Montauk Renewables, Inc. — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Unaudited financial statements; dollar amounts below are in millions unless noted. Montauk develops and operates landfill- and agricultural-biogas projects, selling renewable natural gas (RNG), renewable electricity and associated environmental attributes.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $55.9 | $39.7 | $155.9 | $102.9 |
| Operating income (loss) | $13.6 | $6.7 | $35.9 | $(6.0) |
| Net income (loss) | $11.2 | $8.9 | $29.2 | $(10.0) |
| Diluted EPS | $0.08 | $0.06 | $0.20 | $(0.07) |
| Adjusted EBITDA | $20.9 | $12.8 | $55.5 | $12.2 |
- Operating margin was 24.4% in Q3 (16.9% prior year) and 23.1% for the nine months, versus a loss margin of 5.8% a year earlier. Net margin was 20.0% in Q3 and 18.7% for the nine months.
- Nine-month operating cash flow was $59.8 million, versus $21.3 million. Investing cash outflow was $11.3 million, including $12.8 million of capital expenditures; financing cash outflow was $6.1 million.
- At September 30, cash and equivalents were $95.6 million, restricted cash was $0.4 million, current assets were $121.7 million and current liabilities were $30.3 million. Gross term debt was $74.0 million; there were no revolver borrowings and $116.1 million of revolver capacity remained after letters of credit. The company reported compliance with its debt covenants.
Changes and operating results
- Q3 revenue increased 40.5%; nine-month revenue increased 51.6%. Management attributed the growth principally to higher natural-gas index prices and realized RIN prices. Nine-month average natural-gas pricing rose to $6.77/MMBtu from $3.18, and realized RIN pricing to $3.43 from $1.77.
- RNG generated $54.3 million of Q3 revenue and $151.6 million for the nine months. Production was nearly flat year over year for the nine months at 4,275 versus 4,274 MMBtu, but declined 4.8% in Q3. Renewable electricity revenue was $4.4 million in Q3 and $12.7 million for the nine months.
- Higher revenue was partly offset by increased operating costs, particularly royalties, transportation and related charges, which rose 83% for the nine months. Q3 included a $2.3 million impairment, primarily for a renewable-electricity site; total nine-month impairment was $2.4 million.
- General and administrative expense fell 27% for the nine months, mainly because 2021 included substantial stock-compensation charges tied to the reorganization and IPO. Nine-month results also included $1.4 million of unrealized hedging losses; management said the gas hedge program was priced below market and expected to expire at year-end 2022.
Outlook, risks and contingencies
- Management estimated 2022 non-development capital expenditures of $12–14 million and development expenditures of $25–30 million, principally for the Pico digestion-capacity project, Montauk Ag Renewables and the second Apex RNG facility. The filing states the company expects cash flows and available credit to cover debt service and anticipated capital needs for at least 12 months.
- The planned second Apex facility is expected to add about 2,100 MMBtu/day of RNG processing capacity, an approximate 40% capacity increase, with commercial operation anticipated in 2024. Montauk Ag had not reached commercial operations; significant revenue was not expected before 2024.
- Pico’s anticipated California LCFS score approval was delayed by a public-comment period; management expected approval in Q1 2023. It expected 2022 production’s LCFS revenue to be recognized in 2023. Temporary score certification was obtained in Q4 2022.
- Management reported lower-than-historical feedstock volumes at McCarty, expected to continue through year-end 2022, following landfill wellfield changes. Other disclosed risks include volatile RIN and environmental-credit prices, changes to incentives and regulation, inflation and supply-chain costs, project execution, and weather or feedstock disruptions.
- Revenue concentration was material: two customers represented 56.3% of Q3 revenue and 44.8% of nine-month revenue. The company also disclosed an $8.94 million related-party receivable from Montauk Holdings Limited, due December 31, 2022, secured by 800,000 company shares.
- No material pending legal proceedings were reported. Management concluded disclosure controls were effective at a reasonable level of assurance; no material quarterly change in internal control was reported.
Important facts for investors to verify
- Whether elevated gas and RIN prices, and resulting revenue growth, persist as credit-market and regulatory conditions change.
- Progress on Pico’s final CI-score approval and timing of LCFS-credit monetization, plus the actual delivery and processing of increased feedstock.
- McCarty feedstock recovery and performance at the impaired renewable-electricity site.
- Delivery schedule, cost and expected economics for Apex, Pico and Montauk Ag projects against the stated capital-spending plans.
- Customer concentration, the year-end expiry and market impact of the gas hedge program, and repayment of the related-party loan.
- Floating-rate debt exposure, covenant headroom and remaining revolver capacity as capital requirements evolve.