Montauk Renewables, Inc. (NASDAQ:MNTK) Q3 2022 Earnings Conference Call November 9, 2022 5:00 PM ET
Company Participants
John Ciroli – VP, General Counsel & Corporate Secretary
Sean McClain – CEO
Kevin Van Asdalan – CFO
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. Good afternoon, everyone. Welcome to Montauk Renewables earnings conference call to review the third quarter 2022 financial and operating results and business developments.
Today, we issued our earnings press release, and 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 development; and Kevin Van Asdalan, Chief Financial Officer, to discuss our third 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’s 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, in our third 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. We ask that you please keep to one question to accommodate as many questions as possible.
With that, I will turn the call over to Sean.
Sean McClain
Thank you, John. Good day, everyone, and thank you for joining our call. Building on our previously announced project to upgrade our Raeger RNG facility, I will start today’s call by sharing the next project in our development pipeline. In August 2022, our Board approved a development project to construct a second RNG facility at our Apex location.
Our conversations with our landfill host regarding projections in biogas feedstock availability at the site drove our assessment that a second RNG facility will be necessary to add capacity to process the additional feedstock once it becomes available.
We anticipate an approximately 40% increase in RNG processing capacity with the addition of this second RNG facility. The expansion is expected to increase daily production capacity by approximately 2,100 MMBtus per day once it is commercially operational in 2024.
Next, I would like to provide an update on our Pico dairy cluster project in Idaho. We completed the design of the digestion capacity increase in the third quarter of 2022. We have also begun incurring capital expenditures related to the construction of the project. The dairy has achieved delivery of the first 2 tranches of increased feedstock volumes triggering the 2 associated development payments to the dairy. We expect the dairy to begin delivering the third and final tranche of increased feedstock in 2024.
The improvements we have made to date to both our feedstock digestion process efficiencies and to our water management improvements have enabled us to process the increased feedstock volumes. During the fourth quarter of 2022, we learned through discussions with the California Air Resource Board, CARB, that all dairy projects are being designated as what they call Tier 2. And as such, our CI score pathway will be subject to a 10-day public comment period. The late Q4 timing of CARB’s validation, along with this subsequent public comment period, shift our expectations of the approval of our CI score to the beginning of 2023.
During the fourth quarter of 2022, CARB certified our temporary CI score pathway application for both the third and fourth quarters of 2022. The approval of this temporary application will ensure our ability to generate LCFS credit revenue on 2022 production in 2023. We expect to start earning LCFS credit revenue on 2022 production in 2023, anticipating the recognition of LCFS credit revenues for all of 2022 production by June of 2023.
Related to 2023 production, we expect to normalize the timing of LCFS credit revenue recognition generally 6 months after the month of production. While we started releasing gas from storage during the third quarter of 2022 and recognize revenues from a portion of RINs generated, we currently expect to complete storage release during the fourth quarter of 2022.
Our updates this quarter on our Montauk Ag Renewables development in North Carolina focused primarily on our discussions and progress with the North Carolina Utilities Commission, the NCUC. The commission publicly placed a 3-year moratorium on the designation of any new, new renewable energy facilities while the commission monitors and assesses gas quality. We requested our Turkey, North Carolina location to both be designated as a new renewable energy facility and to be accepted into the NCUC’s pilot project portfolio.
The NCUC, in turn, both designated the Turkey location as a new renewable energy facility and accepted the Turkey location into the pilot project portfolio. We continue to design and plan for the development of the facility to be used for commercial production and do not currently expect commercial production to commence during 2022 based on that current development time line. We expect to commence commercial revenue-generating activities starting in 2024.
And with that, I will turn the call over to Kevin.
Kevin Van Asdalan
Thank you, Sean. I will begin discussing our third quarter 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 third quarter of 2022 were $55.9 million, an increase of approximately $16.1 million or 40.5% compared to $39.7 million in the third quarter of 2021. The primary driver for this increase related to an increase of approximately 111.5% in realized RIN pricing in the third quarter of 2022 of $3.49 compared to $1.65 in the third quarter of 2021.
Additionally, higher revenues were driven by an increase in gas commodity index pricing of approximately 104.5% in the third quarter of 2022 of $8.20 compared to $4.01 in the third quarter of 2021. These increases were offset by lower counterparty sharing revenues of $2.8 million in the third quarter of 2022 compared to the third quarter of 2021 due to these arrangements ending.
As it relates to our results, our profitability is highly dependent on the market price of environmental attributes, including the market price for RINs. As we sell 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 end of the third quarter of 2022, we had approximately 2.4 million RINs in inventory as compared to 0.3 million at the end of the third quarter of 2021. As a result, we have not entered into arrangements to transfer the majority of RINs expected to be generated and available for transfer during the fourth quarter of 2022.
We have currently committed to transfer an insignificant amount of RINs in the fourth quarter of 2022. The average realized price of the commitments we have entered into is approximately $3.52. The average D3 RIN index price during the month of October was approximately $2.58. We believe a portion of the reduction in volatility in RIN price during the third and fourth quarter of 2022 could be temporary and related to the uncertainty due to the upcoming release by the EPA of the 2023 RVO in November 2022. We expect to transfer the majority of RINs generated after the release of the RVO in the fourth quarter.
We report the impacts of our gas commodity hedge program within our corporate segment. Though our gas commodity hedge program was priced at rates below actual index prices, lower index rates during the third quarter of 2022 as compared to index rates in the second quarter of 2022 resulted in recognizing unrecognized gains of approximately $0.3 million. We did not have any gas hedge programs in the third quarter of 2021. Based on current index rates, we expect our gas commodity hedge program to continue to be priced below actual index prices through the end — through year end of 2022, at which time the hedge program will expire.
Total general and administrative expenses were $8.4 million for the third quarter of 2022, an increase of approximately $0.9 million or 12.6% compared to $7.5 million for the third quarter of 2022. General and administrative expense for the third quarter of 2022 increased approximately $1.1 million compared to the third quarter of 2021 associated with our Montauk Ag Renewables acquisition.
Turning to our segment operating metrics. I’ll begin by reviewing our Renewable Natural Gas segment. We produced 1.4 million MMBtu of RNG during the third quarter of 2022, a decrease of approximately $0.1 million MMBtu of RNG over the third quarter of 2021. Our Apex facility produced 26,000 fewer MMBtu in the third quarter of 2022 compared to the third quarter of 2021 as a result of landfill filling patterns resulting in lower production.
Also contributing to the decrease is our Atascocita facility, producing 53,000 fewer MMBtu in the third quarter of 2022 compared to the third quarter of 2021 as a result of increased contaminants in the feedstock which lowered processing efficiency.
Revenues from the Renewable Natural Gas segment in the third quarter of 2022 were $54.3 million, an increase of approximately $19.3 million or 55.3% compared to $35 million in the third quarter of 2021. Average commodity pricing for natural gas for the third quarter of 2022 was 104.5% higher than the third quarter of 2021.
During the third quarter of 2022, we self marketed 10.9 million RINs, representing an approximate $2.4 million or 18.1% decrease compared to the $13.3 million self marketed in the third quarter of 2021. The decrease was primarily related to a prior period decision to forward commit a larger portion of expected RINs. We also sold market purchase RINs during the third quarter of 2021.
Average pricing realized on RIN sales during the third quarter of 2022 was $3.49 as compared to $1.65 in the third quarter of 2021, an increase of 111.5% This compares to the average D3 RIN index price for the third quarter of 2022 of $2.83 being approximately 8.8% lower than the average D3 RIN index price in the third quarter of 2021.
Operating and maintenance expenses for our RNG facilities in the third quarter of 2022 were $12.1 million, an increase of approximately $3.3 million or 38.4% as compared to $8.7 million in the third quarter of 2021.
Our McCarty facility incurred increased preventative maintenance expenses of approximately $0.3 million. Our Apex facility operating and maintenance expenses increased approximately $1 million as a result of timing of preventative maintenance and increased waste disposal costs in the third quarter of 2022 as compared to the third quarter of 2021.
Utility expense for all of our RNG facilities in the third quarter of 2022 increased approximately $2.2 million or 68.4% compared to the utility expense for all of our RNG facilities in the third quarter of 2021.
We produced approximately 49,000 megawatt hours in renewable electricity during the third quarter of 2022, an increase of 6-megawatt hours or 14% from 43,000 megawatt hours in the third quarter of 2021. Our security facility produced approximately 3-megawatt hours in the third quarter of 2022 compared to no production in the third quarter of 2021 as a result of the prior period engine restoration project.
Our Bowerman facility produced 4-megawatt hours more — 4,000 megawatt hours more in the third quarter of 2022 compared to the third quarter of 2021 as a result of preventative engine maintenance performed during the third quarter of 2021.
Our Tulsa facility produced approximately 1,000 megawatt hours less in the third quarter of 2022 compared to the third quarter of 2021 due to reduced feedstock availability at the landfill. Revenues from our renewable electricity facilities in the third quarter of 2022 were $4.4 million, an increase of approximately $0.5 million or 12.4% compared to $3.9 million in the third quarter of 2021. The increase is primarily driven by the increase in our Bowerman production volumes.
Operating and maintenance expenses for our renewable electricity facilities in the third quarter of 2022 were $2.1 million, a decrease of approximately $1.5 million or 41.4% compared to $3.5 million in the third quarter of 2021. The decrease is primarily related to scheduled preventative maintenance at our Bowerman facility, which was approximately $1.6 million higher in the third quarter of 2021 compared to the third quarter of 2022.
During the third quarter of 2022, we performed interim recoverability tests for our Tulsa facility when it was determined that it was more likely than not that the carrying value of the long-lived asset group would not be recoverable. The results of our testing indicated that the long-lived assets related to the Tulsa facility within our RNG segment had carrying values in excess of the asset group’s fair value.
Our cash flow analysis was based on estimates of future revenue growth, gross margin, EBITDA and cash flow generation. As a result of the analysis, we recorded an approximate $2.1 million property plant and equipment impairment related to the Tulsa site in the third quarter of 2022. As to the remaining reporting units, we further concluded, based on our interim cash flow assessment conducted for monitoring of potential indicators of impairment, that the cash flows to be generated are significantly in excess of their carrying values of our operating sites, primarily due to the length of the underlying gas rights agreements. And we did not record any other impairments in the third quarter of 2022 related to our cash flows assessments.
Operating profit in the third quarter of 2022 was $13.6 million, an increase of approximately $6.9 million or 102.6% compared to an operating profit of $6.7 million in the third quarter of 2021. RNG operating profit for the third quarter of 2022 was $26.8 million, an increase of approximately $10.9 million or 68.1% compared to $16 million in the third quarter of 2021.
Renewable electricity generation operating loss for the third quarter of 2022 was $1.7 million, a decrease of approximately $0.2 million or 17.3% compared to an operating loss of $1.4 million for the third quarter of 2021.
Turning to the balance sheet. As of September 30, 2022, $74 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 9 months ended September 30, 2022, we generated $59.8 million of cash from operating activities, a 180.8% increase from the first 9 months of 2021 of $21.3 million.
For the 9 months ended September 30, 2022, our capital expenditures were $12.8 million, of which approximately $5.4 million and $1.6 million respectively of the expenditures were related to the ongoing development of the Pico facility digestion capacity increase and the Montauk Ag Renewables project in North Carolina.
During the 9 months ended September 30, 2022, we received proceeds from the sale of NOx emissions allowance credits, 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 third quarter of 2022 was $20.9 million, an increase of approximately $8 million or 62.7% over adjusted EBITDA of $12.8 million for the third quarter of 2021. EBITDA for the third quarter of 2022 was $18.9 million, an increase of approximately $7.2 million or 60.7% over EBITDA of $11.8 million for the third quarter of 2021.
Net income of $11.2 million for the third quarter of 2022 increased approximately $2.3 million or 25.8% from net income of $8.9 million for the third quarter of 2021. The increase is primarily related to increased RNG operating profit for the third quarter of 2022 of approximately $10.8 million. Partially offsetting this increase was an increase in our income tax expense of approximately $6 million.
The third quarter of 2021 was impacted by a permanent disallowance of officers’ compensation and when compared to the pretax book loss, resulted in a tax benefit being recorded during the third quarter of 2021.
I’ll now turn the call back over to Sean.
Sean McClain
Thank you, 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 in index prices does impact our revenue expectations. Our production volumes are also subject to landfill host waste intake, filling patterns and other landfill matters out of our direct control.
We expect RNG production volumes to range between 5.6 million and 5.9 million MMBtus with corresponding RNG revenues between $196 million and $216 million. We expect renewable electricity production volumes to range between 188,000 and 198,000 megawatt hours, with corresponding renewable electricity revenues between $17 million and $18 million.
And with that, we will pause for any questions.
Question-and-Answer Session
Operator
Sean McClain
Thank you for taking the time to join us on the conference call today, and we look forward to speaking with you in 2023.
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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