Montauk Renewables, Inc. — Q3 2021 Form 10-Q
Reporting period: Three and nine months ended September 30, 2021. Unaudited results; dollar amounts below are in millions unless noted. Montauk develops and operates biogas projects that produce renewable natural gas (RNG), renewable electricity, and associated environmental credits. It reported 15 operating projects across seven states.
Financial results and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $39.7 | $28.3 | $102.9 | $74.6 |
| Operating income (loss) | $6.7 | $4.8 | $(6.0) | $5.6 |
| Net income (loss) | $8.9 | $(2.1) | $(10.0) | $2.1 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $21.3 | $22.6 |
| Adjusted EBITDA (non-GAAP) | $12.8 | $10.1 | $12.2 | $22.2 |
- Q3 operating margin was approximately 16.9%; net margin was approximately 22.4%, reflecting a $3.5 million income-tax benefit. For the nine months, operating margin was approximately negative 5.8% and net margin negative 9.7%.
- Q3 RNG segment revenue was $35.0 million, up 45.9%; renewable electricity generation revenue was $3.9 million, down 9.0%. For the nine months, RNG revenue rose 49.2% to $90.7 million, while electricity revenue fell 15.0% to $11.3 million.
- At September 30, cash and cash equivalents were $20.9 million; current assets were $39.4 million and current liabilities $29.0 million. Gross debt was $59.2 million, down from $66.7 million at year-end 2020. Revolver availability was $39.4 million after letters of credit; the company reported compliance with financial covenants.
- Cash from operations of $21.3 million was offset by $11.4 million of investing outflows and $9.9 million of financing outflows. Ending cash, including restricted cash, was $21.6 million.
Changes and notable items
- Q3 revenue increased 40.7%, primarily from more RINs sold, higher natural-gas prices, and greater counterparty-sharing revenue. RNG production was nearly flat year over year; the average realized RIN price was $1.65, below the quarter’s average D3 index price of $3.11.
- Nine-month revenue grew 38.0%, but operating results swung to a loss. General and administrative expense rose $23.9 million, largely due to IPO/reorganization-related share-based compensation; total nine-month G&A was $35.3 million. Adjusted EBITDA also declined year over year.
- The company completed its IPO and reorganization in January 2021. It acquired agricultural-waste technology and related assets in North Carolina in May for $4.1 million including acquisition costs, and acquired additional land and a building for $5.4 million in October.
- Q3 results included an income-tax benefit; management cited an unusually high estimated annual effective tax rate and used the actual year-to-date rate. The nine-month period nevertheless recorded $1.3 million of tax expense despite a pretax loss.
Outlook, risks, and contingencies
- Management expected 2021 capital expenditures of $8–9 million, in addition to describing up to $14 million of development spending related to the Ag and Pico projects and $5 million for optimization at recently commissioned facilities; these disclosed plans may overlap.
- Pico RNG production was temporarily idled for digester work. Management expected resumption in Q1 2022, with at least $1.0 million of nonrecurring expense plus approximately $0.3 million of expected capital costs, and anticipated higher production after restart. CARB pathway approval and related LCFS revenues remained uncertain.
- The agricultural-waste reactor was operational but undergoing improvements; commissioning with those improvements was expected during 2022. Management cautioned that the new business was at an early stage and outcomes were not assured.
- McCarty feedstock collection issues, Bowerman maintenance, and failed engines at Security constrained production. Security repairs were expected to finish in Q4 2021. Environmental-credit prices and regulation, project execution, feedstock availability, customer concentration, COVID-19 impacts, and debt restrictions were identified risks.
- The company disclosed a material weakness in controls over income-tax provision inputs and accruals. Disclosure controls were deemed ineffective as of September 30, 2021; remediation and testing were ongoing. Management said additional procedures supported fair presentation of the reported statements.
- Five customers each represented more than 10% of nine-month revenue. No material pending legal proceedings were reported.
Important facts for investors to verify
- Whether Q3 profitability is sustainable after the unusual tax benefit and substantial IPO-related compensation costs.
- RIN and LCFS pricing, forward-sale commitments, and the timing and outcome of CARB pathway approvals.
- Progress and costs for Pico, Security, McCarty, and agricultural-waste projects, including commissioning and production assumptions.
- Customer concentration, feedstock agreements, revolver availability, covenant headroom, and debt maturity in December 2023.
- Whether the tax-control material weakness is remediated and independently tested as effective.