Q4 2022 Montauk Renewables Inc Earnings Call
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
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 are made on this call. John, please go ahead.
Thank you, and good afternoon, everyone. Welcome to Montauk Renewables earnings conference call to review fiscal 2022 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 developments; and Kevin Van Asdalan, Chief Financial Officer, to discuss our 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 may 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 fiscal 2022 earnings press release and Form 10-K issued and filed this afternoon. Both are available on our website at ir.montaukrenewables.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.
And with that, I will turn the call over to Sean.
Sean F. McClain
Thank you, John. Good day, everyone, and thank you for joining our call. I wanted to start this call with a summary of the major events for Montauk during 2022. First, as to our 2021 Montauk Ad Renewables acquisition, we continue to work with our engineer record through the optimization of improvements to the patented reactor technology. During the fourth quarter of 2022, we began to process of relocating our existing reactor at the Magnolia North Carolina facility to the Turkey, North Carolina facility in an effort to centralize future feedstock processes.
We continue to progress on our improvement and continue to expect reaching commercial operations 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 the renewable energy credits under North Carolina's renewable energy portfolio standards in anticipation of commercial production. Our Turkey, North Carolina facility has been accepted into the Piedmont natural gas, renewable natural gas pilot program, which is a step towards obtaining the new renewable energy facility designation under the North Carolina Utilities Commission.
Due to our consolidation of operations at the Turkey facility and based on our current expectations related to commercial operations, we have paused our registration process to obtain NREF status for the Turkey, North Carolina location. Next, I would like to provide an update on our Pico Dairy cluster project in 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. The performance we have made to date into both our existing digestion process efficiencies and to our water management improvements have enabled us to process the increased feedstock volumes we are receiving.
The dairy has delivery of the first 2 tranches of increased feedstock volumes, triggering the first 2 associated development payments to the dairy. We have 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 begin to reach commercial operations during the third quarter of 2023. We expect the dairy to begin delivering the third and final tranche of increased feedstock in 2024.
In the first quarter of 2023, the California Air Resource Board, CARB, finalized the engineering review of the Pico facility's provisional CI application and released it for public comments. The public comment period ended on March 24, 2023. We do not believe we received any significant public comments and expect to receive the certified provision of CI score before the end of the first quarter of 2023. During 2022, we announced our plans to construct a second RNG processing facility at the Apex landfill. This project is being driven by projections in biogas feedstock availability from the host landfill. We anticipate an approximate 40% increase in RNG processing capacity with the addition of the second facility.
This expansion is expected to increase daily production by approximately 2,100 MMBtus per day and expand the infrastructure for the conversion of LFG to RNG. We have begun to incur capital expenditures for this project and expect the project to be complete and become commercially operational in 2024. In June 2022, we completed our analysis for process facility improvements and our Board of Directors improved a capital improvement project to make upgrades to our regular facility that will increase production. This facility is currently being impacted by requirements to meet federal pipeline tariffs, which limit the oxygen content of product gas. The pipeline tariffs have resulted in limitations in our ability to process all existing feedstock. Construction on this capital project commenced during the third quarter of 2022, and we expect it will become commercially operational during the second half of 2023.
Based on the current production of the Raeger facility, we anticipate an approximate increase of 50% of average daily production. Finally, and as Kevin will explain in more detail, we have decided not to commit to transfer RINs on 2023 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 volume of RINs to be generated from renewable electricity and used in transportation fuel. We believe this rulemaking has introduced volatility in the price of D3 RINs during the first quarter of 2023. We plan to transfer during the first quarter of 2023, only RINs generated from 2022 production.
And with that, I will turn the call over to Kevin.
Kevin Andrew Van Asdalan
Thank you, Sean. I will be discussing our 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 2022 were $205.6 million, an increase of $57.4 million or 38.8% compared to $148.1 million in 2021. The primary driver for this increase relates to an increase of 70.2% in realized RIN pricing during 2022 of $3.25 compared to $1.91 in 2021. Additionally, contributing to the increase was an increase in natural gas index pricing of 72.9% in 2022 of $6.64 compared to $3.84 in 2021. These increases were offset by lower counterparty sharing revenues of $13.2 million in 2022 compared to 2021 due to these arrangements ending.
We report the impact of our gas commodity hedge program within our corporate segment. Our gas commodity hedge program was priced at rates below actual index prices, and we recorded a loss of $7.8 million in 2022. Our gas commodity hedge expired in December 2022, and we have not currently entered into any gas commodity hedge programs for 2023.
Total general and administrative expenses were $34.1 million for 2022, a decrease of $8.4 million or 19.8% compared to $42.5 million for 2021. The employee-related costs, including stock-based compensation decreased approximately $10.6 million or 35.4% in 2022 compared to 2021. The decrease is primarily related to our accounting for cancellation of M&K options and the 2021 grants of restricted stock, nonqualified stock options and restricted stock units to the company's employees.
Offsetting this decrease is an increase in general and administrative expenses of approximately $3.6 million or 337.5% in 2022 as compared to 2021 associated with the Montauk Ag Renewables acquisition. Our corporate insurance premiums increased approximately $0.4 million, 6.8% during 2022 compared to 2021, primarily related to premium increases. Our Board of Directors approved payments of cash fees to nonemployee directors, resulting in increased fees of approximately $0.7 million in 2022 as compared to 2021.
Finally, excluding our Montauk Ag Renewables acquisition, our professional fees increased approximately $0.8 million or 19.2% in 2022 as compared to 2021. Turning to our segment operating metrics. I'll begin by reviewing our renewable natural gas segment. We produced approximately $5.5 million MMBtu of RNG during 2022, a decrease of $0.2 million compared to the number of MMBTUs produced in 2021.
Of the 2022 volumes, our Atascocita facility produced $0.2 million fewer MMBtu in 2022 compared to 2021 due to a temporary process equipment failure. Our Rumpke facility produced 0.1 million fewer MMBtu in 2022 compared to 2021 as a result of lower well field inlet fuel flow associated with the landfill host filling operations. Our Apex facility produced 0.1 million fewer MMBTU in 2022 compared to 2021 due to landfill billing pattern changes resulting in lower production.
Offsetting these decreases were production volume increases at both our Pico and Galveston facilities. Our Pico facility produced 0.1 million MMBtu more in 2022 compared to 2021 as a result of improvements related to the existing digestment process and our water management practices. Our Galveston facility produced 0.1 million MMBtu more in 2022 compared to 2021 and as a result of higher inlet gas due to well field changes and plant efficiency optimization of process equipment.
Revenues from the Renewable Natural Gas segment in 2022 were $196.2 million, an increase of $64.4 million or 48.9% compared to $131.8 million in 2021. Average commodity pricing for natural gas for 2022 was 72.9% higher than the prior year. During 2022, we self-marketed approximately 43.8 million RINs, representing a 1.2 million increase or 2.9% compared to 42.6 million in 2021. The increase was primarily related to an offtake agreement change in 2021, providing for more RNG volumes available to self-market. Average pricing realized on RIN sales during 2022 was $3.25 as compared to $1.91 in 2021, an increase of 70.2%. This compares to the average D3 RIN index price for 2022 of $2.98 being approximately 1.7% lower than the average D3 RIN index price in 2021 of $3.03.
All of our RIN sales in 2022 and 2021 were priced generally on the D3 index with non-based own cellulosic waiver credit. At December 31, 2022, we had approximately 0.4 million MMBtus available for RIN generation and had approximately 0.7 million RINs generated and unsold. We had approximately 0.4 million MMBTUs available for RIN generation and approximately 0.1 million RINs generated and unsold at December 31, 2021. 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, the decision not to commit to transfer available RINs during a period will impact our revenue and operating profit.
In regard to recent developments, the industry has experienced volatile D3 RIN index prices since the EPA's release of the 2023 RVO in December of 2022. The average market price of D3 RIN since the 2023 RVO release was approximately $2.18, the market price declined as low as $1.88 in February 2023 from a D3 RIN index price of $2.43 on the day of the 2023 RVO release. We view this volatility in prices temporary, and accordingly, we determined not to transfer a significant amount of D3 RINs generated from 2023 production and available for transfer during the first quarter of 2023.
As a result, we had approximately 3.9 million RINs in inventory and available for sale from 2022 gas production and have approximately 7.3 million RINs in inventory and available for sale from 2023 gas production. We plan to transfer the 3.9 million RINs in inventory from 2022 gas production during the first quarter of 2023. We produced approximately 190,000 megawatt hours in renewable electricity during 2022, an increase of approximately 7,000 megawatt hours or 3.8% compared to 183,000 megawatt hours in 2021. In 2022, our security facility produced 10,000 megawatt hours in 2022 compared to 0 reduction in 2021 as a result of the prior period engine restoration project.
Offsetting this increase was a decrease at our Tulsa facility that produced 3,000 megawatt hours left in 2022 compared to 2021 due to feedstock -- reduced feedstock availability at the landfill. Revenues from renewable electricity facilities in 2022 were $17.2 million, an increase of $1.7 million or 11.1% compared to $15.4 million in 2021. Our Bowerman facility contributed $1.2 million of the increase, which was primarily driven by a temporary shutdown of the facility in the fourth quarter of 2020 due to California wildfires resulting in $0.6 million in reduced environmental attribute revenues in 2021 compared to 2022.
Also contributing to the increase is our security facility engine restoration project resulting in $0.7 million in higher revenues for 2022 compared to 0 in 2021. During 2022, we recorded impairments of approximately $4.9 million, an increase of $3.7 million compared to $1.2 million in 2022. The primary driver for this increase relates to a third quarter 2022 impairment of approximately $2.1 million for our renewable electricity generation site wherein the forecasted future cash flows did not exceed the carrying value of the site's long-lived assets.
As to the remaining long-lived asset groups, we concluded based on our annual cash flow assessment conducted for monitoring of potential impairment indicators at the cash flows to be generated are significantly in excess of the carrying values of our remaining operating sites, primarily due to the length of the underlying gas rights agreement, and we did not record any other impairments related to our cash flows assessments.
Separate from our cash flow assessments, we identified discrete events and recorded impairment charges. A second renewable electricity generation site was impaired for $1.4 million due to a discrete conclusion that certain assets acquired in the May 2021 Montauk Ag Renewables acquisition would no longer be utilized. Also in 2022, we recorded an impairment at an R&D facility for approximately $1.1 million due to a specific identification of certain assets no longer being capable of being used as designed.
Operating profit in 2022 was $44.6 million, an increase of $41.2 million compared to $3.3 million in 2021. R&G operating profit for 2022 was $94.4 million, an increase of $44 million or 87.6% compared to $50.4 million in 2021. The renewable electricity generation operating loss for 2022 was $7 million, an increase of $3.9 million or 127.2% compared to operating loss of $3.1 million in 2021.
Turning to the balance sheet. In December 2021, we refinanced our credit facility and entered into the fourth amendment to the second amended and restated revolving credit and term loan agreement. The current credit agreement, which is secured by lean on substantially all assets of the company and certain of its subsidiaries, provides for a 5-year $80 million term loan and a $20 million revolving credit facility. As of December 31, 2022, and $72 million was outstanding under the term loan.
As of December 31, 2022, the company's capacity available for borrowing under the revolving credit facility was approximately $116.1 million. During 2022, we generated $81.8 million of cash from operating activities and 89.1% increase from the prior year ended December 31, 2021, of $42.9 million. For 2022, our capital expenditures were $22.3 million, of which, $6.9 million and $3.6 million were related to the Pico facility digestion capacity increase and the Montauk Ag renewables development in North Carolina, respectively. As of December 31, 2022, we had cash and cash equivalents of approximately $105.2 million.
Adjusted EBITDA for 2022 was $70.5 million, an increase of $43.6 million or 152.4% over adjusted EBITDA of $27.9 million for 2021. EBITDA for 2022 was $65.7 million, an increase of $40.3 million or 158.4% over EBITDA of $25.4 million for 2021. Net income for 2022 increased $39.7 million over net income for 2021. This increase was primarily related to increased operating revenues of $57.4 million or 38.8% to $205.6 million in 2022 as compared to operating revenues of $148.1 million in 2021.
I'll now turn the call back over to Sean.
Sean F. McClain
Thank you, Kevin. In closing, we would like to provide our full year 2023 outlook. While we don't provide guidance on our expectations of future environmental attribute prices, volatility and index prices does impact our revenue expectations. We expect RNG production volumes to range between 5.7 million and 6.1 million MMBtu with corresponding R&D revenues between $137 million and $145 million. We 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
Our first question is from William Blair with TPH.
Matthew Robert Lovseth Blair
I had a 2-part question. So the first was on the 2023 RNG production. At the midpoint, it's about a 7% growth rate compared to your 2022 level. Is that a good number, it's kind of mid-single digits. Is that a good number to run with for the next 3 years or so? Because you did outline some compelling growth projects Apex-2, the work you're doing on the ag side. So I guess the question is, should we expect a step up in 2024 or is mid-single digit the right way to think about it going forward? And then the second question is, could you just clarify in your revenue guidance for 2023, what is your assumption on D3 RINs and LCFS prices that's embedded in that guidance? It kind of sounds like you expect D3 RINs to move up, but I just wanted to know what the actual embedded number was?
Kevin Andrew Van Asdalan
Thank you, Matthew. I'll address the 2023 RNG production volumes first. Using the middle point for a growth rate from 2023 -- from 2022 would not include our expected volumes from the Apex project coming online in 2024. So we would anticipate a larger production volumes in 2024 as compared to that 2023 growth rate. And as it relates to the residual rest of 2023, I think as we were talking last year. There are some well field expansion projects as we monitor our well field expansion during the year as well as our landfill host during the year, we'll continue to monitor that 2023 production range and as we move throughout the year.
And then just to reiterate, Sean's comments, we generally try to not opine on what our view of the RIN price is going to be in our embedded revenue guidance, just knowing that we have a view on what those D3 RIN indexes is going to look like for the rest of the year or the LCFS credit price as well.
Our next question is from Manav Gupta with UBS.
I also have a 2-part question. And the first part here is that as I look at the revenue year-over-year, it looks like from the RNG side, you're going from about $196.2 million this year to about $137 million to $145 million, so let's say, $141 million, and I'm just trying to make sure is that apples-to-apples? And is that primarily driven by credit price differencing? And what I'm trying to really get here is there any reason why the EBITDA margin should be very different between the 2 years. So starting with a lower number, should I still assume a similar EBITDA margin for 2023, if I'm trying to benchmark my model versus 2022?
Kevin Andrew Van Asdalan
Okay, Manav. I can take that question. The guidance that we provided is it's reflective of the, call it, midpoint of the increase in production, it does reflect from a revenue perspective, the expectations of attribute pricing. The EBITDA margins, as you're calling them are expected to reflect changes with respect to tiered royalty structure that we have historically disclosed the business utilizes your cost of operations are not impacted in an increasing or a decreasing attribute scenario.
And our next question is from Craig Irwin with Roth.
It's Andrew on for Craig. So just a quick one for me here. You did touch on it on the prepared remarks, but I was just hoping you could provide some more color around the RVL proposal from the EPA and in particular, the introduction of RINs, proposed volumes of 600 million gallons in 2024 versus around 620 million gallons for D3 RINS treatments in 2023? So just I was wondering if you thought the proposed volumes were sufficient for the industry? And how has this shaped your thinking of RIN monetization in the near term?
Sean F. McClain
Without giving a lot of speculation on our view of what RIN pricing will be, we do acknowledge that the compartmentalization of the RVO that was given by the EPA does sync up significantly closer to the run rate of RIN generation that's publicly available on the EPA site in relation to what the RVO has been compared to previous years. That compared with the allocation of future years for the onset of E-RINs, although is an exciting development. We do expect there to be a healthy discussion related to a large volume of commentary that's been submitted to the EPA since they released to those preliminary numbers.
And our next question is from Craig Shere with Tuohy Brothers.
Craig Kenneth Shere
Given the weakness in environmental attribute pricing of late, LCFS somewhat steady over the past year plus and more recently, RINs. Is the fixed price institutional voluntary market looking more attractive? Or is the international opportunities to monetize environmental attributes looking more attractive? I know you participated in both of those.
Sean F. McClain
That's a great question, Craig. The both the voluntary market as well as the international markets have continued to provide interesting opportunities to secure a relatively healthy baseline of revenue streams as an alternative to selling directly into the market. Our business model allows for us to divert volumes out of the RFS market to take advantage of those opportunities as they become available and the business routinely entertains and discusses with voluntary market offtakers as well as folks that participate even as obligated parties in the RFS that are looking for alternative structures beyond just a straight purchase of the D3 RIN attribute.
Thank you. And I'm showing no further questions at this time. I would now like to turn the conference back to Sean McClain for closing remarks.
Sean F. McClain
Well, we thank you for taking the time to join us on the conference call today, and we look forward to speaking with you again on our 2023 first quarter conference call.
And this concludes today's conference call. Thank you for participating. You may now disconnect.