Business context and reporting period
Montauk Renewables, Inc. filed this Form 10-K for the fiscal year ended December 31, 2021. The company develops, owns, and operates renewable natural gas (RNG) and renewable electricity facilities using landfill gas and agricultural biogas. At year-end, it operated 12 RNG projects and three renewable electricity projects across six states. The company’s 2021 reporting follows its reorganization and January 2021 IPO; historical comparative financial results are those of its predecessor business.
Financial and operating metrics
Amounts below are in millions of dollars unless indicated otherwise. Annual financial figures are for the year ended December 31; fourth-quarter figures are unaudited.
| Metric | 2021 | 2020 |
|---|---|---|
| Revenue | $148.1 | $100.4 |
| Operating profit | $3.3 | $3.6 |
| Net income (loss) | ($4.5) | $4.6 |
| Adjusted EBITDA (non-GAAP) | $27.9 | $26.0 |
| Cash from operating activities | $42.9 | $28.7 |
| Cash and cash equivalents at year-end | $53.3 | $21.0 |
| Debt before debt issuance costs | $80.0 | $66.7 |
- Revenue increased 47.5%. RNG revenue rose 58.3% to $131.8 million; renewable electricity revenue declined 7.3% to $15.4 million. Environmental Attributes accounted for 62% of 2021 revenue.
- Operating margin was approximately 2.3%, down from 3.6%; net margin was approximately negative 3.1%. Adjusted EBITDA margin was approximately 18.9%, compared with 25.9% in 2020. Adjusted EBITDA is a non-GAAP measure.
- RNG production was 5.688 million MMBtu, down 1.0%; renewable electricity generation was 183,000 MWh, down 1.6%. Average realized D3 RIN price increased to $1.91 from $1.31.
- Operating cash flow increased 49.5%. Capital expenditures were $10.0 million; operating cash flow less reported capital expenditures was approximately $32.9 million, before acquisitions and other investing activity.
- Year-end current assets were $75.2 million and current liabilities $24.6 million. The company reported $116.1 million of borrowing availability under its revolving facility after letters of credit.
- Fourth-quarter revenue was $45.3 million, operating profit $9.3 million, and net income $5.5 million, versus fourth-quarter 2020 revenue of $25.8 million, operating loss of $2.0 million, and net income of $2.5 million.
Material changes versus the prior comparable period
- Revenue growth was driven principally by higher realized RIN prices, higher natural gas index pricing, and increased counterparty-sharing revenue; RNG production itself was slightly lower.
- General and administrative expense rose to $42.6 million from $16.6 million, including $22.4 million of stock-based compensation. The IPO, reorganization, and public-company costs also contributed to higher expenses.
- Net results shifted to a loss despite higher revenue: income tax expense was $4.2 million, including a $4.4 million expense associated with the Section 162(m) compensation limitation. The prior year included a $6.0 million income tax benefit.
- Operating cash flow improved, while year-end debt increased to $80.0 million. The December 2021 credit amendment established an $80.0 million term loan and $120.0 million revolver, maturing in December 2026.
- In 2021, the company acquired agricultural-waste technology and related assets, obtained a patent, and bought additional North Carolina land and a building. It also completed the IPO and loaned $8.9 million to affiliate Montauk Holdings Limited.
Outlook, management commentary, risks and unusual items
- Management expected available operating cash flow and credit-facility capacity to cover debt service and anticipated capital needs for the next 12–24 months. Estimated 2022 capital expenditures were $10–12 million for maintenance and improvements, plus $25–30 million for development. No specific revenue or earnings guidance was provided.
- Management expected lower-than-historical feedstock volumes at McCarty through 2022 due to landfill collection-system changes and elevated nitrogen. The Pico RNG facility resumed operations in the first quarter of 2022 after upgrades; production had more than doubled, but the filing said 2022 production would be stored pending CARB carbon-intensity pathway approval. LCFS credit revenue on that production was not expected until 2023.
- Montauk Ag was in early development; the company did not expect significant production from the project during 2022. The acquired reactor remained under optimization, and management gave no assurance that the initiative would meet expectations.
- Security facility electricity production was zero in 2021 while engine restoration work continued. Texas facilities were temporarily idled during February 2021 cold weather and power outages. These events, McCarty feedstock constraints, and Pico upgrades affected operating output.
- Key exposures include RIN and LCFS pricing and policy changes, dependence on government incentives, feedstock supply and project output, customer and project concentration, reliance on landfill partners and pipeline interconnections, weather, permitting, construction and supply-chain delays, and variable interest rates. Five projects generated approximately 76% of 2021 operating revenue.
- A hypothetical 10% decrease in realized RIN prices was estimated to reduce annual operating profit by approximately $11.5 million; a 10% decrease in wholesale gas prices was estimated to reduce it by approximately $1.6 million. These are sensitivity estimates, not forecasts.
- Unusual items included $1.2 million of impairment losses and $22.4 million of stock-based compensation expense. The company reported a prior material weakness in income-tax controls as remediated at December 31, 2021; management assessed internal controls as effective. The auditor gave an unqualified opinion on the financial statements but did not attest to internal-control effectiveness.
Important facts for investors to verify
- Whether McCarty feedstock quality and volumes recover as expected, and the resulting impact on RNG production and margins.
- CARB approval timing and the economics and timing of Pico’s LCFS credit monetization.
- Montauk Ag’s development schedule, funding requirements, feedstock arrangements, and ability to achieve commercial production.
- RIN, LCFS, and natural-gas price assumptions, the status of forward sales, and sensitivity to regulatory changes.
- Credit-facility covenant headroom, interest-rate exposure, and repayment of the $8.9 million affiliate loan, which matures December 31, 2022 and is secured by company shares.
- The sustainability of cash generation given customer and project concentration, planned development spending, and the large gap between GAAP net income and adjusted EBITDA.