Business Context and Reporting Period
Montauk Renewables, Inc. filed this Form 10-K for the fiscal year ended December 31, 2020. The historical operating financial statements are those of predecessor Montauk Holdings USA, LLC, presented on a consolidated basis. Montauk develops, owns and operates renewable natural gas (RNG) and renewable electricity projects that process landfill gas and anaerobic digester gas. At year-end, the portfolio comprised 12 RNG projects and three renewable electricity projects across six states.
The company completed a reorganization and IPO after year-end. On January 26, 2021, it sold 2.7 million newly issued shares at $8.50 per share, generating approximately $15.0 million of net proceeds to the company. The common stock began trading on Nasdaq under “MNTK” and on the Johannesburg Stock Exchange under “MKR.”
Financial Performance and Key Metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Operating revenue | $100.4 million | $105.7 million | Down 5.0% |
| Operating profit | $3.6 million | $11.0 million | Down 67.5% |
| Operating margin | 3.6% | 10.4% | Down 6.8 percentage points |
| Net income | $4.6 million | $5.8 million | Down 20.9% |
| Net margin | 4.6% | 5.5% | Down 0.9 percentage points |
| Adjusted EBITDA | $26.0 million | $33.1 million | Down 21.3% |
| Net cash from operations | $28.7 million | $27.8 million | Up 3.1% |
| Capital expenditures | $17.6 million | $45.6 million | Down 61.3% |
RNG revenue was $83.2 million, down 1.1%, while renewable electricity revenue was $16.7 million, down 16.1%. RNG production increased 7.2% to 5.7 million MMBtu, but average realized RIN pricing declined 9.0% to $1.32. The company sold approximately 39.3 million RINs, up from 36.8 million.
Environmental Attributes, including RINs, LCFS credits and RECs, represented approximately 60% of 2020 revenue versus 56% in 2019. Revenue disclosed by major source included $29.5 million of natural gas commodity revenue, $54.1 million of natural gas Environmental Attribute revenue, $9.6 million of electric commodity revenue and $7.0 million of electric Environmental Attribute revenue.
Operating expenses increased 2.2% to $96.8 million. Operating and maintenance costs rose 9.3% to $43.5 million, general and administrative expenses rose 21.7% to $16.6 million, and depreciation and amortization rose 11.9% to $22.1 million. A $3.9 million insurance gain related to an engine failure partially offset operating costs. The company recorded a $0.3 million impairment loss, compared with $2.4 million in 2019.
Liquidity, Debt and Cash Flow
- Cash and cash equivalents were $21.0 million at December 31, 2020, plus $0.6 million of restricted cash, compared with $9.8 million and $0.6 million, respectively, at year-end 2019.
- Debt before debt issuance costs was $66.7 million, consisting of $30.0 million of term loans and $36.7 million drawn on the revolving credit facility.
- The credit agreement provides for a $95.0 million term loan and an $80.0 million revolving facility, with maturity on December 12, 2023. Revolver borrowing availability was approximately $36.2 million after outstanding letters of credit.
- The company was in compliance with its financial covenants at year-end, including a fixed-charge coverage ratio of at least 1.2 to 1.0 and a total leverage ratio of no more than 3.0 to 1.0.
- Cash used in investing activities was $16.0 million, primarily for capital expenditures. Cash used in financing activities was $1.5 million, principally reflecting net debt repayments.
- Contractual obligations totaled approximately $127.2 million, including $66.7 million of debt, $59.8 million of minimum gas-rights obligations and $0.6 million of operating lease obligations. The filing also reports a $5.7 million asset-retirement obligation excluded from that table.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because of lower renewable electricity revenue following the Monmouth exit, Coastal Plains conversion, Pico’s conversion to RNG and California wildfire disruption at Bowerman.
- RNG production increased, but lower realized RIN prices and higher operating costs reduced RNG profitability. RNG operating profit declined 11.7% to $22.7 million.
- Renewable electricity production declined 21.2% to approximately 0.2 million MWh, and the segment remained loss-making, with a 2020 operating loss of $2.3 million.
- Cash generation improved modestly despite lower earnings, while capital expenditures fell substantially as major development projects approached completion.
- Total assets increased to $253.4 million from $243.6 million, and total equity increased to $159.6 million from $154.3 million.
Guidance, Outlook, Commentary and Risks
Management expects 2021 capital expenditures of approximately $8.0 million to $9.0 million, excluding strategic transactions, plus $2.0 million to $4.0 million for optimization projects at recently commissioned facilities. The company expects to pursue project expansions, electricity-to-RNG conversions, acquisitions, greenfield development and additional livestock, wastewater and organic-waste opportunities. No prospective project was subject to a definitive agreement as of March 15, 2021.
COVID-19 delayed commissioning of development sites by approximately four to five months, reduced transportation-fuel demand and RIN pricing, and increased operating and safety costs. The company reported that February 2021 extreme cold temporarily idled several Texas facilities and was expected to increase first-quarter 2021 RNG utility costs by approximately 7.1%. California wildfires reduced Bowerman production by approximately 38% in the fourth quarter of 2020; management expected Bowerman first-quarter 2021 revenue to be approximately 16% below the prior-year quarter.
Key risks include dependence on RINs and other Environmental Attributes, regulatory changes to the federal RFS and state LCFS programs, commodity-price volatility, customer and project concentration, dependence on Waste Management and Republic Services, production interruptions, permitting and interconnection delays, environmental liabilities, project-development execution, debt covenant compliance and LIBOR transition risk. A hypothetical 10% decline in average realized RIN pricing was estimated to reduce operating profit by approximately $7.1 million.
Management disclosed a material weakness in internal control over financial reporting related to the complete and accurate recording of income-tax provision inputs and related accruals. Disclosure controls and procedures were determined to be ineffective at December 31, 2020. Remediation included using external specialists and strengthening tax provision review and reconciliation controls.
Subsequent to year-end, the company recorded a $0.7 million impairment charge in the first quarter of 2021 after a landfill host required removal and decommissioning activities at a renewable electricity site. The filing reports no material pending legal proceedings.
Important Facts for Investors to Verify
- Confirm the extent to which 2020 earnings and cash flow depended on RINs, LCFS credits, RECs and other Environmental Attributes, including realized versus forward-contract pricing.
- Review the credit agreement’s covenant calculations, 2021 debt maturities, revolver availability, letters of credit and the potential effect of RIN-price thresholds.
- Assess the operating outlook for Bowerman and the Texas facilities following wildfire and extreme-weather disruptions.
- Evaluate the profitability and credit qualification status of the Pico dairy RNG project and the company’s dependence on LCFS pricing and carbon-intensity scores.
- Monitor the material-weakness remediation plan and any subsequent restatements or control deficiencies.
- Reconcile predecessor-company financial statements with the post-IPO Montauk Renewables structure, including the IPO proceeds, reorganization transactions and related-party promissory note.
- Verify the timing, cost and expected returns of planned expansions, conversions, acquisitions and 2021 capital expenditures.