Montauk Renewables, Inc. (MNTK) CEO Sean McClain on Q4 2021 Results - Earnings Call Transcript

Montauk Renewables, Inc. (NASDAQ:MNTK) Q4 2021 Earnings Conference Call March 16, 2022 5:00 PM ET

Company Participants

John Ciroli - VP, General Counsel & Secretary

Sean McClain - President, CEO & Director

Kevin Van Asdalan - CFO & Treasurer

Conference Call Participants

Matthew Blair - Tudor, Pickering, Holt

Craig Irwin - ROTH Capital Partners

Craig Shere - Tuohy Brothers Investment Research

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 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 fiscal 2021 financial and operating results and developments. I'm John Ciroli, Vice President, General Counsel and Secretary, at Montauk. Joining me today are Sean McClain, Montauk's Chief Executive Officer and President, to discuss business developments; and Kevin Van Asdalan, Chief Financial Officer, to discuss our 2021 financial and operating results.

During this call, certain statements we make will be forward looking and based on management's beliefs and assumptions and information currently available to management at this time, including without limitation, statements relating to the company's future results of operations and financial conditions as well as our expectations and plans for the company, such as with our Montauk Ag Renewables project in North Carolina, the Pico Improvement Project and Pico CI score and market volatility and fluctuations in commodity prices and the market prices of environmental attributes. These statements are subject to known and unknown risks and uncertainties, many of which may be beyond our control, including those set forth in our safe harbor provision for forward-looking statements that can be found in our 2021 earnings press release, in our Form 10-K for the fiscal year ended December 31, 2021 and in our other reports in file with the SEC, and that provides further detail about the risks related to our business.

Additionally, please note that the company's actual results may differ materially from those anticipated and except as required by law, we undertake no obligation to update any forward-looking statement. Our remarks today may also include non-GAAP financial measures. 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 and in our fiscal 2021 earnings release and Form 10-K issued and filed this afternoon. These 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. Hello everyone, and thanks for joining our call. I want to start this call with a summary of the major events for Montauk during 2021. In January 2021, the company completed the initial public offering of its common stock on the NASDAQ capital market and its related reorganization transactions, including the secondary listing of its common stock on the Johannesburg Stock Exchange.

In May of 2021, we completed the Montauk Ag renewables asset acquisition in North Carolina to purchase developing technology to recover residual natural resources from waste streams of modern agriculture and to refine and recycle such waste products through proprietary and other processes in order to produce high quality, renewable natural gas, bio oil and biochar.

In August of 2021, we were granted a patent of over 24 specific aspects of our continuous feed closed loop reactor technology acquired in the acquisition. In October of 2021, we closed on a $5.5 million dollar transaction to acquire approximately 146 acres and in existing approximately 500,000 square foot structure in North Carolina, which we plan to use as we pursue our development project associated with the Montauk Ag renewables acquisition.

We have also executed master service agreements that provide access to waste feed stock for Montauk Ag to process. The feedstock will be swine waste source from our farming partner locations. We do not currently expect significant production to commence at Montauk Ag renewables North Carolina project during 2022, based on the current development timeline.

I also want to provide an update on our first dairy cluster project, the Pico facility in Jerome, Idaho. As part of our overall capacity expansion at the Pico facility, we undertook significant efforts to improve the performance of its existing digestion process. We temporarily idled RNG production at this facility in order to clean out settled solids in the digester, replace the cover of the digester and to make various other efficiency improvements. We have completed the improvements and RNG production has resumed at Pico.

At this stage of the capacity expansion has impacted the timeline for modeling Pico's initial CI score pathway model in subsequent auditing approval by CARB, we did not receive a temporary CI pathway in 2021 and were not able to generate LCFS credit revenue on 2021 production. We are, and we will be storing 2022 production from Pico while CARB completes its CI score pathway. Though we expect to receive the results of this approval during the second half of 2022, we do not currently expect to receive LCFS credit revenue on Pico's 2022 production until 2023.

And with that, I will turn the call over to Kevin Van Asdalan, our Chief Financial Officer.

Kevin Van Asdalan

Thank you, Sean. I will be discussing our 2021 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 2021 were $148.1 million, an increase of $47.7 million or 47.5% compared to a $100.4 million in 2020. The primary driver for this increase related to an increase of 45.5% in realized RIN pricing during 2021 of a $1.91 compared to a $1.31 in 2020.

Additionally, an increased in natural gas index pricing of approximately 46% in 2021 of $3.84 compared to $2.63 in 2020 and higher revenues under our counterparty sharing arrangements of approximately $8 million in 2021, compared to 2020, primarily related to increased RIN pricing also contributed to higher revenues.

As it relates to 2022 RINs, we have not forward sold a significant portion of expected generation and our current 2022 RIN commitments are at an average D3 RIN price of approximately $3.40 with commitments through June 2022. Total general and administrative expenses were $42.6 million for 2021, an increase of $26.0 million or 156.4% compared to $16.6 million for 2020. Of the total expense in 2021, $22.4 million is related to stock-based compensation costs primarily associated with the IPO and reorganization transaction. Excluding the impacts of the IPO related stock-based compensation expense, general and administrative expenses increased approximately $3.3 million.

Corporate insurance premiums for 2021 increased approximately $2.9 million or 110.3% compared to 2020 due to increased premiums associated with the IPO. Professional fees increased approximately $1.4 million or 46.8% during 2021, primarily resulting from our successful completion of the IPO.

Turning to our segment operating metrics, I'll begin by reviewing our renewable natural gas segment. We produced $5.7 million in MMBtu of RNG during 2021, essentially unchanged as compared to the number of MMBtu produced in 2020. Of the 2021 volumes $0.1 million MMBtu of RNG was produced from development sites commissioned during 2020. Of the $0.2 million 2021 increase as compared to 2020 MMBtu of RNG produced at our other locations, this reduction relates primarily to our McCarty facility.

The performance of the collection system at the McCarty facility was hampered in 2021 by increased volumes of water negatively impacting biogas collection. As water levels vary or increase, the ability to draw feed stock may be reduced. We also experience process equipment failures at the McCarty facility in 2021 that impacted our collection system.

Revenues from the renewable natural gas segment in 2021 were $131.8 million, an increase of $48.6 million or 58.3% compared to $83.2 million in 2020. Average commodity pricing for natural gas for 2021 was 46.0% higher than the prior year.

During 2021, we self-marketed $42.6 million RINs representing a $3.3 million or 8.3% increase compared to $39.3 million in 2020. The increase was primarily related to an off-take agreement change in 2021, providing more RNG volumes available to self-market.

Average pricing realized on RIN sales during 2021 was a $1.91 as compared to a $1.31 in 2020, an increase of 45.5%. This compares to the average D3 RIN index price for 2021 of $3.02 being approximately 102.7% higher than the average D3 RIN index price in 2020. Operating and maintenance expenses for our RNG facilities in 2021 were $38.1 million an increase of $4.6 million or 13.6% as compared to $33.6 million in 2020. Approximately $4.7 million of this increase relates to development sites commissioned during 2020. Exclusive of the effects of these development sites, operating and maintenance expenses for 2021 or $33.5 million, a decrease of $0.1 million or 0.3% compared to 2020.

In the first quarter of 2021, our Houston, Texas facilities were favorably impacted by lower utility rates as a result of the weather event. Certain of our utility contracts have provisions that when we are not using utilities, the providers are able to contribute that capacity back into the market and we receive credit against our future bills. The 2021 weather event, which temporarily impacted our Texas facility's utility consumption resulted in our RNG utilities being approximately $0.5 million lower in 2021 as compared to 2020.

We produced approximately 183,000 megawat hours in renewable electricity during 2021, a decrease of 3,000 megawat hours from the 186,000 megawat hours produced in 2020. In 2021, our Bowerman facility produced 152 megawat hours, an increase of eight megawat hours or 5.3% over the 144 megawat hours produced in 2020. The increased production in 2021 was primarily driven by the California wildfires that forced the facility to temporarily shut down in October, 2020 negatively impacting our 2020 production at Bowerman.

Offsetting this increase was our security facility that had zero production in 2021 compared to eight megawat hours in 2020 due to ongoing projects to restore the engines at our security facility. Operating and maintenance expenses for our renewable electricity facilities in 2021 were $10.4 million in increase of $0.6 million or 6.3% compared to $9.8 million in 2020. We reported the results of Pico within the renewable electricity generation segment until October 2020, and Pico contributed $1.4 million to the 2020 period.

Exclusive of Pico, renewable electricity facility operating and maintenance expenses increased by $2 million or 19.2% in 2021, compared to 2020. The increase is primarily a result of the timing of scheduled engine preventative maintenance intervals at our Bowerman facility, which was approximately $2.8 million higher in 2021 over 2020. Operating profit in 2021 was $3.3 million, a decrease of $0.2 million or 6.9% compared to an operating profit of $3.6 million in 2020. R&D operating profit for 2021 was $50.4 million an increase of $28.1 million or 126.5% compared to $22.2 million in 2020. Renewable electricity generation operating loss for 2021 was $3.1 million, a decrease of $0.8 million or 35.5% compared to an operating loss of $2.3 million for 2020.

Turning to the balance sheet as of December 31, 2021, $80 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 approximately $116.1 million. During December, 2021, we refinanced our credit facility and entered into the fourth amendment to the amended credit agreement. The amended credit agreement provided for a five year $80 million term loan and a five year $120 million revolving credit facility.

During 2021, we generated $42.9 million of cash from operating activities, a 49.5% increase from 2020 of $28.7 million. For 2021, our capital expenditures were approximately $10 million of which approximately $2.4 million related to optimization projects at our recently commissioned facilities and $1 million related to the Pico feedstock amendment.

We acquired assets for the Montauk Ag renewables acquisition in North Carolina of $4.1 million, including acquisition costs of $0.3 million. We also closed on a $5.5 million transaction to acquire approximately 146 acres and an existing approximately 500,000 square foot structure in North Carolina, which we plan to use as we pursue our development project associated with the Montauk Ag renewables acquisition.

We present EBITDA and adjusted EBITDA metrics because we believe the measures assist investors in analyzing our performance across reporting period on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. Adjusted EBITDA for 2021 was $27.9 million an increase of $1.9 million or 7.3% over adjusted EBITDA of $26 million for 2020. EBITDA for 2021 was $25.4 million an increase of $0.4 million or 1.5% over EBITDA of $25.1 million for 2020.

Net loss for 2021 decreased approximately $9.1 million or 198.4% from net income for 2020. The decrease was partially related to income tax expense for 2021 of $4.1 million increasing $10.2 million or 169.4% compared to a benefit of income taxes in 2020 of $6 million.

I'll turn the call back over to Sean.

Sean McClain

Thank you, Kevin. In closing, we want to provide our full year 2022 outlook. We expect RNG production volumes to range between $5.5 million and $6.8 million MMBtu with corresponding RNG revenues between $181 million and $226 million. We expect renewable electricity production volumes to range between 189 megawatt and 231,000 megawatt hours with corresponding renewable electric revenues between $17 million and $20 million.

And with that, we'll pause for any questions.

Question-and-Answer Session

Operator

[Operator instructions] Our first question comes from Matthew Blair of Tudor, Pickering, Holt. Your line is open.

Matthew Blair

Hey good afternoon, Sean and Kevin. Thanks for taking my questions here. The first one, so your 2022 RNG production guidance it looks like it's anywhere from down 4% to up 19% for next year, I guess this year. What are the factors that would push you to the low end of the range versus the high end of the range? And are there any major projects that we should be looking out for starting up in 2022?

Sean McClain

I'll take that initially, Sean. Matthew given that feedstock is a diverse sort of living organism, we're always managing landfill host impacts. We are mindful as we publicly disclose that our McCarty location is experiencing matters with the landfill host that is going to drive down our McCarty production volumes from their normal historical levels. And then in regards to the upside, we do have some development, not development, we do have projects at certain of these facilities especially some of the newer commission as they continue to go through optimization that we believe could drive volumes to that upper range.

Operator

Thank you. Our next question comes from Craig Irwin of ROTH Capital. Your line is open.

Craig Irwin

Thank you for taking my questions. So can you update us on the Pico Carbs certification? Where do we stand there? What is the process for us to actually Montauk D3? Sorry. LCFS credits on top of the D3 and do you have an inventory there that you can maybe share with us of gas that's generated and waiting for finals certification? Thank you.

Sean McClain

Yeah, sure. Craig, we can talk a little bit about what we've done at the Pico facility in general, and then what that means in terms of monetization. So with Pico, as we have announced temporarily idling the facility. In 2021, we announced an executed amendment with the dairy partner that we had of an Idaho to expand the feedstock that's available for the whole cluster project.

When we proceeded with that expansion, we determined the first most beneficial step was to actually refurbish the existing digester to increase its capacity, as well as the efficiency for RNG production, as opposed to what it was originally optimized for, which was fiber recovery for the dairy.

So it was determined that if we temporarily idled the facility, cleaned out the existing digester and made a number of improvements to the digester, as well as the handling of the feedstock, it would result in an increase to the feedstock gas to the RNG facility and in turn RNG production because of the excess capacity of that RNG plant that the value of which would be well in excess of the risk of not achieving any LCFS credit revenue on the run rate that we had for 2021 production.

After all of the improvements were completed, the production volumes have more than doubled in the first quarter in 2022. The expectation is that we will monetize LCFS credit revenue for all of our 2022 production, the timing of which is a function of CARB, with the number of projects that it is currently processing its evaluation and approval for. And the expectation is we'll receive that notification from CARB in the second half of 2022. So there is an opportunity, but our current expectation is we would monetize those in 2023, the earliest that it would happen would be a quarter sooner, depending on the timing the CARB comes back with that notification.

Craig Irwin

Okay. Just a clarification of if I may. So the gas that's produced at this facility this year will generate an LCFS credit inventory that can be liquidated on certification. Is that correct?

Sean McClain

I think a better way to say it Craig, is the gas that is going into storage is eligible to generate LCFS credits when it comes out of storage and it will in turn then be able to monetize the LCFS credit revenue, but you're right. It is contingent on the timing in which CARB comes back and approved that certification.

Operator

Thank you. Our next question comes from Craig Shere of Tuohy Brothers. Your line is open.

Craig Shere

Hi wonder if you can give us a little update on what to anticipate this year, as far as decision making and guidance that may be coming out around the Swine RNG opportunity? Do you expect some more definitive announcements over the next quarter or two?

Sean McClain

Sure. With respect to North Carolina, as we disclosed previously, we've continued down the path of our initial five year development project. We've disclosed publicly all of the milestones that have been associated with that endeavor. Specifically we announced our successful award of our technology patent in August of 2021. Our closing on a $5.5 million real estate and building property in North Carolina, which will actually house the operations of the development project and the execution of some initial service agreements with the farming partners that will provide the feedstock volumes of the project itself.

As we continue to reach those milestones in terms of development and the capital that we have already provided guidance on four 2022, we'll announce those publicly in due course.

Operator

Thank you. Our next question comes from David McCall [indiscernible]. Your line is open.

UnidentifiedAnalyst

Good afternoon guys. Thanks for taking the question. I'll follow up in the North Carolina. I love the Montauk Ag. So you've got the patent, the property, the people, the partners. The question is, is really when do you think we could see production? You seem to be checking all the boxes towards making a final investment decision. You've got the Magnolia concept, you're improving on it. So what's the critical path that's left for a final investment decision? Is that something we could expect in 2022? What would cause that to not happen and what would maybe cause that to happen?

Sean McClain

I think the question on the investment decision has already been resolved with the asset acquisition that we did in 2021. The question is to how we proceed with that investment is in order to maximize the value that we get out of this first cluster project. The number of farms that we'll be taking under consideration, the deployment of the newly patented technology to what extent to optimize the value that we get from both the RIN and the LCFS credit markets to ensure that we are servicing the farming community in the way that this project was originally designed and intended.

All of these things are staged processes that need to happen in order of prioritization, making sure that we are securing the obligations as well as the rights to the farmers at the same time, that we are securing the orders for the critical pieces of equipment that we're optimizing the engineering with the lessons that we continue to learn and develop through our commercially operatable technology that's already in existence in North Carolina. One of the reactors of which we're looking at building up to 20 of those in this cluster project, in the real estate purchase that we had in North Carolina and October.

And so as we continue to develop that, as we continue to secure more and more of these feedstock agreements, as we continue to pro with major equipment orders, as we continue to provide guidance on anything associated with additional capital developments for the year and as we have a line of sight as to when those deliveries and the further build out of that project results in us having an expectation for that quarter of when we're going to commence production, those are all items that will communicate publicly in future disclosures.

Operator

Thank you. Our next question comes from Matthew Blair of Tudor Pickering Holt. Your line is open.

Matthew Blair

Hi, thanks. If I could just circle back to this Pico LCFS opportunity, you mentioned you doubled capacity. I previously have capacity at 330K MMBtu per year. So doubling, it would be 660. I'm showing dairy LCFS credits around $60 per MMBtu and then if I take off like a 20% royalty on that, basically putting all this together, I'm getting to about $32 million of potential annual revenue from Pico LCFS, which presumably would also, just translate to EBITDA. So, is that the right way to think about it? Do those numbers sound approximately correct? And, I guess, should we think of your underlying earnings power as being this $2.22 midpoint guidance for '22 plus this PCO LCFS opportunity?

Sean McClain

No, that's a good question. The guidance that we have provided has been exclusive to the capacity expansion in terms of our production expectations. So directionally correct, in the sense that we would be doubling those production numbers in 2022. In regards to the value that you expect to achieve for the revenue monetization itself, one has to have a specific view that the company does not provide guidance on in terms of the expectations of those attribute prices at the time that they're monetized. They are not monetized in advance of generation, and we expect to monetize those attributes more likely than not in 2023, based on the 2022 production and the release from storage.

Operator

Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to Sean McClain for any closing remarks.

Sean McClain

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 on our 2022 first quarter conference call.

Operator

Thank you, ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may all disconnect. Have a great day.