Montauk Renewables, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Unaudited; dollar amounts below are in millions unless otherwise stated. Montauk develops and operates landfill- and agricultural-biogas projects, selling renewable natural gas (RNG), renewable electricity, and associated environmental attributes, including RINs and RECs.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $67.9 | $31.7 | $100.1 | $63.1 |
| Operating income (loss) | $24.0 | $(0.5) | $22.3 | $(12.7) |
| Net income (loss) | $19.2 | $(4.7) | $18.0 | $(18.9) |
| Diluted EPS | $0.13 | $(0.03) | $0.13 | $(0.13) |
| Adjusted EBITDA | $27.6 | $5.2 | $34.6 | $(0.6) |
Q2 operating margin was approximately 35% and net margin approximately 28%; six-month operating and net margins were approximately 22% and 18%, respectively. Adjusted EBITDA is a non-GAAP measure and should not be treated as cash flow or a substitute for GAAP results.
- Q2 revenue increased 114% year over year; six-month revenue increased 59%. Growth was primarily driven by higher natural-gas index prices and realized RIN prices, rather than comparable growth in production. Q2 RNG production rose 3.7% and six-month production rose 2.7%.
- Q2 RNG revenue was $64.6 million, up 134%; renewable-electricity revenue was $4.3 million, up 6%. Six-month segment revenues were $97.2 million for RNG and $8.3 million for renewable electricity.
- Q2 realized RIN price was $3.38 versus $1.78 a year earlier; the six-month average was $3.39 versus $1.77. Gas commodity indices also rose sharply. Higher royalties and related costs partly offset the revenue growth.
- Cash from operating activities was $26.8 million for the first half, versus $11.2 million a year earlier. Capital expenditures were $5.1 million; operating cash flow less capital expenditures was approximately $21.6 million. Cash and cash equivalents at June 30 were $72.2 million.
- Gross term-loan principal was $76.0 million, down from $80.0 million at year-end 2021; there were no revolver borrowings. Revolver availability was $116.1 million after letters of credit. The company reported compliance with financial covenants.
- Current assets were $111.0 million and current liabilities $32.3 million. Accounts receivable rose to $24.0 million from $9.3 million at year-end; operating cash flow included a $18.0 million use of cash from receivables and other current assets.
Material changes and unusual items
- Results turned profitable compared with losses in the 2021 comparable periods. Six-month G&A fell 38% to $17.2 million, largely because the prior-year period included substantial share-based compensation related to the 2021 reorganization and equity awards. Q2 G&A increased 19% year over year, including higher professional fees and Montauk Ag development-related costs.
- Royalties, transportation, gathering and production-fuel costs rose 152% in Q2 and 83% for the first half, mainly alongside higher RNG revenue. Q2 operating and maintenance costs also included scheduled maintenance at several sites.
- First-half derivative results included a $3.7 million realized natural-gas hedge loss and a $1.8 million unrealized loss, partly offset by gains on interest-rate swaps. Management said the gas hedge program was priced below prevailing indices and expected to remain so through year-end 2022, when it was due to expire.
- The company sold NOx emissions allowances in March for $1.1 million, recognizing a $0.3 million gain. First-half impairment losses were $0.1 million, compared with $0.6 million in 2021.
Outlook, risks and contingencies
- Management estimated 2022 non-development capital expenditures of $12–14 million, increased from its prior $10–12 million range, and development capital expenditures of $30–35 million. The Raeger facility improvement project was not in the original 2022 capital budget.
- Raeger construction was expected to begin in Q3 2022, with commercial operation in the second half of 2023; management anticipated roughly 50% higher average daily production after completion. This is a forecast, not a reported outcome.
- Pico production had improved after process upgrades, but 2022 production was being stored pending CARB review of its carbon-intensity pathway. Management expected validation in Q4 2022 and did not expect LCFS credit revenue from 2022 production until 2023. RIN revenue from stored gas was anticipated in the second half of 2022.
- Management reported lower available feedstock at McCarty following landfill-host wellfield changes and expected volumes to remain below historical levels through year-end 2022. The company also disclosed ongoing engine repairs at Security and development risks at Montauk Ag; commercial production at the North Carolina project was not expected in 2022.
- Key exposures include volatile RIN, LCFS and commodity prices; changes to renewable-fuel incentives and regulations; feedstock quality and supply; project execution, interconnection and permitting; inflation and supply-chain disruption; and customer and project concentration. Four customers each represented more than 10% of Q2 revenue; the largest represented 24.9%. Management stated COVID-19 had not materially affected results through June 30, 2022.
- The company said existing cash, operating cash flow and credit availability were expected to cover debt service and anticipated capital needs for at least the next 12 months, while cautioning that business and operating risks could affect liquidity. The $8.9 million loan to affiliate Montauk Holdings Limited matures December 31, 2022 and is 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 over financial reporting was reported.
The filing does not provide formal full-year revenue or earnings guidance. Forward-looking estimates and project expectations are subject to the risks described in the filing.
Most important facts for investors to verify
- Whether higher commodity and environmental-attribute prices, RIN sales timing and realized prices persist, and how hedge losses affect reported results and cash generation.
- Whether production, feedstock availability and operational performance improve at Raeger, Pico, McCarty and Security as management expects.
- Actual timing, cost and funding of the planned capital program, including the Raeger upgrade and Montauk Ag development.
- Collection of the increased receivables and repayment of the $8.9 million related-party loan by its maturity date.
- Customer concentration, available revolver capacity, covenant compliance and debt-service requirements as spending and operations evolve.