Montauk Renewables Inc

NASDAQ:MNTK

Earnings Call Transcript 2024-Q3

[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 material or made on this call. John, please go ahead.

[John Ciroli, executive]

Thank you, and good afternoon, everyone. Welcome to Montauk Renewables earnings conference call to review the third quarter 2024 financial and operating results and development. 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 developments; and Kevin Van Asdalan, Chief Financial Officer; to discuss our third quarter 2024 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 and in our third quarter 2024 earnings press release and Form 10-Q issued and filed this afternoon, which are available on our website at htps://ir.montaukrenewables.com.

After our remarks, we will open the call to questions. [Operator Instructions] And with that, I will turn the call over to Sean.

[Sean McClain, executive]

Thank you, John. Good day, everyone, and thank you for joining our call. I'd like to begin with commending our operations staff for the production levels we achieved both during the 2024 third quarter and for the 9 months ended September 30, 2024. For 2 consecutive quarters, our Houston, Texas facilities were challenged by severe weather events, resulting in multi-day utility power outages. Our Houston, Texas-based facilities account for over half of our RNG production. While we estimate production losses during the first 9 months of 2024 due to these weather events, totaled approximately 100,000 MMBtus, our employee safety and the operability of all facility equipment were preserved throughout.

Our development activities continue with the construction of our second Apex RNG facility. As previously discussed, the primary catalyst for the construction of the second Apex RNG facility was a gas rights contractual requirement trigger by increasing landfill waste intake and in turn, gas feedstock availability that has periodically exceeded the processing capacity of our current facility.

We continue to expect there to be a period of excess processing capacity that is subject to the rate at which the gas feedstock availability increases from landfill activities. We remain on schedule for a 2025 commissioning. Related to our Blue Granite RNG project, we have been informed by the interconnection utility and its near-term prioritization continues to be remediation efforts from the impacts of Hurricane Helene. The prioritization of these remediation efforts on Hurricane Helene will delay necessary utility upgrades for our facility interconnection, shifting our commissioning expectation of our RNG facility into 2027. Our pace of capital deployment for this project has slowed due to the delay of the utility, and we do not expect to incur significant capital expenditures on this project through the remainder of 2024.

As the company continues to develop its RNG facility at the Frank R. Bowerman landfill in California, we remain committed to support the landfill host in its management of its wellfield and its flare facility permitting requirements. Related to the landfill obligations, Orange County Waste and Recycling has proposed corresponding changes to its wellfield and flare facility, which could result in impacts to our existing and agreed upon RNG facility commissioning schedule.

We continue to work with the landfill on those proposed changes and assess what, if any, impact these changes could additionally have related to the receipt of the required regional regulatory construction permits and the potential impact of delayed commissioning into 2027. As a continuation of our previously announced CO2 development opportunity with European Energy, we have received equipment proposals from multiple vendors, all having prior experience with liquid CO2 capture and processing.

We continue to anticipate commissioning in 2027 and expect the capital investment to range between $65 million and $75 million. We also continue to engage with various regulatory agencies in North Carolina related to our swine waste-to-energy development initiative project in Turkey, North Carolina, Montauk Ag Renewables. In October 2024, we received notice from the North Carolina Utilities Commission that our application for a certificate of public convenience and necessity and registration for a new renewables energy facility related to the sale of electricity to generate swine rec was approved for public notice.

Additionally, Piedmont Natural Gas has submitted the design of our gas interconnection for regulatory approval. We continue to expect the interconnection construction to begin in 2024 and to be completed in line with our commissioning time line. This gas interconnection will enable us to engage in registration and regulatory approval processes under programs such as the favorable renewable fuel standard and the California low carbon fuel standard. We have completed the majority of the installation of collection process equipment on 2 farms for which we have feedstock agreements and continue to optimize our collection methods.

We also continue to bring additional farms under contract in securing the necessary feedstock supply for our first phase for Montauk Ag Renewables project in Turkey, North Carolina. New trends impacting inlet fuel supply at several of our projects have been identified during the third quarter of 2024, critically shaping our updated 2024 production expectations. Several of our landfill hosts have begun to delay their installation of or delay our ability to install wellfield collection infrastructure in active waste placement areas, a practice historically common and critical to our projections of feedstock gas and, therefore, production.

These landfill-driven delays will impact the timing of collection system enhancement installations and the resulting timing of our production increases. We expect these trends to continue through 2025. The company records revenues from its production and sale of RNG and the generation and sale of its environmental attributes derived from RNG, such as RINs and LCFS credits.

Our R&D revenues for environmental attributes are recorded net of a portion of either the environmental attributes themselves for a portion of their revenues shared with offtake counterparties as consideration for such counterparties using the RNG as a transportation fuel. We have certain pathway provider sharing agreements expiring at the end of 2024. While we have not experienced a significant increase in the environmental attributes or the related revenues shared with pathway providers related to our current renewals in 2024, our current pathway renewals have been at higher percentages than historically contracted.

We are also seeing current proposed pathway renewals for percentages significantly higher than those under our historical agreements. The company monetizes a portion of its RNG production under fixed price agreements, which provide floor prices in excess of commodity indices. We have received offers to consider monetizing a larger portion of our RNG through fixed price contracts that could mitigate the impact of these aforementioned pathway percentage increases. Historically, we have monetized less than 25% of our RNG volumes under these fixed price agreements. We are considering entry into multiple short-term contracts throughout 2025, some potentially increasing our historical percentage of volumes monetized under fixed price arrangements to provide additional time to evaluate and navigate these recent market trends related to pathway offtakes.

And with that, I will turn the call over to Kevin.

[Kevin Van Asdalan, executive]

Thank you, Sean. I will be discussing our third quarter 2024 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 2024 were $65.9 million, an increase of $10.2 million or 18.4% compared to $55.7 million in the third quarter of 2023. The increase was primarily related to an increase in the number of RINs we self-marketed from 2024 RNG production in the third quarter of 2024 compared to the third quarter of 2023. Additionally, realized RIN pricing increased approximately 9.5% during the third quarter of 2024 compared to the third quarter of 2023.

Total general and administrative expenses were $10 million for the third quarter of 2024, an increase of $2.2 million, or 27.9% compared to $7.8 million in the third quarter of 2023. Employee-related costs, including stock-based compensation, were $7.2 million in the third quarter of 2024, an increase of $2.7 million or 59.6% compared to $4.5 million in the third quarter of 2023. The increase was primarily related to the accelerated vesting of certain restricted share awards as a result of the termination of an employee. Our corporate insurance fees decreased approximately $0.3 million, or 17.1% in the third quarter of 2024 compared to the third quarter of 2023.

Turning to our segment operating metrics. I'll begin by reviewing our renewable natural gas segment. As Sean mentioned, certain of our Houston, Texas sites were impacted by Hurricane Beryl, causing multi-day utility outages. We produced approximately 1.4 million MMBtu of RNG during the third quarter of 2024, flat compared to 1.4 million during the third quarter of 2023. Our Pico facility produced approximately 27,000 MMBtu more in the third quarter of 2024 as compared to the third quarter of 2023 due to the commissioning of our digestion expansion project. Our Galveston and coastal facilities produced approximately 27,000 combined more MMBtu in the third quarter of 2024 compared to the third quarter of 2023 due to the previously disclosed third quarter of 2023 dry weather conditions impacting feedstock availability in that prior period.

Our Rumpke facility produced approximately 59,000 fewer MMBtu in the third quarter of 2024 as compared to the third quarter of 2023 due to ongoing wellfield extraction environmental factors. Our Athascacita facility produced 22,000 fewer MMBtu in the third quarter of 2024 as compared to the third quarter of 2023 as a result of weather-driven utility outages, which impacted our production.

Revenues from the renewable natural gas segment during the third quarter of 2024 were $61.8 million, an increase of $10.8 million or 21.2% compared to $50.9 million during the third quarter of 2023. Average commodity pricing for natural gas in the third -- for the third quarter of 2024 was approximately 15.3% lower than the third quarter of 2023. During the third quarter of 2024, we self-marketed 15.8 million RINs, representing a 2 million increase or 14.5% compared to [ 13.8 ] million RINs self-marketed during the third quarter of 2023. Average pricing realized on RIN sales during the third quarter of 2024 was $3.34 as compared to $3.05 during the third quarter of 2023, an increase of 9.5%. This compares to the average D3 rent index price for the third quarter of 2024 of $3.36 being approximately 11.5% higher than the average D3 rent index price for the third quarter of 2023 of $3.01.

At September 30, 2024, we had approximately 0.3 million MMBtus available for in-generation and had approximately 0.1 million RINs generated and unsold. We had approximately 0.3 million MMBtus available for RIN generation and had approximately 0.8 million RINs generated and unsold at September 30, 2023.

Our profitability is highly dependent on the market price of environmental attributes, including the market price for RINs. As we self-market a significant portion of our RINs, a decision not to commit the transfer available RINs during a period will impact our revenue and operating profit. We have entered into commitments to transfer a portion of the RINs we expect to generate from 2024 fourth quarter production at an average price of approximately $3.52.

Our operating and maintenance expenses for our RNG facilities during the third quarter of 2024 were $12.6 million, an increase of $0.7 million or 5.6% compared to $11.9 million during the third quarter of 2023. Our McCarty facility operating and maintenance expenses increased approximately $0.4 million, primarily related to wellfield operational enhancements. Our Athascacita facility operating and maintenance expenses increased approximately $0.4 million, primarily related to an increase in utility expense and a property tax refund received in the prior year 2023 third quarter.

Our Pico facility operating and maintenance expenses increased approximately $0.2 million as a result of timing of digester preventative maintenance. Our Apex facility operating and maintenance expenses decreased approximately $0.4 million, primarily related to reduced utility expense and waste disposal costs. Our coastal facility operating and maintenance expenses decreased approximately $0.2 million, primarily related to reduced utility expense and wellfield operational enhancements.

We produced approximately 41,000 megawatt hours in renewable electricity during the third quarter of 2024, a decrease of approximately 7,000 megawatt hours or 14.6% compared to 48,000 megawatt hours during the third quarter of 2023. Our security facility produced approximately 5,000 megawatt hours less in the third quarter of 2024 compared to the third quarter of 2023 as a result of us ceasing operations in connection with the first quarter of 2024 sale of the gas right back to the landfill host.

Revenues from renewable electricity facility during the third quarter of 2024 were $4.2 million, a decrease of $0.6 million or 12.3% compared to $4.8 million during the third quarter of 2023. The decrease was primarily driven by the cessation of operations at our security facility. Our renewable electricity generation operating and maintenance expenses during the third quarter of 2024 were $2.7 million, an increase of $0.5 million or 21.8% compared to $2.2 million during the third quarter of 2023. Our Magnolia facility operating and maintenance expenses increased approximately $0.5 million as a result of noncapitalizable costs.

During the third quarter of 2024, we recorded impairments of $0.5 million, an increase of $0.5 million compared to less than $0.1 million in the third quarter of 2023. The specifically identified impairment losses in the third quarter of 2024, primarily related to various RNG equipment that was deemed obsolete and REG assets that were impacted under initial startup testing for 1 of our renewable electricity generation construction work in process sites.

Operating income for the third quarter of 2024 was $22.7 million, an increase of $5.9 million or 35.3% compared to $16.8 million for the third quarter of 2023. RNG operating income for the third quarter of 2024 was $33.6 million, an increase of $9.6 million or 39.7% compared to $24.1 million for the third quarter of 2023. Renewable electricity generation operating loss for the third quarter of 2024 was $0.6 million, a decrease of $1.3 million compared to operating income of $0.7 million for the third quarter of 2023.

Turning to our balance sheet. At September 30, 2024, $58 million was outstanding under our term loan as of September 30, 2024, our borrowing capacity available under our revolving credit facility remained at $117.8 million. As of September 30, 2024, we generated $43.1 million of cash from operating activities, an increase of 119.9% compared to $19.6 million as of September 30, 2023. Based on our estimate of the present value of our Pico earn-out obligation, we recorded a decrease of $1.3 million to the liability at September 30, 2024. This decrease was recorded through our RNG segment royalty expense.

For the 9 months ended September 30, 2024, we incurred approximately $53.3 million in capital expenditures, of which $25 million was for Montauk Ag Renewables; $10 million was for the second Apex facility; $7.9 million was for the Boerman RNG project; $1.8 million was for the Blue Granite RNG project; and $1.3 million for the Pico-digestion capacity increase project.

For 2024, we expect our nondevelopment 2024 capital expenditures to range between $14 million and $16 million. Additionally, we currently estimate that our existing 2024 development capital expenditures will range between $55 million and $65 million. As of September 30, 2024, we had cash and cash equivalents of approximately $55 million and accounts and other receivables of approximately $19.2 million. The majority of the accounts receivable balance is our September 2024 RIN sales, which were collected after September 30, 2024. Adjusted EBITDA for the third quarter of 2024 was $29.4 million, an increase of $7 million or 31.3% compared to $22.4 million for the third quarter of 2023.

EBITDA for the third quarter of 2024 was $28.9 million, an increase of $6.5 million or 64.3% compared to EBITDA of $22.4 million for the third quarter of 2023. Net income in the third quarter of 2024 was $17 million compared to net income of $12.9 million in the third quarter of 2023. Our income tax expense increased approximately $1.2 million or 41.2% for the third quarter of 2024 as compared to the third quarter of 2023.

I'll now turn the call back over to Sean.

[Sean McClain, executive]

Thank you, Kevin. In closing, while 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 an updated full year 2024 outlook. The aforementioned trends in landfill-driven delays of wellfield projects and active waste placement areas result in our full year RNG production volumes to range between 5.5 million and 5.7 million MMBtus and corresponding RNG revenues to range between $175 million and $185 million. We expect renewable electricity production volumes to range between 180,000 and 185,000 megawatt hours. Corresponding renewable electricity revenues are expected to range between $17 million and $18 million.

It is also important to note recent market trends potentially impacting our near-term renewal strategies for offtake pathway sharing and fixed price agreements may impact how we provide 2025 guidance as it relates to RNG revenues. And with that, we will pause for any questions.

[Operator]

[Operator Instructions]

Thank you. And I will turn it back to Sean McClain for closing comments.

[Sean McClain, executive]

Thank you for taking the time to join us on the conference call today, and we look forward to speaking with you in 2025.

[Operator]

Thank you all for participating in today's conference. You may now disconnect.