Q3 2022 Montauk Renewables Inc Earnings Call
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Good afternoon, everyone and thank you for participating in today's conference call.
I would like to turn the call over to Mr. Jonathan Rowley, If you provide 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 good afternoon, everyone welcome to montage 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 Am John's Raleigh, Vice President General Counsel and Secretary.
At Mt Todd joining.
Joining me today are Shawn Mcclain, montage, President and Chief Executive Officer to discuss business development, and Kevin Vann Ashlin, 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 montage renewables SEC filings.
Our remarks today may include references to non-GAAP financial measures.
Conciliations to the most directly comparable GAAP financial measures can be found at the back of our slide presentation.
Our third quarter 2022 earnings press release, and Form 10-Q, which are available on our website at IR dot montage renewables dot 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.
Sure.
Thank you John .
Good day, everyone and thank you for joining our call.
Building on our previously announced project to upgrade our rigor R&D 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 R&D facility at our apex location.
Our conversations with our landfill host regarding projections and biogas feedstock availability at the site drove our assessment that a second R&D facility will be necessary to add capacity to process. The additional feedstock once it becomes available.
We anticipate an approximately 40% increase in R&D processing capacity with the addition of this second R&D facility.
The expansion is expected to increase daily production capacity by approximately 2100, and then Btu 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 two tranches of increased feedstock volumes triggering the two 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. It tier two and as such our Ci score pathway will be subject to a 10 day public common period.
Eight Q4 timing of carbs validation.
Along with this subsequent to public common period and shift our expectations of the approval of RCI 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 our CFS credit revenue on 2022 production in 2023.
We expect to start earning else CFS credit revenue on 2022 production in 2023, anticipating the recognition of CFS credit revenues for all of 2022 production by June of 2023.
Related to 2023 production, we expect to normalize the timing of CFS credit revenue recognition generally six months after the month of production.
While we started releasing gas from storage during the third quarter of 2022 and recognized revenues from a portion of <unk> generated we currently expect to complete storage release during the fourth quarter of 2022.
Our update this quarter on our Montauk AG renewables development in North Carolina focused primarily on our discussions in progress with the North Carolina Utilities Commission the NCUA.
The commission publicly placed a three year moratorium on the designation of any new new renewable energy facilities.
While the commission monitors and asbestos 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 Mcu's pilot project portfolio.
The NC UC 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 timeline, we expect to commence commercial revenue generating activities starting in 2024.
With that I will turn the call over to Kevin.
Thank you Sean.
I'll begin discussing our third 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 third quarter of 2022 were $55 9 million, an increase of approximately $16 1 million or 45% 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.
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 <unk> 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 rents.
<unk> market a significant portion of Rins a decision not to commit available returns during a period will impact our revenue and operating profit at.
At the end of the third quarter of 2022, we had approximately $2 4 million rins in inventory as compared to <unk> 3 million at the end of third 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 brands in the fourth quarter of 2022, the average realized price of the commitments. We have entered into is approximately $3 52.
The average <unk> index price during the month of October was approximately $2 58.
We believe a portion of the reduction in volatility and 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 rens 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 lower 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 <unk> 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 Btu of R&D during the third quarter of 2022 and.
A decrease of approximately <unk> 1 million Btu of R&D over the third quarter of 2021 hour.
Our apex facility produced 26000 fewer <unk> in the third quarter of 2022 compared to the third quarter of 2021, as a result of landfills selling patterns, resulting in lower production.
Also contributing to the decrease is our task to see the facility producing 53000 fewer and then btu in the third quarter of 2022 compared to the third quarter of 2021 as a result of increased contaminants in the feedstock, which lowered the 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 <unk> 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 approximately $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 rents. We also sold market purchase rent during the third quarter of 2021.
Average pricing realized when 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 D. Three rent index price for the third quarter of 2022 of $2 83.
Being approximately eight 8% lower than the average <unk> index price in the third quarter of 2021.
Operating and maintenance expenses for our R&D 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 <unk> $3 million or APEC facility operating and maintenance expenses increased approximately $1 million as a result of timing and prevent timing of preventative maintenance and increased waste disposal costs in the third quarter of 2022 as compared to the third quarter of 2000.
'twenty one.
Utility expense for all of our R&D facilities in the third quarter of 2022 increased approximately $2 2 million or 68, 4% compared to the utility expense for all of our R&D facilities in the third quarter of 2021.
We produced approximately 49000 megawatt hours in renewable electricity during the third quarter of 2022, an increase of six megawatt hours or 14% from 43000 megawatt hours in the third quarter of 2021.
Our security facility produced approximately three 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 bellmon facility produced four megawatt hours more than 4000 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 1000 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 <unk> 5 million or 12, 4% compared to $3 9 million in the third quarter of 2021.
The increase was primarily driven by the increase in our environment 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 <unk> 41, 4% compared to $3 5 million in the third quarter of 2021. The decrease is primarily related to scheduled preventative maintenance at our <unk> facility, which was.
Ultimately $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.
Results of our testing indicated that the long lived assets related to the Tulsa facility within our <unk> segment had carrying values in excess of the asset groups 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 the 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 with $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.
Our <unk> operating profit for the third quarter of 2022 with $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 <unk> 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 32000, $20 million to $74 million was outstanding under our term loan and we had no borrowings under our revolving credit facility the.
The company's capacity available for borrowing under the revolving credit facility was $116 1 million.
During the nine months ended September 32022, we generated $59 8 million of cash from operating activities, a 188% increase from the first nine months of 2021 of $21 3 million for.
For the nine months ended September 32022, 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 nine months ended September 32022, we received proceeds from the sale of Nox emission allowance credits, resulting in a gain of approximately <unk> 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.
EBITDA for the third quarter of 2022 with $18 9 million, an increase of approximately $7 2 million or 67% 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 was primarily related to increased R&D 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 permanent disallowance of officers compensation and when compared to the pre tax 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.
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 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 R&D production volumes to range between five six and $5 9 million MBT use with corresponding R&D revenues between 196 and $216 million.
We expect renewable electricity production volumes to range between 188, and 198000 megawatt hours with corresponding renewable electricity revenues between 17 and $18 million.
With that we will pause for any questions.
Okay.
Thank you.
To ask a question you need to press Star one one on your phone. Please standby as we compile the Q&A roster.
Again, please standby as we compile the Q&A roster.
Okay.
Okay.
Close the Q&A session.
And now I would like to turn the call back over to Shawn Mcclain for closing remarks.
Thank you for taking the time to join US on the conference call today, and we look forward to speaking with you in 2023.
This concludes today's conference call. Thank you all for participating you may now disconnect and have a pleasant day.
The conference will begin shortly to raise your hand during Q&A you can dial star one one.
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