The following discussion and analysis should be read in conjunction with the financial statements and related notes included elsewhere in this Report. This discussion contains forward-looking statements reflecting our current expectations, estimates, and assumptions concerning events and financial trends that may affect our future operating results or financial position. Actual results and the timing of events may differ materially from those contained in these forward-looking statements due to a number of factors, including those discussed in the section entitled "Risk Factors" in Part I, Item 1A in the 2021 Annual Report and the sections entitled "Risk Factors" in Part II, Item 1A and "Forward-Looking Statements" appearing elsewhere in this Report.
Overview
Archaea is one of the largest RNG producers in the
Archaea develops, designs, constructs, and operates RNG facilities. Archaea, through wholly-owned entities or joint ventures, has 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. Archaea's development backlog includes 38 cumulative projects as ofJune 30, 2022 and increased to 88 cumulative projects as ofJuly 31, 2022 primarily due to the Lightning JV and INGENCO transaction, with the total backlog including planned optimizations of certain operating RNG facilities over time and opportunities to build new RNG facilities on sites with existing renewable electricity facilities and on greenfield sites. Our differentiated commercial strategy is focused on selling the majority of our RNG volumes under long-term, fixed-price contracts to creditworthy partners, including utilities, corporations, and universities, helping these entities 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 fixed price contracts with creditworthy counterparties, which are designed to provide revenue certainty. Certain long-term off-take contracts were accounted for as operating leases prior toJanuary 1, 2022 and have no minimum lease payments. The rental income under these leases was recorded as revenue when the RNG was 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 as transportation fuel. These RINs are able to be separated and sold independently 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 RINs are transferred to a third party. The remaining RIN sales are under a combination of short-term spot price contracts and forward sold fixed-price contracts independent from RNG sales, and revenue is recognized upon transfer of control to a third-party customer. 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 inCalifornia . There is a general lag in the generation and sale of RINs 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 theEPA'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 qualified RINs. RINs are generated monthly for the previous month's production. 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 fuel pathway application. Following
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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 fuel 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.
Our Segments
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. We expect our future long-term growth to be driven primarily by additional projects within the RNG segment, and we expect to build new RNG facilities on the majority of our sites with existing LFG to renewable electricity projects over time. In addition, we hold interests in other entities that are accounted for using the equity method of accounting, includingMavrix, LLC , which owns and operates five separate RNG facilities, andSaturn Renewables, LLC , which owns gas rights at two landfills, both of which are included in the RNG segment, as well as the Sunshine electric project included in the Power segment.
The Business Combinations
OnSeptember 15, 2021 , RAC completed the Business Combinations to acquire Legacy Archaea and Aria. Following the Closing, RAC changed its name from "Rice Acquisition Corp. " to "Archaea Energy Inc. ," andRice Acquisitions Holdings LLC was renamed "LFG Acquisition Holdings LLC " (also referred to herein as "Opco"). The Company and Opco issued 33.4 million Class A Opco Units and 33.4 million shares of Class B Common Stock on the Closing Date to Legacy Archaea Holders to acquire Legacy Archaea. Aria was acquired for total initial consideration of$863.1 million , which was reduced by$1.9 million inMarch 2022 for the final adjustment under the terms set forth in the Aria Merger Agreement. The initialAria Merger consideration consisted of cash consideration of$377.1 million paid to Aria Holders and equity consideration in the form of 23.0 million Class A Opco Units and 23.0 million shares of Class B Common Stock. In addition,$91.1 million of Aria debt was repaid in connection with the Aria Merger. Archaea has retained its "up-C" structure, whereby all of the equity interests in Aria and Legacy Archaea are indirectly held byOpco andArchaea Energy Inc.'s only assets are its equity interests in Opco. Opco is considered a VIE for accounting purposes, and the Company, as the sole managing member of Opco, is considered the primary beneficiary. As such, the Company consolidates Opco and the unitholders that hold economic interests directly at Opco are presented as redeemable noncontrolling interests in the Company's financial statements. Holders of Class A Opco Units (other than Archaea) have a redemption right, subject to certain limitations, to redeem Class A Opco Units (and a corresponding number of shares of Class B Common Stock) for, at Opco's option, (i) shares of Class A Common Stock on a one-for-one basis, subject to adjustment for stock splits, stock dividends, reorganizations, recapitalizations and the like, or (ii) a corresponding amount of cash.
Predecessor and Successor Reporting
Legacy Archaea is considered the accounting acquirer of the Business Combinations for accounting purposes, and the 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. Legacy Archaea is considered the "Successor." As such, the consolidated assets, liabilities and results of operations prior to theSeptember 15, 2021 reverse recapitalization are those of Legacy Archaea (the accounting acquirer), and the Company's consolidated financial statements include the assets, liabilities and results of operations of Aria beginning onSeptember 15, 2021 . 41
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The Aria Merger represents a business combination in which Aria was determined to be the acquired company. Due to Aria's historical operations compared to Legacy Archaea and the relative fair values, Aria was determined to be the "Predecessor." Aria's consolidated statements of operations and consolidated statements of comprehensive income for the three and six months endedJune 30, 2021 and Aria's consolidated statement of cash flows for the six months endedJune 30, 2021 have been included in "Financial Statements" in Part 1, Item 1 of this Report to enhance comparability for readers.
Factors Affecting the Comparability of Our Financial Results
Our 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 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 onSeptember 15, 2021 only include Legacy Archaea, the accounting acquirer, whereas our results beginning onSeptember 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, including the INGENCO acquisition and the Lightning JV. In addition to significant growth and expansion in operations, the Company has raised a significant amount of capital through financing transactions to fund a portion of that growth, which may also impact the comparability of our historical results to our future results. •As a result of the Business Combinations, and subsequent acquisitions, joint ventures and other transactions, the Company has hired and will need to hire additional personnel and implement procedures and processes to address expanded facilities, as well as public company regulatory requirements and customary practices. The Company expects to incur additional annual expenses as a public company that Legacy Archaea and Aria did not historically incur for, among other things, directors' and officers' liability insurance, director fees and additional internal and external accounting and legal and administrative resources, including increased audit and legal fees. •As a corporation, the Company is subject toU.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 toU.S. federal income tax at an entity level. Accordingly, the net income in Legacy Archaea and Aria's historical financial statements does not reflect the full tax expense the Company would have incurred if it were subject toU.S. federal income tax at an entity level during such periods. Recent Events Operational Highlights
Below are key recent development and operational events:
?Formed the landmark Lightning JV with Republic to jointly invest approximately$1.1 billion to develop a total of 40 RNG projects across theU.S. that will be located at various landfill sites owned or operated by Republic. Initial funding occurred inJuly 2022 as discussed in "Note 4 - Business Combinations and Reverse Recapitalization" in this Report. ?During the second quarter of 2022, the Company signed several new bundled RNG sales contracts for RNG and its associated Environmental Attributes, including a long-term fixed-price RNG agreement with Energir L.P ("Energir") and a medium-term fixed-price RNG agreement withUGI Utilities, Inc. ("UGI"). The agreement with Energir is for the sale of 2.15 gigajoules (approximately 2.04 million MMBtus) annually for a period of 20 years beginning approximatelyOctober 2023 and is subject toQuebec regulatory approval. The agreement with UGI is for the sale of 331,785 MMBtus annually for a period of 5 years beginningJuly 1, 2022 . 42
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?Completed initial optimization work at five legacy Aria facilities, with a focus on CO2 separation systems and nitrogen rejection unit upgrades, which are essential components of the Company's V1 plant design, translating into improved operational performance at these existing RNG facilities. On average, methane recovery increased almost 10% upon completion of the initial optimization projects and is expected to further increase after completing the remaining optimization work at these and other legacy sites within the Company's portfolio.
?Produced first pipeline-quality RNG and achieved commercial operations at the
Costa View dairy digester facility in
Term Loan and Revolver Amendment
OnJune 30, 2022 , the Company amended its Revolving Credit and Term Loan Agreement to, among other things, increase its total commitment by approximately$630 million to a total of$1.1 billion and provide for a$400 million Term Loan and a$700 million Revolver. See "Note 10 - Debt" in this Report for additional information on the Revolver and the Term Loan.
INGENCO Acquisition
OnApril 26, 2022 , a wholly owned subsidiary of the Company,Archaea Infrastructure, LLC , entered into a definitive purchase and sale agreement (the "INGENCO Purchase Agreement") to purchase INGENCO, which owned 14 LFG to renewable electricity facilities. The consideration paid upon theJuly 2022 closing of the transaction was$230.5 million and was funded with cash on hand and borrowings under the Term Loan and Revolver. The acquisition includes gas rights for the 14 LFG to energy sites, which have a number of existing long-term agreements in place. Lightning JV Formation OnMay 5, 2022 , the Company and Republic announced the formation of the Lightning JV to develop 39 RNG projects across theU.S. that will be located at various landfill sites owned or operated by Republic. The joint venture will develop and construct RNG facilities that will convert LFG into pipeline-quality RNG that can be used for a variety of applications. Pursuant to the terms of the contribution agreement, datedMay 4, 2022 , a wholly owned subsidiary of the Company,Zeus Renewables LLC ("Zeus"), and a wholly owned subsidiary of Republic,Republic Services Renewable Energy, LLC ("Investco"), will contribute approximately$780 million and$300 million , respectively, over approximately five years to six years in exchange for newly issued limited liability company interests of the Lightning JV (the "Lightning JV Membership Interests"), with Zeus and Investco holding 60% and 40%, respectively, of the outstanding Lightning JV Membership Interests. InJuly 2022 , the Company made its initial capital contribution of$222.5 million to the Lightning JV, which was funded with borrowings under the Revolver. Concurrent with the funding, the Lightning JV paid$37.9 million to acquire an additional site ("Fort Wayne") located inFort Wayne, Indiana . The purchase ofFort Wayne includes the landfill gas rights to a Republic-owned landfill site and a medium-BTU facility. Cash on hand from operations of the Lightning JV (less certain customary reserves) will be distributed quarterly to Zeus and Investco, as the members, in accordance with their membership percentages, and no later than 10 days following the final commercial operations date of all approved LFG projects (excluding any subsequently abandoned), the Lightning JV will distribute all unused capital contributions to Zeus and Investco in proportion to their capital contributions.The Lightning JV, Investco and Archaea Operating LLC , a wholly owned subsidiary of the Company, have entered into certain other arrangements relating to the Lightning JV that govern, among other things, the grant by Republic of landfill gas rights and real property rights at 40 of Republic's landfills to the Lightning JV, the process and timeline for development at those landfills by the Lightning JV, the production and sale of RNG and related Environmental Attributes by the Lightning JV, the payment of royalties to Republic and, in exchange for a fee to be paid toArchaea Operating LLC , engineering, procurement, construction management services and O&M services to be provided to the Lightning JV.
Key Factors Affecting Operating Results
The Company's business strategy includes growth primarily through the upgrade and expansion of existing RNG production facilities, building new RNG production facilities at sites of our existing LFG to renewable electricity production facilities, development and construction of greenfield RNG development projects for which we already have 43
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gas development agreements in place, and the procurement of LFG rights and LFG to renewable electricity production facilities to develop additional RNG projects. We are also evaluating other potential sources of biogas and exploring the development of wells for carbon sequestration, the use of on-site solar-generated electricity to meet energy needs for RNG production, and the use of RNG as a feedstock for low-carbon hydrogen. The Company's performance and future success depend on several factors that present significant opportunities but also pose risks and challenges. For information regarding the key factors affecting our performance and future success, see "Key Factors Affecting Operating Performance" within "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the 2021 Annual Report. In addition to those discussed in Part I, Item 1A. "Risk Factors" of the 2021 Annual Report, these factors include: the demand for RNG, renewable electricity and Environmental Attributes; electricity prices and the costs of raw materials and labor; the regulatory landscape, which affects demand for our products by providing market participants with incentives to purchase RNG, renewable electricity and Environmental Attributes and which may also affect our development or operating costs; and seasonality. Results of OperationsKey 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 of RNG and MWh of electricity sold and Adjusted EBITDA in evaluating our operating performance. Each of these metrics is discussed below under "Comparison of the Three and Six Months EndedJune 30, 2022 and 2021."
Key Components of Results of Operations
See "Key Components of Results of Operations" within "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the 2021 Annual Report for information regarding the key components of our results of operations, which are revenue, cost of sales, general and administrative expenses and equity earnings.
Comparison of the Three and Six Months Ended
The following discussion pertains to the results of operations, financial condition, and changes in financial condition of the Successor. Legacy Archaea (the Successor) did not have operational RNG and Power assets until commercial RNG and Power operations commenced in the fiscal quarter endedJune 30, 2021 and did not have significant revenues from operations until the acquisition of Aria. A majority of the Company's revenues prior toMarch 31, 2021 were comprised of sales of customized pollution control equipment and maintenance agreement services. As such, to provide more meaningful comparisons, the following discussion also compares certain of the Company's operating results for the three and six months endedJune 30, 2022 to the combined operating results of Legacy Archaea and Aria for the three and six months endedJune 30, 2021 . Such combined information (which is referred to in this Report as "on a combined basis") is the sum of the historical financial results of Legacy Archaea and Aria and does not include the impact of purchase accounting.
In this section, any increases or decreases "for the three and six months ended
As noted above, Legacy Archaea did not have significant revenues from operations until the the acquisition of Aria. As such, any segment comparison would not be informative and has not been included for comparison purposes. 44
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Table of Contents Volumes Sold Three Months Ended June 30, Six Months Ended June 30, 2022 2021 Change 2022 2021 Change RNG Sold (MMBtu)(1)(2) 1,755,145 47,592 1,707,553 3,016,500 47,667 2,968,833 Electricity Sold (MWh)(1)(2) 142,977 47,847 95,130 290,404 47,847 242,557
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(1) Volumes sold represent the consolidated Successor volumes only (excluding volumes sold by the Company's equity method investments). On a combined basis, during the three and six months endedJune 30, 2021 , the Company sold 1,137,988 MMBtu and 2,152,379 MMBtu of RNG, respectively, and 146,772 MWh and 251,296 MWh of electricity, respectively. (2) Volumes sold exclude the Company's equity method investments' net volumes sold during the three and six months endedJune 30, 2022 of 282,620 MMBtu and 561,297 MMBtu of RNG, respectively, and 15,826 MWh and 33,979 MWh of electricity, respectively. Volumes increased for the three and six months endedJune 30, 2022 compared to the three and six months endedJune 30, 2021 on consolidated basis due to the acquisition of Aria, commencement of commercial operations inApril 2021 at our Boyd County RNG facility, the purchase of thePEI Power assets inApril 2021 , the acquisition of additional LFG to renewable electricity facilities, and the commencement of commercial operations at our Assai facility, offset by downtime at certain facilities related to winter weather in the first quarter of 2022. The increase on a combined basis occurred due to the same factors discussed above, excluding the acquisition of Aria.
As of
Set forth below is a summary of selected financial information for the three and
six months ended
Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2022 2021 $ Change 2022 2021 $ Change Revenues and other income$ 77,219 $ 5,127
62,746 5,233 57,513 105,437 6,443 98,994 Equity investment income (loss) 2,693 - 2,693 4,122 - 4,122 General and administrative expenses 18,883 7,884 10,999 45,236 11,042 34,194 Operating income (loss) (1,717) (7,990) 6,273 (12,435) (10,704) (1,731) Other income (expense), net 34,470 60 34,410 12,016 275 11,741 Net income (loss)$ 32,624 $ (7,930) $ 40,554 $ (548) $ (10,429) $ 9,881
Revenues and Other Income
Revenues and other income were approximately$77.2 million and$134.1 million for the three and six months endedJune 30, 2022 , respectively, as compared to$5.1 million and$6.8 million for the three and six months endedJune 30, 2021 , respectively, an increase of$72.1 million and$127.3 million , respectively. The increased revenues are primarily attributable to the acquisition of Aria resulting in a$48.1 million and$91.7 million increase for the three and six months endedJune 30, 2022 , respectively, the strong market pricing of Environmental Attributes, natural gas and electricity, and the commencement of commercial operations at our Assai RNG facility, and other acquisitions made in late 2021, partially offset by downtime at certain facilities related to winter weather in the first quarter of 2022. Revenues and other income increased on a combined basis for the three and six months endedJune 30, 2022 as compared to revenue and other income for the three and six months endedJune 30, 2021 primarily due to the strong market pricing of Environmental Attributes natural gas and electricity, the commencement of commercial operations at our Assai RNG facility, and other acquisitions made in late 2021, partially offset by downtime at certain facilities related to winter weather in the first quarter of 2022. 45
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Cost of Sales
Costs of sales increased by$57.5 million and$99.0 million for the three and six months endedJune 30, 2022 , respectively, as compared to$5.2 million and$6.4 million for the three and six months endedJune 30, 2021 , respectively, primarily due to the acquisition of Aria resulting in increases of$36.3 million and$70.0 million for the three and six months endedJune 30, 2022 , respectively, the commencement of commercial operations at our Assai RNG facility, additional royalty and marketing expenses, and increased utility and gas costs.
Costs of sales on a combined basis increased for three and six months ended
General and Administrative Expenses
General and administrative expenses were$18.9 million and$45.2 million for the three and six months endedJune 30, 2022 , respectively, an increase of$11.0 million and$34.2 million compared to the three and six months endedJune 30, 2021 , respectively. The increase is primarily due to higher employee costs, including share-based compensation expenses, associated with higher headcount and contractors and consultants costs as our business has expanded and we became a public company. Additionally, expenses for the three months endedJune 30, 2022 include$3.6 million for non-recurring legal and professional fees and other non-recurring costs primarily associated with the formation of the Lightning JV and the acquisition of INGENCO, and expenses for the six months endedJune 30, 2022 include$8.9 million in severance related costs, including accelerated share-based compensation expense, and$6.0 million related to non-recurring legal and professional fees associated with the executive transition, the Ares Secondary Offering, the formation of the Lightning JV, and the acquisition of INGENCO. Other Income (Expense) Other income was$34.5 million and$12.0 million for the three and six months endedJune 30, 2022 , respectively, as compared to other income of$0.1 million and$0.3 million for the three and six months endedJune 30, 2021 , respectively, primarily due to the decrease in fair value on the Private Placement Warrant liabilities resulting in gains of$37.0 million and$13.0 million for the three and six months endedJune 30, 2022 , respectively, compared with no Private Placement Warrants outstanding during the three and six months endedJune 30, 2021 , and gains in fair value on the interest rate swap of$1.0 million and$4.6 million for the three and six months endedJune 30, 2022 , respectively, offset in part by the increase in interest expense of$3.7 million and$6.3 million for the three and six months endedJune 30, 2022 , respectively.
Adjusted EBITDA
Adjusted EBITDA is calculated by taking net income (loss) before taxes, interest expense, and depreciation, amortization and accretion, and adjusting for the effects of certain non-cash items, other non-operating income or expense items, and other items not otherwise predictive or indicative of ongoing operating performance, including net derivatives activity, certain acquisition and other transaction expenses, severance expenses, non-cash share-based compensation expense and Settled RIN adjustment (as defined below). We believe the exclusion of these items enables investors and other users of our financial information to assess our sequential and quarter-over-quarter performance and operating trends on a more comparable basis and is consistent with management's own evaluation of performance. Under GAAP, the timing of revenue recognition for stand-alone RIN sales contracts is tied to the delivery of the RINs to our counterparty and not the production of the RINs. The Company had approximately 3.0 million RINs generated byJune 2022 RNG production that were delivered under forward RIN sale agreements inJuly 2022 at a weighted-average price of$3.15 . To reflect this and match the RIN revenue to the month of production, Adjusted EBITDA for both the three and six months endedJune 30, 2022 includes a$7.0 million add-back ("Settled RIN adjustment"), which represents the net cash value (proceeds minus expenses) of this settled, forward sold RIN transaction. The related revenues and associated royalty expenses will be recognized in the third quarter of 2022. The Company anticipates the quarterly financial impact of these monetization timing delays to be mitigated over time as it continues to bring additional RNG facilities online and enter into new contracts. 46
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Adjusted EBITDA also includes adjustments for equity method investment basis difference amortization and the depreciation and amortization expense included in our equity earnings from our equity method investments. These adjustments should not be understood to imply that we have control over the related operations and resulting revenues and expenses of our equity method investments. We do not control our equity method investments; therefore, we do not control the earnings or cash flows of such equity method investments. The use of Adjusted EBITDA, including adjustments related to equity method investments, as an analytical tool should be limited accordingly. Adjusted EBITDA is commonly used as a supplemental financial measure by our management and external users of our consolidated financial statements to assess the financial performance of our assets without regard to financing methods, capital structures, or historical cost basis. Adjusted EBITDA is not intended to represent cash flows from operations or net income (loss) as defined by GAAP and is not necessarily comparable to similarly titled measures reported by other companies.
We believe Adjusted EBITDA provides relevant and useful information to management, investors, and other users of our financial information in evaluating the effectiveness of our operating performance in a manner that is consistent with management's evaluation of financial and operating performance.
The table below sets forth the reconciliation of Net income (loss) to Adjusted EBITDA:
Three Months Ended June 30, Six Months Ended June 30, (in thousands) 2022 2021 2022 2021 Net income (loss)$ 32,624 $ (7,930) $ (548) $ (10,429) Adjustments Interest expense 3,712 13 6,366 19 Depreciation, amortization and accretion 13,730 886 26,219 935 Income tax expense 129 - 129 - EBITDA$ 50,195 $
(7,031)
(38,095) - (18,180) - Amortization of intangibles and below-market contracts (1,103) - (2,206) - Amortization of equity method investments basis difference 2,571 - 5,141 - Depreciation and amortization adjustments for equity method investments 1,579 - 3,173 - Income tax expense for equity method investments 151 - 1,693 - Share-based compensation expense 3,170 146 8,923 178 Acquisition and other transaction costs and severance costs (1) 4,621 - 12,956 - Settled RIN adjustment (2) 7,006 - 7,006 - Adjusted EBITDA $ 30,095$ (6,885) $ 50,672$ (9,297)
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(1) Other transaction costs include expenses related to certain joint ventures, R&D expenses, and the Ares Secondary Offering. (2) Adjustment for gross profit on RINs generated from June gas production which will be recognized in the Company's third quarter 2022 consolidated statement of operations.
Liquidity and Capital Resources
Sources and Uses of Funds
The Company's primary uses of cash have been to fund construction of RNG facilities and acquisitions of complementary businesses and assets and LFG rights. The Company is expected to primarily finance its project development activities with cash on hand, cash expected to be generated from operations and available funding under the Revolver. The amount and timing of the future funding requirements will depend on many factors, including the pace and results of our acquisitions and project development efforts. As discussed in "Recent Events," the Company has significantly expanded and accelerated the pace of developing its project backlog. The Company is in the process of optimizing the pace and timing of its long-term project development backlog as a result of recent additions to its backlog related to the Lightning JV and the 47
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acquisition of INGENCO. Capital expenditures guidance for 2022 (excluding
acquisition costs) has increased to a range of
During the three months endedJune 30, 2022 , we borrowed a total of$50.0 million under the Revolver to provide funding for ongoing operations and capital expenditures. As ofJune 30, 2022 , we had the cash balance described in the paragraph below and approximately$580.5 million of outstanding indebtedness, including$400.0 million of outstanding borrowings under the Term Loan and$130.5 million outstanding on our Assai Notes (as defined below). We also had$626.2 million of available borrowing capacity under the Revolver as ofJune 30, 2022 . OnJuly 5, 2022 andJuly 14, 2022 , we borrowed$220.0 million and$75.0 million , respectively, under the Revolver. Following these borrowings, available borrowing capacity under the Revolver was approximately$331.2 million . We expect the Revolver along with the Company's other existing sources of liquidity will be sufficient to fund the Company's development capital needs for the foreseeable future, including capital expenditures related to the Lightning JV, projects related to INGENCO, and core development projects, thereby eliminating the need for additional external capital in the near-term based on the Company's current development plans and backlog. Further accelerating our growth plans may require additional cash requirements, which would likely be funded with additional debt or equity issuances. We may, to the extent market conditions are favorable, incur additional debt or issue equity securities to, among other things, finance future acquisitions of businesses, assets, or biogas rights, fund development of projects in our backlog, respond to competition, or for general corporate purposes. The Company cannot predict with certainty the timing, amount and terms of any future issuances of any such securities or whether they occur at all.
Cash
As ofJune 30, 2022 , the Company had$213.3 million of unrestricted cash and cash equivalents, which is expected to provide ample liquidity to fund our current operations and a portion of our near-term development projects. As ofJune 30, 2022 , we also had$21.9 million of restricted cash for permitted payments and required reserves related to the Assai RNG facility, including future principal and interest payments for the Assai Notes. During the three months endedJune 30, 2022 , the Company received a total of$9.3 million in distributions from restricted cash.
Term Loan and Revolver
OnJune 30, 2022 , the Company amended its Revolving Credit and Term Loan Agreement which included a Revolver with an initial commitment of$250 million and a Term Loan with an initial commitment of$220 million . The amendment, among other things, increased the aggregate total commitment from the original syndicate of lenders plus two additional lenders by approximately$630 million to a total of$1.1 billion and provides for a$400 million Term Loan and a$700 million Revolver. In addition, onJune 1, 2022 , the benchmark interest rate was revised to SOFR plus 2.75% for the Revolver and SOFR plus 3.25% for the Term Loan. The maturity date of the Revolver and Term Loan remains unchanged atSeptember 15, 2026 . As ofJune 30, 2022 , the Company has outstanding borrowings under the Term Loan of$400.0 million at an effective interest rate of 4.89% and has drawn down a total of$50.0 million under the Revolver. As ofJune 30, 2022 , the Company had issued letters of credit under the Credit Facilities of$23.8 million , and thus reducing the borrowing capacity of the Revolver to$626.2 million . Under the Company's updated 2022 capital expenditure budget, we expect to utilize a portion of available capacity under the Revolver to fund our near-term development projects. InJuly 2022 , the Company drew an additional$295.0 million under the Revolver and used these proceeds along with incremental Term Loan proceeds from theJune 30, 2022 amendment to fund its initial capital contribution in the Lightning JV and the acquisition of INGENCO.
See "Note 10 - Debt" in this Report for additional information on the Revolver and the Term Loan.
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Assai Energy 3.75% and 4.47% Senior Secured Notes
OnJanuary 15, 2021 , Assai entered into a senior secured note purchase agreement with certain investors for the purchase of$72.5 million in principal amount of 3.75% Senior Secured Notes (the "3.75% Notes"). Interest on the 3.75% Notes is payable quarterly in arrears on each payment date and the 3.75% Notes mature onSeptember 30, 2031 . OnApril 5, 2021 , Assai entered into an additional senior secured note purchase agreement with certain investors for the purchase of$60.8 million in principal amount of its 4.47% Senior Secured Notes (the "4.47% Notes" and, together with the 3.75% Notes, the "Assai Notes"). Interest is payable quarterly in arrears on each payment date, and the 4.47% Notes mature onSeptember 30, 2041 .
Summarized Cash Flows for the Six Months Ended
Six Months Ended June 30, (in thousands) 2022 2021 Cash provided by (used in) operating activities$ 56,692 $ (7,510) Cash used in investing activities$ (133,631) $ (88,136) Cash provided by financing activities$ 219,052 $ 130,453
Net increase in cash, cash equivalents and restricted cash
$ 34,807
Cash Provided by (Used in) Operating Activities
The Company generates cash from revenues and uses cash in its operating activities and for general and administrative expenses.
Total cash provided by operating activities increased by$64.2 million for the six months endedJune 30, 2022 , which was primarily related to higher revenues, offset in part by higher cost of energy associated with the increased level of operations and higher general and administrative expenses due to increases in employee costs as we continue to build our business. Changes in other working capital accounts were approximately$36.4 million and related to the timing of revenue receipts and increases in accounts payable and accrued liability balances.
Cash Used in Investing Activities
We continue to have significant cash outflows for investing activities as we expand our business, make acquisitions, and develop projects. Total cash used in investing activities was$133.6 million for the six months endedJune 30, 2022 . We spent$127.9 million on development activities and$7.0 million , net of cash acquired, primarily related to the acquisition of landfill gas right assets. Development activities in the six months endedJune 30, 2022 are related to supply chain purchases, deposits on long-lead items, and construction and optimization at our various plants, including additional costs at Assai. We also made contributions to equity method investments totaling$8.0 million and received return of investment in equity method investments of$7.4 million .
Cash used in investing activities of
Cash Provided by Financing Activities
Cash used provided by financing activities for the six months endedJune 30, 2022 is primarily attributable additional funding under the Term Loan and Revolver of$225.3 million , net of issuance costs, offset by scheduled repayments of long-term debt and payment of contingent consideration related to the Boyd County acquisition resulting in net cash payments of$4.5 million . Cash provided by financing activities of$130.5 million for the six months endedJune 30, 2021 was comprised primarily of proceeds from issuance of the Assai Notes and borrowings under the Company's line of credit agreement.
Material Cash Requirements
The Company has various long-term contractual commitments pertaining to certain of its biogas rights agreements that
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include annual minimum royalty and landfill gas rights payments. Annual minimum royalty and landfill gas rights payments generally begin when production commences and continue through the period of operations. As ofJune 30, 2022 , the expected annual minimum royalty and landfill gas rights payments are approximately$8.0 million , and the annual commitment will increase as production commences from new facilities under development with 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
OnMay 5, 2022 , the Company and Republic announced the formation of the Lightning JV. The Company and Republic have agreed to contribute to the Lightning JV approximately$780 million and$300 million , respectively, over approximately five to six years. The Company made its initial capital contribution of$222.5 million onJuly 5, 2022 . Contributions to the Lightning JV are subject to annual budget approval by the Lightning JV's board of directors and are further subject to adjustment based on actual amounts spent by the Lightning JV through the completion of development of RNG projects.
Critical Accounting Policies and Estimates
The preparation of the Company's financial statements in accordance with GAAP requires us to make estimates and judgments that affect the reported amount of assets, 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. Because these estimates can vary depending on the situation, actual results may differ from the estimates and assumptions used in preparing the financial statements. The Company considers critical accounting estimates to be those that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on the Company's financial condition or results of operations. See "Significant Accounting Policies - Critical Accounting Policies and Estimates" included within "Management's Discussion and Analysis of Financial Condition and Results of Operations" in Part II, Item 7 of the 2021 Annual Report for a discussion of our critical accounting estimates; there have been no material changes to the Company's critical accounting estimates as disclosed therein.
Recent Accounting Pronouncements
For a description of the Company's recently adopted accounting pronouncements and recently issued accounting standards not yet adopted, see "Note 3 - Recently Issued and Adopted Accounting Standards" in this Report.
Inflation
The Company does not believe that inflation had a material impact on our business, revenues or operating results during the periods presented. If inflationary trends continue, our business and operating results could be adversely affected.
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