Montauk Renewables, Inc.

Good afternoon, everyone, and thank you for participating in today's conference call. I would like to turn the call over to Mr. John Cerulli as he provides some important cautions regarding forward-looking statements contained in the earnings material or made on this call. John, please go ahead.

Thank you, and good afternoon, everyone. Welcome to Montauk's Renewables Earnings Conference call to review fiscal 2021 financial and operating results and developments. I'm John Cerulli, 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 Asselen, 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 condition, 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 risk 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 on file with the SEC, and that provide 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 Press 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. We ask that you please keep to one question to accommodate as many questions as possible. And with that, I turn the call over to Sean. 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 acquisitions. In October of 2021, we 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 have also executed master service agreements that provide access to waste feedstock for Montauk AG to process. The feedstock will be swine waste sourced 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 PECO facility in Jerome, Idaho. As part of our overall capacity expansion at the PECO 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 PECO. At this stage of the capacity expansion, has impacted the timeline for modeling PICO's initial CI score pathway model and subsequent auditing approval by CARB. We did not receive a temporary CI pathway in 2021, and we're 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 Asselen, our Chief Financial Officer.

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 $100.4 million in 2020. The primary driver for this increase related to an increase of 45.5% in realized rent pricing during 2021 of $1.91 compared to $1.31 in 2020. Additionally, an increase 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 percent 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 MMBTU of RNG during 2021, essentially unchanged as compared to the number of MMBTUs produced in 2020. Of the 2021 volumes, 0.1 million MMVTUs of RNG was produced from development sites commissioned during 2020. Of the 0.2 million 2021 increases compared to 2020 MMVTUs 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 collections. As water levels vary or increase, the ability to draw feedstock may be reduced. We also experienced 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 $46.3%. 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 offtake agreement change in 2021, providing more RNG volumes available to self-market. Average pricing realized on RIN sales during 2021 was $1.91 as compared to $1.31 in 2020. an increase of 45.5 percent. This compares to the average D3 RIN index price for 2021 of $3.02, being approximately 102.7 percent 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 percent, 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 were $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 a 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 facilities utility consumption, resulted in our orange utilities being approximately $0.5 million lower in 2021 as compared to 2020. We produced approximately 183,000 megawatt hours in renewable electricity during 2021, a decrease of 3,000 megawatt hours from the 186,000 megawatt hours produced in 2020. In 2021, our Bowerman facility produced 152 megawatt hours, an increase of 8 megawatt hours, or 5.3%, over the 144 megawatt 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 megawatt hours in 2020 due to ongoing projects to restore the engines at our security facilities. Operating and maintenance expenses for our renewable electricity facilities in 2021 were $10.4 million, an increase of $0.6 million, or 6.3%, compared to $9.8 million in 2020. We reported the results of PECO within the renewable electricity generation segment until October 2020, and PECO contributed $1.4 million to the 2020 period. Exclusive of PECO, renewable electricity facility operating and maintenance expenses increased by 2 million or 19.2 percent 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 percent compared to an operating profit of 3.6 million in 2020. R&G 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 amendments. 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 periods 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 percent, 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. And I'll turn the call back over to Sean.

Thank you, Kevin. In closing, we want to provide our full year 2022 outlook. We expect R&G production volumes to range between 5.5 and 6.8 million MMBTU, with corresponding R&G revenues between 181 million and 226 million. We expect renewable electricity production volumes to range between 189 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.

Thank you. Ladies and gentlemen, if you'd like to ask a question, please press star then 1 on your touchtone telephone. Again, if you would like to ask a question, please press star then 1. Our first question comes from Matthew Blair of Tudor Pickering Holt. Your line is open.

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?

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 disclosed, 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 commissioned facilities as they continue to go through optimization that we believe could drive volumes to that upper range.

Thank you. Our next question comes from Craig Owen of Roth Capital. Your line is open.

Thank you for taking my questions. So can you update us on the PICO CARB certification? Where do we stand there? What is the process for us to actually monetize 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 final certification. Thank you.

Sure. Craig, we can talk a little bit about what we've done at the PECO facility in general and then what that means in terms of monetization. So with PECO, as we have announced, temporarily idling the facility, in 2021 we announced an executed amendment with the dairy partner that we have in 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 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, 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 that CARB comes back with that notification.

Okay, just a clarification, 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?

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 approves that certification.

Thank you. Our next question comes from Craig Sheree. of toy brothers your line is open.

Hi, I 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?

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 for 2022, we'll announce those publicly in due course.

Thank you. Our next question comes from David McCall of Port Washington. Your line is open.

Afternoon, guys. Thanks for taking the question. I'll follow up on the North Carolina one. You know I love the Montauk, the egg. So you've got the patent, the property, the people, the partners. The question 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?

I think the question on the investment decision has already been resolved with the asset acquisition that we did in 2021. The question as to how we proceed with that investment is, you know, 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 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 in 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 progress 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 a an expectation for that quarter of when work's going to commence production. Those are all items that we'll communicate publicly in future disclosures.

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

Hi, thanks. If I could just circle back to this PICO LCFS opportunity. You mentioned you doubled capacity. I previously had capacity at 330. K 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, you know, I guess should we think of your underlying earnings power as being this 222 midpoint guidance for 22 plus, you know, this PICO LCFS opportunity? Yeah.

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 their generation, and we expect to monetize those attributes more likely than not in 2023 based on the 2022 production and the release from storage.

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.

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.

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