Montauk Renewables, Inc. (NASDAQ:MNTK) Q2 2022 Earnings Conference Call August 9, 2022 5:00 PM ET
Company Participants
John Ciroli – Vice President & General Counsel
Sean McClain – Chief Executive Officer & President
Kevin Van Asdalan – Chief Financial Officer
Conference Call Participants
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 earnings materials or made on this call.
John, please go ahead.
John Ciroli
Thank you and good afternoon everyone. Welcome to Montauk Renewables Earnings Conference Call to review Second Quarter 2022 Financial and Operating Results and Business Developments. Today, we issued our earnings press release. I’m John Ciroli, Vice President, General Counsel and Secretary at Montauk.
Joining me today are Sean McClain, Montauk’s President and Chief Executive Officer, to discuss business developments; and Kevin Van Asdalan, Chief Financial Officer, to discuss our second quarter 2022 financial and operating results.
At this time, I would like to direct your attention to our forward-looking disclosure statement. 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 Montauk Renewables’ SEC filings.
Our remarks today may include references to non-GAAP financial measures. Reconciliations to the most directly comparable GAAP financial measures can be found at the back of our slide presentation and in our second quarter 2022 earnings press release and Form 10-Q, which are available on our website at ir.montaukrenewables.com.
After our prepared remarks, we will open the call to questions. [Operator Instructions]
With that, I will turn the call over to Sean.
Sean McClain
Thank you, John. Good day, everyone and thanks for joining our call.
In June 2022, our Board approved a capital project to upgrade our Raeger, RNG facility to increase production under stringent federal pipeline tariff requirements that limit the oxygen content of product gas. We anticipate this improvement project will become commercially operational in the second half of 2023, at which time we expect an approximately 50% increase in average daily production from the already existing available feedstock.
The company continues to progress with its dairy cluster RNG projects, Pico in Idaho. We expect to finalize the design of our digestion capacity expansion, along with water management and purification improvements in the third quarter of 2022. We expect the California Air Resource Board, CARB, will finalize its review of our CI score for Pico during the third quarter of 2022 and complete its validation of the application during the fourth quarter of 2022. We expect to begin releasing gas from storage in the third quarter of 2022.
Related to our Pico feedstock amendment, the dairy began to deliver the first tranche of increased feedstock volumes in the third quarter of 2022, triggering a development payment to the dairy. We expect the dairy to begin delivering the second tranche of increased feedstock in the first half of 2023. The improvements made to date in our digestion process efficiencies and in our water management have enabled us to process all of the increased feedstock.
The company continues to optimize improvements to the now patented reactor technology, which is operating a pilot scale at our Magnolia, North Carolina location. We have not yet, however, completed the optimization program of the Magnolia facility and have not yet achieved commercial operations.
We continue to engage with regulatory agencies in North Carolina related to the power generation that will be derived from swine waste in confirming its eligibility for renewable energy credits under North Carolina’s renewable energy portfolio standards in anticipation of commercial production. Our Magnolia, North Carolina location has an existing electricity interconnection, which can be reactivated, pending the outcome of those regulatory discussions. We are also in varying stages of discussions with potential power purchases related to this project.
Finally, we received — we recently filed a provisional patent application with the U.S. Patent and Trademark Office at the end of July 2022, pertaining to a combustion-based oxygen removal and condensate neutralization technology we developed. The patent application is for a new low pH neutralization technology that is designed to mitigate the harmful unfavorable pH condensate that can be produced as wastewater is removed from the biogas conversion process. Without mitigating measures such as our technology, low PH can result in additional expense to remedy damage to processing facility components and downtime for equipment replacement and troubleshooting.
We currently have this technology deployed at one of our RNG facilities and are exploring deployment at additional select sites within our portfolio. The filing of this provisional patent application aligns with our continued efforts to deploy technology within the company’s existing portfolio to optimize landfill biogas recovery.
And with that, I will turn the call over to Kevin.
Kevin Van Asdalan
Thank you, Sean. I will be discussing our second quarter of 2022 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 second quarter of 2022 were $67.9 million, an increase of approximately $36.2 million or 114.3% compared to $31.7 million in the second quarter of 2021. The primary driver for this increase related to an increase of 89.9% in realized RIN pricing in the second quarter of 2022 of $3.38 compared to $1.78 in the second quarter of 2021.
Additionally, higher revenues were driven by an increase in natural gas index pricing of 153.4% in the second quarter of 2022, up $7.17 compared to $2.83 in the second quarter of 2021. These increases were offset by lower counterparty sharing revenues of $1.1 million in the second quarter of 2022 compared to $6.1 million in the second quarter of 2021. Also offsetting the increase are gains recognized in the second quarter of 2022 related to gas commodity hedging activities of approximately $1.6 million.
As it relates to 2022 results, our profitability is highly dependent on the market price of environmental attributes, including the market price of RINs. As we self-market a significant portion of our RINs, a decision not to commit available RINs during a period will impact our revenue and operating profit.
At the beginning of the second quarter of 2022, we had approximately 4.4 million RINs in inventory. We sold all of those RINs in inventory during the second quarter of 2022 in addition to the RINs generated from our second quarter 2022 production. At the end of the second quarter of 2022, we had approximately 1.6 million RINs in inventory as compared to 1.6 million RINs in inventory at the end of the second quarter of 2021.
We have also entered into agreements to transfer the majority of RINs expected to be generated and available for transfer during the third quarter of 2022. The average realized price of these commitments is approximately $3.49. The average D3 RIN index price during the month of July was approximately $2.67. We have not currently committed to transfer a significant amount of RINs beyond the third quarter of 2022.
We report the impacts of our gas commodity hedge program within our Corporate segment. In the second quarter of 2022, though our gas commodity hedge program was priced at rates below actual index prices, lower index rates during the second quarter of 2022 as compared to index rates in the first quarter of 2022 resulted in recognizing gains of approximately $1.6 million. We did not have any gas hedge program in the second quarter of 2021. Based on current rates, we expect our gas commodity hedge program to continue to be priced below actual index prices through the year end of 2022, at which time the hedge program will expire.
Total general and administrative expenses were $8.8 million for the second quarter of 2022, an increase of approximately $1.4 million or 19.2% compared to $7.3 million in the second quarter of 2022. General and administrative expense for the second quarter of 2022 increased approximately $0.7 million compared to the second quarter of 2021, associated with our Montauk Ag Renewables acquisition. Professional fees increased approximately $0.5 million or 64.9% during the second quarter of 2022.
Turning to our segment operating metrics. I’ll begin by reviewing our Renewable Natural Gas segment. We produced 1.5 million MMBtu of RNG during the second quarter of 2022, an increase of approximately 0.1 million MMBtu of RNG over the second quarter of 2021. Our Pico facility produced 29,000 more MMBtu in the second quarter of 2022 compared to the second quarter of 2021, as a result of improvements to the existing digestion process. Our Galveston facility produced 37,000 more MMBtu in the second quarter of 2022 compared to the second quarter of 2021 as a result of process efficiency gains resulting from the second quarter of 2021 repairs related to the hydrogen sulfide contaminants in the feedstock.
Revenues from the Renewable Natural Gas segment in the second quarter of 2022 were $64.6 million, an increase of approximately $37.0 million, 134.1% compared to $27.6 million in the second quarter of 2021. Average commodity pricing for natural gas for the second quarter of 2022 was 153.4% higher than the second quarter of 2021. During the second quarter of 2022, we self-marketed 14.4 million RINs, representing an approximate 5.7 million or 65% increase compared to the 8.8 million self-marketed in the second quarter of 2021. The increase was driven by our decision not to self-market a significant amount of RINs due to our belief that the 2022 first quarter D3 RIN index volatility and decline was temporary.
Average pricing realized on RIN sales during the second quarter of 2022 was $3.38 as compared to $1.78 in the second quarter of 2021, an increase of 89.9%. This compares to the average D3 RIN index price for the second quarter of 2022 of $3.22 being approximately 4.9% higher than the average D3 RIN index price in the second quarter of 2021.
Operating and maintenance expenses for our RNG facilities in the second quarter of 2022 were $11.0 million, an increase of approximately $0.8 million or 8.1% as compared to $10.2 million in the second quarter of 2021. Our McCarty facility incurred increased preventative maintenance expenses of approximately $0.3 million and our Pico facility operating and maintenance expenses increased approximately $0.7 million, as a result of scheduled engine preventive maintenance in the second quarter of 2022 as compared to the second quarter of 2021.
Offsetting the increase was our Galveston facility having lower operating and maintenance expenses of approximately $0.7 million in the second quarter of 2022 as compared to the second quarter of 2021 due to the repairs related to the hydrogen sulfide contaminants.
We produced approximately 47,000 megawatt hours in renewable electricity during both the second quarter of 2022 and 2021. Revenues from renewable electricity facilities in the second quarter of 2022 were $4.3 million, an increase of approximately $0.2 million or 5.8% compared to $4.1 million in the second quarter of 2021. The increase is due to our security facility production volumes. Operating and maintenance expenses for our renewable electricity facilities in the second quarter of 2022 were $3.8 million, an increase of approximately $1.5 million or 64.0% compared to $2.3 million in the second quarter of 2021. The increase is primarily a result of the timing of scheduled engine preventive maintenance intervals at our Bowerman facility, which was approximately $1.3 million higher in the second quarter of 2022 over the second quarter of 2021.
Operating profit in the second quarter of 2022 was $24.0 million, an increase of approximately $24.5 million compared to an operating loss of $0.5 million in the second quarter of 2021. RNG operating profit for the second quarter of 2022 was $35.3 million, an increase of approximately $27.7 million or 363.7% compared to $7.6 million in the second quarter of 2021.
Renewable electricity generation operating loss for the second quarter of 2022 was $1.4 million, a decrease of approximately $1.4 million compared to an operating profit of less than $0.1 million for the second quarter of 2021.
Turning to the balance sheet. As of June 30, 2022, $76.0 million was outstanding under our term loan, and we had no borrowings under our revolving credit facility. The company’s capacity available for borrowing under the revolving credit facility was $116.1 million.
During the six months ended June 30, 2022, we generated $26.8 million of cash from operating activities, a 138.1% increase from the second quarter of 2021 of $11.2 million. For the six months ended June 30, 2022, our capital expenditures were $5.1 million, of which approximately $1.3 million of the six months ended June 30, 2022 capital expenditures were related to the ongoing development of Montauk Ag Renewables in North Carolina. During the six months ended June 30, 2022, we received proceeds from the sale of NOx emissions allowance credit, resulting in a gain of approximately $0.3 million.
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.
Adjusted EBITDA for the second quarter of 2022 was $27.6 million, an increase of approximately $22.4 million or 435.0% over adjusted EBITDA of $5.2 million in the second quarter of 2021. EBITDA for the second quarter of 2022 was $29.1 million, an increase of approximately $24.0 million or 469.6% over EBITDA of $5.1 million for the second quarter of 2021.
Net income for the second quarter of 2022 increased approximately $23.8 million or 511.7% from net loss of $4.7 million for the second quarter of 2021. This increase was primarily related to increased RNG operating profit for the second quarter of approximately $24.7 million.
I’ll now turn the call back over to Sean.
Sean McClain
Thanks Kevin. In closing, we want to provide our updated full year 2022 outlook. While we don’t provide guidance on our expectations of future environmental attribute prices, volatility and index prices does impact our revenue expectations. We are halfway through our various wellfield capital projects, have improved clarity regarding the completion of those projects and their expected benefits and accordingly have narrowed our production ranges.
We expect RNG production volumes to range between 5.6 million and 6.3 million MMBtus with corresponding RNG revenues between $200 million and $220 million. We expect renewable electricity production volumes to range between 188,000 and 208,000 megawatt hours, with corresponding renewable electricity revenues between $17 million and $18.8 million.
And with that, we will pause for any questions.
Question-and-Answer Session
Operator
And I am not seeing any questions at this time. So, I would like to turn the conference back to Sean McClain for closing remarks.
Sean McClain
Thank you. Thank you for taking the time to join us on the conference call today, and we look forward to speaking with you on our 2022 third quarter conference call.
Operator
This concludes today’s conference call. Thank you all for participating. You may now disconnect, and have a pleasant day.
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