Equity method investments are evaluated for impairment when the Company determines factors indicate that an other than temporary loss has occurred.
Goodwill
Goodwill is determined as the excess of the consideration transferred over the fair value of the acquired assets and assumed liabilities in a business combination. Goodwill is not amortized, but rather tested for impairment annually on October 1, or earlier if an event occurs, or circumstances change, that indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If the qualitative assessment indicates that it is more likely than not that the fair value of the reporting unit is less than its carrying amount including goodwill, the Company will then perform a quantitative goodwill impairment test.
Asset Retirement Obligations
The Company recognizes a liability for obligations which the Company has a legal or a contractual obligation to remove a long-lived asset. Liabilities are recorded at estimated fair value with the associated asset retirement costs being capitalized as a part of the carrying amount of the long-lived asset. Accretion expense is recognized over time as the discounted liabilities are accreted to their expected settlement value and is included in Depreciation, amortization and accretion in the consolidated statement of operations. The Company has recognized asset retirement obligations ("AROs") arising from legal or regulatory requirements to perform certain asset retirement activities at the time that certain contracts terminate, including the costs of removing our facilities from the landfill property and returning the land to the state it was in prior to our facility construction.
Postretirement Obligations
Postretirement benefits amounts recognized in consolidated financial statements are determined on an actuarial basis. The Company obtains an independent actuary valuation of its postretirement obligation annually as of December 31st. To calculate the present value of plan liabilities, the discount rate needs to be determined and 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. Actuarial gains and losses are recognized in Other income (expense) in the period determined.
Income Taxes
Archaea is a corporation and is subject to U.S. federal income and applicable state taxation. The Company accounts for income taxes using the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax laws and tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
In assessing the realizability of deferred tax assets, the Company considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company routinely assesses the realizability of its deferred tax assets by analyzing the reversal periods of available net operating loss carryforwards and credit carryforwards,
ARCHAEA ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
temporary differences in tax assets and liabilities, the availability of tax planning strategies, and estimates of future taxable income and other factors. Deferred tax assets may be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. The Company recognizes the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured as the largest amount that is greater than 50% likely of being realized.
The Company records interest related to an underpayment of income taxes in interest expense and penalties in operating expenses.
Derivative Instruments
The Company evaluates all of its financial instruments, including issued stock purchase warrants, to determine if such instruments are derivatives or contain features that qualify as embedded derivatives under GAAP. Derivative instruments are recognized on the consolidated balance sheets at fair value, with subsequent changes included in earnings. Certain contracts that are used to manage exposure to commodity prices are accounted for as derivatives, unless they meet the normal purchase/normal sale criteria and are designated and documented as such.
Share-based Compensation
The Company accounts for share-based compensation at fair value. Restricted stock units (“RSUs”) are valued at the grant date using the price of the Company’s Class A Common Stock. The Company records share-based compensation cost, net of actual forfeitures, on a straight-line basis over the requisite service period of the respective award.
NOTE 3 – Recently Issued and Adopted Accounting Standards
In February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The main difference between previous generally accepted accounting principles and the new requirements under Topic 842 is the recognition of lease assets and lease liabilities by lessees for those leases with a term greater than 12 months classified as operating leases under previous GAAP. ASU 2016-02 is effective for the Company for fiscal years beginning after December 15, 2021 with early adoption permitted.
Upon adoption of Topic 842 as of January 1, 2022, the Company recognized approximately $7 million of ROU assets and lease liabilities on its Consolidated Balance Sheet related to operating leases existing on the adoption date. The adoption of Topic 842 did not have a material impact on the Company’s Consolidated Statement of Operations or Consolidated Statement of Cash Flows.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes, to simplify the accounting for income taxes. The guidance eliminates certain exceptions related to the approach for intra-period tax allocations, the methodology for calculating income taxes in an interim period, and recognition of the deferred tax liabilities for outside basis differences related to changes in ownership of equity method investments and foreign subsidiaries. The guidance also simplifies aspects of accounting for franchise taxes, enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The standard is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years with early adoption permitted. The Company adopted ASU 2019-12 as of January 1, 2021, and the adoption of this guidance did not have a material impact on the consolidated financial statements.
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (ASC 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 provides optional guidance for a limited period of time to ease the transition from the London Inter-Bank Offered Rate (“LIBOR”) to an alternative reference rate. The guidance intends to address certain concerns relating to accounting for contract modifications and hedge accounting. These optional expedients and exceptions to applying GAAP, assuming certain criteria are met, are allowed through December 31, 2022. The Company is currently evaluating the provisions of this update and has not yet determined whether it will elect the
ARCHAEA ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
optional expedients. The Company does not expect the transition to an alternative rate to have a material impact on its business, operations or liquidity.
NOTE 4 – Business Combinations and Reverse Recapitalization
On September 15, 2021, Archaea consummated the previously announced Business Combinations with Aria and Legacy Archaea, as described in “Note 1 - Organization and Description of Business”.
Reverse Recapitalization
Legacy Archaea is considered the accounting acquirer of the Business Combinations because Legacy Archaea Holders have the largest portion of the voting power of the Company and Legacy Archaea’s senior management comprise the majority of the executive management of the Company. Additionally, 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 were stated at historical cost, no goodwill or other intangible assets were recorded.
The consideration paid in connection with the acquisition of Legacy Archaea consisted of 33,350,385 newly issued Class A Opco Units and 33,350,385 newly issued shares of Class B Common Stock.
In the reverse recapitalization, the Company was deemed to have received $236.9 million in gross cash proceeds from RAC upon Closing. For accounting purposes, these cash proceeds were treated as the equivalent of proceeds for issuance of the following outstanding shares and warrants at the time of Closing:
•23,680,528 shares of Class A Common Stock, after redemptions
•5,931,350 shares of Class B Common Stock
•11,862,492 Public Warrants and 6,771,000 Private Placement Warrants, each exercisable at a price of $11.50 per share. See “Note 13 - Derivatives Instruments” for further discussion.
In connection with the Business Combinations, the Company incurred approximately $40.5 million of equity issuance costs, mainly consisting of underwriting, legal, consulting, and other professional fees, which are recorded to additional paid-in capital as a reduction of proceeds.
PIPE Financing
On April 7, 2021, in connection with its entry into the Business Combination Agreements, the Company entered into subscription agreements (each, an “Initial Subscription Agreement”) with certain investors (the “Initial PIPE Investors”) pursuant to which, among other things, the Initial PIPE Investors agreed to subscribe for and purchase, and the Company agreed to issue and sell to the Initial PIPE Investors, an aggregate of 30.0 million shares of the Company’s Class A Common Stock for an aggregate purchase price of $300.0 million ($10.00 per share), on the terms and subject to the conditions set forth therein (the “Initial PIPE Financing”).
Additionally, on April 7, 2021, RAC, RAC Opco, Sponsor and Atlas Point Energy Infrastructure Fund, LLC, a Delaware limited liability company (“Atlas”), entered into an Amendment to Forward Purchase Agreement (the “FPA Amendment”) pursuant to which the Forward Purchase Agreement, dated as of September 30, 2020 (the “Original FPA Agreement” and, together with the FPA Amendment, the “FPA”), by and among such parties was amended to provide that Atlas shall purchase a total of $20.0 million of Forward Purchase Securities and Forward Purchase Warrants (both as defined in the Original FPA Agreement). Atlas satisfied its obligation to purchase the Forward Purchase Securities by participating in the PIPE Financing, and upon consummation of the Business Combinations, Atlas also received 250,000 warrants (each exercisable for one share of Class A Common Stock at a price of $11.50).
ARCHAEA ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On September 13, 2021, due to the expectation that one of the Initial PIPE Investors would not be able to fulfill its $25.0 million commitment for 2.5 million shares ($10.00 per share) in the Initial PIPE Financing, the Company entered into additional subscription agreements (each, a “Follow-On Subscription Agreement”) with certain investors (the “Follow-On PIPE Investors” and, together with the Initial PIPE Investors, the “PIPE Investors”) pursuant to which, among other things, the Follow-On PIPE Investors agreed to subscribe for and purchase from the Company, and the Company agreed to issue and sell to the Follow-On PIPE Investors, an aggregate of 1,666,667 newly issued shares of the Company’s Class A Common Stock for an aggregate purchase price of $25.0 million ($15.00 per share), on the terms and subject to the conditions set forth therein (the “Follow-On PIPE Financing” and, together with the Initial PIPE Financing, the “PIPE Financing”). Each Follow-On Subscription Agreement is substantially identical to the form of Initial Subscription Agreement.
On the Closing Date, gross consideration of $300 million was received under the PIPE Financing, including the proceeds under the FPA Amendment, in exchange for 29,166,667 shares of Class A Common Stock and 250,000 warrants (each warrant exercisable for one share of Class A Common Stock at a price of $11.50).
Aria Merger
Aria was acquired to complement Archaea's existing RNG assets and for its operational expertise in the renewable gas industry. Aria was determined to be a VIE immediately prior to the Business Combination. As a result of the Business Combinations, the Company became the primary beneficiary of Aria. The Aria Closing Merger Consideration consisted of both cash consideration and consideration in the form of newly issued Class A Opco Units and newly issued shares of the Company’s Class B Common Stock. The cash component of the Aria Closing Merger Consideration paid upon Closing was $377.1 million paid to Aria Holders, subject to certain future adjustments set forth in the Aria Merger Agreement, and $91.1 million for repayment of Aria debt. The remainder of the Aria Closing Merger Consideration consisted of 23.0 million Class A Opco Units and 23.0 million shares of Class B Common Stock.
Total consideration was determined to be as follows:
| | | | | | | | |
(in thousands) | | At September 15, 2021 |
Class A Opco Units (and corresponding shares of Class B Common Stock) | | $ | 394,910 | |
Cash consideration | | 377,122 |
Repayment of Aria debt at Closing | | 91,115 | |
Total purchase price consideration | | $ | 863,147 | |
ARCHAEA ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Aria Merger represented an acquisition of a business and was accounted for using the acquisition method, whereby all of the assets acquired and liabilities assumed were recognized at their fair value on the acquisition date, with any excess of the purchase price over the estimated fair value recorded as goodwill. Certain data to complete the purchase price allocation is not yet available, including but not limited to final appraisals of certain assets acquired and liabilities assumed and tax calculations. The Company will finalize the purchase price allocation during the 12-month period following the Closing, during which time the value of the assets and liabilities may be revised as appropriate. The following table sets forth the preliminary allocation of the Aria Closing Merger Consideration.
| | | | | | | | |
(in thousands) | | As of September 15, 2021 |
Fair value of assets acquired | |
|
Cash and cash equivalents | | $ | 4,903 | |
Account receivable, net | | 27,331 | |
Inventory | | 9,015 | |
Prepaid expenses and other current assets | | 3,834 | |
Property, plant and equipment, net | | 126,463 | |
Intangible assets, net | | 607,610 | |
Equity method investments | | 243,128 | |
Other non-current assets | | 861 | |
Goodwill | | 26,457 | |
Amount attributable to assets acquired | | $ | 1,049,602 | |
| |
|
Fair value of liabilities assumed | |
|
Accounts payable | | $ | 2,760 | |
Accrued and other current liabilities | | 26,496 | |
Below-market contracts | | 146,990 | |
Other long-term liabilities | | 10,209 | |
Amount attributable to liabilities assumed | | 186,455 | |
Net assets acquired | | 863,147 | |
Total Aria Merger consideration | | $ | 863,147 | |
The goodwill is primarily attributable to the expected synergies Archaea believes will be created as a result of the combined companies, the ability to enhance Aria's current RNG production facilities, and the ability to convert certain of Aria's electricity production facilities to RNG production facilities. We expect a majority, if not all of the goodwill, to be assigned to the RNG reporting unit upon finalizing the purchase price allocation. Due to the existence of cumulative losses, no deferred taxes are recorded for the Aria merger transaction.
ARCHAEA ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Intangible assets/(below-market liabilities) acquired, and their related weighted average amortization periods, are as follows:
| | | | | | | | | | | | | | |
(in thousands, excluding weighted average amortization period in years) | | As of September 15, 2021 | | Weighted Average Amortization Period |
Biogas rights agreements | | $ | 565,300 | | | 20 |
Electricity off-take agreements | | 23,400 | | | 12 |
Operations and maintenance contracts | | 8,620 | | | 15 |
RNG purchase contract | | 10,290 | | | 1 |
Gas off-take agreement liabilities | | $ | (146,990) | | | 11 |
Revenues of $54.3 million and net income of $19.8 million related to results of Aria for the period from the Closing of the Business Combinations through December 31, 2021 are included in the consolidated statement of operations for the year ended December 31 2021. The Company recognized transaction costs of $3.0 million during the year ended December 31, 2021 related to the Business Combinations.
Unaudited Pro Forma Operating Results
The following unaudited pro forma combined financial information has been prepared as if the Aria Merger and other related transactions had taken place on January 1, 2020. The information reflects pro forma adjustments based on certain assumptions that the Company believes are reasonable, including depreciation of the Company's fair-value property, plant and equipment and LFG rights, amortization of fair value intangibles and below-market contracts, and that debt associated with the transaction was outstanding as of January 1, 2020. We have included the impacts of the change in fair value of the warrants associated with the Company's reverse merger with RAC. Other revenues and costs incurred by RAC during 2021 and 2020 were not material to the pro forma statement of operations and have not been included. The pro forma combined financial information has been included for comparative purposes and is not necessarily indicative of the results that might have actually occurred had the Aria Merger taken place on January 1, 2020; furthermore, the pro forma financial information is not intended to be a projection of future results. The following table includes unaudited pro forma information for the years ended December 31, 2021 and 2020.
| | | | | | | | | | | | | | | |
(in thousands) | | | | | 2021 | | 2020 |
Total revenues | | | | | $ | 205,758 | | | $ | 162,018 | |
Net income (loss) | | | | | $ | (77,449) | | | $ | (49,730) | |
Lock-up Agreements
Pursuant to the terms of the Stockholders Agreement, dated as of September 15, 2021, by and among RAC, Opco, Archaea Borrower, the Sponsor and certain stockholders of the Company (the “Stockholders Agreement”), the Company Holders (as defined in the Stockholders Agreement) were granted certain customary registration rights. Also, the Aria Holders (as defined in the Stockholders Agreement) are subject to a 180-day lock-up period on transferring their equity interests in the Company and Opco, while the Legacy Archaea Holders (as defined in the Stockholders Agreement) are subject to a lock-up period (i) ending on the date that is the two-year anniversary of the Closing solely with respect to the Company Interests distributed by Archaea Energy LLC after the one-year anniversary of the Closing to the Legacy Archaea Holders who are members of management of the Company as of the Closing or their Affiliates (as defined in the Stockholders Agreement) and (ii) ending on the date that is the one-year anniversary of the Closing with respect to all other Company Interests issued to the Legacy Archaea Holders at the Closing other than those described in the immediately foregoing clause (i). In addition, RAC’s former officers and directors and their affiliates have agreed with RAC, subject to certain exceptions, not to transfer or dispose of their Common Stock during the period from the Closing of the Business Combinations through the earlier of (i) the first anniversary of the consummation of the Business Combinations, (ii) the date that the closing price of the Common Stock equals or exceeds $12.00 (as adjusted for stock splits, stock dividends, reorganizations, recapitalizations and the like), for 20 trading days within any 30 trading day period following the 150th day following the initial business combination and (iii) the consummation of a liquidation, merger, capital stock exchange, reorganization or
ARCHAEA ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
other similar transaction that results in all stockholders having the right to exchange their shares of Common Stock for cash, securities or other property.
The lock-up restrictions applicable to the Aria Holders are subject to early expiration based on the per share trading price of the Company’s Class A Common Stock, par value $0.0001, as set forth in the Stockholders Agreement. As of November 11, 2021, all of the Aria Closing Shares were no longer subject to the lock-up restrictions due to Class A Common Stock trading prices. As of March 14, 2022, RAC's former officers and directors and their affiliates Common Stock was no longer subject to the lock-up restrictions due to Class A Common Stock trading prices.
Predecessor Financial Statements
Archaea determined that Aria is the predecessor to the Company due to the relative fair values of the Company and legacy operations Aria had compared to Archaea. As such, we have included Aria's consolidated statements of operations for the period from January 1 to September 14, 2021, and the year ended December 31, 2020, and the consolidated balance sheets as of September 14, 2021 and December 31, 2020 following the Notes to the Company's Consolidated Financial Statements for comparative purposes.
Gulf Coast Environmental Systems
On January 14, 2020, Legacy Archaea entered into a Membership Interest and Loan Purchase Agreement with NEI Ventures, LLC (“NEI”). Pursuant to this agreement, Legacy Archaea purchased 51% of the Class A membership interests of GCES for consideration of $0.5 million. Additionally, Legacy Archaea purchased a loan receivable held by Noble which was due from GCES for consideration of approximately $0.7 million. In February 2020, Legacy Archaea obtained additional Class A interests in consideration of waiving certain receivables, and thereby increased its GCES ownership to 72%. The Company acquired additional Class A interests in October 2021 and December 2021 and, as of December 31, 2021, the Company has 100% ownership of GCES.
The January 14, 2020 acquisition of GCES was accounted for using the acquisition method, whereby all of the assets acquired, liabilities assumed and noncontrolling interests were recognized at their estimated fair value on the acquisition date, with the excess of the purchase price over the estimated fair value recorded as goodwill. The Company recorded goodwill of approximately $2.7 million.
NOTE 5 – Revenues
Revenue by Product Type
The following table disaggregates revenue by significant product type for the year ended December 31, 2021 and 2020:
| | | | | | | | | | | | | | | |
(in thousands) | | | | | 2021 | | 2020 |
RNG, including RINs and LCFSs | | | | | $ | 44,815 | | | $ | — | |
Gas O&M service | | | | | 386 | | | — | |
Power, including RECs | | | | | 21,502 | | | — | |
Electric O&M service | | | | | 1,070 | | | — | |
Equipment and associated services | | | | | 5,817 | | | 6,523 | |
Other | | | | | 98 | | | — | |
Total | | | | | $ | 73,688 | | | $ | 6,523 | |
ARCHAEA ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Contract Assets and Contract Liabilities
The timing of revenue recognition may differ from the timing of invoicing to customers. Contract assets include unbilled amounts from equipment sales projects when revenues recognized under the cost-to-cost measure of progress exceed the amounts invoiced to customers, as the amounts cannot be billed under the terms of the contracts. There were no credit allowances for contract assets as of December 31, 2021 or 2020. Contract liabilities from contracts arise when amounts invoiced to customers exceed revenues from equipment sales recognized under the cost-to-cost measure of progress. Contract liabilities additionally include advanced payments from customers on certain contracts. Contract liabilities decrease as revenue is recognized from the satisfaction of the related performance obligation and are recorded as either current or long-term, depending upon when such revenue is expected to be recognized.
Contract assets and liabilities consisted of the following as of December 31, 2021 and 2020:
| | | | | | | | | | | |
(in thousands) | 2021 | | 2020 |
Contract assets (included in Prepaid expenses and other current assets) | $ | 87 | | | $ | 48 | |
Contract liabilities (included in Accrued and other current liabilities) | $ | (505) | | | $ | (1,423) | |
The change in contract liabilities during year ended December 31, 2021 was primarily due to $1.4 million of revenue recognized that was included in contract liabilities at December 31, 2020, partially offset by an increase in new equipment sales billings in advance of revenue recognition.
Transaction Price Allocated to Remaining Unsatisfied Performance Obligations
Remaining unsatisfied performance obligations as of December 31, 2021 relate to certain of the Company's RNG, RIN, and REC contracts. The Company applies the optional exemptions in ASC 606 and does not disclose consideration for remaining performance obligations with an original expected duration of one year or less or for variable consideration related to unsatisfied performance obligations. Firm contracts for fixed-price, fixed-quantity sales of RNG, RINs, and RECs are reflected in the table below when their original expected term is in excess of one year. The following table summarizes the revenue the Company expects to recognize over next 20 years on these firm sales contracts as of December 31, 2021:
| | | | | |
(in thousands) | |
2022-2023 | $ | 118,362 | |
2024-2025 | 123,992 |
2026-2027 | 128,826 |
2028-2029 | 118,116 |
2030-2031 | 119,115 |
Thereafter | 416,779 |
Total | $ | 1,025,189 | |
NOTE 6 – Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consist of the following as of December 31, 2021 and 2020:
| | | | | | | | | | | |
(in thousands) | 2021 | | 2020 |
Prepaid equipment and parts | $ | 6,578 | | | $ | — | |
Prepaid royalties | 5,119 | | | 1,255 | |
Prepaid insurance | 4,852 | | | 112 | |
Other prepaid expenses | 4,676 | | | 3,363 | |
Total | $ | 21,225 | | | $ | 4,730 | |
ARCHAEA ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 – Property, Plant and Equipment
Property, plant and equipment consist of the following as of December 31, 2021 and 2020:
| | | | | | | | | | | |
(in thousands) | 2021 | | 2020 |
Machinery and equipment | $ | 285,718 | | | $ | 376 | |
Buildings and improvements | 16,039 | | | 88 | |
Furniture and fixtures | 1,176 | | | 13 | |
Construction in progress | 55,039 | | | 51,927 | |
Land | 246 | | | 1 | |
Total cost | 358,218 | | | 52,405 | |
Less accumulated depreciation | (7,635) | | | (37) | |
Property, plant and equipment, net | $ | 350,583 | | | $ | 52,368 | |
NOTE 8 – Equity Method Investments
As a result of the Aria Merger, the Company holds 50% interest in two joint ventures, Mavrix and Sunshine Gas Producers, LLC. (“SGP”), which are accounted for using the equity method due to the joint control by both the Company and unrelated parties with ownership interest in each entity.
Under the terms of the original Mavrix, LLC Contribution Agreement dated September 30, 2017, the Company is required to make an earn-out payment to its joint venture partner holding the other 50% membership in Mavrix in an amount up to $9.55 million. The earn-out payment represents additional consideration for the Company's equity interest in Mavrix and 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 due until the completion of the earn-out period. The Company has estimated the earn-out payment to be $3.7 million at December 31, 2021, and this amount is reflected in the accompanying balance sheet in accrued and other current liabilities.
The summarized financial information for the Mavrix and SGP equity method investments following the Business Combinations is as follows:
| | | | | | | | |
(in thousands) | | December 31, 2021 |
Assets | | $ | 203,864 | |
Liabilities | | 15,477 | |
Net assets | | $ | 188,387 | |
Company's share of equity in net assets | | $ | 94,194 | |
| | | | | | | | | | |
(in thousands) | | | | Year Ended December 31, 2021 |
Total revenues | | | | $ | 34,958 | |
Net income | | | | $ | 16,433 | |
Company's share of net income | | | | $ | 8,217 | |
The Company's carrying values of the Mavrix and SGP investments also include basis differences totaling $154.0 million as of December 31, 2021 as a result of the fair value measurements recorded in the Aria Merger. Amortization of the basis differences reduced equity investment income by $3.1 million for the year ended December 31, 2021. As of December 31, 2021, the Company's interest in Mavrix's and SGP's undistributed earnings was $0.3 million and zero, respectively.
ARCHAEA ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On December 30, 2021 the Company entered into a joint venture with a large waste management company. The Company contributed $7.5 million in cash into a newly created entity, Saturn Renewables LLC ("Saturn"), in exchange for a 50% interest. Concurrent with the closing, Saturn acquired existing gas rights at two locations along with an existing non-operating power plant at one of the locations. The JV partner extended long-term gas agreements for the Hickory Meadows site and contributed gas rights at an additional undeveloped site. Each party will have three board seats and jointly control Saturn. The Company will be the operator of the day to day operations of Saturn's existing power plant and will account for its investment using the equity method.
In addition, the Company also owns several smaller investments accounted for using the equity method of accounting totaling $7.1 million as of December 31, 2021.
NOTE 9 – Goodwill and Intangible Assets
Goodwill
At December 31, 2021, the Company had $29.2 million of goodwill, all of which is allocated to the RNG segment. The goodwill is primarily associated with the acquisition of Aria in the Business Combinations. As a result of the annual impairment test performed as of October 1, 2021, the Company determined that there were no indications of impairment related to the RNG segment's goodwill. No impairment of goodwill was recorded during the years ended December 31, 2021 and 2020.
Intangible Assets
Intangible assets consist of biogas rights agreements, off-take agreements, O&M contracts, an RNG purchase contract, customer relationships and trade names that were recognized as a result of the allocation of the purchase price under business acquisitions based on their future value to the Company, and such intangible assets will be amortized over their estimated useful lives. The biogas rights agreements have various renewal terms in their underlying contracts that are factored into the useful lives when amortizing the intangible asset.
Intangible assets consist of the following as of December 31, 2021 and 2020:
| | | | | | | | | | | | | | | | | |
(in thousands) | 2021 |
Gross Carrying Amount | | Accumulated Amortization | | Net |
Biogas rights agreements | $ | 603,868 | | | $ | 8,237 | | | $ | 595,631 | |
Electricity off-take agreements | 26,511 | | | 749 | | | 25,762 | |
Operations and maintenance contracts | 8,620 | | | 173 | | | 8,447 | |
RNG purchase contract | 10,290 | | | 1,959 | | | 8,331 | |
Customer relationships | 350 | | | 140 | | | 210 | |
Trade names | 150 | | | 60 | | | 90 | |
Total | $ | 649,789 | | | $ | 11,318 | | | $ | 638,471 | |
ARCHAEA ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | | | | |
(in thousands) | 2020 |
Gross Carrying Amount | | Accumulated Amortization | | Net |
Biogas rights agreements | $ | 8,293 | | | $ | — | | | $ | 8,293 | |
Customer relationships | 350 | | | 70 | | | 280 | |
Trade names | 150 | | | 30 | | | 120 | |
Total | $ | 8,793 | | | $ | 100 | | | $ | 8,693 | |
Total amortization expense was approximately $9.3 million and $0.1 million for the year ended December 31, 2021 and 2020, respectively, excluding the $2.0 million of amortization of the RNG purchase contract for the year ended December 31, 2021 that is amortized to cost of energy.
Estimated future amortization expense, including amortization classified as cost of energy expense, for years ended December 31 is as follows:
| | | | | | | | |
(in thousands) | |
|
2022 | | $ | 39,539 | |
2023 | | 35,521 | |
2024 | | 33,729 | |
2025 | | 33,629 |
2026 | | 33,533 |
Thereafter | | 462,520 |
Total | | $ | 638,471 | |
Below-Market Contracts
As a result of the Aria Merger, the Company assumed certain fixed-price sales contracts that were below current and future market prices at the Closing Date. The contracts were recorded at fair value and are classified as other long-term liabilities on the Company’s consolidated balance sheet as of December 31, 2021.
| | | | | | | | | | | | | | | | | |
| Gross Liability | | Accumulated Amortization | | Net |
Gas off-take agreements | $ | 146,990 | | | $ | 4,360 | | | $ | 142,630 | |
The below-market contract amortization was $4.4 million for the year ended December 31, 2021 and was recognized as an increase to revenues since it relates to the sale of RNG and related Environmental Attributes. The annual amortization is expected to be approximately $14.8 million for each of the next 5 years.
NOTE 10 – Commitments
Operating Leases
The Company has entered into warehouse, facility, and various office leases with third parties for periods ranging from one to eleven years.
The Company also entered into a related-party office lease as a result of its acquisition of interest in GCES in 2020. During the year ended December 31, 2021, the Company paid $0.2 million under this related-party lease that expires in May 2022.
For the years ended December 31, 2021 and 2020, the Company recognized rent expense of $0.4 million and $0.2 million, respectively.
ARCHAEA ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2021, future minimum lease payments under the Company’s non-cancellable operating leases are as follows:
| | | | | | | | |
(in thousands) | |
|
2022 | | $ | 1,465 | |
2023 | | 1,893 | |
2024 | | 1,831 | |
2025 | | 1,843 |
2026 | | 1,875 |
Thereafter | | 12,448 |
Total future minimum lease payments | | $ | 21,355 |
Other Commitments
The Company has various long-term contractual commitments pertaining to its biogas rights agreements. Excluding the evergreen contracts, these agreements expire at various dates through 2045.
NOTE 11 – Debt
The Company's outstanding debt consists of the following as of December 31, 2021 and 2020:
| | | | | | | | | | | |
(in thousands) | 2021 | | 2020 |
New Credit Agreement - Term Loan | $ | 218,625 | | | $ | — | |
Wilmington Trust – 4.47% Term Note | 60,828 | | | — | |
Wilmington Trust – 3.75% Term Note | 72,542 | | | — | |
Comerica Bank – Specific Advance Facility Note | — | | | 4,320 | |
Comerica Term Loan | — | | | 12,000 | |
Kubota Corporation – Term Notes | — | | | 46 | |
| 351,995 | | | 16,366 | |
Less unamortized debt issuance costs | (9,221) | | | (291) | |
Long-term debt less debt issuance costs | 342,774 | | | 16,075 | |
Less current maturities, net | (11,378) | | | (1,302) | |
Total long-term debt | $ | 331,396 | | | $ | 14,773 | |
Scheduled future maturities of long-term debt principal amounts are as follows:
| | | | | | | | |
(in thousands) | | |
2022 | | $ | 12,752 | |
2023 | | 17,108 | |
2024 | | 17,371 | |
2025 | | 17,598 | |
2026 | | 185,607 | |
Thereafter | | 101,559 | |
Total | | $ | 351,995 | |
ARCHAEA ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value of Debt
The Company estimates the fair value of fixed-rate term loans based on quoted market yields for similarly rated debt instruments in an active market, which are considered a Level 2 input in the fair value hierarchy. As of December 31, 2021, the estimated fair value of the Company's outstanding debt was approximately $353.1 million.
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, Archaea Borrower received total proceeds of $220 million under Term Loan. Archaea Borrower had outstanding borrowings under the Term Loan of $218.6 million at an interest rate of 3.35% as of December 31, 2021. As of December 31, 2021, the Company had issued letters of credit under the New Credit Agreement of $14.2 million and there were no borrowings under the Revolver, resulting in available borrowing capacity of $235.8 million under the Revolver.
The maturity date of the New Credit Agreement is the last to occur of (i) September 15, 2026, (ii) the date on which the commitments under the Revolver shall terminate in accordance with the New Credit Agreement (subject to any extensions, as applicable) and (iii) the date on which the commitments under the Term Loan shall terminate in accordance with the New Credit Agreement (subject to any extensions, as applicable). Interest on the Facilities is at a floating rate based on LIBOR, with a LIBOR floor of 0.00%, or the administrative agent’s prime rate, at Archaea Borrower’s election, plus a tiered rate of 1.75% to 3.25% based on the applicable rate and type of loan. The New Credit Agreement is secured by liens on substantially all of the assets of Archaea Borrower and certain of its subsidiaries and a pledge of the equity interests of Archaea Borrower and certain of its subsidiaries. The New Credit Agreement contains customary representations and warranties, affirmative and negative covenants, and events of default typical for a financing of this type, including a consolidated total leverage ratio covenant and a fixed charge coverage ratio, tested quarterly commencing December 31, 2021.
Assai Energy 3.75% and 4.47% Senior Secured Notes
On January 15, 2021, Assai Energy, LLC (“Assai Energy”) 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, and the 3.75% Notes mature on September 30, 2031. On April 5, 2021, Assai Energy 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, and the 4.47% Notes mature on September 30, 2041. As of December 31, 2021, Assai Energy received total proceeds of $133.4 million from the Assai Notes of which approximately $30.0 million was used to complete the acquisition of PEI. The remaining proceeds are expected to be used to fund the continued development of the Assai production facility.
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 Energy. Cash received from the Assai Notes is restricted for use on Assai related costs and cannot be used for general corporate purposes.
Line of Credit
The Company had a revolving line of credit agreement with Comerica Bank (“Comerica”) that provided for maximum borrowings of $8.0 million. The Company had no outstanding balance on the line of credit as of December 31, 2020, and the line of credit was paid off in full and terminated at the closing of the Business Combinations.
ARCHAEA ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Secured Promissory Notes
On July 15 and July 26, 2021, Archaea Holdings LLC entered into several secured promissory notes with certain lenders, including related parties to the Company, in the aggregate principal amount of approximately $30.0 million, including promissory notes totaling approximately $16.5 million bearing interest at 20% per annum, and promissory notes totaling approximately $13.5 million bearing interest at 7.5% per annum. All unpaid principal and unpaid accrued interest of the foregoing promissory notes were due the earlier of (a) the one-year anniversary of the respective issuance date (July 15, 2022 or July 26, 2022), (b) the closing date of the Business Combinations, or (c) the date on which all amounts under promissory notes shall become due and payable in the event of the Company’s default. The promissory notes bearing interest at 20% per annum included a guaranteed minimum interest payment of approximately $1.0 million in aggregate. These promissory notes were repaid in full at the closing of the Business Combinations.
Boyd County Credit Agreement
On November 10, 2020, Archaea Holdings, LLC (“Archaea Holdings”) and Big Run Power Producers, LLC (“BRPP”), both wholly-owned subsidiaries of the Company, entered into certain promissory notes with Comerica pursuant to that certain credit agreement by and between Comerica, as the lender, and Archaea Holdings and BRPP, as the borrowers (the “Boyd County Credit Agreement”). Noble Environmental, Inc. (“Noble”) guaranteed the Boyd County Credit Agreement.
Pursuant to the Boyd County Credit Agreement, Comerica made available to the borrowers a $5.0 million secured specific advance facility loan (the “SAF Loan”) and a $12.0 million secured term loan (the “Comerica Term Loan”). The SAF Loan and the Comerica Term Loan bear interest at LIBOR plus 4.5%. In addition to the Comerica Term Loan and the SAF Loan, Comerica has also made available to the borrowers a corporate credit card program with a credit limit of $3.5 million for use by the borrowers in connection with the operation of the business. As of December 31, 2021 and December 31, 2020, the Company received total proceeds under the SAF Loan and Comerica Term Loan of approximately $17.0 million and approximately $16.3 million, respectively. The Boyd County Credit Agreement, including the SAF Loan and the Comerica Term Loan, was repaid in full at the closing of the Business Combinations.
Noble Environmental, Inc., a related party of Archaea, guaranteed Archaea Holding’s and BRPP's obligations under the Boyd County Credit Agreement (the “Noble Guaranty”). In consideration of Noble furnishing the Noble Guaranty, Noble required that Archaea Holdings and BRPP incur a guaranty fee. The guaranty fee is accrued on the face value of the guaranteed obligation, which shall accrue interest at a 20% interest rate subject to adjustments. The guaranty fee was evidenced by a promissory note dated November 10, 2020 made by Archaea Holding and BRPP payable to Noble Environmental Inc. (the “Noble Note”). The Noble Note aggregate balance of $3.2 million was repaid in full at the closing of the Business Combinations.
Paycheck Protection Program Loan
During 2020, the Company received a $0.2 million loan and GCES received a $0.5 million loan from the Small Business Administration (“SBA”) as provided for under the Paycheck Protection Program (“Program”) established in accordance with the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) signed into law on March 27, 2020. The Company utilized the loan proceeds in accordance with established Program guidelines which would result in forgiveness of the full amount of the loan. The forgiveness of the loan resulted in no interest being charged to the Company.
In March 2021, the Company had received notification from the lending institution that the full amount of the loan had been forgiven, and the proceeds were recorded in other income in the first quarter of 2021. The amount of the proceeds received under this loan at December 31, 2020 was reflected in the accompanying balance sheets as other long-term liability.
In December 2020, GCES had received notification from the lending institution that the full amount of the loan had been forgiven, and the proceeds were recorded in other income in the fourth quarter of 2020.
ARCHAEA ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 12 – Accrued and Other Current Liabilities
Accrued and other current liabilities consist of the following as of December 31, 2021 and 2020:
| | | | | | | | | | | |
(in thousands) | 2021 | | 2020 |
Accrued expenses | $ | 16,638 | | | $ | 5,957 | |
Accrued capital expenditures | 16,609 | | | — | |
Derivative liabilities | 771 | | | — | |
Payroll and related costs | 7,683 | | | — | |
Accrued interest | 738 | | | 590 | |
Contract liabilities | 505 | | | 1,423 | |
Other current liabilities | 3,335 | | | 300 | |
Total | $ | 46,279 | | | $ | 8,270 | |
NOTE 13 – Derivative Instruments
Warrant Liabilities
The Public Warrants, Forward Purchase Warrants, and Private Placement Warrants contain exercise and settlement features that preclude them from being classified within in shareholders’ equity, and therefore are recognized as derivative liabilities. The Company recognizes these warrant instruments as liabilities at fair value with changes in fair value included within other income (loss) in the Company’s consolidated statements of operations. Derivative warrant liabilities are classified as non-current liabilities as their liquidation is not reasonably expected to require the use of current assets or require the creation of current liabilities. As of the Business Combinations, the Company had 12,112,492 total Public Warrants and Forward Purchase Warrants (together the “Redeemable Warrants”) and 6,771,000 Private Placement Warrants outstanding. The Redeemable Warrants had an exercise price of $11.50 per share, subject to adjustments, and expired on September 15, 2026, or earlier upon redemption or liquidation. The Redeemable Warrants became exercisable on October 26, 2021.
The warrants contained a feature that if the last sale price of the Class A Common Stock equals or exceeds $10.00 per share on the last trading day before the notice of redemption is sent to the warrant holders, the Company may redeem the Redeemable Warrants for cash at a price of $0.10 per warrant. During the 30-day redemption period in this instance, warrant holders can elect to exercise their warrants on a cash or cashless basis.
If the last sale price of the Class A Common Stock equals or exceeds $18.00 per share for any 20 trading days within a 30-trading day period ending on the third trading day before the notice of redemption is sent to the warrant holders, the Company may redeem the outstanding Redeemable Warrants for cash at a price of $0.01 per warrant. If the Company calls the Redeemable Warrants for redemption for cash as described above, the Company will have the option to require all holders that wish to exercise warrants to do so on a “cashless basis.” In such event, each holder would pay the exercise price by surrendering Redeemable Warrants for that number of shares of Class A Common Stock equal to the quotient obtained by dividing (x) the product of the number of shares of Class A Common Stock underlying the Warrants, multiplied by the difference between the exercise price of the Warrants and the “fair market value” (as defined in the following sentence) by (y) the fair market value. The “fair market value” of shares of the Company's Class A Common Stock shall mean the volume weighted average price of our shares of Class A Common Stock as reported during the 10 trading days ending on the third trading day prior to the date on which the notice of redemption is sent to the holders of the Warrants; however, in no event will the Redeemable Warrants be exercisable in connection with this redemption feature for more than 0.361 shares of Class A Common Stock per Redeemable Warrant (subject to adjustment).
In November 2021, the $18.00 trigger was met, and the Company issued a redemption notice to the holders of our Redeemable Warrants stating the Company would redeem all of our Redeemable 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 Warrant. The Public Warrants were issued under the Warrant Agreement, dated October 21, 2020, by and
ARCHAEA ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. The Forward Purchase Warrants were issued to Atlas Point Energy Infrastructure Fund, LLC in a private placement simultaneously with the consummation of Business Combinations. During the redemption period, 9,114,403 Public Warrants and all 250,000 Forward Purchase Warrants were exercised for cash at an exercise price of $11.50 per share of Class A Common Stock, generating a total proceeds of $107.7 million to the Company. Additionally, 2,724,515 Public Warrants were exercised on a cashless basis in exchange for an aggregate of 983,520 shares of Class A Common Stock. The remaining 23,574 unexercised and outstanding Public Warrants were redeemed for $0.10 per Public Warrant. At December 8, 2021, all Redeemable Warrants had been exercised or redeemed, and the ticker symbol of Public Warrants traded on the NYSE was removed.
To minimize dilution to its existing stockholders as a result of the warrant exercises, the Company used cash proceeds received from exercises of Redeemable Warrants to repurchase 6,101,449 shares of Class A Common Stock from Aria Renewable Energy Systems LLC at a pre-negotiated price of $17.65 per share.
The Private Placement Warrants remain outstanding as of December 31, 2021, and each is exercisable to purchase one share of Class A Common Stock or, in certain circumstances, one Class A Opco Unit and corresponding share of Class B Common Stock. The Private Placement Warrants expire on September 15, 2026, or earlier upon redemption or liquidation. Private Placement Warrants are nonredeemable so long as they are held by the initial purchasers of the Private Placement Warrants or their permitted transferees. There were no Private Placement Warrants transfers as of December 31, 2021.
Prior to their exercise, the fair value of the Redeemable Warrants was based on observable listed prices on the NYSE for such warrants (a Level 1 measurement). The fair value of the Private Placement Warrants is estimated using the Black-Scholes option pricing model (a Level 3 measurement).
The Company used the following assumptions to estimate the fair value of the Private Placement Warrants:
| | | | | | | | | | | |
| As of September 15, 2021 at Initial Measurement | | December 31, 2021 |
Stock price | $ | 18.05 | | $ | 18.28 |
Exercise price | $ | 11.50 | | $ | 11.50 |
Volatility | 45.8 | % | | 46.0 | % |
Expected term (years) | 5.0 | | 4.7 |
Risk-free interest rate | 0.79 | % | | 1.21 | % |
The change in the fair value of the warrant liabilities is recognized in gain (loss) on derivative contracts in the consolidated statement of operations. The changes in the Redeemable Warrants and Private Placement Warrants liabilities through December 31, 2021 are as follows:
| | | | | | | | |
(in thousands) | |
|
Warrant liabilities as of September 15, 2021 (Closing Date) | | $ | 150,153 | |
Change in fair value | | 3,015 | |
Less fair value of warrants exercised or redeemed | | (85,878) | |
Warrant liabilities as of December 31, 2021 | | $ | 67,290 | |
Natural Gas Swap
In conjunction with the Business Combinations, the Company assumed a natural gas variable to fixed priced swap agreement entered into by Aria. The Company is the fixed price payer under the swap agreement that provides for monthly net settlements thorough the termination date of June 30, 2023. The agreement was intended to manage the risk associated with changing commodity prices. The agreement has a remaining notional of 327,600 MMBtu as of December 31, 2021.
ARCHAEA ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company received cash payments of $0.1 million for the natural gas swap for the period from the Closing Date through December 31, 2021.
Changes in the fair values and realized gains (losses) for the natural gas swap are recognized in gain (loss) on derivative contracts in the consolidated statement of operations. 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 remaining life of the contract (a Level 2 measurement), with an adjustment for each counterparty’s credit rate risk.
Interest Rate Swap
In December 2021, the Company entered into an interest rate swap that locks in payments of a fixed interest rate of 1.094% in exchange for a floating interest rate that resets monthly based on LIBOR. The interest rate swap was not designated as a hedging instrument, and net gains and losses are recognized currently in gain (loss) on derivative contracts. The interest rate swap notional begins at $109.3 million and declines over the term of the swap ending at $94.9 million as of the December 2024 contract termination date.
The following summarizes the balance sheet classification and fair value of the Company’s derivative instruments as of December 31, 2021 and 2020 :
| | | | | | | | | | | |
(in thousands) | 2021 | | 2020 |
Other non-current assets | | | |
Interest rate swap asset | $ | 439 | | | $ | — | |
Total derivative assets | $ | 439 | | | $ | — | |
Accrued and other current liabilities | | | |
Natural gas swap liability | $ | 44 | | | $ | — | |
Interest rate swap liability | 727 | | | — | |
Derivative liabilities | | | |
Natural gas swap liability | 134 | | | — | |
| | | |
Warrant liabilities | 67,290 | | | — | |
Total derivative liabilities | $ | 68,195 | | | $ | — | |
The following table summarizes the income statement effect of gains and losses related to derivative instruments for the years ended December 31, 2021 and 2020:
| | | | | | | | | | | | | | | |
(in thousands) | | | | | 2021 | | 2020 |
| | | | | | | |
Gain (loss) on natural gas swap contract | | | | | $ | (424) | | | $ | — | |
Gain (loss) on warrant liabilities | | | | | (3,015) | | | — | |
Gain (loss) on interest rate swap contract | | | | | (288) | | | — | |
Total | | | | | $ | (3,727) | | | $ | — | |
NOTE 14 – Asset Retirement Obligations
The Company has asset retirement obligations (“ARO”) associated with the future environmental remediation responsibility to restore the land and remove biogas plants and related facilities within one year of the expiration of certain operating lease agreements. The fair value of the ARO is measured using expected cash outflows associated with the ARO, adjusted for inflation and discounted at our credit-adjusted risk-free rate when the liability is initially recorded. Accretion expense is recognized over time as the discounted liability is accreted to its expected settlement value. ARO estimates are derived from historical costs and management’s expectations of future cost elements, and therefore, the Company has designated these liabilities as Level 3 financial liabilities. The significant inputs to this fair value measurement include cost estimates of asset removals, site clean-up, transportation and remediation costs, inflation estimates, and the Company's credit-adjusted risk-free rate.
ARCHAEA ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summarizes changes in the Company’s ARO liabilities for the years ended December 31, 2021 and 2020:
| | | | | | | | | | | |
(in thousands) | 2021 | | 2020 |
Balance at beginning of period | $ | 306 | | | $ | — | |
Liabilities acquired(1) | 3,580 | | | — | |
Liabilities incurred | 706 | | | 306 | |
Accretion expense | 85 | | | — | |
Balance at end of period | $ | 4,677 | | | $ | 306 | |
(1) Liabilities acquired relate to asset retirement obligations assumed in the Aria Merger. See “Note 4 - Business Combinations and Reverse Recapitalization.”
NOTE 15 – Fair Value Measurements
Fair Values - Recurring
The Company’s Public Warrants and Private Placement Warrants were assumed in connection with the Business Combinations and are accounted for as liabilities carried at fair value prior to their exercise. The fair value of the Public Warrants was based on observable listed prices on the NYSE. Therefore, the Company designated the Public Warrant liabilities as Level 1 financial liabilities prior to their exercise. The fair value of the Private Placement Warrants is determined using the Black-Scholes option pricing model with observable and estimated inputs. Therefore, the Company has designated the Private Placement Warrant liabilities as Level 3 financial liabilities for which there is no current market such that the determination of fair value requires significant judgement or estimation. See “Note 13 - Derivatives Instruments” for quantitative inputs and assumptions for fair value measurements of the Private Placement Warrants.
The Company has a natural gas variable to fixed-priced swap agreement that is accounted for as a derivative. Changes in fair value of such agreement are recognized in earnings. The fair value of the Company’s natural gas derivative instruments are measured using an industry-standard pricing model, and the fair value of the natural gas derivative 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, and adjusted for each counterparty's credit rate risk, which are considered as Level 2 measurement.
The Company entered into an interest rate swap in December 2021, that locks in a fixed interest rate of 1.094% in exchange for a floating interest rate that resets monthly based on LIBOR, and net gains and losses are recognized currently in gain (loss) on derivative contracts. The fair value of the Company’s interest rate swap is measured using observable benchmark rates at commonly quoted intervals for the term of interest rate swap contracts, which is considered a Level 2 measurement.
There were no outstanding derivative instruments as of December 31, 2020.
The following table summarizes the outstanding derivative instruments and the fair value hierarchy for the Company’s derivative assets and liabilities that are required to be measured at fair value on a recurring basis:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | Level 1 | | Level 2 | | Level 3 | | Total Fair Value |
December 31, 2021 | | | | | | | | |
Assets | | | | | | | | |
| Interest rate swap | | $ | — | | | $ | 439 | | | $ | — | | | $ | 439 | |
Liabilities | | | | | | | | |
| Private Placement Warrant liabilities | | $ | — | | | $ | — | | | $ | 67,290 | | | $ | 67,290 | |
| Natural gas swap | | — | | | 178 | | | — | | | 178 | |
| Interest rate swap | | — | | | 727 | | | — | | | 727 | |
ARCHAEA ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financial Instruments Fair Value
As of December 31, 2021 and 2020, the fair value of other financial instruments including cash and cash equivalents, prepaid expenses, accounts payable, and accrued and deferred expenses approximate the carrying values because of the short-term maturity of those items. See “Note 11 - Debt” for the fair value of the Company's debt.
Fair Values - Nonrecurring
The Company applies the provisions of the fair value measurement standard on a nonrecurring basis to non-financial assets and liabilities, including goodwill, assets acquired and liabilities assumed in business combinations, below-market contracts, and asset retirement obligations. These assets and liabilities are not measured at fair value on a recurring basis but are subject to fair value adjustments when facts and circumstances arise that indicate a need for remeasurement.
The fair value measurements of goodwill, assets acquired and liabilities assumed, including below-market contracts assumed, in the business combinations are measured on a nonrecurring basis on the acquisition date based on inputs that are not observable in the market, and therefore, represent Level 3 inputs and measurements. See “Note 9 - Goodwill and Intangible Assets” and “Note 4 - Business Combinations and Reverse Recapitalization”.
The fair value of the asset retirement obligations is measured using expected cash outflows associated with the ARO, adjusted for inflation and discounted at our credit-adjusted risk-free rate when the liability is initially recorded. ARO estimates are derived from historical costs and management’s expectations of future cost elements, and therefore, represent Level 3 measurements. See “Note 14 - Asset Retirement Obligations.”
There were no transfers between fair value hierarchy levels for the years ended December 31, 2021 and 2020.
NOTE 16 – Redeemable Noncontrolling Interest and Stockholders’ Equity
Redeemable Noncontrolling Interest
The redeemable noncontrolling interest relates to Class A Opco Units, including units issued in connection with the Business Combinations and units owned by the Sponsor, Atlas or Company directors. As of December 31, 2021, the Company directly owned approximately 54.5% of the interest in Opco and the redeemable noncontrolling interest was 45.5%. Holders of Class A Opco Units other than Archaea own an equal number of shares of Class B Common Stock and 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. Due to the cash redemption provisions of the redemption right, the Company has accounted for the redeemable noncontrolling interest as temporary equity.
Stockholders' Equity
Preferred Stock
The Company is authorized to issue 10.0 million shares of preferred stock with a par value of $0.0001 per share. As of December 31, 2021 and 2020, no shares of preferred stock were issued or outstanding.
Class A Common Stock and Class B Common Stock
The Company is authorized to issue 900.0 million shares of Class A Common Stock with a par value of $0.0001 per share. The Company is authorized to issue 190.0 million shares of Class B Common Stock with a par value of $0.0001 per share. Class B Common Stock represents a non-economic interest in the Company.
ARCHAEA ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of Class A Common Stock and Class B Common Stock activity for the year ended December 31, 2021:
| | | | | | | | | | | |
(in shares) | Class A Common Stock | | Class B Common Stock |
Outstanding at beginning of period | — | | | — | |
Reverse recapitalization and PIPE Financing | 52,847,195 | | | 5,931,350 | |
Issued to Legacy Archaea Holders | — | | | 23,000,000 | |
Issued in Aria Merger | — | | | 33,350,385 | |
Issued for warrant exercises | 10,347,923 | | | — | |
Exchange of Class B Common Stock for Class A Common Stock | 7,943,621 | | | (7,943,621) | |
Retirement of Class A Common Stock repurchased | (6,101,449) | | | — | |
Issued for vested RSUs | 84,910 | | | — | |
Outstanding at end of period | 65,122,200 | | | 54,338,114 | |
Voting Rights
Holders of the Class A Common Stock and holders of the Class B Common Stock will vote together as a single class on all matters submitted to a vote of the stockholders, except as required by law. Each share of common stock will have one vote on all such matters.
Nonredeemable Noncontrolling Interest
Noncontrolling interest included the portion of equity ownership in GCES that was not attributable to the unitholders of Opco. The remaining interest in GCES was acquired by Opco in December 2021.
NOTE 17 – Share-Based Compensation
In connection with Business Combinations, the Company adopted the 2021 Omnibus Incentive Plan (the “Plan”). The Company may grant restricted stock, RSUs, incentive and non-qualified stock options, stock appreciation rights, performance awards, stock awards and other stock-based awards to officers, directors, employees and consultants under the terms of the Plan. There are 11.3 million shares authorized under the plan as of December 31, 2021, and approximately 10.4 million shares remain available for future issuance as of December 31, 2021. The expense is measured at the grant-date fair value of the award and recognized as compensation expense on a straight-line basis over the service period, which is the vesting period. The Company has elected to account for forfeitures of awards granted under the Plan as they occur in determining compensation expense.
Restricted Stock
On December 29, 2021, the Company granted a total of 991,020 RSUs to certain employees, officers, and non-employee directors. One RSU award was fully vested on the grant date, the RSUs issued to the non-employee directors vested in full on January 1, 2022, and the remaining RSUs issued vest over periods ranging from 6 months to 3 years from the Business Combinations Closing Date. RSUs will be subject to forfeiture restrictions and cannot be sold, transferred, or disposed of during the restriction period.
For the year ended December 31, 2021 and 2020, the Company recognized $2.7 million and zero of share-based compensation expense respectively related to RSUs. At December 31, 2021, there was $14.4 million of unrecognized compensation expense related to unvested RSUs, which is expected to be recognized over a weighted average period of approximately 1.5 years.
ARCHAEA ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The table below summarizes RSUs activity for the year ended December 31, 2021:
| | | | | | | | | | | |
| Restricted Stock Units | | Weighted- Average Grant Date Fair Value (per share) |
Outstanding at December 31, 2020 | — | | $ | — |
Granted | 991,020 | | | $ | 17.23 |
Vested (1) | (140,000) | | | $ | 17.23 |
Forfeited | — | | | $ | — |
Outstanding at December 31, 2021 | 851,020 | | $ | 17.23 |
____________________________
(1) Vested RSUs include 55,090 units that were not converted into Class A Common Stock due to net share settlements to cover employee withholding taxes.
Series A Incentive Plan
Legacy Archaea adopted a Series A Incentive Plan in 2018 to provide economic incentives to select employees and other service providers in order to align their interests with equity holders of Legacy Archaea. The Series A unit awards were determined to be equity classified. These Series A unit awards were granted by, and for equity interest in, Archaea Energy LLC. As of December 31, 2020, there were 4,000 vested and 4,500 unvested Series A unit awards. Under the original terms of the awards, all unvested Series A units outstanding were vested upon Closing of Business Combinations.
Series A Incentive Plan activities related to unvested units during the year ended December 31, 2021 were as follows:
| | | | | | | | | | | |
| Series A Incentive Units | | Weighted- Average Grant Date Fair Value (per share) |
Outstanding at December 31, 2020 | 4,500 | | | $ | — | |
Granted | 1,500 | | | $ | 1,565.90 | |
Forfeited | (250) | | | $ | — | |
Vested | (5,750) | | | $ | 408.52 | |
Outstanding at December 31, 2021 | — | | | $ | — | |
For the years ended December 31, 2021 and 2020, Legacy Archaea recognized compensation expense of $2.3 million and zero, respectively, related to Series A units awards. As a result of the Business Combinations, the Series A Incentive Plan is no longer applicable to the Company.
NOTE 18 – Employee Benefit Plans
401(k) Plans
The Company maintains two separate qualified tax deferred 401(k) plans that cover all employees who meet the one of 401(k) plan’s eligibility requirements. The Company matches up to 100% of each participant’s contribution up to a maximum of 5% of the participant’s eligible compensation.
ARCHAEA ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Postretirement Obligations
Effective with the Business Combinations, the Company sponsors an unfunded defined benefit health care plan that provides postretirement medical benefits to certain legacy Aria full-time employees who meet minimum age and service requirements.
The following table sets forth changes in the plan’s benefit obligations:
| | | | | | | | | | | |
(in thousands) | 2021 | | 2020 |
Benefit obligation at beginning of year | $ | — | | | $ | — | |
Addition due to Business Combinations | 3,567 | | | — | |
Service cost | 11 | | | — | |
Interest cost | 27 | | | — | |
Net actuarial (gain) loss | (917) | | | — | |
Net benefits paid | (71) | | | — | |
Benefit obligation at end of year | $ | 2,617 | | $ | — | |
Amounts recognized in the consolidated balance sheets as of December 31, 2021 and 2020, consist of:
| | | | | | | | | | | |
(in thousands) | 2021 | | 2020 |
Accrued benefit liability | $ | 2,617 | | | $ | — | |
Net periodic benefit cost recognized in the consolidated statements of comprehensive loss was as follows:
| | | | | | | | | | | | | | | |
(in thousands) | | | | | 2021 | | 2020 |
Service cost | | | | | $ | 11 | | $ | — |
Interest cost | | | | | 27 | | | — | |
Net actuarial (gain) loss | | | | | (917) | | | — | |
Net periodic benefit cost | | | | | $ | (879) | | $ | — |
The discount rate assumption for the net periodic benefit cost for 2021 was 2.62% and the discount rate assumption for the benefit obligation as of December 31, 2021 was 2.56%.
Estimated future benefit payments for the next 10 years are as follows for the years ended December 31:
| | | | | | | | |
(in thousands) | |
|
2022 | | $ | 206 | |
2023 | | 162 |
2024 | | 150 |
2025 | | 142 |
2026 | | 147 |
2027 to 2031 | | 745 |
NOTE 19 – Risk and Uncertainties
The Company maintains at a financial institution cash and cash equivalents that may periodically exceed federally insured limits. It is the opinion of management that the solvency of the financial institution is not of particular concern currently. As such, management believes the Company is not exposed to any significant credit risk related to cash and cash equivalents.
ARCHAEA ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 20 – Provision for Income Tax
The components of income tax expense for the years ended December 31, 2021 and 2020 consisted of the following:
| | | | | | | | | | | | | | | |
(in thousands) | | | | | 2021 | | 2020 |
Current | | | | | | | |
Federal | | | | | $ | — | | | $ | — | |
State | | | | | — | | | — | |
Deferred | | | | | | | |
Federal | | | | | — | | | — | |
State | | | | | — | | | — | |
Income tax expense | | | | | $ | — | | | $ | — | |
The Company recognized federal and state income tax expense of $0 million and $0 million during the years ended December 31, 2021 and 2020, respectively. The Company did not record a tax provision for the year ended December 31, 2020 primarily due to Archaea Energy LLC's status as a pass-through entity for U.S. federal income tax purposes.
A reconciliation of income tax expense from operations to the federal statutory rate for the years ended December 31, 2021 and 2020 is as follows:
| | | | | | | | | | | | | | | |
(in thousands) | | | | | 2021 | | 2020 |
Income (loss) before income taxes (all domestic) | | | | | $ | (30,921) | | | $ | (2,236) | |
U.S. federal statutory tax rate | | | | | 21 | % | | 21 | % |
Income taxes computed at federal statutory rate | | | | | $ | (6,493) | | | $ | (470) | |
State and local taxes | | | | | (183) | | | 4 | |
Income taxes computed at the federal statutory rate on net income (loss) from pass-through entities not attributable to Class A Common Stock | | | | | 4,657 | | | 648 | |
Change in valuation allowance | | | | | 1,832 | | | (80) | |
PPP loan forgiveness - nontaxable | | | | | — | | | (102) | |
Other | | | | | 187 | | | — | |
Income tax expense | | | | | $ | — | | | $ | — | |
The effective tax rates were 0% for the year ended December 31, 2021, and 0% for the year ended December 31, 2020. The difference between the Company’s effective tax rate for the year ended December 31, 2021, and the U.S. statutory tax rate of 21% was primarily due to a full valuation allowance recorded on the Company’s net U.S. and State deferred tax assets, income (loss) from pass-through entities not attributable to Class A Common Stock, and state and local taxes.
ARCHAEA ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes and operating loss and tax credit carryforwards. Significant items comprising the net deferred tax assets at December 31, 2021 and 2020 were:
| | | | | | | | | | | | | | | |
(in thousands) | | | | | 2021 | | 2020 |
Deferred tax assets | | | | | | | |
Net operating loss carryforwards | | | | | $ | 3,430 | | | $ | 194 | |
Investment in partnership ("Outside Basis Deferred Tax Asset") (1) | | | | | 51,799 | | | — |
Other | | | | | 110 | | | 46 |
| | | | | 55,339 | | | 240 | |
Valuation allowance | | | | | (55,224) | | | (109) | |
Deferred tax assets, net of valuation allowance | | | | | 115 | | | 131 | |
Deferred tax liabilities | | | | | | | |
Depreciation | | | | | — | | | 47 |
Intangible assets | | | | | 115 | | 84 |
| | | | | 115 | | 131 |
Net deferred tax asset | | | | | $ | — | | $ | — |
_______________________
(1) This amount is the deferred tax asset the Company recognizes for its book to tax basis difference in its investment in Opco.
At December 31, 2021, Archaea Energy Inc. and certain subsidiaries had federal and state net operating loss carryforwards of approximately $15.1 million and $7.2 million, respectively, which will be able to offset future taxable income. The U.S. federal losses will be carried forward indefinitely. State net operating losses have carryover periods ranging from 10 years to unlimited periods.
As of December 31, 2021, the Company determined it is not more likely than not the Company’s net deferred tax assets will be realized due to significant negative evidence such as cumulative losses and continues to maintain a full valuation allowance. The valuation allowance for the Company increased by $55.1 million in the year ended December 31, 2021, compared to a decrease of $0.1 million in the year ended December 31, 2020. The increase is related to the valuation allowance applied to deferred tax assets resulting from the Business Combinations, deferred tax assets relating to the acquisition of additional interests in Opco during the fourth quarter, and additional operating losses incurred during 2021. The Company and its subsidiaries file U.S. federal income tax returns and tax returns in various states. The Company is not under any material audits in any jurisdiction.
There are no uncertain tax benefits recorded as of December 31, 2021 and 2020.
On March 27, 2020, the CARES Act was signed into law. The CARES Act includes provisions relating to refundable payroll tax credits, deferment of the employer portion of certain payroll taxes, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property. The Company analyzed the provisions of the CARES Act and determined there was no significant impact to its income tax for the year ended December 31, 2021. Future regulatory guidance under the CARES Act or additional legislation enacted by Congress could impact our tax provision in future periods.
Additionally, the CARES Act is an economic emergency aid package to help mitigate the impact of the COVID-19 pandemic. The Company implemented certain provisions of the CARES Act, specifically securing loans under the Paycheck Protection Program. All amounts outstanding under such loans have been forgiven as of December 31, 2021.
ARCHAEA ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 21 – Net Earnings (Loss) Per Share
The Archaea Merger was accounted for as a reverse recapitalization and is treated as the equivalent of Legacy Archaea receiving proceeds for the issuance of the outstanding Class A and Class B shares, as well as the warrants, of Rice Acquisition Corp. accompanied by a recapitalization. Therefore, Class A Common Stock is deemed to be outstanding beginning at the Closing due to the reverse recapitalization.
The Company’s basic earnings per share (“EPS”) of Class A Common Stock is computed based on the average number of shares of Class A Common Stock outstanding for the period. Diluted EPS includes the effects of the Company’s outstanding RSUs and Public Warrants, Forward Purchase Warrants, and Private Placement Warrants, as appropriate prior to their exercise if applicable, unless the effects are anti-dilutive to EPS.
The following provides a reconciliation between basic and diluted EPS attributable to Class A Common Stock for the years ended December 31, 2021 and 2020.
| | | | | | | | | | | | | | | |
(in thousands, except per share amounts) | | | | | 2021 | | 2020 |
Net income (loss) attributable to Class A Common Stock | | | | | $ | (5,153) | | | $ | — | |
Class A Common Stock | | | | | | | |
Average number of shares outstanding - basic | | | | | 56,466 | | | — | |
Average number of shares outstanding - diluted | | | | | 56,466 | | | — | |
Net income (loss) per share of Class A Common Stock | | | | | | | |
Basic and diluted | | | | | $ | (0.09) | | $ | — |
The following potential common shares were excluded from diluted EPS in 2021 as the Company had a net loss for the year: 15,303,946 weighted-average warrants and 159,751 weighted-average RSUs.
NOTE 22 - Contingencies
Management has regular litigation reviews, including updates from corporate and outside counsel, to assess the need for accounting recognition or disclosure of contingencies. The Company accrues an undiscounted liability for contingencies where a loss is probable and the amount can be reasonably estimated. If a range of amounts can be reasonably estimated and no amount within the range is a better estimate than any other amount, then the minimum of the range is accrued. The Company does not record liabilities when the likelihood that the liability has been incurred is probable, but the amount cannot be reasonably estimated or when the liability is believed to be only reasonably possible or remote. The Company does not believe the ultimate outcome of any currently pending lawsuit will have a material adverse effect upon the Company’s financial statements, and the liability is believed to be only reasonably possible or remote. In July 2021, Legacy Archaea settled certain lawsuits on confidential terms with the lawsuits being dismissed with prejudice.
NOTE 23 – Segment Information
The Company’s two reporting segments for the years ended December 31, 2021 and 2020 are RNG and Power. The Company’s chief operating decision maker evaluates the performance of its segments based on operational measures including revenues, net income and EBITDA.
ARCHAEA ENERGY INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summarizes selected financial information for the Company’s reporting segments:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
(in thousands) | | RNG | | Power | | Corporate and Other | | Total |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Year ended December 31, 2021 | | | | | | | | |
Revenue | | $ | 51,024 | | $ | 20,285 | | $ | 5,817 | | $ | 77,126 |
Intersegment revenue | | — | | | 872 | | | (872) | | | — | |
Total revenue and other income | | 51,024 | | 21,157 | | 4,945 | | 77,126 |
Equity investment income, net | | 5,042 | | | 641 | | | (30) | | | 5,653 | |
Net income (loss) | | 17,362 | | (1,492) | | (46,791) | | (30,921) |
Interest expense | | 490 | | — | | 4,307 | | 4,797 |
Depreciation, amortization and accretion | | 10,029 | | 5,718 | | 278 | | 16,025 |
EBITDA | | $ | 27,881 | | $ | 4,226 | | $ | (42,206) | | $ | (10,099) |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
December 31, 2021 | | | | | | | | |
Goodwill | | $ | 29,211 | | | $ | — | | $ | — | | $ | 29,211 |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Year ended December 31, 2020 | | | | | | | | |
Revenue | | $ | 34 | | $ | — | | $ | 6,489 | | 6,523 |
Intersegment revenue | | — | | | — | | | — | | | — | |
Total revenue and other income | | 34 | | — | | 6,489 | | 6,523 |
Equity investment income, net | | — | | | — | | | — | | | — | |
Net income (loss) | | (1,125) | | (11) | | (1,100) | | (2,236) |
Interest expense | | — | | | — | | | 20 | | | 20 | |
Depreciation, amortization and accretion | | 3 | | | — | | | 134 | | | 137 | |
EBITDA | | $ | (1,122) | | $ | (11) | | $ | (946) | | $ | (2,079) |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
December 31, 2020 | | | | | | | | |
Goodwill | | $ | 2,754 | | $ | — | | $ | — | | $ | 2,754 |
Major Customers
No single customer accounted for more than 10% of the Company's revenues and other income in 2021 and 2020.
NOTE 24 – Related Party Transactions
Engineering, Procurement and Construction Contract
Assai Energy, LLC (a wholly owned subsidiary of the Company) entered into a construction service and project guarantee agreement with Noble Environmental Specialty Services, LLC (“NESS”) (a wholly owned subsidiary of Noble). NESS is responsible for constructing an RNG plant located at the Keystone Landfill, near Scranton, PA. The total contract price for the engineering, procurement and construction (“EPC”) contract is $19.9 million. As of December 31, 2021, the Company has paid a total of $17.9 million to NESS under the EPC contract. The Company also reimbursed NESS $5.8 million for costs outside the EPC related to the Assai project. This agreement is considered to be a related party transaction due to the owners of NESS also being certain employees of the Company. As of December 31, 2021, the Company had a related party balances with NESS including a payable of $1.5 million and a receivable of $0.2 million.
O&M Contracts with Mavrix JV
The Company provides O&M services to the Mavrix JV and recognized revenues of $0.4 million for the period from the Business Combinations thorough December 31, 2021. As of December 31, 2021, the Company had a related party balances with Mavrix including a payable of zero and a receivable of $0.4 million.
Predecessor - Aria Energy LLC Financial Statements
Archaea determined that Aria is the predecessor to the Company due to the relative fair values of the Company and legacy operations Aria had compared to Archaea. As such, we have included Aria's consolidated statements of operations for the periods January 1 to September 14, 2021, and the year ended December 31, 2020, and the consolidated balance sheets as of September 14, 2021 and December 31, 2020. See Archaea Energy Inc.’s “Note 4 - Business Combinations and Reverse Recapitalization” for additional information. Report of Independent Registered Public Accounting Firm
To the Board of Directors
Aria Energy LLC:
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Aria Energy LLC and subsidiaries (the Company) as of September 14, 2021 and December 31, 2020, the related consolidated statements of operations, comprehensive income, equity, and cash flows for the period from January 1, 2021 through September 14, 2021 and the year ended December 31, 2020, and the related notes (collectively, the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of September 14, 2021 and December 31, 2020, and the results of its operations and its cash flows for the period from January 1, 2021 through September 14, 2021 and the year ended December 31, 2020, in conformity with U.S. generally accepted accounting principles.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ KPMG LLP
We have served as the Company’s auditor since 2014.
Detroit, Michigan
March 18, 2022
ARIA ENERGY LLC AND SUBSIDIARIES (Predecessor)
Consolidated Balance Sheets
| | | | | | | | | | | |
(in thousands) | September 14, 2021 | | December 31, 2020 |
ASSETS | | |
|
Current Assets | | | |
Cash and cash equivalents | $ | 4,903 | | | $ | 14,257 | |
Accounts receivable | 27,338 | | | 20,727 | |
Inventory | 9,015 | | | 7,770 | |
Prepaid expenses and other current assets | 3,834 | | | 3,768 | |
Assets held for sale | — | | | 70,034 | |
Total Current Assets | 45,090 | | | 116,556 | |
Property and equipment, net | 63,829 | | | 70,759 | |
Intangible assets, net | 117,737 | | | 126,922 | |
Equity method investments | 86,200 | | | 77,993 | |
Other noncurrent assets | 882 | | | 689 | |
Total Assets | $ | 313,738 | | | $ | 392,919 | |
| | | |
LIABILITIES AND EQUITY | | | |
Current Liabilities | | | |
Accounts payable - trade | $ | 2,439 | | | $ | 1,570 | |
Current portion of long-term debt, net | 90,430 | | | 102,831 | |
Accrued and other current liabilities | 25,210 | | | 25,736 | |
Liabilities held for sale | — | | | 12,534 | |
Total Current Liabilities | 118,079 | | | 142,671 | |
Long-term debt, net | — | | | 136,593 | |
Derivative liabilities | — | | | 1,268 | |
Below-market contracts | 3,935 | | | 5,769 | |
Asset retirement obligations | 3,580 | | | 3,408 | |
Other long-term liabilities | 5,351 | | | 5,150 | |
Total Liabilities | 130,945 | | | 294,859 | |
Commitments and contingencies | | | |
Equity | | | |
Controlling interest | | | |
Class A units | 299,327 | | | 299,327 | |
Class B units | 19,327 | | | 19,327 | |
Class C units | 1 | | | 1 | |
Retained loss | (134,726) | | | (218,957) | |
Accumulated other comprehensive loss | (1,136) | | | (1,349) | |
Total Controlling Interest | 182,793 | | | 98,349 | |
Noncontrolling interest | — | | | (289) | |
Total Equity | 182,793 | | | 98,060 | |
Total Liabilities and Equity | $ | 313,738 | | | $ | 392,919 | |
| | | |
The accompanying notes are an integral part of these consolidated financial statements (Predecessor)
94
ARIA ENERGY LLC AND SUBSIDIARIES (Predecessor)
Consolidated Statements of Operations
| | | | | | | | | | | | | | | |
(in thousands) | | | | | January 1 to September 14, 2021 | | Year Ended December 31, 2020 |
Revenues and Other Income | | | | | | | |
Energy revenue | | | | | $ | 120,250 | | | $ | 132,580 | |
Construction revenue | | | | | 32 | | | 9,983 | |
Amortization of intangibles and below-market contracts | | | | | (2,693) | | | (3,682) | |
Total Revenues and Other Income | | | | | 117,589 | | | 138,881 | |
Equity Investment Income, net | | | | | 19,777 | | | 9,298 | |
Cost of Sales | | | | | | | |
Cost of energy | | | | | 56,291 | | | 72,519 | |
Cost of other revenues | | | | | 30 | | | 9,507 | |
Depreciation, amortization and accretion | | | | | 15,948 | | | 30,564 | |
Total Cost of Sales | | | | | 72,269 | | | 112,590 | |
Gain on disposal of assets | | | | | (1,347) | | | — | |
Impairment of assets | | | | | — | | | 25,293 | |
General and administrative expenses | | | | | 33,737 | | | 20,782 | |
Operating Income (Loss) | | | | | 32,707 | | | (10,486) | |
Other Income (Expense) | | | | | | | |
Interest expense, net | | | | | (10,729) | | | (19,305) | |
Gain (loss) on derivative contracts | | | | | 1,129 | | | (135) | |
Gain on extinguishment of debt | | | | | 61,411 | | | — | |
Other income | | | | | 2 | | | 3 | |
Total Other Income (Expense) | | | | | 51,813 | | | (19,437) | |
Net Income (Loss) | | | | | 84,520 | | | (29,923) | |
Net income attributable to noncontrolling interest | | | | | 289 | | | 78 | |
Net Income (Loss) Attributable to Controlling Interest | | | | | $ | 84,231 | | | $ | (30,001) | |
The accompanying notes are an integral part of these consolidated financial statements (Predecessor)
95
ARIA ENERGY LLC AND SUBSIDIARIES (Predecessor)
Consolidated Statements of Comprehensive Income
| | | | | | | | | | | | | | | |
(in thousands) | | | | | January 1 to September 14, 2021 | | Year Ended December 31, 2020 |
Net Income (Loss) | | | | | $ | 84,520 | | | $ | (29,923) | |
Other Comprehensive Income (Loss) | | | | | | | |
Net actuarial income | | | | | 213 | | | (45) | |
Other Comprehensive Income (Loss) | | | | | 84,733 | | | (29,968) | |
Comprehensive income attributable to noncontrolling interest | | | | | 289 | | | 78 | |
Comprehensive Income (Loss) Attributable to Controlling Interest | | | | | $ | 84,444 | | | $ | (30,046) | |
The accompanying notes are an integral part of these consolidated financial statements (Predecessor)
96
ARIA ENERGY LLC AND SUBSIDIARIES (Predecessor)
Consolidated Statements of Equity
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 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 – December 31, 2019 | $ | 299,327 | | | $ | 19,327 | | | $ | 1 | | | $ | (188,956) | | | $ | (1,304) | | | $ | 128,395 | | | $ | (266) | | | $ | 128,129 | |
Net income (loss) | — | | | — | | | — | | | (30,001) | | | — | | | (30,001) | | | 78 | | | (29,923) | |
Adjustments for postretirement plan | — | | | — | | | — | | | — | | | (45) | | | (45) | | | — | | | (45) | |
Distributions to noncontrolling interest | — | | | — | | | — | | | — | | | — | | | — | | | (101) | | | (101) | |
Balance – December 31, 2020 | 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 | |
The accompanying notes are an integral part of these consolidated financial statements (Predecessor)
97
ARIA ENERGY LLC AND SUBSIDIARIES (Predecessor)
Consolidated Statements of Cash Flows
| | | | | | | | | | | | | | |
(in thousands) | | January 1 to September 14, 2021 | | Year Ended December 31, 2020 |
Cash flows from operating activities | | | | |
Net income (loss) | | $ | 84,520 | | | $ | (29,923) | |
Adjustments to reconcile consolidated net income (loss) to net cash provided by operating activities: | | | | |
Depreciation, amortization and accretion | | 15,948 | | | 30,564 | |
Impairment of assets | | — | | | 25,293 | |
Gain on disposal of assets | | (1,573) | | | — | |
Amortization of debt origination costs | | 699 | | | 1,382 | |
Amortization of intangibles and below-market contracts | | 859 | | | 1,238 | |
Return on investment in equity method investments | | 19,518 | | | 13,016 | |
Equity in earnings of equity method investments | | (19,777) | | | (8,823) | |
Change in fair value of derivatives | | (1,268) | | | (1,246) | |
Gain on extinguishment of debt | | (61,411) | | | — | |
Net periodic postretirement benefit cost | | 106 | | | 106 | |
Changes in operating assets and liabilities: | | | | |
Accounts receivable | | (4,728) | | | (5,835) | |
Inventory | | (1,318) | | | (140) | |
Prepaid expenses and other assets | | (143) | | | (966) | |
Other non-current assets | | (196) | | | 368 | |
Trade accounts payable | | 478 | | | (131) | |
Accrued and other current liabilities | | 19,231 | | | 6,126 | |
Net cash provided by operating activities | | 50,945 | | | 31,029 | |
Cash flows from investing activities | | | | |
Purchase of property and equipment | | (2,318) | | | (2,324) | |
Contributions to equity method investments | | (8,430) | | | (13,020) | |
Net cash used in investing activities | | (10,748) | | | (15,344) | |
Cash flows from financing activities | | | | |
Payments on note payable and revolving credit agreement | | — | | | (16,408) | |
Proceeds from revolving credit agreement | | — | | | 8,000 | |
Payments on long-term debt | | (49,551) | | | |
Distributions to noncontrolling interest | | — | | | (101) | |
Net cash used in financing activities | | (49,551) | | | (8,509) | |
Net increase (decrease) in cash and cash equivalents | | (9,354) | | | 7,176 | |
Cash and cash equivalents – beginning of period | | 14,257 | | | 7,081 | |
Cash and cash equivalents – end of period | | $ | 4,903 | | | $ | 14,257 | |
Supplemental cash flow information | | | | |
Cash paid for interest | | $ | 5,940 | | | $ | 11,617 | |
Noncash investing activities | | | | |
Accruals of property and equipment incurred but not yet paid | | $ | 25 | | | $ | 151 | |
The accompanying notes are an integral part of these consolidated financial statements (Predecessor)
98
ARIA ENERGY LLC AND SUBSIDIARIES (Predecessor)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - Description of Business - Predecessor
Aria Energy LLC and its subsidiaries (“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 LFG fuel engines and related Environmental Attributes, production and sale of RNG and related Environmental Attributes, operating and maintaining LFG projects owned by third parties, and constructing energy projects. Environmental Attributes include RECs in the power market and RINs and LCFS credits in the RNG market. Aria benefits from federal and state renewable fuel standards and federal 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.
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 (“GAAP”). Certain amounts for prior years have been reclassified to conform to the current presentation
Segment Reporting
Aria reports segment information in two segments: RNG and Power. LFG fuel source is a common element, though Aria had a new RNG plant that was under construction as of the Closing 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.
•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”). These plants are operationally 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.
ARIA ENERGY LLC AND SUBSIDIARIES (Predecessor)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Use of Estimates
The preparation of the consolidated financial statements in conformity with 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 GAAP, a portion of revenue is accounted for under 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 PPAs, the amounts recorded under ASC 840 are generally consistent with revenue recognized under ASC 606. For the year-to-date period ended September 14, 2021, approximately 36% of revenue was accounted for under ASC 606 and 64% under ASC 840. For the year ended December 31, 2020, approximately 41% of revenue was accounted for under ASC 606 and 59% under ASC 840.
The following tables display Aria’s revenue by major source and by operating segment for the periods January 1 to September 14, 2021 and the year ended December 31, 2020:
| | | | | | | | | | | | | | |
(in thousands) | | January 1 to September 14, 2021 | | Year Ended December 31, 2020 |
RNG, including RINs and LCFSs | | $ | 83,848 | | | $ | 75,143 | |
Gas O&M service | | 974 | | | — | |
Power, including RECs | | 31,217 | | | 46,434 | |
Electric O&M service | | 4,211 | | | 11,003 | |
| | | | |
Other | | 32 | | | 9,983 | |
Total | | $ | 120,282 | | | $ | 142,563 | |
| | | | |
Operating segments | | | | |
RNG | | $ | 84,853 | | | $ | 85,126 | |
Power | | 35,429 | | | 57,437 | |
Total | | $ | 120,282 | | | $ | 142,563 | |
ARIA ENERGY LLC AND SUBSIDIARIES (Predecessor)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 PPAs 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 off-taker. 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 off-taker. 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.
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 RNG processed from LFG 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.
ARIA ENERGY LLC AND SUBSIDIARIES (Predecessor)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 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.
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 period ended September 14, 2021 and the year ended December 31, 2020.
ARIA ENERGY LLC AND SUBSIDIARIES (Predecessor)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Depreciation is computed using the straight-line method over the estimated useful lives of the assets.
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. 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, which 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 in the period ended September 14, 2021.
The assets and liabilities included in the consolidated balance sheet that are held for sale as of December 31, 2020 are as follows:
| | | | | |
(in thousands) | |
Current assets | |
Accounts receivable | $ | 2,092 | |
Inventory | 3,034 | |
Related party accounts receivable and advances | 88 | |
Prepaid expenses and other current assets | 686 | |
Total current assets | 5,900 | |
Property and equipment – net | 4,906 | |
Intangible assets – net | 82,179 | |
Held for sale valuation allowance | (25,293) | |
Investment in joint ventures | 2,342 | |
Total assets held for sale | $ | 70,034 | |
| |
Current liabilities | |
Accounts payable - trade | $ | 824 | |
Accrued and other current liabilities | 2,066 | |
Total current liabilities | 2,890 | |
Below-market contracts | 6,060 | |
Asset retirement obligations | 3,584 | |
Total liabilities | $ | 12,534 | |
Aria recorded a valuation allowance in relation to its sale of LESPH’s assets and liabilities. Given the characteristics of the cooperative sale process, this was treated as a separate transaction from the settlement of the debt (through the execution of the Mutual Release Agreement). Since the former will result in a loss, it is recognized as an impairment charge of $25.3 million in 2020.
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 statement of operations were $67.6 million and $38.4 million for the year-to-date period ended September 14, 2021 and the year ended December 31, 2020, respectively.
ARIA ENERGY LLC AND SUBSIDIARIES (Predecessor)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, 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 PPA also specific to the project site), and liabilities associated with out of market contracts (out of market PPAs, if applicable).
There were no triggering events related to Aria’s projects in the period ended September 14, 2021.
Other Noncurrent Assets
The other noncurrent assets 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.
ARIA ENERGY LLC AND SUBSIDIARIES (Predecessor)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 treated as a pass-through entity for U.S. federal income tax purposes and is generally not subject to U.S. federal income tax at an entity level. 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 U.S. federal and applicable state income 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 the year ended December 31, 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.
ARIA ENERGY LLC AND SUBSIDIARIES (Predecessor)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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:
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) | September 14, 2021 | | December 31, 2020 |
Buildings | $ | 25,391 | | | $ | 25,186 | |
Machinery and equipment | 167,935 | | 166,191 |
Furniture and fixtures | 1,154 | | 1,154 |
Construction in progress | 1,799 | | 1,366 |
Total cost | 196,279 | | | 193,897 | |
Accumulated depreciation | (132,450) | | | (123,138) | |
Net property, plant and equipment | $ | 63,829 | | | $ | 70,759 | |
ARIA ENERGY LLC AND SUBSIDIARIES (Predecessor)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - Intangible Assets - Predecessor
Intangible assets consist of gas rights agreements, O&M 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
| | | | | | | | | | | | | | | | | |
| September 14, 2021 |
(in thousands) | Gross Carrying Amount | | Accumulated Amortization | | Net |
Gas rights agreements | $ | 217,285 | | | $ | 109,436 | | | $ | 107,849 | |
O&M contracts | 3,500 | | | 2,652 | | | 848 | |
Gas sales agreements | 32,059 | | | 23,019 | | | 9,040 | |
Total | $ | 252,844 | | | $ | 135,107 | | | $ | 117,737 | |
| | | | | | | | | | | | | | | | | |
| December 31, 2020 |
(in thousands) | Gross Carrying Amount | | Accumulated Amortization | | Net |
Gas rights agreements | $ | 217,285 | | | $ | 102,944 | | | $ | 114,341 | |
O&M 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 CONSOLIDATED FINANCIAL STATEMENTS
Details of the intangible assets are summarized below:
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(in thousands) | | | | | | | | | | Expense |
Type of Contract | | Amortization Line Item | | Remaining Lives | | | | | | January 1 to September 14, 2021 | | Year Ended December 31, 2020 |
Gas rights | | Depreciation, amortization and accretion | | 4 to 16 years | | | | | | $ | 6,493 | | | $ | 14,636 | |
O&M contracts | | Amortization of intangibles and below-market contracts | | 5 years | | | | | | $ | 178 | | | $ | 552 | |
Gas sales | | Amortization of intangibles and below-market contracts | | 1 to 8 years | | | | | | $ | 2,514 | | | $ | 3,566 | |
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. These include:
| | | | | | | | | | | | | | | | | |
| September 14, 2021 |
| Gross | | Accumulated | | |
(in thousands) | Liability | | Amortization | | Net |
Gas purchase agreements | $ | 19,828 | | | $ | 15,893 | | | $ | 3,935 | |
| | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Gross | | Accumulated | | |
(in thousands) | Liability | | Amortization | | Net |
Gas purchase agreements | $ | 19,828 | | | $ | 14,059 | | | $ | 5,769 | |
Below-market contracts related to the purchase of gas are amortized to cost of energy, and amortization was $1.8 million for the period ended September 14, 2021 and $2.4 million for the year ended December 31, 2020, which was recorded as a decrease to cost of energy.
NOTE 5 - 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 JV 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 million at September 14, 2021 and $1.4 million at December 31, 2020, and has recorded these amounts in other long-term liabilities in the respective periods.
ARIA ENERGY LLC AND SUBSIDIARIES (Predecessor)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summary information on the equity method investments is as follows:
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(in thousands) | December 31, 2020 |
Assets | $ | 171,288 | |
Liabilities | 13,570 | |
Net assets | $ | 157,718 | |
Aria’s share of equity in net assets | 77,993 | |
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(in thousands) | | | | | January 1 to September 14, 2021 | | Year Ended December 31, 2020 |
Revenue | | | | | $ | 78,125 | | | $ | 60,459 | |
Net income | | | | | $ | 38,512 | | | $ | 18,801 | |
Aria’s share of net income | | | | | $ | 19,777 | | | $ | 9,298 | |
NOTE 6 - Long-Term Debt - Predecessor
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(in thousands) | September 14, 2021 | | December 31, 2020 |
Notes payable - due October 7, 2020 | $ | 91,115 | | | $ | 102,831 | |
Term Loan B - due May 2022 | — | | | 137,978 | |
Debt origination costs | (685) | | | (1,385) | |
Total | 90,430 | | | 239,424 | |
Less: current portion of debt, net | 90,430 | | | 102,831 | |
Long-term portion | $ | — | | | $ | 136,593 | |
Notes Payable
In October 2010, LESPH entered into a credit agreement with a syndicate of bank lenders that provided for a term note and a working capital commitment, 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 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 non-operating income on the consolidated statement of operations.
Senior Secured Credit Facility Revolver and Term Loan B
Aria Energy LLC and certain subsidiaries (the “Borrowers”) entered into a senior secured credit facility that provides for a $200 million secured term loan maturing in May 2022, 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
ARIA ENERGY LLC AND SUBSIDIARIES (Predecessor)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
NOTE 7 - 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-priced swap agreement with a remaining notional quantity of 392,400 and 789,600 MMBtu as of September 14, 2021 and December 31, 2020, respectively. The swap agreement 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, 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 million and $1.3 million for the period from January 1 to September 14, 2021 and for the year ended December 31, 2020 respectively.
| | | | | | | | | | | |
(in thousands) | September 14, 2021 | | December 31, 2020 |
Natural gas swap asset - included in other noncurrent assets | $ | 326 | | | $ | — | |
Natural gas swap liability - included in derivative liabilities | — | | | (1,268) | |
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(in thousands) | | | | | January 1 to September 14, 2021 | | Year Ended December 31, 2020 |
Natural gas swap - unrealized gain (loss) | | | | | $ | 1,129 | | | $ | (40) | |
Interest rate cap - unrealized loss | | | | | — | | | (95) | |
NOTE 8 - 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 CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth changes in the plan’s benefit obligations:
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(in thousands) | January 1 to September 14, 2021 | | Year Ended December 31, 2020 |
Benefit obligation at beginning of year | $ | 3,750 | | | $ | 3,599 | |
Service cost | 27 | | | 49 | |
Interest cost | 64 | | | 103 | |
Net actuarial loss (gain) | (148) | | | 144 | |
Net benefits paid | (72) | | | (145) | |
Benefit obligation at end of period | $ | 3,621 | | | $ | 3,750 | |
Amounts recognized in the consolidated balance sheets consist of:
| | | | | | | | | | | |
(in thousands) | September 14, 2021 | | December 31, 2020 |
Accrued benefit liability | $ | (3,621) | | | $ | (3,750) | |
Unrecognized net actuarial loss | 1,000 | | | 1,205 | |
Unrecognized prior service benefit | 136 | | | 144 | |
Net amount recognized | $ | (2,485) | | | $ | (2,401) | |
Net periodic benefit cost recognized in the consolidated statements of comprehensive income was as follows:
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(in thousands) | | | | | January 1 to September 14, 2021 | | Year Ended December 31, 2020 |
Service cost | | | | | $ | 27 | | | $ | 49 | |
Interest cost | | | | | 64 | | | 103 | |
Amortization of prior service cost | | | | | 8 | | | 12 | |
Recognition of net actuarial loss | | | | | 57 | | | 87 | |
Net periodic benefit cost | | | | | $ | 156 | | | $ | 251 | |
Amounts recognized in other comprehensive loss consist of:
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(in thousands) | January 1 to September 14, 2021 | | Year Ended December 31, 2020 |
Net actuarial (loss) gain | $ | 213 | | | $ | (45) | |
ARIA ENERGY LLC AND SUBSIDIARIES (Predecessor)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 September 14, 2021 and December 31, 2020:
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(in thousands, except price per share) | | September 14, 2021 |
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 | |
| | | | | | | | | | | | | | | | | | | | |
(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 | | Year Ended 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 11 - Related Party Transactions - Predecessor
Sales are made to and services are purchased from entities and individuals affiliated through common ownership. Aria provides O&M services, and administration and accounting services to their 50% owned joint ventures. As of
ARIA ENERGY LLC AND SUBSIDIARIES (Predecessor)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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) | | | | | January 1 to September 14, 2021 | | Year Ended December 31, 2020 |
Sales of construction services | | | | | $ | 32 | | | $ | 9,983 | |
Sales of operations and maintenance services | | | | | $ | 1,215 | | | $ | 1,701 | |
Sales of administrative and other services | | | | | $ | 221 | | | $ | 409 | |
NOTE 12 - Segment Reporting - Predecessor
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January 1 to September 14, 2021 | | | | | | | |
(in thousands) | RNG | | Power | | Corporate and Other | | Total |
Total revenue | $ | 82,338 | | $ | 37,058 | | $ | (1,807) | | $ | 117,589 |
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 | |
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Year ended December 31, 2020 | | | | | | | |
(in thousands) | RNG | | Power | | Corporate and Other | | Total |
Total revenue | $ | 81,559 | | $ | 57,322 | | $ | — | | $ | 138,881 |
Net income (loss) | 30,459 | | (26,048) | | (34,334) | | (29,923) |
Depreciation, amortization and accretion | 9,012 | | | 21,478 | | | 74 | | | 30,564 | |
Interest expense | — | | | — | | | 19,319 | | | 19,319 | |
EBITDA | $ | 39,471 | | | $ | (4,570) | | | $ | (14,941) | | | $ | 19,960 | |
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