Montauk Renewables, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. Unaudited results; amounts are in millions of dollars unless otherwise stated. Montauk develops and operates renewable natural gas (RNG) and renewable electricity projects, monetizing energy and environmental attributes such as RINs and RECs.
Financial performance and liquidity
- Revenue: $32.2, up 2.3% from $31.4. RNG segment revenue was $32.7, up 16.2%; renewable electricity revenue was $4.0, up 19.5%, before corporate reconciliation items.
- Profitability: Operating loss was $1.7 versus $12.2; net loss was $1.1, or $0.01 per diluted share, versus a $14.3 net loss, or $0.10 per share. The improvement chiefly reflects lower stock-based compensation and IPO/reorganization-related costs in 2022 compared with 2021. Adjusted EBITDA, a non-GAAP measure, was $7.0 versus negative $5.8.
- Margins: Operating margin was approximately negative 5.1% and net margin approximately negative 3.5%, calculated from reported revenue and losses.
- Cash flow: Operating cash flow was $9.6 versus $7.8. Capital expenditures were $2.4; cash used in investing was $1.0 and cash used in financing was $2.1. Cash and cash equivalents were $59.8 at quarter-end, up from $53.3 at December 31, 2021.
- Debt and liquidity: Term-loan principal was $78.0, with no revolver borrowings. The company reported $116.1 of revolver availability after $3.9 of letters of credit. The stated borrowing rate was 2.40%; the term loan amortizes quarterly and has a $32.0 final payment due in late 2026. The company was in compliance with applicable financial covenants.
- Balance sheet: Total assets were $287.0 and stockholders’ equity $183.4. Current assets were $78.0 versus current liabilities of $26.1. Current assets include an $8.9 related-party receivable from Montauk Holdings Limited (MNK).
Changes versus Q1 2021
- Revenue rose modestly: higher natural-gas and realized RIN prices were partly offset by lower counterparty-sharing revenue and gas-hedging impacts.
- RNG production increased 1.5% to 1,369 MMBtu; renewable electricity production decreased 4.2% to 45 MWh.
- Average realized RIN price increased 81.2% to $3.46, while RINs sold fell 26.9% to 6,485. Unsold RIN inventory grew to 4,394 from 622.
- Operating and maintenance expense increased 24.4% to $13.2; general and administrative expense fell 58.5% to $8.5, largely because Q1 2021 included IPO- and reorganization-related stock compensation. Adjusted EBITDA improved substantially, but GAAP net income remained negative.
Outlook, management commentary and risks
- Management expected 2022 non-development capital expenditures of $10–$12 and development capital expenditures of $25–$30. It said existing cash, operating cash flow and credit availability were expected to cover debt service and anticipated capital needs for at least 12 months, subject to business and operating risks. No full-year revenue or earnings guidance is provided.
- Management chose to defer selling a significant volume of generated D3 RINs amid Q1 price declines, viewing the decline as temporary. It reported commitments after quarter-end to transfer all quarter-end RIN inventory and most RINs expected to be available in Q2; it had not committed a significant portion of expected second-half 2022 generation. RIN pricing and transfer timing can materially affect reported results.
- Pico production more than doubled year over year after process improvements. Management expected a CARB carbon-intensity pathway decision in the second half of 2022, planned to release stored gas beginning in Q3, and did not expect LCFS credit revenue on 2022 production until 2023. Increased feedstock delivery and capacity work depend on further water-management improvements.
- Montauk Ag’s North Carolina project had not reached commercial operations; management did not expect production to begin in 2022 and gave no assurance the project would meet expectations. Regulatory eligibility, engineering, feedstock and development execution remain uncertainties.
- McCarty faced lower feedstock volumes and elevated nitrogen following landfill-host wellfield changes; management expected lower-than-historical volumes through 2022. Atascocita’s equipment failure had been repaired. Bowerman production was affected by preventative engine maintenance.
- Commodity and environmental-attribute prices, changing RFS/LCFS rules, project output, feedstock availability, host and customer concentration, development delays, supply-chain costs and the secured credit agreement are material risks. Five customers each represented more than 10% of Q1 revenue.
- The $8.9 MNK loan matures December 31, 2022, is secured by 800,000 company shares, and involves an affiliate with overlapping directors and officers. Management reported no material pending legal proceedings, no material subsequent events, effective disclosure controls, and no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Whether post-quarter RIN transfers occurred as committed, at what realized prices, and how much second-half 2022 production remains uncontracted.
- CARB’s decision and timing for Pico’s CI pathway, release of stored gas, LCFS revenue timing, and completion and cost of capacity and water-management improvements.
- McCarty feedstock recovery and the operational performance of other facilities, including Bowerman.
- Montauk Ag’s regulatory approvals, commercial-operation timeline, funding requirements and ability to secure feedstock and power purchasers.
- Repayment of the MNK related-party receivable by its maturity, and ongoing covenant compliance, debt amortization and capital spending against available liquidity.
- The sensitivity of earnings and cash generation to RIN, LCFS, gas and electricity prices, hedges, and customer concentration.