Montauk Renewables, Inc. — Form 10-Q Summary
Business context and reporting period
Montauk Renewables is a renewable energy company that converts landfill gas and other biogas into renewable natural gas (RNG), renewable electricity, and related environmental attributes such as RINs, LCFS credits, and RECs. It operated 12 RNG projects and three renewable electricity projects across six states during the quarter.
This unaudited quarterly filing covers the three months ended March 31, 2021, with comparison to March 31, 2020. The company completed its reorganization and initial public offering in January 2021; historical results principally reflect the predecessor business, Montauk USA.
Financial and operating highlights
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Operating revenue | $31.447 million | $18.403 million | +70.9% |
| Operating loss | $(12.204) million | $(2.783) million | Worsened by $9.421 million |
| Net income (loss) | $(14.265) million | $5.816 million | Declined by $20.081 million |
| Operating margin | (38.8%) | (15.1%) | Lower |
| Net margin | (45.4%) | 31.6% | Lower |
| Adjusted EBITDA | $(5.786) million | $3.257 million | Declined by $9.043 million |
| Cash flow from operations | $7.769 million | $1.168 million | +565.1% |
| Capital expenditures | $1.335 million | $5.204 million | Lower |
RNG generated $28.123 million of revenue, up 102.5%, while renewable electricity generation revenue declined 25.5% to $3.324 million. RNG production was 1.348 million MMBtu, down 3.0%, but RINs sold increased 13.3% to 8,875 and average realized RIN pricing increased 151.3% to $1.91. Renewable electricity production was approximately 47,000 MWh, down 9.6% on the reported metric.
Q1 2021 general and administrative expense rose to $20.452 million from $3.439 million, principally because of $14.598 million of stock-based compensation associated with the IPO, reorganization, cancellation of legacy awards, and new equity awards. Excluding IPO-related stock compensation, management stated that G&A increased by approximately $2.660 million.
Liquidity, debt, and capital resources
- Cash and cash equivalents were $22.643 million at March 31, 2021, compared with $20.992 million at December 31, 2020. Cash, cash equivalents, and restricted cash totaled $23.215 million.
- Total debt before debt issuance costs was $64.198 million, consisting of $27.500 million of term loans and $36.697 million drawn on the revolving facility, compared with $66.697 million at year-end 2020.
- The credit facility matures December 12, 2023. The term loan requires quarterly principal payments of $2.500 million and carried an interest rate of 2.926% at quarter-end.
- Revolving facility borrowing capacity was $37.537 million after $5.765 million of outstanding letters of credit. The company was in compliance with applicable financial covenants.
- Financing cash flow included $15.593 million of IPO proceeds, $10.813 million for treasury stock withheld in connection with equity awards, a $7.140 million loan to affiliate Montauk Holdings Limited, and $2.500 million of debt repayment.
- Management expects 2021 capital expenditures of $8.5 million to $9.5 million, $2 million to $4 million for optimization projects, and up to $3 million of initial capital expenditures related to the Montauk Swine acquisition.
Material changes versus the prior comparable period
- Revenue increased substantially because of higher RIN pricing and higher RIN sales, despite lower RNG production and lower natural gas commodity pricing.
- Renewable electricity revenue declined because of the prior-year California wildfires affecting the Bowerman facility, the reclassification of the Pico facility to the RNG segment, and lower reported production.
- Operating results were substantially affected by $14.598 million of Q1 2021 stock-based compensation, including $10.813 million related to restricted stock withholding and $2.050 million of accelerated compensation from canceled legacy awards.
- Interest expense declined to $646,000 from $2.214 million, partly because of lower debt-related costs and hedge activity.
- A $626,000 impairment charge was recorded after a landfill host amended a gas rights agreement and requested decommissioning of a renewable electricity site.
- Cash flow from operations improved materially, primarily because of non-cash stock-based compensation and working-capital changes, while capital expenditures fell from the unusually high Q1 2020 development spending level.
Guidance, outlook, management commentary, and risks
Management expects to fund near-term development with operating cash flow and revolving-facility borrowings and believes liquidity is sufficient for at least the next 12 months. The company intends to pursue project optimization, conversions of electricity projects to RNG, greenfield development, livestock-farm projects, and acquisitions. It completed the acquisition of certain technology and assets related to producing RNG, bio-oil, and biochar from agricultural waste in May 2021 for approximately $3.797 million in cash plus restricted stock awards.
Management expects newly commissioned projects to require optimization before reaching budgeted performance. It also expects Bowerman maintenance costs to remain elevated through the fourth quarter of 2021. A dairy project may receive a more favorable carbon-intensity score from CARB, but the filing states that this information was not expected until 2022.
- RIN pricing, LCFS and REC values, commodity prices, regulatory policy, and future EPA renewable volume obligations are significant revenue and profitability drivers. EPA had not set 2021 RVOs as of the filing date, and policy after 2023 remained uncertain.
- Approximately 50% of expected 2021 RIN generation had been forward committed in late 2020. Consequently, Q1 realized RIN pricing of $1.91 was below the approximately $2.54 D3 RIN index.
- COVID-19 continued to create risks involving transportation fuel demand, environmental attribute pricing, project commissioning, maintenance efficiency, and contract performance, although the company reported no material operational disruption to date.
- The company relies on landfill operators, fuel supply agreements, interconnections, permits, customers, and government incentives. Revenues are concentrated among a limited number of customers and projects.
- The company identified a material weakness in internal control over financial reporting related to the complete and accurate recording of income tax provisions and related accruals. Disclosure controls were deemed ineffective as of March 31, 2021, although management stated that the financial statements fairly present the reported periods. Remediation remained ongoing.
- The company had no material pending legal proceedings reported in the filing.
Most important facts for investors to verify
- Whether higher RIN pricing and RNG revenue can persist after the company’s forward commitments and changing regulatory conditions are considered.
- The recurring versus nonrecurring components of Q1 stock-based compensation and the expected ongoing quarterly equity-compensation expense.
- Progress toward restoring or replacing affected electricity-generation assets, including the decommissioned site and Bowerman operations.
- Compliance with credit-facility covenants, required $2.5 million quarterly term-loan amortization, available revolver capacity, and the impact of letters of credit.
- Execution, capital requirements, and expected returns from the Montauk Swine acquisition and other livestock-farm or RNG development projects.
- Remediation and independent testing of the material weakness in tax-related internal controls.