Montauk Renewables, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Unaudited; amounts below are in millions of dollars unless stated otherwise. Montauk develops and operates landfill- and agricultural-biogas projects that produce renewable natural gas (RNG), renewable electricity and associated environmental credits.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $55.7 | $55.9 | $128.1 | $155.9 |
| Operating income | $16.8 | $13.6 | $16.2 | $35.9 |
| Net income | $12.9 | $11.2 | $10.1 | $29.2 |
| Diluted earnings per share | $0.09 | $0.08 | $0.07 | $0.20 |
| Adjusted EBITDA (non-GAAP) | $22.4 | $20.9 | $33.2 | $55.5 |
Operating margin was approximately 30.1% in Q3, versus 24.4% a year earlier; nine-month operating margin was 12.6%, versus 23.1%. Net margin was approximately 23.2% in Q3 and 7.9% for the nine months. The filing does not report a gross margin.
- Q3: Revenue was nearly flat year over year. Operating income and net income increased, helped in part by lower operating expenses and much lower impairment charges. RNG revenue fell 6.3%; renewable-electricity revenue rose 9.2%.
- Year to date: Revenue declined 17.8%, operating income 55.0%, and net income 65.3%. Management attributed the revenue decline chiefly to weaker natural-gas index prices and realized RIN prices, alongside modestly lower RNG production. Nine-month average realized RIN price fell 24.5%, to $2.59.
- Q3 RNG production was down 4.0% year over year; nine-month production was down 2.6%. Q3 RIN sales increased 26.7%, while average realized RIN price declined 12.6%.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $19.6, down from $59.8 in 2022. Capital expenditures were $45.4, versus $12.8; operating cash flow less capital expenditures was approximately negative $25.8.
- Cash and cash equivalents were $73.3 at September 30, 2023, down from $105.2 at December 31, 2022. Current assets were $107.4 and current liabilities $30.2.
- Total debt was $65.5, including $66.0 of term-loan principal before debt issuance costs; no revolver borrowings were outstanding. The stated interest rate was 6.38%, up from 4.12% at year-end 2022. Nine-month interest expense was $3.7 versus $0.3.
- Available revolving-credit capacity was $117.5 after $2.5 of letters of credit. The company reported compliance with financial covenants and said it expects operating cash flow and borrowing availability to cover debt service and anticipated capital needs for at least 12 months.
Outlook, developments and risks
- Management estimated 2023 development capital expenditures of $65–$85 and non-development expenditures of $14–$17. Nine-month spending included $9.6 for Montauk Ag Renewables, $10.1 for the second Apex facility, $2.9 for Blue Granite and $2.7 for Bowerman.
- The North Carolina Montauk Ag project’s first phase was estimated at $140–$160 of capital investment. Management expected the first processing line in the first half of 2024, commissioning to continue through the second half of 2025, and significant revenue generation to begin in 2025. The schedule, costs, interconnection and expected returns remain uncertain.
- Other stated project targets included Pico’s final digestion-capacity expansion in Q4 2023; Second Apex operations in the second half of 2024; Blue Granite in 2025; and Bowerman in 2026. These are forward-looking estimates, not guarantees.
- Management cited dry weather and high temperatures as production headwinds. Rumpke wellfield conditions could affect volumes into 2024; McCarty had lower feedstock availability and was expected to remain below historical volumes through year-end 2023. Pico feedstock processing also faced capacity-related constraints.
- Regulatory exposure includes EPA biogas-rule reforms requiring existing RFS participants to comply by January 1, 2025, and potential California LCFS changes that could affect credit volumes, prices and project economics. Renewable credits and RINs are significant revenue drivers and prices are volatile.
- Four customers each represented more than 10% of Q3 revenue; the largest accounted for 21.9%. The company also held a $10.1 related-party receivable from affiliate Montauk Holdings Limited, with repayment due December 31, 2023 and shares pledged as security.
- Environmental compliance costs, feedstock availability, project execution, interest rates, commodity and credit prices, and customer concentration are material risks. Management reported no material pending legal proceedings and no subsequent events requiring disclosure.
Most important facts to verify
- Whether Q4 RIN transfer and recognition of approximately $1.5 of revenue occurred as expected.
- Progress, final cost and funding needs for the North Carolina project and other development projects, particularly given elevated capital spending and weaker operating cash flow.
- Trends in RNG production and feedstock conditions at Rumpke, McCarty and Pico, and any resulting effects on credit generation.
- RIN and LCFS market prices, regulatory implementation timing, and the company’s realized credit prices and sales commitments.
- Repayment of the $10.1 related-party loan by its December 31, 2023 maturity, and continued compliance with credit-facility covenants as interest costs rise.