Montauk Renewables Q1 2024 Earnings Call Transcript

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Provided by Quartr
May 9, 2024

There are 7 speakers on the call.

Operator

Good 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 earning materials 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 2024 financial and operating results and developments. I'm John Ciroli, Chief Legal Officer and Secretary at Montauk. Joining me today are Sean McClain, Montauk's President and Chief Executive Officer, to discuss business development and Kevin Van Aslan, Chief Financial Officer, to discuss our Q1 2024 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 as such, 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 are detailed in Monmouth's 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 by 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 2024 earnings press release and Form 10 Q issued and filed this afternoon, which are available on our website at ir.montaukrenobals.com. After our remarks, we will open the call to questions. We ask that you please keep the one question to accommodate as many questions as possible. And with that, I will turn the call over to Sean.

Speaker 2

Thank you, John. Good day, everyone, and thank you for joining our call. To begin with development, my comments will be focused on updates regarding our Pico Dairy Digestion capacity increase and our Turkey, North Carolina Montauk Ag Renewables Swine Waste Energy Project, both of which were also discussed during our 2023 year end call a short 2 months ago. As we ended 2023, we had commissioned the first of our 2 new digesters in our new expanded reception pit at our PECO Dairy Cluster project. During the Q1 of 2024, we completed the commissioning of the second and final digester.

Speaker 2

With the digestion expansion project now fully commissioned, we expect to continue to ramp up in production through the Q2 of 2024. The PECO Expansion project increased digestion capacity by approximately 60% to better match the unchanged processing capacity of the project's RNG facility. The new digestion capacity is expected to be fully utilized once the dairy provides our contractual 3rd and final increase in feedstock volumes in 2025. In the Q1 of 2024, our RNG production at the PECO facility increased approximately 39% compared to the Q1 of 2023. I will now provide an update regarding our North Carolina swine to waste energy development, Mauthach Ag Renewables.

Speaker 2

We have substantially completed the engineering and are preparing to initiate the commissioning activities of our first reactor processing line at our Turkey, North Carolina location. We expect commissioning to continue through the end of June 2024. Our development progress has positioned us to be able to enter into a full engineering procurement and construction contract related to the 1st phase full build out to satisfy our Duke rec agreements. We have also placed orders for various significant components, many of which have long lead times related to the construction of the additional reactors. We expect this new EPC contract to assist us in meeting our rolling commissioning schedule through late 2025.

Speaker 2

To support the 1st phase rolling commissioning schedule and ultimately our due rec agreements, we continue to pursue feedstock agreements. During the Q1 of 2024, we have contracted with a farming group in our late stage discussions with multiple others. We continue to thoughtfully bring partners under agreement targeting approximately 120,000 Hog spaces to ultimately satisfy our Duke Rec agreement. A critical part of our development progress in North Carolina includes the continued optimization of our feedstock collection equipment and methodologies. Our collection process includes installing equipment on our feedstock supplier farms, which are under long term agreements as well as processes and equipment for processing waste through multiple phases of solids concentration on both the farm site as well as our centralized processing facility at Turkey, North Carolina.

Speaker 2

We continue to progress with an amendment to the new renewable energy facility, the NREF designation, our project received late 2023 that can optimize the generation of RECs. We expect a decision on this amendment in 2024, which is a critical path item in the timing of the utility infrastructure design and other balance of plant componentry at our Turkey, North Carolina facility. As discussed in our 2023 year end results call on March 2024, we reached an agreement with 1 of our landfill hosts to exit our gas rights in advance of their exploration, impacting 1 of our smaller renewable electric generation operating facilities. The strategic decision to exit this facility was influenced by mid-twenty 24 expiration of an above market power purchase agreement, the elimination of decommissioning asset removal or site restoration obligations, the agreed consideration of proceeds of $1,000,000 being well in excess of the carrying value of the project and the offer to extend our gas rights at 2 of our existing RNG operating facilities at Tascocita and Coastal Plains for an additional 5 years each. Through the contractual effective date of this agreement, though it is October 1, 2024, in March 2024, we elected to cease operations at this facility as the electrical utility provider is performing upgrades, which would require us to invest additional capital.

Speaker 2

This decision is expected to have a positive effect on 2024 results due to a projected monthly loss on operations following the expiration of the project's power purchase agreement. Finally, I'd like to highlight and outline what we view to be the strong underlying fundamentals of the Montauk, particularly in light of the share price volatility expressed experienced during 2024. I will not however comment on the stock price or its trading volumes. Nearly all of Montauk's portfolio of 14 operating projects nationwide are hosted by large and growing host businesses. Our integrated relationship approach with these host businesses helps us strategically to continue to secure recurring renewals of our gas rights at these facilities.

Speaker 2

The company is winning new competitive project opportunities and is invited to participate in a diverse selection of new opportunities. We are focused on diversifying our comprehensive business model, including the feedstocks we process, the commodities we produce, the federal and state attributes we generate, the method by which we monetize our commodities and attributes and the way in which we acquire our project feedstock requirements. We have a demonstrated history of successful project execution and remain intently focused on attractive growth opportunities. Specifically, we have announced a series of committed development projects that are expected to increase our production capacity by 6,900 MMBtus a day, 2,500,000 MMBtus annually and additional development projects that are expected to advance the benefit of our existing facilities through the monetization of biogenic carbon dioxide and further diversify our feedstock processing to include waste from industrialized swine agriculture. On an annual basis, we have been net income and operating cash flow positive since 2022.

Speaker 2

We maintain the financial discipline that provides us the opportunity to patiently enhance our profit from the sale of our rent attributes by placing them directly with large RFS obligated parties and synchronizing those transactions to the purchasing cadence of those large obligated parties. We ended the Q1 of 2024 with more than $60,000,000 in cash on our balance sheet, an undrawn revolving credit facility with $117,500,000 of availability and a credit syndication which we can approach the utilization of accordion finance options and which is separately project finance development. We remain fully integrated, operate and maintain examples of multiple commercially viable biomethane processing technologies and continue to build upon 4 decades of experience in optimizing the collection and beneficial use of processing of feedstocks through nationwide variability of host business practices, climate impacts and feedstock constituents. Montauk's focus has been and continues to be on maximizing long term shareholder value. We continue to believe our development strategy that supports that focus.

Speaker 2

Lastly, regarding the RFS, the EPA has set the RVO at 1,090 D3 RINs for 2024, implying a monthly D3 generation run rate higher than what the industry has achieved to date through 2024. We also note that the EPA has announced that it will not use waiver authority for the 2024 RVO. We believe those factors can support strong 2024 price levels for rents. And with that, I will turn the call over to Kevin.

Speaker 3

Thank you, Sean. I will be discussing our Q1 2024 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. Our profitability is highly dependent on the market price and environmental attributes, including the market price of RINs. As we self market a significant portion of our RINs, a strategic decision not to commit to transfer available RINs during a period will impact our revenue and operating profit.

Speaker 3

We strategically determined not to transfer all available D3 RINs generated and available for transfer during the Q1 of 2024 based on our internal expectations related to the price of D3 RINs. As a result, we have approximately 3,400,000 RINs remaining in inventory from 2024 Q1 gas production. We did sell approximately 3,900,000 RINs, representing all RINs from our 2023 gas production. We have not entered into commitments to transfer RINs in inventory or RINs expected to be generated from forecasted future production. The average second quarter through the 1st few days of May, B3 RIN price was approximately $3.28 Total revenues in the Q1 of 2024 were $38,800,000 an increase of $19,600,000 or 102.5 percent compared to $19,200,000 in the Q1 of 2023.

Speaker 3

The primary driver for this increase relates to an increase of 4,900,000 RINs sold in the Q1 of 2024 compared to the Q1 of 2023 due to our decision to not sell RINs in the Q1 of 2023 due to our belief that the Q1 of 2023 D3 RIN index volatility was temporary. Of the 7,900,000 RINs sold in the Q1 of 2024, $4,000,000 related to 20 24 RNG production. Also contributing to the increase is an increase in realized RIN pricing during the Q1 of 2024 to $3.25 compared to $2.01 in the Q1 of 2023. Total general and administrative expenses were $9,400,000 in the Q1 of 2024, flat compared to $9,500,000 in the Q1 of 2023. Employee related costs, including stock based compensation, were $5,700,000 in the Q1 of 2024, an increase of $700,000 or 14.6 percent compared to $5,000,000 in the Q1 of 2023.

Speaker 3

Our corporate insurance premiums increased approximately 200,000 dollars or 12.2 percent in the Q1 of 2024 compared to the Q1 of 2023. Our professional fees decreased approximately $1,000,000 or 48.7 percent compared to the Q1 of 2023. 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 2024, an increase of less than $100,000 or 4.4 percent as compared to $1,400,000 during the Q1 of 2023. Our coastal facility produced 38,000 more MMBtu in the first quarter of 2024 compared to the Q1 of 2023 as a result of plant processing equipment improvement and well food operational enhancements.

Speaker 3

Our McCarty facility produced 24,000 more MMBTU in the Q1 of 2024 as compared to the Q1 of 2023 as a result of well field enhancements by our landfill host. Our Galveston facility produced 19,000 MMBTU more in the Q1 of 2024 compared to the Q1 of 2023 as a result of a temporary reduction in feedstock inlet during modifications to process equipment in the Q1 of 2023. Our PECO facility produced 9,000 MMBtu more in the Q1 of 2024 compared to the Q1 of 2023 as a result of commissioning our dairy digestion expansion project. Offsetting the improvements was our Rumpke facility, which produced 55,000 MMbtu less in the Q1 of 2024 compared to the Q1 of 2023 as a result of the process equipment failure that occurred during the Q1 of 2024. Revenues from the Renewable Natural Gas segment during the Q1 of 2024 were $34,000,000 an increase of $19,200,000 or 129.9 percent compared to $14,800,000 during the Q1 of 2023.

Speaker 3

Average commodity pricing for natural gas for the Q1 of 2024 was 34.5% lower than the prior year period. During the Q1 of 2024, we self marketed 7,900,000 RINs, representing a 4,900,000 increase or 167.5 percent compared to 2,900,000 RINs self marketed during the Q1 of 2023. Average pricing realized on RIN sales during the Q1 of 2024 was $3.25 as compared to $2.01 during the Q1 of 2023, an increase of 61.7 percent. This compares to the average D3 RIN index price for the Q1 of 2024 of 3 $0.12 being approximately 53.7% higher than the average D3 RIN index price for the Q1 of 2023 of $2.03 At March 31, 2024, we had approximately 400,000

Speaker 4

millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters

Speaker 3

millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters Btu's available for RIN generation and had approximately 3,400,000 RINs generated and unsold. We had approximately 400,000 MMMBTUs available for RIN generation and had expenses for our RNG facilities during the Q1 of 2024 were $12,100,000 an increase of $800,000 or 7% compared to $11,300,000 during the Q1 of 2023. Our RNG facilities reported increased total segment utility expenses of approximately $100,000 during the Q1 of 2024 as compared to the Q1 of 2023. Other RNG operating and maintenance expenses increased approximately $700,000 during the Q1 of 2024 as compared to the Q1 of 2023, primarily as a result of timing related to annual facility preventative maintenance. We produced approximately 54,000 megawatt hours in renewable electricity during the Q1 of 20 24, an increase of approximately 8,000 megawatt hours or 17.4 percent compared to 46,000 megawatt hours during the Q1 of 2023.

Speaker 3

Our security facility produced approximately 3,000 megawatt hours more in the Q1 of 2024 compared to the Q1 of 2023 as a result of the completion of prior period engine maintenance. Our Bowerman facility produced approximately 3,000 megawatt hours more in the Q1 of 2024 compared to the first quarter of 2023, primarily related to the timing of original equipment manufacturer preventative engine maintenance. Revenues from the renewable electricity facilities during the Q1 of 2024 were $4,800,000 an increase of $400,000 or 9.8 percent compared to $4,400,000 during the Q1 of 2023. The increase is primarily driven by the increase in volumes. Our renewable electricity generation operating and maintenance expenses during the Q1 of 2024 were $2,300,000 a decrease of $600,000 or 19.9 percent compared to $2,900,000 during the Q1 of 2023.

Speaker 3

Our Bowerman facility operating and maintenance expenses decreased approximately $300,000 which is primarily driven by the timing of annual OEM preventative maintenance expenses. Our security facility operating and maintenance expenses decreased approximately $300,000 which was driven by the non recurring reversal of our asset retirement obligation liability related to the sale of the site. During the Q1 of 2024, we recorded impairments of $500,000 an increase of less than $100,000 or 17.1 percent compared to $500,000 in the Q1 of 2023. The specifically identified impairment losses in the Q1 of 2024 primarily relate to the remaining book value of assets due to our decision to cease operations at the security facility. We also impaired various RNG equipment that was deemed obsolete for current operations.

Speaker 3

The Q1 of 2023 impairment relates to specifically identified feedstock processing machine component at an RNG site that was not in operational use. We did not record any impairments related to

Speaker 2

our cash flow assessments.

Speaker 3

Operating income for the Q1 of 2024 was 2,400,000 dollars an increase of $16,500,000 or 116.7 percent compared to an operating loss of $14,200,000 for the Q1 of 2023. RNG operating income for the Q1 of 2024 was $11,600,000 an increase of $15,900,000 or 370.2 percent compared to an operating loss of $4,300,000 for the Q1 of 2023. Renewable electricity generation operating for the Q1 of 2024 was $400,000 an increase of $600,000 compared to an operating loss of $200,000 for the Q1 of 2023. Turning to the balance sheet. At March 31, 2024, dollars 62,000,000 was outstanding under our term loan.

Speaker 3

As of March 31, 2024, the company's capacity available for borrowing under the revolving credit facility remained at $117,500,000 During the Q1 of 2024, we generated $14,300,000 of cash from operating activities, a 220.7% increase from the prior year fiscal quarter ended March 31, 2023 of cash used in operating activities of $11,800,000 Based on our estimate of the present value of our PECO earn out obligation, we recorded a decrease of $800,000 to the liability at March 31, 2024. This decrease was recorded through our RNG segment royalty expense. In the Q1 of 2024, our capital expenditures were approximately $22,000,000 of which $12,000,000 $4,300,000 $1,700,000 $1,500,000 $1,500,000 $1,300,000 were related to the ongoing development of Montauk Ag Renewables, our 2nd Apex facility, the Blue Granite RNG project, our Bowerman RNG project and the Pico digestion capacity increase, respectively. We also acquired approximately 42 acres of property in Turkey, North Carolina, which shares the property line of our existing property as we continue to strategically plan for the Montauk Ag Renewables development. As of March 31, 2024, we had cash and cash equivalents of approximately 63,300,000 dollars Adjusted EBITDA for the Q1 of 2024 was $9,500,000 an increase of $17,900,000 or 212.7 percent compared to adjusted EBITDA of a negative $8,400,000 for the Q1 of 2023.

Speaker 3

EBITDA for the Q1 of 2024 was 8,900,000 dollars an increase of $17,800,000 compared to EBITDA of a negative $9,000,000 for the Q1 of 2023. Net income for the 1st fiscal quarter of 2024 increased $5,600,000 or 148.8 percent compared to net income for the Q1 of 2023. Our income tax expense increased approximately $12,500,000 or 103.4 percent for the Q1 of 2024 as compared to the Q1 of 2023. The difference in effective tax rates between the 2024 Q1 and the 2023 Q1 primarily relate to the increase in pre tax income for the Q1 of 2024 as compared to the Q1 of 2023. I'll now turn the call back over to Sean.

Speaker 2

Thank you, Kevin. In closing, and though we don't provide guidance as to our internal expectations on the market price of environmental attributes, including the market price of D3 RINs, we are reaffirming our full year 2024 outlook provided in March 2024. For 2024, we expect our RNG production volumes to range between $5,800,000 $6,100,000 MMBtu with corresponding RNG revenues to range between $195,000,000 to $215,000,000 We expect our 2024 renewable electricity production volumes to range between 190,000 megawatt hours with corresponding renewable electricity revenue to range between $18,000,000 $19,000,000 And with that, we will pause for any questions.

Operator

And thank you. And our first question comes from Paul Cheng from Scotiabank. Your line is now open.

Speaker 5

Hi, good afternoon. Thank you, gentlemen. Maybe this is for John. I understand that from time to time you would make decision whether you want to sell all of the available win or not in the quarter. But from the outside, is there any indicator or we're trying to understand the process, how you're going to come about making how much of the wins you will decide to sell in a particular quarter?

Speaker 5

Is there any indicator from the outside that we should check? And based on that, we'll be able to have some kind of rule of thumb? We can guess that what's that volume may look like.

Speaker 2

Thanks, Paul. Good question. How we determine the volume of RINs that we sell as closely as we can tie it to the cadence, the purchasing cadence of the obligated parties. So rather than timing the market and obviously, all sales subjected to as much analysis as we can place into publicly available information regarding the RFS, regarding waiver credits, regarding the possibility of any adjustments to the plan in general. We focus on the obligated parties as opposed to selling to any midstream intermediaries on a month to month or quarter to quarter basis.

Speaker 2

So invariably, it results in it's an annual program. So it ends up being heavier weighted from the midpoint of the year to the back half of the year. Volumes are typically purchased more thinly, particularly in the Q1. But that's about all the guidance I can really provide in terms of really what drives those decisions. We try to play very meaningfully into the RFS program and the best way to do that is to get the RINs in the hands seamlessly into the obligated parties and have them retired as such.

Operator

And thank you. And one moment for our next question. And our next question comes from Samya Jain from UBS. Your line is now open.

Speaker 6

Hi, thanks guys. I noticed last quarter you had mentioned that the second Apex RNG facility was supposed to get started in 2nd sorry, in Q4 of 2024. So I guess what caused you guys to push that back to 2025?

Speaker 3

Primarily, it was related around the timing of when we can get that site up and operational. And just from the 4th in the Q4, we noted that there were just some permits or components that were taking longer to get on site and operational to be commissioned than we are anticipating. We still do believe to have that commissioned in the Q1 of 2025. But I do want to point out that, it was a gas rights agreement trigger that was enabled that was triggered requiring the 2nd facility to meet the capacity needs as the landfill host is bringing waste into the site. Even after we expect that site to be commissioned, we're anticipating some excess capacity as the landfill continues to bring in new ways to the site for us to be able to utilize that full capacity.

Speaker 3

But mainly, it was a combination of permitting and various other componentry related to the actual construction of that second facility that delayed us from commissioning into the Q1 of 2025. We don't anticipate that to materially impact our production volumes for 2024.

Operator

And thank you. And our next question comes from Matthew Blair with Tudor, Pickering and Holt and Company. Your line is now open.

Speaker 4

Thanks and good afternoon. I was hoping you could share a little bit more about the I think it was a process equipment failure at Rumpke in the Q1. Has that been fixed? And if not, when would you expect that to be fixed? And what kind of impact might that have had on Q1 and potentially into the Q2 production?

Speaker 3

Thanks, Matthew. Obviously, we're aware of the environmental collection matters that we had discussed in our Q4 at Runcke as well. We're continuing to work through that. The unexpected process equipment failure was associated with efficiency at certain of our processing equipment either in compression or some media that we identified as we were going through the facility in the Q1. Of those two matters, substantively both of them we expect to be resolved in the second quarter.

Speaker 3

And as I noted, that was a drag on our Q1 results at Rumpke pulling the overall production period over period down 55,000 or so when compared back to the Q1 of 2023. But again, we expect to have that those failures remediated during the Q2 of 2024.

Operator

And our follow-up question comes from Paul Cheng from Scotiabank. Your line is now open.

Speaker 5

Hey, John, do you have any kind of guidance for the full year OpEx for the LNG and the LNG?

Speaker 3

We generally, Paul, leave our guidance expectation announcements to production and revenues. Historically, we haven't given guidance towards operating expenses for either segment or our G and A. I'll leave our commentary at that level at this point.

Operator

And thank you. And one

Speaker 6

moment for our next question. Our follow-up question.

Operator

And our follow-up question comes from Matthew Blair from Tudor, Pickering, Holt and Company. Your line is now open.

Speaker 4

Hi, thanks for taking my follow-up. So I think that roughly onefour of your current portfolio is on fixed offtake, getting like a fixed price rather than selling into the transportation market and getting the D3 RIN. You mentioned that your growth projects, I think it was 1,250,000 MMBtu in the hopper. So as you continue to grow, do you anticipate keeping that roughly like 1 fourth fixed ratio or do you think that you'll move more into the spot market? And then could you also talk about any sort of trends you're seeing on the fixed pricing?

Speaker 4

Are utilities paying a higher amount for RNG given the strength of the D3 RIN market? Thanks.

Speaker 2

Sure, Matthew. For sure, we're continuing to evaluate how we are going to contract the volumes that are coming through our development pipeline as these things are coming online. We have a fairly robust RFP process, and we entertain, as we have previously, multiple forms of monetization. We're looking at fixed price opportunities. We're looking at those opportunities in the voluntary market.

Speaker 2

We have deployed in the past more margin share type agreements where we take a base fixed price if we don't want to lock a higher percentage of our portfolio and lose you'll put a sharing mechanism in place beyond that fixed price floor as a component of upside. All of these things have been in play. We continue to look at opportunities in the European market under the Red II directive for some of the volumes. And we're continuing to expand

Speaker 4

what

Speaker 2

it is that we are monetizing to allow for that flexibility. So with our development in North Carolina and the ability to take those volumes initially for this first phase under a fixed price long term agreement with Duke that will have power and the RECs, you are able to allow for, call it, the financial patience that is required to make sure that these RINs can be sold under existing structures that allows you to self market and to do so directly to those obligated parties.

Speaker 3

And then just a tag on there, Matthew, through our RFP process, especially over the last handful of months, we've seen some movement in the voluntary market and that's one of the tougher price points for us to nail down. But some movement, but still generally in that call it $18, $20, $23 or so range plus or minus is what we continue to see. So if it was 18 or 20, call it 6 months ago, maybe we've seen some movement up to 20 or 22 within the last 6 months. But again, it's still basically been around that type of range. We haven't seen anything that is really driving a value from a, call it, plus $3 RIN at this point.

Operator

And thank you. And one moment for our follow-up question. And our follow-up question comes from Paul Cheng from Scotiabank. Your line is now open.

Speaker 5

Hey, Kevin or Sean, do you have a guidance that to provide about the cadence of the pickle warning increase over the next 2nd quarters until you reach the full capacity by 2025?

Speaker 2

I think your question is in regards to the deployment of our Montauk Ag renewables facility. So we will have right now to complete the first phase, first phase defined as the Duke Rec agreement. We will look to target the collection of waste from 100 and 20,000 hog spaces and we will have 7 reactor processing lines. The first of which was imminently starting commissioning and will be commissioning through the end of June. And then the cadence of those will be, I'd say, fairly linear between that point all the way through late 2025.

Operator

And thank you. And I'm showing no further questions. I would now like to turn the call back over to Sean

Speaker 6

for closing remarks. Thank you.

Speaker 2

And thank you all for taking the time to join us on our conference call today. We look forward to speaking with you when we present our second quarter 2024 results.

Operator

This concludes today's conference call. Thank you for participating. You may now disconnect. Thank you.

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