Montauk Renewables Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 10, 2023

Key Takeaways

  • During Q1, Montauk Renewables made a strategic decision to delay all D3 RIN transfers until Q2 2023 amid higher-than-expected volatility following the EPA’s December RVO, resulting in an inventory of 8.3 million unsold RINs as of March 31.
  • Q1 2023 total revenues declined by 40.5 percent to $19.2 million due primarily to the decision not to self-market 2023 RNG production and lower RIN pricing, leading to an operating loss of $14.2 million versus a $1.7 million loss in Q1 2022.
  • Development projects remain on track, including a new 900 MMBtu/day landfill gas-to-RNG facility in South Carolina expected online by 2025, and digestion capacity expansions at the PECO Dairy Cluster in Idaho to be completed by Q3 2023.
  • The company reaffirmed its full-year 2023 outlook with expected RNG production of 5.7–6.1 million MMBtu (revenues of $137–145 million) and renewable electricity output of 195–205 thousand MWh (revenues of $18–19 million).
  • Management highlighted ongoing optimization efforts, including reactor relocations in North Carolina and engagement on electric vehicle ERINs, reflecting confidence in expanding demand for renewable natural gas attributes.
AI Generated. May Contain Errors.
Earnings Conference Call
Montauk Renewables Q1 2023
00:00 / 00:00

There are 7 speakers on the call.

Operator

Afternoon, everyone, and thank you for participating in today's conference call. I would like to turn the call over to Mr. John Ciroli as he provides some important cautions regarding forward looking statements and non GAAP financial measures contained in the earnings material or made on this call. John, please go ahead.

Speaker 1

Thank you, and good afternoon, everyone. Welcome to Montauk Renewables earnings conference call to review the Q1 2023 financial and operating results and developments. I'm John Ciroli, Chief Legal Officer and Secretary at MonTock. Joining me today are Sean McClain, OnToc's President and Chief Executive Officer to discuss business developments and Kevin Van Aslan, Chief Financial Officer to discuss our Q1 2023 financial and operating results. At this time, I would like to direct your attention to our forward looking disclosure statement.

Speaker 1

During this call, certain comments we make constitute forward looking statements and such as involve a number of assumptions, risks and uncertainties that could cause the company's actual results or performance to differ materially from those expressed in or implied by such forward looking statements. These risk factors and uncertainties our detailed and Montauk Renewables SEC filings. Our remarks today may also include non GAAP financial measures. We present EBITDA and adjusted EBITDA metrics because we believe the measures assist investors in analyzing our performance across reporting periods on a consistent basis excluding items that we do not believe are indicative of our core operating performance. These non GAAP financial measures are not prepared in accordance with generally accepted accounting principles.

Speaker 1

Additional details regarding these non GAAP financial measures, including reconciliations to the most directly comparable GAAP financial measures, can be found in our slide presentation and in our Q1 2023 earnings press release and Form 10 Q issued and filed this afternoon. Those are available also on our website at ir.montaukrenobals.com. After our prepared remarks, we will open the call to questions. And with that, I turn the call over to

Speaker 2

Sean. Thank you, John. Good day, everyone, and thank you for joining our call. As we previously announced during our fiscal 2022 earnings conference call in March and as Kevin will explain in more detail, We made a strategic decision not to commit to transfer any available RINs on 2023 RNG production until the Q2 of 2023. The EPA's release of the RVO in December 2022 included RVO obligations for 3 years, 2023 through 2025 and included volumes of ERINs to be generated from renewable electricity and used in transportation fuel.

Speaker 2

With the final RVO due to be released in June 2023, we believe this rulemaking introduced higher than expected volatility in the price of D3 RINs during the Q1 of 2023. As a result, we purposefully delayed the timing of all D3 RIN transfers from 2023 RNG production until the Q2 of 2023. We have begun to seeing the benefits of this strategy With the R4 million dollars related to 2023 RNG production committed in the Q2 of 2023 at an average realized price of $2.04 In March 2023, we announced our entrance into South Carolina with the development of a new landfill gas to RNG facility. The planned project is expected to contribute approximately 900 MMBtus per day of production capacity upon commissioning. We expect to incur capital expenditures beginning in the Q2 of 2023 and expect the project to be complete and become commercially operational in 2025.

Speaker 3

Next,

Speaker 2

I would like to provide an update on our PECO Dairy Cluster project in Idaho. During the Q1 of 2023, CARB finalized the engineering review of the PECO facility's provisional CI application and released it for public comments. The public comment period ended March 14, 2023, and we did not receive any significant comments. CARB certified, our Tier 2 application and the certified CI value will be used to report and generate LCFS credits starting in the Q4 of 2022. We plan to release the remaining gas from storage in the Q2 of 2023.

Speaker 2

As part of our overall capacity expansion at the PECO facility, we undertook significant efforts to improve the performance of his existing digestion process. Related to our PECO feedstock amendment, which increased the amount of feedstock to the facility for processing over a 3 year period. The dairy delivered the 2 increases in feedstock and we have made 3 payments to the dairy as required in the PECO feedstock amendment. The improved efficiencies of our existing digestion process And the water management improvements have enabled us to process the increased feedstock volumes, which we received from the dairy. We completed the design of the digestion capacity increase in the Q3 of 2022 and began incurring capital expenditures related to the completed design our digestion expansion construction of the project.

Speaker 2

We expect the digestion expansion project to be functionally completed during the Q3 of 2023. We expect the dairy to begin delivering the 3rd and final tranche of increased feedstock in 2024. As to our 2021 Montauk Ag Renewables acquisition, we continue to work with our engineer of record through the optimization of improvements the patented reactor technology. In the Q1 of 2023, we completed the relocation of the reactor in Magnolia, North Carolina the Turkey Creek, North Carolina location to centralize processing at one location. We continue to progress on our improvements and continue to expect to begin revenue producing activities in 2024.

Speaker 2

In parallel, we continue to engage with regulatory agencies in the proceeds in North Carolina related to the resulting power generation derived from swine waste to confirm its eligibility for renewable energy credits under North Carolina's Renewable Energy Portfolio Standards in anticipation of commercial production. Our Turkey Creek, North Carolina facility has been accepted into the Piedmont Natural Gas Renewable Gas Pilot Program, which is a step towards obtaining the new Renewable Energy Facility, NREF designation under the North Carolina Utilities Commission. Due to our consolidation of operations the Turkey Creek, North Carolina location and based on our current expectations related to commercial operations,

Speaker 4

We

Speaker 2

have paused our registration process to obtain NREF status for the Turkey Creek, North Carolina location. Concurrently, we have executed a receipt interconnection agreement with Piedmont Natural Gas for the Turkey Creek, North Carolina location. This agreement is structured to coincide with the development timeline at that location. Also in the Q1 of 2023, We signed a lease agreement with Piedmont Natural Gas to provide access to the Turkey Creek, North Carolina property during construction of the interconnection. We are also in varying stages of discussions with potential power purchasers.

Speaker 2

Finally, we are currently in late stage negotiation To develop, own and operate an RNG facility alongside our existing renewable electric generation facility in Irvine, California. We intend to beneficially process the available feedstock, which we currently estimate to be approximately 2,485 MMBtus in excess what the REG facility can process. While we believe we are in the late stages of negotiation and expect to finalize the development opportunity, no assurances can be given that this opportunity will meet our expectations. And with that, I will turn the call over to Kevin.

Speaker 4

Thank you, Sean. I will be discussing our Q1 of 2023 financial and operating results. Please refer to our earnings press release and the supplemental slides that have been posted to our website for additional information. Total revenues in the Q1 of 2023 were 19,200,000 a decrease of $13,000,000 or 40.5 percent compared to $32,200,000 in the Q1 of 2022. The decrease is primarily related to our strategic decision as we are not a fore seller of D3 RINs, do not self market any RINs 2023 RNG production due to our belief that the Q1 of 2023 D3 RIN index volatility was temporary.

Speaker 4

Decreased realized RIN pricing during the Q1 of 2023 of $2.01 compared to $3.46 in the Q1 of 2022 also contributed to the decrease in total revenues. This decrease is partially offset by losses recognized in the Q1 of 2022 of $3,500,000 which were related to a gas commodity hedge program that has since expired in December 2022. We report the impacts of our gas commodity hedge program within our corporate segment. We have not currently entered into any gas commodity hedge programs for 2023. Total general and administrative expenses for the Q1 of 2023 were $9,500,000 an increase of $1,000,000 or 12.6 percent compared to $8,500,000 for the Q1 of 2022.

Speaker 4

The increase is primarily related to stock based compensation expense the results of the 2022 amendments to restricted share awards issued in the Montauk Ag Renewables acquisition. Turning to our segment operating metrics. I'll begin by reviewing our Renewable Natural Gas segment. We produced 1,400,000 MMBtu of RNG during the Q1 of 2023, a decrease of less than $100,000 compared to $1,400,000 MMBtu produced in the Q1 of 2022. Our Rumpke and Apex facilities produced approximately $100,000 more MMBtu in the Q1 of 2023 compared to the Q1 of 2022 due to prior period process equipment failures.

Speaker 4

Our Galveston facility produced less than $100,000 fewer MMBtu in the Q1 of 2023 Compared to the Q1 of 2022 as a result of a temporary reduction in feedstock inlet during modifications to process equipment. Revenues from the Renewable Natural Gas segment in the Q1 of 2023 were $14,800,000 a decrease of $17,900,000 or 54.7 percent Compared to $32,700,000 in the Q1 of 2022. Average commodity pricing for natural gas for the Q1 of 2023 With $3.42 per MMBtu, 30.9% lower than the Q1 of 2022. During the Q1 of 2023, We self monetized 2,900,000 RINs, representing a 3,500,000 decrease or 54.5 percent compared to $6,500,000 monetized in the Q1 of 2022. The decrease was primarily related to our strategic decision Do not self market any RINs from 2023 production.

Speaker 4

Average pricing realized on RIN sales during the Q1 of 2023 was $2.01 as compared to $3.46 in the Q1 of 2022, a decrease of 41.9%. This compares to the average D3 RIN index price for the Q1 of 2023 of $2.03 being approximately 37.5 percent lower the average D3 RIN index price in the Q1 of 2022. At March 31, 2023, We had approximately 400,000 MMPtu available for end generation and had approximately 8,300,000 RINs generated and unsold. Our operating and maintenance expenses for our RNG facilities were $11,300,000 an increase of $1,700,000 We're 18.6% compared to $9,600,000 in the Q1 of 2022. The primary driver of this increase was related to timing of preventative maintenance expenses During the Q1 of 2023 at our McCarty and Apex facilities as compared to the Q1 of 2022.

Speaker 4

Our profitability is highly dependent on the market price of environmental attributes, including the market price of rents.

Speaker 1

As we self market a significant portion of

Speaker 4

our rents and are not a fore seller of D3 RINs, a strategic decision not to commit to transfer RINs during a period will impact our operating revenue and operating profit. The industry experienced volatile D3 RIN index prices boring since the EPA's release of the 2023 RVO in December 2022. The RVO released in December 2022 also included a 3 year volume compliance schedule rather than annual volume obligations. The final RVO is due to be released in June 2023, which we believe has temporarily impacted the timing of D3 RIN transfers from 2023 RNG production. Though the average market price of D3 RINs since the 2023 RVO release was approximately $2.18 Market price declined as low as $1.88 in February of 2023 from a D3 RIN index price of $2.43 on the day of the 2023 RVO release.

Speaker 4

We view this reduction in price as temporary and accordingly, we determined not to transfer any D3 RINs generated and available for transfer from 2023 RNG production during the Q1 of 2023. As a result, at March 31, 2023, we had approximately 8,300,000 RINs in inventory, an increase of 88.1% compared to March 31, 2022. We have entered into commitments to transfer during the Q2 of 2023, a significant amount of RINs generated but unsold as of March 31, 2023. We produced approximately 46,000 megawatt hours in renewable electricity during the Q1 of 2023, An increase of approximately 1,000 megawatt hours compared to 45,000 megawatt hours in the Q1 of 2022. Our Empowerment facility produced approximately 2,000 megawatt hours more in the Q1 of 2023 as a result of preventative engine maintenance performed during the Q1 of 2022.

Speaker 4

Revenues from the renewable electricity facilities in the Q1 of 2023 were approximately 4,400,000 an increase of $400,000 or 10% compared to $4,000,000 in the Q1 of 2022. The increase is primarily driven by the increase in our environment Our renewable electricity generation, operating and maintenance expenses in the Q1 of 2023 were 2,900,000 a decrease of $400,000 or 13.7 percent compared to $3,300,000 in the Q1 of 2022 due to the timing of scheduled preventative maintenance intervals at our We calculated and recorded an impairment loss of approximately $500,000 in the Q1 of 2023, an increase of $400,000 compared to $100,000 in the Q1 of 2022. The impairment in the Q1 of 2023 was related to a feedstock processing machine component at an RNG facility that was not operating at an optimal level and no longer in use. Other than this discrete event, we did not report any other impairments related to future cash flows. Operating loss in the Q1 of 2023 $14,200,000 an increase of $12,500,000 compared to an operating loss of $1,700,000 in the Q1 of 2022.

Speaker 4

RNG operating loss for the Q1 of 2023 was $4,300,000 a decrease of $17,300,000 133% compared to operating profit of $13,000,000 in the Q1 of 2022. Renewable electricity generation operating loss the Q1 of 2023 was $300,000 a decrease of $1,200,000 or 83.2 percent compared to an operating loss of $1,500,000 in the Q1 of 2022. Turning to the balance sheet. As of March 31, 2023, $70,000,000 was outstanding under our term loan. The company's capacity available for borrowing under the revolving credit facility was 115,500,000 During the Q1 of 2023, we used $11,800,000 of cash from operating activities, a decrease of 223.4 compared to $9,600,000 of cash provided by operating activities in the Q1 of 2022.

Speaker 4

In the Q1 of 2023, Our capital expenditures were approximately $13,300,000 of which $5,400,000 $2,700,000 And $2,000,000 were related to the ongoing PECO facility digestion capacity increase, the Montauk Ag Renewables Development project in North Carolina and our second Apex RNG facility respectively. As of December 31, 2022, we had cash and cash equivalent of approximately 78,500,000 Adjusted EBITDA for the Q1 of 2023 was a loss of $8,400,000 a decrease of $15,400,000 or 2 20 percent over adjusted EBITDA of $7,000,000 for the Q1 of 2022. EBITDA for the Q1 of 2023 was a loss of $9,000,000 a decrease of $12,800,000 over EBITDA of $3,800,000 in the Q1 of 2020 Net loss for the Q1 of 2023 increased $2,700,000 over the net loss for the Q1 of 2023. The increase was primarily related to a reduction of revenues due to our strategic decision to not sell RINs from 2023 RNG production in the Q1 of 2023. This loss was partially offset by the tax benefit related to the application of our effective tax rate to our Q1 2023 loss before income taxes.

Speaker 4

I'll now turn the call back over to Sean.

Speaker 2

Thank you, Kevin. In closing, we would like to reaffirm our full year 2023 outlook, which remains unchanged from the 2023 outlook we provided during our 2022 earnings call held in March. While we do not provide guidance on expectations of future environmental attribute prices, volatility in MX prices does impact our revenue expectations. We continue to expect RNG production volumes to range between 5.7000000 6,100,000 MMBtus with corresponding RNG revenues between $137,000,000 145,000,000 We continue to expect renewable electricity production volumes to range between 195,000 205,000 megawatt hours the corresponding renewable electricity revenues between $18,000,000 $19,000,000 And with that, we will pause for any questions. Thank

Operator

you. Queue for our first question. Our first question comes from the line of Craig Sree of Tuohy Brothers. Your line is open.

Speaker 5

Hi, good afternoon and congratulations on the decision to bank those RINs, it seems like a good decision. So I was just wondering if you have any detail about how much Pico RNG is in storage to be sold in Q2 and what exactly that CI score was?

Speaker 4

The CI score that was finalized was minus 261, I believe, Craig. And in regards to providing detailed volumes on our underlying operating sites. We generally don't do that, but we do expect that all of the volumes in storage remaining in storage will be released during the Q2 of 2023.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Matthew Blair of Tudor, Pickering, Holt and Company. Your line is open.

Speaker 3

Hey, good afternoon, Kevin and Sean. I I was hoping you could provide or maybe just confirm the lost EBITDA in the quarter from holding back the incremental RINs. We were coming to about a $3,000,000 impact, but on the call, I thought there was mention of like R4 1,000,000 at $2 a Just want to confirm that. And then also could you just on the big picture level, could you just outlay what gives you confidence The RINs will be moving up in the future. Thank you.

Speaker 4

Thanks, Matthew. If you want to base your

Speaker 6

first part

Speaker 4

of that question on averages, I believe the Q1 D3 RIN Index average was 202, 203,000,000 and of that if you want to apply our approximately $8,300,000 RINs generated but unsold that would give you a top line revenue. And then we have an approximate 20% or 25% depending upon what site they would be sourced from, but our RNG Segment royalty of approximately 20% would reduce those revenues. So again, depending upon timing of sales, but if you wanted to apply our 1st quarter RINs generated but unsold balance against that first quarter Average D3 index price and then take a estimated RNG segment royalty, which probably in the neighborhood of 20% or 22% or 23%. I'm not saying that would definitively approximate the deferred EBITDA out of Q1 into Q2 or the rest of the year, but that would give you a good approximation.

Speaker 2

And Matthew, just to answer that last piece, I mean consistent with our guidance provisions that we do, we do not provide guidance On our expectations of future attribute prices. I mean, we are sensitive to the fact that the volatility in those index prices, it does impact our revenue and EBITDA expectations.

Operator

Thank you. One moment please for our next question. Our next question comes from the line of Manav Gupta of UBS. Your line is open.

Speaker 6

Guys, I just want to ask a macro question. A number of your peers in the RNG space are very excited about what Cummins is doing with the natural gas engines and they think it could be a game changer for R and G in the transportation segment of heavy duty vehicles. I just wanted to know what your views are on this entire developments that are happening in the space as far as coming bringing Which are competitive with diesel in terms of strength and how do you feel about that?

Speaker 2

That's a good question Manav. We continue to evaluate all sources Of development uses of our products. We are very excited about the future prospects of ERINs And the ability for our facilities to generate those attributes for utilization in electric vehicles beyond just fleet usage but consumer vehicles. We are excited about the possibility of natural gas engines And the utilization of that fuel. We are excited about the potential of carbon utilization for a number of sustainable energy source productions that are also being used in the transportation space.

Speaker 2

There's a number of exciting developments that Continue to expand the prevalence and the diversification of how we can sell our products, our commodities as well as our attributes.

Operator

Thank you. One moment please. Our next question comes from Matthew Blair. Your line is open.

Speaker 3

Hey, thanks for taking my follow-up. So it looks like on the $2.01 realized RIN price. That's coming in at approximately a 97% capture against just average RIN prices in the quarter, Which is pretty good. Normally, we've seen cases where other companies are having to take more of a discount When they self market their RINs. So, if you could talk about that a little bit, is there anything special on your end that's allowing you to capture more of the benchmark RIN pricing, any sort of commercial efforts you can highlight or anything in that regard?

Speaker 2

Matthew, I think it's a good question. Obviously, we are not a fore seller of our attributes. And that allows for you to do a couple of things. It allows for you to carefully watch, monitor, project what we see to be higher than expected volatility in pricing. And we also manage our cash flows and our cash needs for development And for operations very carefully that combined with our base revenue from fixed price Contracts, particularly those in our renewable electricity space, allow for us to not only time and patiently monetize our attributes, But to do so more directly with the actual obligated parties as opposed to intermediaries That will provide cash flow, much needed cash flow for other industry players, but, do so at a more meaningful discount.

Operator

Thank you. I'm showing no further questions at this time. I'll turn the call back over to Sean MacLean for any closing remarks.

Speaker 6

Thank

Speaker 2

you, and thank you everyone for taking the time to join us on the conference call today. We look forward to speaking with you on our 2nd 2023 quarter conference call.

Operator

Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.

Powered by Quartr