Montauk Renewables, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unaudited consolidated financial statements; dollar amounts below are in millions unless stated otherwise.
Business context
Montauk develops and operates renewable natural gas (RNG) and renewable electricity projects, primarily converting landfill and agricultural biogas. Revenue depends substantially on RNG, environmental attributes such as RINs and LCFS credits, and renewable electricity sales. The company reported 15 operating projects across eight states.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $53.3 | $67.9 | $72.4 | $100.1 |
| Operating income (loss) | $13.6 | $24.0 | $(0.6) | $22.3 |
| Net income (loss) | $1.0 | $19.2 | $(2.8) | $18.0 |
| Diluted EPS | $0.01 | $0.13 | $(0.02) | $0.13 |
| Adjusted EBITDA | $19.2 | $27.6 | $10.8 | $34.6 |
Q2 operating margin was approximately 25.5% versus 35.3% a year earlier; net margin was approximately 1.9% versus 28.2%. Six-month operating and net margins were approximately negative 0.8% and negative 3.8%, respectively, compared with 22.3% and 18.0% in 2022.
- Six-month operating cash flow was $6.1, down from $26.8. Investing cash use was $29.6, primarily capital expenditures, versus $3.7 in 2022. Cash and cash equivalents declined $27.5 during the six months to $77.6; total cash and restricted cash was $78.1.
- Capital expenditures were $29.6 for the first half, including spending on Pico, Montauk Ag, the second Apex facility and Blue Granite.
- At June 30, total debt before issuance costs was $68.0, all term loan debt; there were no revolving borrowings. Available revolving capacity was $117.6 after $2.4 of letters of credit. The term-loan rate was 6.49%, up from 4.12% at year-end 2022. The company said it was in compliance with financial covenants.
- Current assets were $108.3 and current liabilities $35.0. Receivables included a $10.1 related-party balance.
Changes versus prior period
- Q2 revenue fell 21.5%; first-half revenue fell 27.6%. Management attributed the declines mainly to lower natural-gas index prices and lower realized RIN prices. Q2 natural-gas pricing declined 70.7% year over year and realized RIN prices declined 36.1%; first-half realized RIN prices declined 32.7%.
- RNG production was relatively steady: down 2.6% in Q2 and 1.9% for the first half. Q2 RNG revenue fell 24.7%; first-half RNG revenue fell 34.8%. Renewable electricity revenue rose 7.3% in Q2 and 8.6% for the first half.
- Lower revenue reduced operating profit; first-half operating results shifted to a loss. Higher interest expense, including the effect of higher rates, also weighed on results. Q2 income tax expense was $11.9, producing a reported effective tax rate of 92%; management cited the estimated annual tax-credit benefit and its forecasted income assumptions.
- First-half adjusted EBITDA declined to $10.8 from $34.6. Six-month operating cash flow also fell sharply, while capital expenditures increased to $29.6 from $5.1.
Outlook, commentary and risks
- Management expects 2023 non-development capital expenditures of $15–19 million and development capital expenditures of $70–100 million. It said existing cash, operating cash flows and credit availability should cover debt service and anticipated capital expenditures for at least 12 months, while noting business and operating risks could affect liquidity.
- Development plans include the Pico digestion capacity increase, expected to be functionally complete in Q3 2023 with up to $18 million estimated cost; Second Apex, targeted for the second half of 2024; Blue Granite, expected in 2025; and Bowerman, targeted for 2026 with estimated investment of $85–95 million. Timing, cost and output remain subject to execution and other risks.
- Management reported lower feedstock volumes at McCarty following landfill wellfield changes, elevated nitrogen and reduced feedstock availability; it expects lower-than-historical volumes through year-end 2023. Pico processing may also be affected while receiving capacity is expanded.
- The EPA’s July 2023 RFS final rule set cellulosic biofuel volumes for 2023–2025 and finalized biogas regulatory reforms. Existing participants must comply by January 1, 2025, with registration updates due October 1, 2024. The filing flags regulatory and environmental-attribute price changes as risks to project economics.
- In July 2023, Montauk signed a nonbinding letter of intent concerning biogenic CO2 supply to European Energy, with potential delivery from 2026; a definitive agreement is not assured. It also signed a REC agreement for the planned North Carolina agricultural project. Management does not expect significant revenue from Montauk Ag before the first half of 2025.
- Revenue is concentrated: three customers each accounted for more than 10% of Q2 revenue, with the largest at 20.7%. Environmental-attribute prices, feedstock availability, project execution and incentives are material risks. No material pending legal proceedings were reported; disclosure controls were deemed effective.
Important facts for investors to verify
- Whether lower gas and RIN prices persist and how they affect revenue, operating cash flow and profitability.
- McCarty feedstock recovery, Pico expansion completion and performance, and the delivery of expected feedstock increases.
- Development spending, funding needs, schedules and commissioning risks for Montauk Ag, Second Apex, Blue Granite and Bowerman.
- Compliance timing and economic effects of the EPA’s biogas regulatory reforms, along with future RIN, LCFS and other environmental-attribute prices.
- Debt covenant headroom and interest-rate exposure; the related-party loan of $10.04 million to Montauk Holdings, extended to December 31, 2023 and secured by company shares.
- Customer concentration, the tax-rate assumptions behind the unusually high Q2 provision, and whether the European Energy CO2 letter of intent becomes a definitive agreement.