Montauk Renewables, Inc. Q4 FY2023 Earnings Call

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.

Thank you and good afternoon, everyone. Welcome to Montauk Renewables earnings conference call to review Fiscal 2023 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 Asdalan, Chief Financial Officer, to discuss our 2023 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 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. 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 in our fiscal 2023 earnings press release and Form 10-K issued and filed this afternoon. Those are available also on our website at ir.montaukrenewables.com. After our prepared remarks, we will open the call to questions. And we ask that you please keep to one question to accommodate as many as possible. And with that, I will turn the call over to Sean.

Thank you, John. Good day, everyone, and thank you for joining our call. I will begin by summarizing our announced series of development projects we expect to materially contribute to Montauk's multifaceted growth strategy. In December 2023, we finalized a contract for the delivery of 140,000 tons per year of biogenic carbon dioxide from our four Texas RNG facilities to a North American subsidiary of European Energy. In satisfaction of this arrangement, we intend to capture clean and liquefied CO2, which will then be transported to a new Texas-based e-methanol facility of European Energy. The delivery term is expected to last at least 15 years with deliveries expected in 2027. We expect our capital investment to approximate $15 million per facility and anticipate that capital spend to begin during the second half of 2024 as we work to achieve our targeted 2027 commission. During 2023, we announced our planned entrants into South Carolina through the development of a new landfill gas to RNG facility, an opportunity won by Montauk through a competitive bidding process. The planned project is expected to contribute approximately 900 MMBtus a day of production capacity upon commissioning. We are in the development phase of the project and have started to incur capital expenditures. While we continue to expect the utility interconnection specifically included in our development assumptions to accept our production from this facility, the utility will require certain distribution system upgrades. Though those upgrades do not directly impact our interconnection, they do extend our expectation of the completion of that interconnection and the commissioning of our new RNG facility into 2026. During 2023, we also announced our planned development of a landfill gas to RNG project in Irvine, California at the Frank R. Bowerman Landfill. This new RNG facility is anticipated to process the large and growing volumes of biogas in excess of the existing capacity of our existing renewable electric generation facility on the Bowerman Landfill, which we intend to both retain and operate alongside the new RNG facility. As previously disclosed, we continue to expect the capital investment to range between $85 million and $95 million and anticipate the fully commissioned facility in 2026 to contribute approximately 3,600 MMBtus per day in production capacity, assuming currently forecasted feedstock volumes that are projected to be available from the host landfill at the time of commissioning in 2026. I will now shift to an update on our various ongoing growth development projects, starting with our digestion capacity expansion of our Pico dairy cluster project in Idaho. As previously disclosed, our dairy host began delivering the first 2 of 3 feedstock increases identified in our feedstock amendments, the catalyst for the expansion project. Also, as previously disclosed, 3 of the 4 development payments were made to our dairy host related to those achieved feedstock increases. Our dairy host informed us that they expect to deliver the final increase in feedstock volumes in 2025, at which time we will make the final development payments. The California Air Resource Board approved, after the public comment period ended in March 2023, our provisional carbon intensity score application with a CI score of negative 261.56. We released the remaining gas from storage in the second quarter of 2023 and recognize both RIN and LCFS credit revenues related to those storage releases during 2023. Regarding the physical commissioning of our Pico dairy digestion capacity increase project, we successfully commissioned the first of two new digesters as well as our new reception pit, both of which became operational during the third quarter of 2023. We immediately began using the increased reception pit capacity and have been working to increase gas availability through the additional digestion capacity. We continue to commission the second and last of our new additional digesters expect to complete commissioning during the second quarter of 2024 and increased gas availability into the third quarter of 2024. We continue to expect our digestion capacity expansion project will allow us to take advantage of the excess capacity in our existing RNG facility at this location. I will now discuss the many developments we have had related to our North Carolina swine waste energy development, Montauk Ag Renewables. We continue to work with our engineer of record through the optimization of improvements to our patented reactor technology. During the first quarter of 2023, we completed the relocation of our existing reactor from its original location in Magnolia, North Carolina to our new Turkey, North Carolina facility in an effort to centralize future feedstock processing. We executed a receipt interconnection agreement with Piedmont Natural Gas for our Turkey, North Carolina location. Related to our interconnection, we signed a lease agreement with Piedmont Natural Gas to provide access to the Turkey, North Carolina property during the construction of the interconnection. In July 2023, we signed a Renewable Energy Certificate, REC agreement, with Duke Energy, under which, Duke will purchase the swine waste RECs from the conversion of swine waste feedstock into renewable energy. During the third quarter of 2023, our Board of Directors approved funding for the first phase of our development initiative in North Carolina. We continue to expect the first phase total capital investment to range between $140 million and $160 million, which includes approximately $33 million of cumulative expenditures through the end of 2023. We continue to expect the first of our eight processing lines of this first phase to be operational in the second quarter of 2024, and we are currently planning for a rolling commissioning schedule for the remaining processing lines beginning in the second half of 2024 through the second half of 2025 with revenues beginning in 2025. Our Turkey, North Carolina project location was approved to participate in the Piedmont Natural Gas Renewable Pilot Program, which is a step towards obtaining the new renewable energy facility NREF designation under the North Carolina Utilities Commission, the NCUC. In January 2024, we received notification from the NCUC that our Turkey, North Carolina location was approved for both our NREF and a Certificate of Public Convenience and Necessity. This is a critical step towards obtaining the NREF designation and obtaining this designation could have an impact on the timing of utility infrastructure at our Turkey, North Carolina location. In March 2024, we submitted an amendment to our NREF designation to optimize its applicability to specific facility componentry for which we expect a decision on that amendment during 2024. Upon completion of our first full phase of the Turkey, North Carolina project, we anticipate the ability to process feedstock from over 120,000 hog spaces per day, equating to over 200 tons of daily waste collection per day. We continue to expect to annually produce approximately 45,000 to 50,000 megawatt hour equivalents through the combination of 190,000 to 200,000 MMBtu and 25,000 to 30,000 megawatt hours. Additionally, we continue to estimate the first phase of the project will produce 17,000 to 20,000 tons of organic fertilizer alternatives annually. During 2022, we announced our plans to construct a second RNG processing facility at the Apex landfill. This project is being driven by projections of biogas feedstock availability from the host landfill. As the landfill host continues to increase its waste intake, we believe that the additional 2,100 MMBtu per day of production capacity of our new facility will allow for us to process the landfill hosts currently forecasted increases in biogas feedstock volumes related to their projected increases in waste intake. While the landfill host continues to increase waste intake, we expect there could be a period where we have excess available capacity after the second facility is commissioned. We currently expect commercial operations during the fourth quarter of 2024. In 2024, we reached an agreement with one of our landfill hosts to sell back our gas rights in advance of their expiration impacting one of our smaller renewable electric generation operating facilities. The strategic decision to exit this facility was influenced by a mid-2024 expiration of an above-market power purchase agreement. The elimination of decommissioning asset removal or site restoration obligations, the sale proceeds of $1 million being well in excess of the carrying value of this project and the offer to extend our gas rights at two of our existing RNG operating facilities, Atascocita and Coastal Plains, for an additional 5 years each. The effective date of this transaction will be October 1, 2024. And with that, I will turn the call over to Kevin.

Thank you, Sean. I will discuss our financial and operating results for 2023. For more information, please check our earnings press release and supplemental slides available on our website. Total revenues in 2023 were $174.9 million, which is a decrease of $30.7 million or 14.9% compared to $205.6 million in 2022. This decline is mainly due to a 16.6% drop in realized RIN pricing in 2023, averaging $2.71, down from $3.25 in 2022. Additionally, natural gas index pricing fell approximately 58.7% in 2023 to $2.74 from $6.64 in 2022. General and administrative expenses for 2023 totaled $34.4 million, an increase of $0.3 million or 0.8% compared to $34.1 million in 2022. This rise included about $2.1 million related to stock-based compensation amendments at Montauk Ag Renewables from 2022, partially offset by about $1.0 million in reversed stock-based compensation for forfeited stock awards. Professional fees expense stood at $4.6 million in 2023, a decrease of $0.7 million or 12.5% from $5.3 million in 2022. For Montauk Ag Renewables, professional fees rose by about $0.4 million in 2023, contributing to the total increase of $2.1 million for the segment. Our RIN expense for 2023 was $0.7 million, up by $0.3 million or 69.6% from $0.4 million in 2022. Now turning to segment operating metrics, I'll start with our Renewable Natural Gas segment. We produced 5.5 million MMBtu of RNG in 2023, consistent with 5.5 million MMBtu in 2022. Improvements from reduced preventative maintenance and wellfield optimization, particularly at our Atascocita facility, allowed for increased production, offset somewhat by unrelated quality issues and weather impacts that decreased production at our Rumpke facility by 95,000 MMBtu in 2023 compared to 2022. Revenues from the Renewable Natural Gas segment were $156.4 million, down by $39.8 million or 20.3% from $196.2 million in 2022, with average commodity pricing for natural gas being 58.7% lower than the prior year. We self-marketed 44.9 million RINs, an increase of 1.1 million or 2.5% from 43.8 million RINs in 2022. Average realized pricing for RIN sales in 2023 was $2.71, down 16.6% from $3.25 in 2022, while the average D3 RIN index price was $2.63, approximately 11.7% lower than the $2.98 average in 2022. By December 31, 2023, we had about 0.4 million MMBtus available for RIN generation and approximately 0.1 million unsold RINs. At the same date in 2022, we had around 0.4 million MMBtus available for RIN generation and roughly 0.7 million RINs generated and sold. Our operating and maintenance expenses for RNG facilities in 2023 reached $47.9 million, an increase of $4.2 million or 9.5% over $43.7 million in 2022. Total segment utility expenses were reduced by about $2.1 million in 2023 compared to 2022. Other operating and maintenance expenses increased approximately $6.3 million due to preventative maintenance, repairs, wellfield operational enhancements, and non-capitalizable costs, particularly incurred at our Pico facility for a digestion capacity increase project. Our profitability relies heavily on the market price of RINs and environmental attributes, as we self-market most of our RINs. A strategic decision was made not to transfer a substantial amount of generated D3 RINs in the first quarter of 2024 based on internal price expectations. Consequently, we have about 2.9 million RINs remaining from 2023 gas production and approximately 7.3 million from 2024 gas production at the time of this call, with the average price of D3 RINs around $3.06 at the end of February. In terms of renewable electricity generation, we produced around 194,000 megawatt hours in 2023, an increase of 4,000 megawatt hours or 2.1% from 190,000 megawatt hours in 2022, with our security facility producing 5,000 megawatt hours more than in 2022 due to prior engine maintenance. Revenues from renewable electricity facilities reached $18.4 million, a rise of $1.2 million or 7.4% compared to $17.2 million in 2022, primarily driven by generation timing and monetized RECs and PPA pricing increases at our Bowerman facility. Operating and maintenance expenses for Renewable Electricity Generation were $11.7 million in 2023, a decrease of $1.3 million or 10.2% from $13.1 million in 2022, mainly due to the timing of scheduled maintenance intervals. We recorded impairments of $0.9 million in 2023, a significant decrease of $4.0 million or 81.4% compared to $4.9 million in 2022, including around $0.8 million for RNG machinery and feedstock processing equipment and $0.1 million for obsolete renewable electricity spares. Our long-lived asset assessments indicated that cash flows are substantially greater than carrying values due to long-term gas rate agreements, leading us not to record additional impairments this year, contrasting with $2.1 million of impairments for a Renewable Electric Generation site last year where future cash flows fell short of carrying values. Operating profit for 2023 was $23.6 million, down by $21.0 million or 47% from $44.6 million in 2022, with RNG operating profit at $59.3 million, a decrease of $35.1 million or 37.2% from $94.4 million in 2022. The Renewable Electricity Generation segment reported an operating loss of $0.6 million in 2023, a decrease of $6.4 million or 91.5% from a $7 million loss in 2022. As for the balance sheet, by December 2023, $66.0 million was outstanding on our term loan, and the company had $117.5 million available under our revolving credit facility. We generated $41.1 million in cash from operating activities in 2023, down 49.4% compared to $81.8 million for the previous year. We amended our loan agreement in December 2023, extending the maturity date to December 31, 2033 while keeping the loan balance around $10 million. We also recorded an increase of approximately $1.3 million for our Pico earnout obligation during 2023, a rise of $0.1 million or 12.8% compared to an increase of $1.1 million in 2022. Our capital expenditures for 2023 were $63.1 million, with significant amounts allocated to Montauk Ag Renewables, the Pico facility project, and the second Apex facility. By December 31, 2023, we had approximately $73.8 million in cash and cash equivalents. Adjusted EBITDA for 2023 was $46.5 million, a decrease of $24.0 million or 34.0% from $70.5 million in 2022. EBITDA for 2023 totaled $45.3 million, down $20.4 million or 31.1% from $65.7 million in 2022. Net income for 2023 declined by $20.3 million or 57.7% compared to net income in 2022, mainly driven by a revenue drop of around $30.7 million partially offset by reduced royalty expenses under our tiered royalty structure, which led to a $20.9 million reduction in operating income in 2023. With that, I'll now turn the call back over to Sean.

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 would like to provide our full year 2024 outlook. For 2024, we expect our RNG production volumes to range between 5.8 million and 6.1 million MMBtus with corresponding RNG revenues to range between $195 million and $215 million. We expect our 2024 Renewable Electricity Production volumes to range between 190,000 and 200,000 megawatt hours with corresponding renewable electricity revenues to range between $18 million and $19 million. And with that, we will pause for any questions.

Our first question comes from Saumya Jain with UBS. Your line is open.

Hi. Thank you for taking my question. I guess I was wondering if you have a long-term outlook regarding D3 RIN pricing and LCFS pricing? Or how do you see a potential impact on that?

Excellent question. As we oftentimes say on these calls that we do not give guidance or our views on what the forward prices are for environmental attributes, particularly D3 RINs, we do take note, however, of the 3-year guidance that is provided by the EPA, representing 30% increases in the demand for those attributes. And we do acknowledge based on available data that is on the EPA's site for the renewable fuel standard, the relative monthly generation statistics, which do suggest a recurring shortage of the generation of those attributes related to the run rate that would be more indicative of the demand that you will have for those 3-year RVOs starting with 2024.

Thank you. Please standby for our next question. Our next question comes from the line of Matthew Blair with Tudor, Pickering, Holt. Your line is open.

Thank you and good afternoon. I was hoping you could talk a little bit more about the Q4 production. If I'm doing my math correctly, it looks like Q4 RNG production was actually down a little bit from Q3, which I remember was impacted by some weather issues. So did those weather issues reoccur in Q4? And what is your outlook for Q1? Would you expect things to bounce back? Thank you.

Matthew, in regards to providing quarterly guidance, we continue to just provide annual guidance for which our guidance ranges are between 5.8 million and 6.1 million MMBtu. In regards to the fourth quarter, weather contributed, but we also had some wellfield quality issues, primarily at our large site in Cincinnati, Ohio, which impacted our expectations as we closed out the fourth quarter. In regards to ongoing weather anomalies, similar to Sean, not wanting to predict the future of RIN prices, we try to manage our expectations through weather. But as of right now, our existing guidance ranges of between 5.8 million and 6.1 million MMBtu are contemplating all of our expected contributions from our RNG portfolio across the year.

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

Hi. Thanks for the updates and taking the question. Any thoughts specifically about the EBITDA margin in '24 and more generally about the EBITDA ramp that might be expected through '27 at the North Carolina swine waste project is completed? Your Pico expansion is brought online. You had your Apex expansion and then you also have the Blue Granite and Bowerman projects?

Thanks, Craig. Yes, we do anticipate our EBITDA increase in 2024 to follow along with our increase in expectations of volumes, RIN price notwithstanding, based on our internal assumptions. In regards to the ramp in 2025, specifically related to our North Carolina operation. Based on our current expectations, we look to fill around half of our expected output under the Duke Swine REC agreement with revenue starting around the second half of 2025. Thereafter, the EBITDA contributions from a more recent project that we announced, the European Energy volume metric and price standpoint, I think it would be fair to say from a top line revenue contribution from European Energy, the pricing of that agreement is generally in line with some expected prices from a carbon sequestration tax credit view. However, I do want to note that this is not a tax credit play for us. It is a revenue driver increasing and diversifying our top line revenues whenever we start to deliver our volumetric CO2 to European Energy.

Thank you. Please standby for our next question. We have a follow-up question from the line of Matthew Blair with TPH. Your line is open.

Hi. Thanks for taking my follow-up. I was going to ask about your 2024 spending plans, but I'm actually seeing it in the K here. It looks like it's approximately 150 million to 167 million. Is that correct? And could you talk about what's driving the increase year-over-year?

Yes. That is accurate, Matthew. More poignantly, our annual maintenance capital disaggregated. We expect that to be between 14 million and 17 million. And then our development project capital ranges between 135 million and 150 million. That's largely driven by our two larger projects, the RNG build on the Frank R. Bowerman Landfill in California as well as our continued development of the up to eight processing reactor lines at our North Carolina location.

Thank you. I'm showing no further questions in the queue. I would now like to turn the call back over to Sean for closing remarks.

Thank you, and thank you for taking the time to join us on the conference call today. We look forward to speaking with you on our 2024 first quarter conference call.

Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.