Montauk Renewables, Inc. quarterly report, Q2 FY2021

Montauk Renewables, Inc. — Q2 2021 Form 10-Q

Reporting period: Three and six months ended June 30, 2021. Financial amounts below are in millions of dollars unless otherwise stated. The company produces renewable natural gas (RNG) and renewable electricity from biogas, and earns revenue from energy sales and related environmental attributes, including RINs and RECs.

Key financial results

Metric	Q2 2021	Q2 2020	Six months 2021	Six months 2020
Revenue	$31.7	$27.9	$63.1	$46.3
Operating income (loss)	($0.5)	$3.6	($12.7)	$0.8
Net income (loss)	($4.7)	($1.6)	($18.9)	$4.2
Adjusted EBITDA, non-GAAP	$5.2	$8.8	($0.6)	$12.1
Operating cash flow	Not separately stated	Not separately stated	$11.2	$8.4

Q2 revenue rose 13.5%, but operating results swung to a loss; operating margin was approximately (1.7%), versus 12.8% a year earlier. Net loss per share was $0.03.
First-half revenue grew 36.3%, while the company shifted from net income to a $18.9 million loss. The first-half net loss included substantial IPO- and reorganization-related share-based compensation; management cited approximately $16.6 million for the period. Adjusted EBITDA also declined materially.
RNG revenue was $27.6 million in Q2 and $55.7 million for the first half. Renewable electricity revenue was $4.1 million and $7.4 million, respectively. First-half RNG revenue growth reflected higher realized RIN prices and counterparty-sharing revenue, despite lower RNG production.
First-half operating cash flow improved to $11.2 million. Investing cash outflow was $8.5 million and financing cash outflow was $7.4 million; cash and restricted cash ended at $16.9 million. Cash and equivalents alone were $16.4 million.
At June 30, total debt before issuance costs was approximately $61.7 million, down from $66.7 million at year-end. The company had $37.5 million of stated revolver availability after outstanding letters of credit; it reported compliance with credit covenants. The facility matures in December 2023 and is secured by substantially all company assets and certain subsidiary assets.
Total assets were $251.6 million and total liabilities were $89.0 million. Current assets of $31.0 million exceeded current liabilities of $29.1 million.

Material changes and unusual items

Q2 operating and maintenance expense increased 30.2%; general and administrative expense increased 95.0%. For the first half, G&A rose 285.4%, primarily reflecting IPO/reorganization compensation, including accelerated and equity-award-related charges.
Q2 RNG production declined 8.2% year over year, with equipment failures at McCarty cited as a factor. Renewable electricity production fell 7.8%; the Security facility was not producing during Q2 while engine restoration work continued.
Q2 included a $0.7 million write-down of purchased RINs to net realizable value. The first half also included a $0.6 million impairment related to a landfill host’s request to decommission a site.
The company acquired North Carolina agricultural-waste-related assets in May for $4.1 million, including acquisition costs, and completed a Pico feedstock amendment for a $1.0 million cash payment. It also recorded a $7.1 million related-party receivable for a loan to Montauk Holdings Limited (MNK) to fund MNK’s South African dividend-tax liability.
Environmental-attribute pricing and revenue timing are important: first-half realized RIN price was $1.77 versus a reported D3 index average of about $2.80. The company attributed the gap partly to forward commitments entered into for roughly half of expected 2021 RIN generation.

Outlook, risks, and controls

Management said it expected operating cash flows and borrowing availability to cover debt service and anticipated required capital expenditures for at least the next 12 months, while noting business and operating risks could adversely affect liquidity.
Stated 2021 capital expenditure expectations were $8.5–$9.5 million, with an additional $5 million anticipated for optimization projects and up to $14 million in development capital for Montauk Ag Renewables and Pico expansion. The filing does not clearly specify whether these categories overlap.
Management cited uncertainty over RIN and other environmental-attribute prices, future EPA renewable volume obligations, regulatory and incentive changes, project commissioning and output, weather, site-host and customer concentration, and COVID-19-related demand or operational impacts. The EPA had not set 2021 RVOs; the company anticipated proposed 2021–2022 requirements in Q4 2021 but said timing was uncertain.
Six customers each represented more than 10% of first-half revenue, highlighting customer concentration. The company also disclosed that six customers exceeded 10% in Q2.
Disclosure controls were deemed ineffective as of June 30, 2021 because of a previously identified material weakness in recording and reviewing income-tax provision inputs and related accruals. Remediation was ongoing and not yet fully tested. Management nevertheless stated the interim financial statements fairly presented the company’s results.

Important facts for investors to verify

How recurring operating performance compares with reported results after the unusually large IPO- and reorganization-related compensation charges.
Whether the stated capital spending estimates overlap, and whether project spending and operating cash flow remain within management’s liquidity expectations.
Future RIN prices, EPA RVO decisions, realized prices versus index prices, and the effect of forward sales and counterparty-sharing arrangements.
Progress restoring Security facility engines, resolving McCarty equipment issues, and achieving expected output at newer and development projects.
Whether the tax-control material weakness is remediated and validated, and the repayment timing and security for the $7.1 million MNK related-party loan.
Customer concentration, covenant compliance, available revolver capacity after letters of credit, and the company’s ability to refinance or repay debt before its December 2023 maturity.