Q1 2023 Montauk Renewables Inc Earnings Call
Participants
John Ciroli; Chief Legal Officer & Secretary; Montauk Renewables, Inc.
Kevin Andrew Van Asdalan; CFO & Treasurer; Montauk Renewables, Inc.
Sean F. McClain; President, CEO & Director; Montauk Renewables, Inc.
Craig Kenneth Shere; Director of Research; Tuohy Brothers Investment Research, Inc.
Manav Gupta; Analyst; UBS Investment Bank, Research Division
Matthew Robert Lovseth Blair; MD of Refiners, Chemicals & Renewable Fuels Research; Tudor, Pickering, Holt & Co. Securities, LLC, Research Division
Presentation
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 to provide 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
Thank you. Good afternoon, everyone. Welcome to Montauk Renewables earnings conference call to review the first quarter 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 first quarter 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 such as (sic) [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 first quarter 2023 earnings press release and Form 10-Q 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 with that, I turn the call over to Sean.
Sean F. McClain
Thank you, John. Good day, everyone, and thank you for joining our call. As we previously announced during our fiscal 2022 earnings conference call in March, and as Kevin will explain in more detail, we made a strategic decision not to commit to transfer any available RINs on 2023 RNG production until the second quarter of 2023. The EPA's release of the RVO in December 2022 included RVO obligations for 3 years, 2023 through 2025, and included volumes of eRINs to be generated from renewable electricity and used in transportation fuel.
With the final RVO due to be released in June 2023, we believe this rule making introduced higher-than-expected volatility in the price of D3 RINs during the first quarter of 2023. As a result, we purposefully delayed the timing of all D3 RIN transfers from 2023 RNG production until the second quarter of 2023. We have begun to seeing the benefits of this strategy with the 4 million RINs related to 2023 RNG production committed in the second quarter of 2023 at an average realized price of $2.04.
In March 2023, we announced our entrance into South Carolina with the development of a new landfill gas-to-RNG facility. The planned project is expected to contribute approximately 900 MMBtus per day of production capacity upon commissioning. We expect to incur capital expenditures beginning in the second quarter of 2023 and expect the project to be complete and become commercially operational in 2025.
Next, I would like to provide an update on our Pico dairy cluster project in Idaho. During the first quarter of 2023, CARB finalized the engineering review of the Pico facility's provisional CI application and released it for public comments. Public comment period ended March 14, 2023, and we did not receive any significant comments. CARB certified our Tier 2 application and the certified CI value will be used to report and generate LCFS credits starting in the fourth quarter of 2022. We plan to release the remaining gas from storage in the second quarter of 2023.
As part of our overall capacity expansion at the Pico facility, we undertook significant efforts to improve the performance of its existing digestion process. Related to our Pico Feedstock Amendment, which increased the amount of feedstock supplied to the facility for processing over a 3-year period, the dairy delivered the 2 increases in feedstock, and we have made 3 payments to the dairy as required in the Pico Feedstock Amendment. The improved efficiencies of our existing digestion process and the water management improvements have enabled us to process the increased feedstock volumes, which we received from the dairy.
We completed the design of the digestion capacity increase in the third quarter of 2022 and began incurring capital expenditures related to the completed design of our digestion expansion construction of the project. We expect the digestion expansion project to be functionally completed during the third quarter of 2023. We expect the dairy to begin delivering the third and final tranche of increased feedstock in 2024.
As to our 2021 Montauk Ag Renewables acquisition, we continue to work with our engineer of record through the optimization of improvements in the patented reactor technology. In the first quarter of 2023, we completed the relocation of the reactor in Magnolia, North Carolina to the Turkey Creek, North Carolina location to centralize processing at one location. We continue to progress on our improvements and continue to expect to begin revenue-producing activities in 2024.
In parallel, we continue to engage with regulatory agencies in North Carolina related to the resulting power generation derived from swine waste to confirm its eligibility for renewable energy credits under North Carolina's Renewable Energy Portfolio Standards in anticipation of commercial production. Our Turkey Creek, North Carolina facility has been accepted into the Piedmont Natural Gas renewable gas pilot program, which is a step towards obtaining the new renewable energy facility, NREF designation under the North Carolina Utilities Commission.
Due to our consolidation of operations at the Turkey Creek, North Carolina location and based on our current expectations related to commercial operations, we have paused our registration process to obtain NREF status for the Turkey Creek, North Carolina location. Concurrently, we have executed a receipt interconnection agreement with Piedmont Natural Gas for the Turkey Creek, North Carolina location. This agreement is structured to coincide with the development time line at that location.
Also, in the first quarter of 2023, we signed a lease agreement with Piedmont Natural Gas to provide access to the Turkey Creek, North Carolina property during construction of the interconnection. We are also in varying stages of discussions with potential power purchasers.
Finally, we are currently in late-stage negotiation to develop, own and operate an RNG facility alongside our existing renewable electric generation facility in Irvine, California. We intend to beneficially process the available feedstock, which we currently estimate to be approximately 2,485 MMBtus in excess of what the REG facility can process. While we believe we are in the late stages of negotiation and expect to finalize the development opportunity, no assurances can be given that this opportunity will meet our expectations.
And with that, I will turn the call over to Kevin.
Kevin Andrew Van Asdalan
Thank you, Sean. I will be discussing our first quarter of 2023 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 first quarter of 2023 were $19.2 million, a decrease of $13 million or 40.5% compared to $32.2 million in the first quarter of 2022. The decrease is primarily related to our strategic decision as we are not a force-seller of D3 RINs, do not self-market any RINs from 2023 RNG production due to our belief that the first quarter of 2023, D3 RIN index volatility was temporary.
Decreased realized RIN pricing during the first quarter of 2023 of $2.01 compared to $3.46 in the first quarter of 2022 also contributed to the decrease in total revenues. This decrease is partially offset by losses recognized in the first quarter of 2022 of $3.5 million, which were related to a gas commodity hedge program that expired in December 2022. We report the impacts of our gas commodity hedge program within our corporate segment. We have not currently entered into any gas commodity hedge programs for 2023.
Total general and administrative expenses for the first quarter of 2023 were $9.5 million, an increase of $1 million or 12.6% compared to $8.5 million for the first quarter of 2022. The increase is primarily related to stock-based compensation expense as a result of the 2022 amendments to restricted share awards issued in the 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 first quarter of 2023, a decrease of less than 0.1 million compared to 1.4 million MMBtu produced in the first quarter of 2022. Our Rumpke and Apex facilities produced approximately 0.1 million more MMBtu in the first quarter of 2023 compared to the first quarter of 2022 due to prior period process equipment failures. Our Galveston facility produced less than 0.1 million fewer MMBtu in the first quarter of 2023 compared to the first quarter of 2022 as a result of the temporary reduction in feedstock inlet during modifications to process equipment.
Revenues from the Renewable Natural Gas segment in the first quarter of 2023 were $14.8 million, a decrease of $17.9 million or 54.7% compared to $32.7 million in the first quarter of 2022. Average commodity pricing for natural gas for the first quarter of 2023 was $3.42 per MMBtu, 30.9% lower than the first quarter of 2022.
During the first quarter of 2023, we self-monetized 2.9 million RINs, representing a 3.5 million decrease or 54.5% compared to 6.5 million monetized in the first quarter of 2022. The decrease was primarily related to our strategic decision to not self-market any RINs from 2023 production.
Average pricing realized on RIN sales during the first quarter of 2023 was $2.01 as compared to $3.46 in the first quarter of 2022, a decrease of 41.9%. This compares to the average D3 RIN index price for the first quarter of 2023 of $2.03 being approximately 37.5% lower than the average D3 RIN index price in the first quarter of 2022.
At March 31, 2023, we had approximately 0.4 million MMBtus available for RIN generation and had approximately 8.3 million RINs generated and unsold. At March 31, 2022, we had approximately 0.4 million MMBtus available for RIN generation and had approximately 4.4 million RINs generated and unsold.
Our operating and maintenance expenses for our RNG facilities were $11.3 million, an increase of $1.7 million or 18.6% compared to $9.6 million in the first quarter of 2022. The primary driver of this increase was related to timing of preventative maintenance expenses during the first quarter of 2023 at our McCarty and Apex facilities as compared to the first quarter of 2022.
Our profitability is highly dependent on the market price of environmental attributes, including the market price of RINs as we self-market a significant portion of our RINs and are not a force-seller of D3 RINs, a strategic decision not to commit to transfer RINs during a period will impact our operating revenue and operating profit.
The industry experienced a volatile D3 RIN index prices since the EPA's release of the 2023 RVO in December 2022. The RVO released in December '22 also included a 3-year volume compliance schedule rather than annual volume obligations. The final RVO is due to be released in June 2023, which we believe has temporarily impacted the timing of D3 RIN transfers from 2023 RNG production.
Though the average market price of these 3 RINs since the 2023 RVO release was approximately $2.18, the market price declined as low as $1.88 in February of 2023 from a D3 RIN index price of $2.43 on the day of the 2023 RVO release. We viewed this reduction in price as temporary and accordingly, we determined not to transfer any D3 RINs generated and available for transfer from 2023 RNG production during the first quarter of 2023. As a result, at March 31, 2023, we had approximately 8.3 million RINs in inventory, an increase of 88.1% compared to March 31, 2022.
We have entered into commitments to transfer during the second quarter of 2023, a significant amount of RINs generated but unsold as of March 31, 2023.
We produced approximately 46,000 megawatt hours in renewable electricity during the first quarter of 2023, an increase of approximately 1,000 megawatt hours compared to 45,000 megawatt hours in the first quarter of 2022. Our Bowerman facility produced approximately 2,000 megawatt hours more in the first quarter of 2023 as a result of preventative engine maintenance performed during the first quarter of 2022.
Revenues from the renewable electricity facilities in the first quarter of 2023 were approximately $4.4 million, an increase of $0.4 million or 10% compared to $4 million in the first quarter of 2022. The increase is primarily driven by the increase in our Bowerman facility production volumes.
Our renewable electricity generation operating and maintenance expenses in the first quarter of 2023 were $2.9 million, a decrease of $0.4 million or 13.7% compared to $3.3 million in the first quarter of 2022 due to the timing of scheduled preventative maintenance intervals at our Bowerman facility.
We calculated and recorded an impairment loss of approximately $0.5 million in the first quarter of 2023, an increase of $0.4 million compared to $0.1 million in the first quarter of 2022. The impairment in the first quarter of 2023 was related to a feedstock processing machine component at an RNG facility that was not operating at an optimal level and no longer in use. Other than this discrete event, we did not report any other impairments related to future cash flows.
Operating loss in the first quarter of 2023 was $14.2 million, an increase of $12.5 million compared to an operating loss of $1.7 million in the first quarter of 2022. RNG operating loss for the first quarter of 2023 was $4.3 million, a decrease of $17.3 million or 133% compared to operating profit of $13 million in the first quarter of 2022. Renewable electricity generation operating loss for the first quarter of 2023 was $0.3 million, a decrease of $1.2 million or 83.2% compared to an operating loss of $1.5 million in the first quarter of 2022.
Turning to the balance sheet. As of March 31, 2023, $70 million was outstanding under our term loan. The company's capacity available for borrowing under the revolving credit facility was $115.5 million. During the first quarter of 2023, we used $11.8 million of cash from operating activities, a decrease of 223.4% compared to $9.6 million of cash provided by operating activities in the first quarter of 2022.
In the first quarter of 2023, our capital expenditures were approximately $13.3 million, of which $5.4 million, $2.7 million and $2.0 million were related to the ongoing Pico facility digestion capacity increase, the Montauk Ag Renewables development project in North Carolina and our second Apex RNG facility, respectively. As of December 31, 2022, we had cash and cash equivalents of approximately $78.5 million.
Adjusted EBITDA for the first quarter of 2023 was a loss of $8.4 million, a decrease of $15.4 million or 220% over adjusted EBITDA of $7.0 million for the first quarter of 2022. EBITDA for the first quarter of 2023 was a loss of $9 million, a decrease of $12.8 million over EBITDA of $3.8 million in the first quarter of 2022.
Net loss for the first quarter of 2023 increased $2.7 million over the first -- over the net loss for the first quarter of 2023. The increase was primarily related to a reduction of revenues due to our strategic decision to not sell RINs from 2023 RNG production in the first quarter of 2023. This loss was partially offset by the tax benefit related to the application of our effective tax rate to our first quarter 2023 loss before income taxes.
I'll now turn the call back over to Sean.
Sean F. McClain
Thank you, Kevin. In closing, we would like to reaffirm our full year 2023 outlook, which remains unchanged from the 2023 outlook we provided during our 2022 earnings call held in March. While we do not provide guidance on expectations of future environmental attribute prices, volatility in the index prices does impact our revenue expectations.
We continue to expect RNG production volumes to range between 5.7 and 6.1 million MMBTUs with corresponding RNG revenues between $137 million and $145 million. We continue to expect renewable electricity production volumes to range between 195,000 and 205,000 megawatt hours with corresponding renewable electricity revenues between $18 million and $19 million.
And with that, we will pause for any questions.
Question and Answer Session
Operator
(Operator Instructions) Our first question comes from the line of Craig Shere of Tuohy Brothers.
Craig Kenneth Shere
Congratulations on the decision to bank those RINs. It seems like a good decision. So I was just wondering if you have any detail about how much Pico RNG is in storage to be sold in second quarter? And what exactly that CI Score was?
Kevin Andrew Van Asdalan
CI Score that was finalized was minus 261, I believe, Craig. And in regards to providing detailed volumes on our underlying operating sites, we generally don't do that, but we do expect that all of the volumes in storage -- remaining in storage will be released during the second quarter of 2023.
Operator
Our next question comes from the line of Matthew Blair of Tudor, Pickering, Holt & Company.
Matthew Robert Lovseth Blair
Kevin and Sean, I was hoping you could provide or maybe just confirm the lost EBITDA in the quarter from holding back the incremental RINs. We were coming to about a $3 million impact. But on the call, I thought there was a mention of like 4 million RINs at $2 a RIN. I just wanted to confirm that. And then also, could you just -- on the big picture level, could you just outlay what gives you confidence that RINs will be moving up in the future?
Kevin Andrew Van Asdalan
Thanks, Matthew. If you want to base your first part of that question on averages, I believe the first quarter D3 RIN index average was $2.02, $2.03 million and of that, if you want to apply our approximately 8.3 million RINs generated but unsold, that would give you a top line revenue. And then we have an approximate 20% or 25% depending upon what site they would be sourced from. But our RNG segment royalty of approximately 20% would reduce those revenues.
So again, depending upon timing of sales, but if you wanted to apply our first quarter RINs generated but unsold balance against that first quarter average D3 index price and then take an estimated RNG segment royalty, which is probably in the neighborhood of 20% or 22% or 23%, I'm not saying that would definitively approximate the deferred EBITDA out of Q1 into Q2 or the rest of the year, but that would give you a good approximation.
Sean F. McClain
And Matthew, just to answer that last piece. I mean, consistent with our guidance provisions that we do, we do not provide guidance on our expectations of future attribute prices. I mean, we are sensitive to the fact that the volatility in those index prices, it does impact our revenue and EBITDA expectations.
Operator
Our next question comes from the line of Manav Gupta of UBS.
Manav Gupta
Guys, I just want to ask a macro question. A number of your peers in the RNG space are very excited about what Cummins is doing with the natural gas engines and they think it could be a game changer for RNG in the transportation segment of heavy-duty vehicles. I just wanted to know what your views are on the entire developments that are happening in the space as far as Cummins bringing new vehicles which are competitive with diesel in terms of strength. How do you feel about that?
Sean F. McClain
That's a good question, Manav. We continue to evaluate all sources of development uses of our products. We are very excited about the future prospects of eRINs and the ability for our facilities to generate those attributes for utilization in electric vehicles beyond just fleet usage, but consumer vehicles.
We are excited about the possibility of natural gas engines and the utilization of that fuel. We are excited about the potential of carbon utilization for a number of sustainable energy source productions that are also being used in the transportation space. There's a number of exciting developments that continue to expand the prevalence and the diversification of how we can sell our products, our commodities as well as our attributes.
Operator
Our next question comes from Matthew Blair.
Matthew Robert Lovseth Blair
Thanks for taking my follow-up. So it looks like on the $2.01 realized RIN price, that's coming in at approximately 97% capture against just average RIN prices in the quarter, which is pretty good. Normally, we see some cases where other companies are having to take more of a discount when they self-market their RINs. So I was hoping you could talk about that a little bit. Is there anything special on your end that's allowing you to capture more of the benchmark RIN pricing? Any sort of commercial efforts you can highlight or anything in that regard?
Sean F. McClain
Matthew, I think it's a good question. Obviously, we are not a force-seller of our attributes, and that allows for you to do a couple of things. It allows for you to carefully watch, monitor, project what we see to be a higher-than-expected volatility in pricing. And we also manage our cash flows and our cash needs for development and for operations very carefully. That combined with our base revenue from fixed price contracts, particularly those in our renewable electricity space, allow for us to not only time and patiently monetize our attributes, but to do so more directly with the actual obligated parties as opposed to intermediaries that will provide cash flow, much needed cash flow for other industry players, but do so at a more meaningful discount.
Operator
Thank you. I'm showing no further questions at this time. I'll turn the call back over to Sean McClain for any closing remarks.
Sean F. McClain
Thank you, and thank you, everyone, for taking the time to join us on the conference call today. We look forward to speaking with you on our second 2023 quarter conference call.
Operator
Thank you. Ladies and gentlemen, this does conclude today's conference. Thank you all for participating. You may now disconnect. Have a great day.
