Montauk Renewables Q3 2023 Earnings Call Transcript

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November 9, 2023

There are 6 speakers on the call.

Operator

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

Speaker 1

Thank you, and good afternoon. Welcome to Montauk Renewables earnings conference call to review the Q3 2023 financial and operating results and developments. I'm John Ciroli, Chief Legal Officer and Secretary at MonTock. Joining me today are Sean McClain, MonTock's President and Chief Executive Officer, to discuss business developments and Kevin Van Aslan, Chief Financial Officer, to discuss our Q3 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 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 details in Montauk Renewable's SEC filings. Our remarks today may also include non GAAP financial measures. We present EBITDA and adjusted EBITDA metrics because we believe these 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 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 Q3 2023 earnings press release and Form 10 Q issued and filed this afternoon.

Speaker 1

Those are available also on our website at ir.montaukrenewables.com. And after our prepared 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 McClain.

Speaker 2

Thank you, John. Good day, everyone, and thank you for joining our call. During the Q3 of 2023, industry wide B3 RIN generation decreased approximately 8% when comparing RIN generation in July 2023 to September 2020 as reported by the U. S. EPA.

Speaker 2

This compares to an approximately 6.6% increase and industry wide RIN generation from July 2022 to September 2022. We believe contributing factors to the Q3 2023 reduction in D3 RIN generation could include drought weather anomalies of lower than average rainfall and higher than average temperatures. As some of our production facilities experienced these weather anomalies and as Kevin will explain more, Our production during the Q3 of 2023 was similarly impacted. In the Q3 of 2023, Our Board of Directors approved funding for the first phase of our swine waste to renewable energy development initiative in North Carolina, Including the approximately $24,000,000 of cumulative expenditures through Q3 2023, We currently expect the 1st phase total capital investment to range between $140,000,000 $160,000,000 We currently expect to have the first of 8 processing reactor drains operational during the first half of twenty twenty four.

Speaker 3

We are

Speaker 2

currently planning for a rolling commissioning schedule for the remaining processing lines beginning in the second half of twenty twenty four and continuing through the second half of twenty twenty five. We expect revenue generation to commence in 2025. Upon completion of this first phase of the project, we expect to have sufficient capacity to satisfy The Duke Energy rep contract through the deployment of up to 8 of our patented reactors. At first full phase processing capacity, We anticipate the ability to process feedstock from over 120,000 hog spaces per day equating to over 200 tons of waste collection information today. The first phase of this project is expected to produce approximately 45,000 to 50,000 megawatt hour equivalents through a combination of 190,000 to 200,000 NMMBTUs and 25,000 to 30,000 megawatt hours.

Speaker 2

We also expect the first phase of the project will produce approximately 17,000 to 20,000 tons of char soil enhancement annually. Related to our PECO Dairy digestion capacity increase project, during the Q3 of 2023, We commissioned additional digestion capacity and our new reception pit. We have begun utilizing the increased reception pit capacity and have been working to increase gas availability through the additional digestion capacity. We expect to commission the last expansion of our digestion capacity increase During the Q4 of 2023, it will be necessary to process the final tranche of increased feedstock. Our dairy host informed us they expect to deliver that final increase in feedstock volumes in 2025, at which time we will make the final contractual payment to the dairy.

Speaker 2

And with that, I will turn the call over to Kevin.

Speaker 3

Thank you, Sean. I will be discussing our Q3 of 2023 financial and operating results. Please refer to our earnings press release and the supplemental slides that have been posted information. Total revenues in the Q3 of 2023 were $55,700,000 a decrease $200,000 or 0.3 percent compared to $55,900,000 in the Q3 of 2022. Decrease is primarily related to a decrease in pricing of gas commodity indices, which decreased 68.9% during the Q3 of 2023 as compared to the Q3 of 2022.

Speaker 3

Similarly, realized RIN prices decreased 12.6 percent to $3.05 in the Q3 of 2023 compared to $3.49 Q3 of 2022. Contributing to the revenue decrease are gains recognized in the Q3 of 2022 $400,000 related to a gas commodity hedge program that has since expired. Offsetting these revenue decreases was an increase of 26.7 percent of RINs sold in the Q3 of 2023 as compared to the Q3 of 2022. Total general and administrative expenses for the Q3 of 2023 were $7,800,000 a decrease of $700,000 or 8.2 percent Compared to $8,500,000 in the Q3 of 2022. The decrease was primarily related to a decrease of $700,000 or 13.9 percent and employee related costs, including stock based compensation.

Speaker 3

Turning to our segment operating metrics, I'll begin by reviewing our Renewable Natural Gas segment. We produced 1,400,000 MMptu of renewable natural gas during the Q3 of 2023, a decrease of less industry D3 RIN generation decreased approximately 8% when comparing RIN generation in July 2023 to September 2023 as reported by the EPA. This compares to approximately 6.6% increase in RIN generation between July 2022 September 2022. We believe contributing factors to this Q3 of 2023 reduction in industry D3 RIN generation could include drought weather anomalies of lower than expected rainfall in higher than average temperatures. These weather anomalies have impacted gas availability at certain of our RNG facilities during the Q3 of 2023.

Speaker 3

Also impacting our production were previously discussed Q2 of 2023 process equipment failures, which impacted the Q3 of 2023, but have and prepared. Revenues from the Renewable Natural Gas segment in the Q3 of 2023 were 50,900,000 decrease of $3,400,000 or 6.3 percent compared to $54,300,000 in the Q3 of 2022. Average commodity pricing for natural gas for the Q3 of 2023 was $2.55 per MMBtu, 68.9 percent lower than the Q3 of 2022. During the Q3 of 2023, we self monetized R13,800,000 RINs, Representing a $2,900,000 increase or 26.7 percent compared to $10,900,000 in the Q3 of 2022. Average realized pricing on RIN sales during the Q3 of 2023 was $3.05 as compared to $3.49 in the Q3 of 2022, decrease of 12.6%.

Speaker 3

This compares to the average D3 rent index price for the Q3 of 2023 of $3.01 being approximately 6.4% higher than the average D3 rent index price in the Q3 of 2022. At At September 30, 2023, we had approximately 300,000 MMBTUs available for RIN generation and had approximately 800,000 RINs generated and unsold. Of the RINs generated and unsold as of September 30, 2023, approximately $1,500,000 in revenues will be recognized during the Q4 of 2023 as the transfer of ownership was not completed by the customer until after September 30, 2023. At September 30, 2022, we had approximately 400,000 millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters

Speaker 4

millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters millimeters Btu's available

Speaker 3

for RIN generation and had approximately 1,400,000 RINs generated and unsold. Our profitability is highly dependent on the market price of environmental attributes, including the market price of rents. Realized prices for environmental attributes monetized in the period may not correspond directly to index prices due to the forward selling of commitments. We have not entered into significant forward sell commitments beyond the Q4 of 2023. We have entered into commitments to monetize all RINs expected to be generated during the Q4 of 2023 at an average price of $3.09 Our operating and maintenance expenses for our RNG facilities in the Q3 of 2023 were $11,900,000 a decrease of $200,000 or 1.7 percent Compared to $12,100,000 in the Q3 of 2022.

Speaker 3

Our RNG facilities reported reduced utility expenses Approximately $1,500,000 in the Q3 of 2023 as compared to the Q3 of 2022. Additionally, operating and maintenance expenses at our RNG facilities increased approximately $1,200,000 in the Q3 of 2023 as compared to the Q3 of 2022 as a result of facility preventative maintenance, repairs and other well field operational enhancements. We produced approximately 48,000 megawatt hours of renewable During the Q3 of 2023, a decrease of approximately 1,000 megawatt hours compared to 49,000 megawatt hours in the Q3 of 2022. Our Bowerman facility produced approximately 3,000 megawatt hours less in the Q3 of 2023 compared to the Q3 of 2022 due to higher ambient temperature Q3 of 2023. Our security facility produced approximately 2,000 megawatt hours more in the Q3 of 2023

Speaker 2

compared

Speaker 3

to the Q3 of 2022 due to engine maintenance completed in 2022. Revenues from renewable electricity facilities in the Q3 of 2023 were $4,800,000 an increase of $400,000 or 9.2 percent

Speaker 2

Compared

Speaker 3

to $4,400,000 in the Q3 of 2022. The increase is primarily driven by an increase in our security facility production volumes and the timing and generation and the timing of the generation and monetization of REX at our Empowerment facility. Our renewable electricity generation operating and maintenance expenses in the Q3 of 2023 were $2,200,000 an increase of $100,000 or 4.8 percent compared to $2,100,000 in the Q3 of 2022. The increase is primarily related to our Tulsa facility operating and maintenance expenses, which increased approximately $300,000 as a result of scheduled engine preventative maintenance and well field operational maintenance. Additionally, our Turkey Creek facility operating and maintenance expenses increased approximately 200,000 as a result of non capitalizable costs.

Speaker 3

The increase was offset by a decrease of approximately $300,000 at our Ironman facility as a result of property tax funds received in the Q3 of 2023. We calculated and recorded an impairment loss of less than $100,000 in the Q3 of 2023, a decrease of $2,200,000 or 97.8 percent compared to $2,300,000 in the Q3 of 2020 The impairments in the Q3 of 2023 were for specifically identified RNG machinery and equipment that were no longer in operational use. Other than this discrete event, we did not record any other impairments related to future cash flows. Operating income in the Q3 of 2023 was 16,800,000 increase of $3,100,000 or 23.1 percent compared to $13,600,000 in the Q3 of 2022. RNG operating income for the Q3 of 2023 was $24,100,000 a decrease of $2,700,000 or 10.3 percent Compared to $26,800,000 in the Q3 of 2022.

Speaker 3

Renewable electricity generation operating income for the Q3 of 2023 was 700,000 increase of $2,400,000 or 141.9 percent compared to an operating loss of $1,700,000 in the Q3 of 2022. Turning to the balance sheet. As of September 30, 2023, dollars 66,000,000 was outstanding under our term loan. The company's capacity available for borrowing under the revolving credit facility was $117,500,000 During the 9 months ended September 30, 2023, We generated $19,600,000 of cash from operating activities, a decrease of $40,200,000 or 67.3 percent compared to $59,800,000 of cash provided by operating activities in the Q3 of 2022. Of the RINs generated and unsold at September 30, 2023, approximately $1,500,000 in deferred revenues was included in working capital as of September 30, 2023, As the transfer of ownership was not completed by the customer until October of 2023.

Speaker 3

For the 9 months ended September 30, 2023, our capital expenditures $45,400,000 of which approximately $12,300,000 were related to the ongoing PECO facility digestion capacity increase, $9,600,000 were related to the Montauk Ag Renewables project in North Carolina, dollars 10,100,000 were related to our 2nd Apex RNG facility, $2,900,000 were related to our Blue Granite RNG facility and $2,800,000 were related to our Bowerman RNG project. As of September 30, 2023, we had cash and cash equivalents of approximately 73,700,000 Adjusted EBITDA for the Q3 of 2023 was $22,400,000 an increase of $1,500,000 or 7.4 percent Compared to $20,900,000 for the Q3 of 2022. EBITDA for the Q3 of 2023 was $22,400,000 an increase of 3.5 $1,700,000 or 15.6 percent over the Q3 of 2022. And with that, I'll turn the call back over to Sean.

Speaker 2

Thank you, Kevin. In closing, we would like to provide an updated full year 2023 outlook driven by drought weather anomalies that are likely a leading cause expectations of future environmental attribute prices, volatility in MX prices does impact our revenue expectations. We currently expect RNG production volumes to range between 5,700,000 5,800,000 MMBtu. Corresponding RNG revenues are expected to range between $155,000,000 $160,000,000 We expect renewable electricity production volumes to range between 190,000 and 195,000 megawatt hours and corresponding renewable electricity revenues are expected to range between $17,700,000 18,700,000 And with that, we will pause for any questions.

Operator

Thank you. We ask that you please limit yourself to one question until all have had a chance to ask a question, after which we'll answer additional questions from you as time permits. One moment for our first question. Our first question comes from the line of Ryan Finks with B. Riley.

Operator

Your line is now open.

Speaker 5

Hey, guys. Thanks for taking my question. Could you just talk about the decision to enter into commitments for All of your expected RIN generation in 4Q at $309,000,000 Was that just out of an abundance of caution? And Do you expect to enter into commitments in the near term for 2024 given the recent strength we've seen in index prices?

Speaker 2

Good question, Ryan. The philosophy that we have on rent commitments Is tied closer to our direct sales to obligated parties. We try to avoid selling RINs to any intermediaries and the timing at which we make those commitments is a cross between the strength of the pricing that we see, the abundance or absence of any news to the contrary that would suggest that those prices Are abnormal and the demand interest from those obligated parties. And that's the extent to which we make the decision on what we monetize or committed for the Q4. As far as the commitments into the upcoming year relative to the price strength, we don't provide forward guidance In terms of commitments beyond our acknowledgment that we haven't made any of those commitments in any material nature as of this point, But continue to evaluate it no differently than we have in previous quarters and in previous years, again, combination of the price strength and the demand interest of the obligated parties under the renewable fuel standard.

Operator

Thank you. One moment for our next question. Our next question comes from the line of Craig Shere with Tuohy Brothers. Your line is now open.

Speaker 5

Hi, good afternoon. So my apologies, I'm jumping around between earnings calls. It looks like your 3rd quarter was Mostly in line, but you're lowering RNG guidance for the year, which implies kind of a softer 4th quarter. Is this primarily relating to this drought issue impacting RNG production? Can you provide a little more color on what might make for a softer Q4?

Speaker 3

Yes. And Craig, that's correct. Our Q3 was impacted by these weather anomalies, significantly impacting our Ohio facilities and our Texas facilities. That's the primary leading reason for the lowering of the top end of our 2023 guidance. And then I did want to note that our Q3, while in line, we did have a approximately $1,500,000 in revenues from Q3 into Q4 that we normally would have obtained.

Speaker 3

But yes, generally, the drought that we experience for a prolonged period in our Q3, is the primary reason for the top end of that range being reduced from last quarter to this quarter.

Operator

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

Speaker 4

Hey, good afternoon. I was wondering if you had any thoughts on why D3 RIN generation appears to have slowed down recently. I I think the year to date pace, it's around a 17% growth rate, which obviously is pretty strong. But in recent months, It's been much lower than that. And if you're seeing that in your system or if you had any ideas on why things might be slowing down in that regard?

Speaker 3

Yes, Matthew, I think, as we disclosed, the we believe that the weather, some Less than average rainfall, higher than average temperatures. We believe that's contributing it to the 3rd quarter. And while we still continue to review and try to glean information from our systems and information. We do believe that there is that continued growth in the voluntary off take market as well. We're aware of that voluntary offtake.

Speaker 3

We have a portion of our production that is sold under fixed pricing. We're working to quantify that, but I believe it's those two leading factors would be contributing to the falling RIN production that we've been seeing as an industry over the last handful of months.

Operator

Thank you. I have a follow-up from the line of Craig Shere with Tuohy Brothers. Your line is now open.

Speaker 5

Yes. I was just wondering, could you provide a little more clarity because When I asked before, was a good summary about the Q3, but it sounded like the weakness was mostly going to be in the Q4. And I was trying to get a better sense of what the drivers were there.

Speaker 3

Thanks, Greg, for the follow-up. I apologize for not appropriately addressing. We're working through our various sites that have had impact with these drought conditions. And as we bring volumes back from the field, We're anticipating a rebound, but it's we're being mindful of any contemporaneous issues as we resume vacuum on the field in areas like that. We don't anticipate significant issues currently, but we are being mindful of 4th quarter impacts coming off of this previous summer.

Speaker 5

Thank you.

Operator

I would now like to hand the conference back over to Mr. Sean McLane for closing remarks.

Speaker 2

Thank you. And thank you all for taking the time to join us on the conference call today. We look forward to speaking with you again in 2024.

Operator

This concludes today's conference call. Thank you for your participation. You may now disconnect. Everyone have a wonderful day.

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Montauk Renewables Q3 2023
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