Table of Contents
`
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
or
For the transition period from to
Commission File Number:
(Exact name of registrant as specified in its charter)
(State or Other Jurisdiction of Incorporation or Organization) |
(IRS Employer Identification No.) |
|
|
(Address of Principal Executive Offices) |
(Zip Code) |
(
(Registrant’s Telephone Number, Including Area Code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
|
Trading symbol(s)
|
Name of each exchange on which registered
|
The |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:
Large accelerated filer |
☐ |
☒ |
|
|
|
|
|
Non-accelerated filer |
☐ |
Smaller reporting company |
|
|
|
|
|
|
|
Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No
The number of outstanding shares of the registrant’s common stock on August 4, 2023 was
Table of Contents
TABLE OF CONTENTS
|
|
|
|
Page |
|
|
|
|
|
|
6 |
|||
|
|
|
|
|
ITEM 1. |
|
|
6 |
|
|
|
|
|
|
ITEM 2. |
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
|
26 |
|
|
|
|
|
ITEM 3. |
|
|
46 |
|
|
|
|
|
|
ITEM 4. |
|
|
46 |
|
|
|
|
|
|
|
47 |
|||
|
|
|
|
|
ITEM 1. |
|
|
47 |
|
|
|
|
|
|
ITEM 1A. |
|
|
47 |
|
|
|
|
|
|
ITEM 2. |
|
|
47 |
|
|
|
|
|
|
ITEM 3. |
|
|
47 |
|
|
|
|
|
|
ITEM 4. |
|
|
47 |
|
|
|
|
|
|
ITEM 5. |
|
|
47 |
|
|
|
|
|
|
ITEM 6. |
|
|
48 |
|
|
|
|
|
|
|
49 |
|||
Table of Contents
```
Glossary of Key Terms
This Quarterly Report on Form 10-Q uses several terms of art that are specific to our industry and business. For the convenience of the reader, a glossary of such terms is provided here. Unless we otherwise indicate, or unless the context requires otherwise, any references in this Quarterly Report on Form 10-Q to:
3
Table of Contents
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of U.S. federal securities laws that involve substantial risks and uncertainties. All statements other than statements of historical or current fact included in this report are forward-looking statements. Forward-looking statements refer to our current expectations and projections relating to our financial condition, results of operations, plans, objectives, strategies, future performance, and business. Forward-looking statements may include words such as “anticipate,” “assume,” “believe,” “can have,” “contemplate,” “continue,” “strive,” “aim,” “could,” “design,” “due,” “estimate,” “expect,” “forecast,” “goal,” “intend,” “likely,” “may,” “might,” “objective,” “plan,” “predict,” “project,” “potential,” “seek,” “should,” “target,” “will,” “would,” and other words and terms of similar meaning in connection with any discussion of the timing or nature of future operational performance or other events. For example, all statements we make relating to future results of operations, financial condition, estimated and projected costs, and plans and objectives for future operations, growth, strategies or initiatives, including the Pico feedstock amendment, the Montauk Ag project in North Carolina, the Raeger capital improvement project, the Second Apex RNG Facility project, the Blue Granite RNG project, the Bowerman RNG project, the delivery of biogenic carbon dioxide volumes to European Energy, and the resolution of gas collection issues at the McCarty facility, are forward-looking statements. All forward-looking statements are subject to risks and uncertainties that may cause actual results to differ materially from those that we expect and, therefore, you should not unduly rely on such statements. The risks and uncertainties that could cause those actual results to differ materially from those expressed or implied by these forward-looking statements include but are not limited to:
4
Table of Contents
We make many of our forward-looking statements based on our operating budgets and forecasts, which are based upon detailed assumptions. While we believe that our assumptions are reasonable, we caution that it is very difficult to predict the impact of known factors, and it is impossible for us to anticipate all factors that could affect our actual results.
All forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements as well as others made in our other Securities and Exchange Commission (“SEC”) filings and public communications. You should evaluate all forward-looking statements made by us in the context of these risks and uncertainties. See the “Risk Factors” section in our latest Annual Report on Form 10-K and our other filings with the SEC.
We caution you that the risks and uncertainties identified by us may not be all of the factors that are important to you. Furthermore, the forward-looking statements included in this report are made only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statement as a result of new information, future events, or otherwise, except as required by law.
5
Table of Contents
PART I FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
|
Page |
Montauk Renewables, Inc. |
|
Unaudited condensed consolidated financial statements |
|
7 |
|
8 |
|
9 |
|
10 |
|
11 |
6
Table of Contents
MONTAUK RENEWABLES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share data):
|
|
As of June 30, |
|
|
As of December 31, |
|
||
ASSETS |
|
2023 |
|
|
2022 |
|
||
Current assets: |
|
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
|
|
$ |
|
||
Accounts and other receivables |
|
|
|
|
|
|
||
Related party receivable |
|
|
|
|
|
|
||
Income tax receivable |
|
|
|
|
|
|
||
Current portion of derivative instruments |
|
|
|
|
|
|
||
Prepaid expenses and other current assets |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Total current assets |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Non-current restricted cash |
|
$ |
|
|
$ |
|
||
Property, plant and equipment, net |
|
|
|
|
|
|
||
Goodwill and intangible assets, net |
|
|
|
|
|
|
||
Deferred tax assets |
|
|
|
|
|
|
||
Non-current portion of derivative instruments |
|
|
|
|
|
|
||
Operating lease right-of-use assets |
|
|
|
|
|
|
||
Finance lease right-of-use assets |
|
|
|
|
|
|
||
Other assets |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Total assets |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Current liabilities: |
|
|
|
|
|
|
||
Accounts payable |
|
$ |
|
|
$ |
|
||
Accrued liabilities |
|
|
|
|
|
|
||
Income tax payable |
|
|
|
|
|
|||
Current portion of operating lease liability |
|
|
|
|
|
|
||
Current portion of finance lease liability |
|
|
|
|
|
|
||
Current portion of long-term debt |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Total current liabilities |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Long-term debt, less current portion |
|
$ |
|
|
$ |
|
||
Non-current portion of operating lease liability |
|
|
|
|
|
|
||
Non-current portion of finance lease liability |
|
|
|
|
|
|||
Asset retirement obligations |
|
|
|
|
|
|
||
Other liabilities |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Total liabilities |
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Common stock, $ |
|
|
|
|
|
|
||
Treasury stock, at cost, |
|
|
( |
) |
|
|
( |
) |
Additional paid-in capital |
|
|
|
|
|
|
||
Retained earnings |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Total stockholders' equity |
|
|
|
|
|
|
||
|
|
|
|
|
|
|
||
Total liabilities and stockholders' equity |
|
$ |
|
|
$ |
|
||
The accompanying notes to the unaudited condensed consolidated financial statements are an integral part of these statements.
7
Table of Contents
MONTAUK RENEWABLES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except for share and per share data):
|
|
For the Three Months Ended June 30, |
|
|
For the Six Months Ended June 30, |
|
||||||||||
|
|
2023 |
|
|
2022 |
|
|
2023 |
|
|
2022 |
|
||||
Total operating revenues |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating and maintenance expenses |
|
|
|
|
|
|
|
|
|
|
|
|
||||
General and administrative expenses |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Royalties, transportation, gathering and production fuel |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Depreciation, depletion and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Gain on insurance proceeds |
|
|
|
|
|
|
|
|
|
|
|
( |
) |
|||
Impairment loss |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Transaction costs |
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total operating expenses |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating income (loss) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other expenses (income): |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Other (income) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Total other expense (income) |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Income (loss) before income taxes |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Income tax expense (benefit) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net income (loss) |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
Diluted |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Weighted-average common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Basic |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
||||
The accompanying notes to the unaudited condensed consolidated financial statements are an integral part of these statements.
8
Table of Contents
MONTAUK RENEWABLES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
(in thousands, except share data):
|
|
Common Stock |
|
|
Treasury Stock |
|
|
|
|
|
|
|
|
|
|
|||||||||||||
|
|
Shares |
|
|
Amount |
|
|
Shares |
|
|
Amount |
|
|
Additional Paid-in Capital |
|
|
Retained Earnings (Deficit) |
|
|
Total Equity |
|
|||||||
Balance at March 31, 2023 |
|
|
|
|
$ |
|
|
|
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
|
||||||
Net income |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|||
Stock-based compensation |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|||
Balance at June 30, 2023 |
|
|
|
|
$ |
|
|
|
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Balance at March 31, 2022 |
|
|
|
|
$ |
|
|
|
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||||
Issuance of common stock |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Net income |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|||
Stock-based compensation |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|||
Balance at June 30, 2022 |
|
|
|
|
$ |
|
|
|
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Balance at December 31, 2022 |
|
|
|
|
$ |
|
|
|
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
|
||||||
Net loss |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
|
Stock-based compensation |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|||
Balance at June 30, 2023 |
|
|
|
|
$ |
|
|
|
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
|
||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||
Balance at December 31, 2021 |
|
|
|
|
$ |
|
|
|
|
|
$ |
( |
) |
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||||
Issuance of common stock |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Treasury stock |
|
— |
|
|
|
— |
|
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
||
Net income |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|||
Stock-based compensation |
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
— |
|
|
|
|
|||
Balance at June 30, 2022 |
|
|
|
|
$ |
|
|
|
|
|
$ |
( |
) |
|
$ |
|
|
$ |
|
|
$ |
|
||||||
The accompanying notes to the unaudited condensed consolidated financial statements are an integral part of these statements.
9
Table of Contents
MONTAUK RENEWABLES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands):
|
|
Six Months Ended |
|
|||||
|
|
June 30, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Cash flows from operating activities: |
|
|
|
|
|
|
||
Net (loss) income |
|
$ |
( |
) |
|
$ |
|
|
Adjustments to reconcile net (loss) income to net cash provided by operating activities: |
|
|
|
|
|
|
||
Depreciation, depletion and amortization |
|
|
|
|
|
|
||
Provision for deferred income taxes |
|
|
|
|
|
|
||
Stock-based compensation |
|
|
|
|
|
|
||
Derivative mark-to-market adjustments and settlements |
|
|
( |
) |
|
|
|
|
Gain on property insurance proceeds |
|
|
|
|
|
( |
) |
|
Increase in earn-out liability |
|
|
|
|
|
|
||
Net loss (gain) on sale of assets |
|
|
|
|
|
( |
) |
|
Accretion of asset retirement obligations |
|
|
|
|
|
|
||
Amortization of debt issuance costs |
|
|
|
|
|
|
||
Impairment loss |
|
|
|
|
|
|
||
Changes in operating assets and liabilities: |
|
|
|
|
|
|
||
Accounts and other receivables and other current assets |
|
|
( |
) |
|
|
( |
) |
Accounts payable and other accrued expenses |
|
|
|
|
|
|
||
Net cash provided by operating activities |
|
$ |
|
|
$ |
|
||
Cash flows from investing activities: |
|
|
|
|
|
|
||
Capital expenditures |
|
$ |
( |
) |
|
$ |
( |
) |
Proceeds from insurance recovery |
|
|
|
|
|
|
||
Proceeds from sale of assets |
|
|
|
|
|
|
||
Cash collateral deposits, net |
|
|
|
|
|
|
||
Net cash used in investing activities |
|
$ |
( |
) |
|
$ |
( |
) |
Cash flows from financing activities: |
|
|
|
|
|
|
||
Repayments of long-term debt |
|
$ |
( |
) |
|
$ |
( |
) |
Treasury stock purchase |
|
|
|
|
|
( |
) |
|
Finance lease payments |
|
|
( |
) |
|
|
( |
) |
Net cash used in financing activities |
|
$ |
( |
) |
|
$ |
( |
) |
Net (decrease) increase in cash and cash equivalents and restricted cash |
|
$ |
( |
) |
|
$ |
|
|
Cash and cash equivalents and restricted cash at beginning of period |
|
$ |
|
|
$ |
|
||
Cash and cash equivalents and restricted cash at end of period |
|
$ |
|
|
$ |
|
||
Reconciliation of cash, cash equivalents, and restricted cash at end of period: |
|
|
|
|
|
|
||
Cash and cash equivalents |
|
$ |
|
|
$ |
|
||
Restricted cash and cash equivalents - current |
|
|
|
|
|
|
||
Restricted cash and cash equivalents - non-current |
|
|
|
|
|
|
||
|
|
$ |
|
|
$ |
|
||
|
|
|
|
|
|
|
||
Supplemental cash flow information: |
|
|
|
|
|
|
||
Cash paid for interest |
|
$ |
|
|
$ |
|
||
Cash paid for income taxes |
|
|
|
|
|
|
||
Accrual for purchase of property, plant and equipment included in accounts payable and accrued liabilities |
|
|
|
|
|
|
||
The accompanying notes to the unaudited condensed consolidated financial statements are an integral part of these statements.
10
Table of Contents
MONTAUK RENEWABLES, INC.
NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in thousands, except per-share amounts)
NOTE 1 – DESCRIPTION OF BUSINESS
Operations and organization
Montauk Renewables’ Business
Montauk Renewables, Inc. (the “Company” or “Montauk Renewables”) is a renewable energy company specializing in the management, recovery and conversion of biogas into Renewable Natural Gas (“RNG”). The Company captures methane, preventing it from being released into the atmosphere, and converts it into either RNG or electrical power for the electrical grid (“Renewable Electricity”). The Company, headquartered in Pittsburgh, Pennsylvania, has more than
Two of the Company’s key revenue drivers are sales of captured gas and sales of Renewable Identification Numbers (“RINs”) to fuel blenders. The Renewable Fuel Standard (“RFS”) is an Environmental Protection Agency (“EPA”) administered federal law that requires transportation fuel to contain a minimum volume of renewable fuel. RNG derived from landfill methane, agricultural digesters and wastewater treatment facilities used as a vehicle fuel qualifies as a D3 (cellulosic biofuel with a
An additional program utilized by the Company is the Low Carbon Fuel Standard (“LCFS”). This is state specific and is designed to stimulate the use of low-carbon fuels. To the extent that RNG from the Company’s facilities is used as a transportation fuel in states that have adopted an LCFS program, it is eligible to receive an Environmental Attribute additional to the RIN value under the federal RFS.
Another key revenue driver is the sale of captured electricity and the associated environmental premiums related to renewable sales. The Company’s electric facilities are designed to conform to and monetize various state renewable portfolio standards requiring a percentage of the electricity produced in that state to come from a renewable resource. Such premiums are in the form of Renewable Energy Credits (“RECs”). The Company’s largest electric facility, located in California, receives revenue for the monetization of RECs as a part of a purchase power agreement.
Collectively, the Company benefits from federal and state government incentives in the United States, provided in the form of RINs, RECs, LCFS credits, tax credits and other incentives to end users, distributors, system integrators and manufacturers of renewable energy projects, that promote the use of renewable energy, as Environmental Attributes.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and with the instructions of the SEC on Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by GAAP for complete financial statements. In the opinion of management, the unaudited condensed consolidated financial statements include all adjustments necessary, which are of a normal and recurring nature, for the fair presentation of the Company’s financial position and of the results of operations and cash flows for the periods presented. These financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2022 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 16, 2023 (the “2022 Annual Report”). The results of operations for the three months and six months ended June 30, 2023 in this report are not necessarily indicative of the results that may be expected for any other interim period or for the full year. The balance sheet at December 31, 2022, has been derived from the audited financial statements as of that date. For further information, refer to the Company’s audited financial statements and notes thereto included for the year ended December 31, 2022 in the 2022 Annual Report.
11
Table of Contents
Segment Reporting
The Company reports segment information in
The RNG segment represents the sale of gas sold at fixed-price contracts, counterparty share RNG volumes and applicable Environmental Attributes. This business unit represents the majority of the revenues generated by the Company.
The Renewable Electricity Generation segment represents the sale of captured electricity and applicable Environmental Attributes. Corporate relates to additional discrete financial information for the corporate function. It is primarily used as a shared service center for maintaining functions such as executive, accounting, treasury, legal, human resources, tax, environmental, engineering and other operations functions not otherwise allocated to a segment. As such, the corporate entity is not determined to be an operating segment but is discretely disclosed for purposes of reconciliation to the Company’s consolidated financial statements.
Use of Estimates
The preparation of financial statements, in conformity with accounting principles generally accepted in the United States (“GAAP”), requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Recently Adopted Accounting Standards
In June 2016, the FASB issued Accounting Standards Update 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”). This ASU and subsequent amendments are codified as Accounting Standards Codification Topic 326, Financial Instruments—Credit Losses (“ASC 326”). Application of ASC 326 was effective for SEC Issuers (excluding smaller reporting companies) for fiscal years beginning after December 15, 2019. Adoption for smaller reporting companies, emerging growth companies and nonpublic entities was deferred due to the COVID-19 pandemic and was required for fiscal years beginning after December 15, 2022. The ASU did not have a material impact on the Company’s consolidated financial statements or related financial statement disclosures.
Recently Issued Accounting Standards
In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848), which provides optional expedients and exceptions to the current guidance on contract modifications and hedging relationships to ease the financial reporting burdens of the expected market transition from London Interbank Offered Rate (“LIBOR”) and other interbank offered rates to alternative reference rates. The guidance was effective upon issuance and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The FASB included a sunset provision within Topic 848 based on expectations of when the LIBOR would cease being published. The sunset provision has been amended from December 31, 2022, to December 31, 2024, after which entities will no longer be permitted to apply the relief in Topic 848. The Company’s current debt agreement bears interest at the Bloomberg Short-Term Bank Yield Index Rate plus an applicable margin. LIBOR is no longer utilized as a reference rate.
NOTE 3 – ASSET IMPAIRMENT
The Company recorded an impairment loss of $
NOTE 4 – REVENUES FROM CONTRACTS WITH CUSTOMERS
Revenues are comprised of renewable energy and the related Environmental Attribute sales provided under a variety of short-term and medium-term agreements with customers. All revenue is recognized when the Company satisfies its performance
12
Table of Contents
obligation(s) under the contract (either implicit or explicit) by transferring the promised product to the customer either when (or as) the customer obtains control of the product. A performance obligation is a promise in a contract to transfer a distinct product or service to a customer. A contract’s transaction price is allocated to each distinct performance obligation. The Company allocates the contract’s transaction price to each performance obligation using the product’s observable market standalone selling price for each distinct product in the contract.
Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring product. As such, revenue is recorded net of allowances and customer discounts as well as net of transportation and gathering costs incurred. To the extent applicable, sales, value add, and other taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from revenues) basis. The Company’s performance obligations related to the sale of renewable energy (i.e. RNG and Renewable Electricity) are generally satisfied over time. Revenue related to the sale of renewable energy is generally recognized over time using an output based upon the product quantity delivered to the customer. This measure is used to best depict the Company’s performance to date under the terms of the contract.
The nature of the Company’s contracts may give rise to several types of variable consideration, such as periodic price increases. This variable consideration is outside of the Company’s influence as the variable consideration is dictated by the market. Therefore, the variable consideration associated with the long-term contracts is considered fully constrained.
The following tables display the Company’s revenue by major source, excluding realized and unrealized gains or losses under the Company’s gas hedge program, based on product type and timing of transfer of goods and services for the three and six months ended June 30, 2023 and 2022:
|
|
Three months ended June 30, 2023 |
|
|||||||||
|
|
Goods transferred at a point in time |
|
|
Goods transferred over time |
|
|
Total |
|
|||
Major goods/Service line: |
|
|
|
|
|
|
|
|
|
|||
Natural gas commodity |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Natural gas environmental attributes |
|
|
|
|
|
— |
|
|
|
|
||
Electric commodity |
|
|
— |
|
|
|
|
|
|
|
||
Electric environmental attributes |
|
|
|
|
|
— |
|
|
|
|
||
|
|
$ |
|
|
$ |
|
|
$ |
|
|||
Operating segment: |
|
|
|
|
|
|
|
|
|
|||
RNG |
|
$ |
|
|
$ |
|
|
$ |
|
|||
REG |
|
|
|
|
|
|
|
|
|
|||
|
|
$ |
|
|
$ |
|
|
$ |
|
|||
|
|
Three months ended June 30, 2022 |
|
|||||||||
|
|
Goods transferred at a point in time |
|
|
Goods transferred over time |
|
|
Total |
|
|||
Major goods/Service line: |
|
|
|
|
|
|
|
|
|
|||
Natural gas commodity |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Natural gas environmental attributes |
|
|
|
|
|
— |
|
|
|
|
||
Electric commodity |
|
|
— |
|
|
|
|
|
|
|
||
Electric environmental attributes |
|
|
|
|
|
— |
|
|
|
|
||
|
|
$ |
|
|
$ |
|
|
$ |
|
|||
Operating segment: |
|
|
|
|
|
|
|
|
|
|||
RNG |
|
$ |
|
|
$ |
|
|
$ |
|
|||
REG |
|
|
|
|
|
|
|
|
|
|||
|
|
$ |
|
|
$ |
|
|
$ |
|
|||
13
Table of Contents
|
|
Six months ended June 30, 2023 |
|
|||||||||
|
|
Goods transferred at a point in time |
|
|
Goods transferred over time |
|
|
Total |
|
|||
Major goods/Service line: |
|
|
|
|
|
|
|
|
|
|||
Natural gas commodity |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Natural gas environmental attributes |
|
|
|
|
|
— |
|
|
|
|
||
Electric commodity |
|
|
— |
|
|
|
|
|
|
|
||
Electric environmental attributes |
|
|
|
|
|
— |
|
|
|
|
||
|
|
$ |
|
|
$ |
|
|
$ |
|
|||
Operating segment: |
|
|
|
|
|
|
|
|
|
|||
RNG |
|
$ |
|
|
$ |
|
|
$ |
|
|||
REG |
|
|
|
|
|
|
|
|
|
|||
|
|
$ |
|
|
$ |
|
|
$ |
|
|||
|
|
Six months ended June 30, 2022 |
|
|||||||||
|
|
Goods transferred at a point in time |
|
|
Goods transferred over time |
|
|
Total |
|
|||
Major goods/Service line: |
|
|
|
|
|
|
|
|
|
|||
Natural gas commodity |
|
$ |
|
|
$ |
|
|
$ |
|
|||
Natural gas environmental attributes |
|
|
|
|
|
— |
|
|
|
|
||
Electric commodity |
|
|
— |
|
|
|
|
|
|
|
||
Electric environmental attributes |
|
|
|
|
|
— |
|
|
|
|
||
|
|
$ |
|
|
$ |
|
|
$ |
|
|||
Operating segment: |
|
|
|
|
|
|
|
|
|
|||
RNG |
|
$ |
|
|
$ |
|
|
$ |
|
|||
REG |
|
|
|
|
|
|
|
|
|
|||
|
|
$ |
|
|
$ |
|
|
$ |
|
|||
NOTE 5 – ACCOUNTS AND OTHER RECEIVABLES
The Company extends credit based upon an evaluation of the customer’s financial condition and, while collateral is not required, the Company periodically receives surety bonds that guarantee payment. Credit terms are consistent with industry standards and practices. Reserves for uncollectible accounts, if any, are recorded as part of general and administrative expenses in the condensed consolidated statements of operations.
Accounts and other receivables consist of the following as of June 30, 2023 and December 31, 2022:
|
June 30, 2023 |
|
December 31, 2022 |
|
||
Accounts receivables |
$ |
|
$ |
|
||
Other receivables |
|
|
|
|
||
Reimbursable expenses |
|
|
|
|
||
Accounts and other receivables, net |
$ |
|
$ |
|
||
14
Table of Contents
NOTE 6 – PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consists of the following as of June 30, 2023 and December 31, 2022:
|
June 30, 2023 |
|
December 31, 2022 |
|
||
|
|
|
|
|
||
Land |
$ |
|
$ |
|
||
Buildings and improvements |
|
|
|
|
||
Machinery and equipment |
|
|
|
|
||
Gas mineral rights |
|
|
|
|
||
Construction work in progress |
|
|
|
|
||
Total |
$ |
|
$ |
|
||
Less: Accumulated depreciation and amortization |
|
( |
) |
|
( |
) |
Property, plant & equipment, net |
$ |
|
$ |
|
||
Depreciation expense for property plant and equipment was $
NOTE 7 – GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill and intangible assets consist of the following as of June 30, 2023 and December 31, 2022:
|
|
June 30, 2023 |
|
|
December 31, 2022 |
|
||
Goodwill |
|
$ |
|
|
$ |
|
||
Intangible assets with indefinite lives: |
|
|
|
|
|
|
||
Land use rights |
|
|
|
|
|
|
||
Total intangible assets with indefinite lives: |
|
$ |
|
|
$ |
|
||
Intangible assets with finite lives: |
|
|
|
|
|
|
||
Interconnection, net of accumulated amortization of $ |
|
$ |
|
|
$ |
|
||
Customer contracts, net of accumulated amortization of $ |
|
|
|
|
|
|
||
Total intangible assets with finite lives: |
|
$ |
|
|
$ |
|
||
Total Goodwill and Intangible assets |
|
$ |
|
|
$ |
|
||
As of June 30, 2023, the weighted average remaining useful life of customer contracts and interconnections were
NOTE 8 – ASSET RETIREMENT OBLIGATIONS
The following table summarizes the activity associated with asset retirement obligations of the Company as of June 30, 2023 and December 31, 2022:
|
Six months ended June 30, 2023 |
|
Year Ended December 31, 2022 |
|
||
Asset retirement obligations—beginning of period |
$ |
|
$ |
|
||
Accretion expense |
|
|
|
|
||
Decommissioning |
|
|
( |
) |
||
Asset retirement obligations—end of period |
$ |
|
$ |
|
||
NOTE 9 – DERIVATIVE INSTRUMENTS
To mitigate market risk associated with fluctuations in energy commodity prices (natural gas) and interest rates, the Company utilizes various derivative contracts to secure energy commodity pricing and interest rates under a board-approved program. The Company does not apply hedge accounting to any of its derivative instruments, and all realized and unrealized gains and losses from changes in derivative values are recognized in earnings each period.
15
Table of Contents
Company had the following realized and unrealized gains and losses in the condensed consolidated statements of operations for the three and six months ended June 30, 2023 and 2022:
Derivative Instrument |
Location |
Three months ended June 30, 2023 |
|
Three months ended June 30, 2022 |
|
||
Commodity contracts: |
|
|
|
|
|
||
Cash paid on derivatives |
Operating revenue |
$ |
|
$ |
( |
) |
|
Non cash gain on derivatives |
Operating revenue |
|
|
|
|
||
Interest rate swaps |
Interest expense |
|
|
|
|
||
Net gain (loss) |
|
$ |
|
$ |
( |
) |
|
|
|
|
|
|
|
||
|
|
|
|
|
|
||
Derivative Instrument |
Location |
Six months ended June 30, 2023 |
|
Six months ended June 30, 2022 |
|
||
Commodity contracts: |
|
|
|
|
|
||
Cash paid on derivatives |
Operating revenue |
$ |
|
$ |
( |
) |
|
Non cash loss on derivatives |
Operating revenue |
|
|
|
( |
) |
|
Interest rate swaps |
Interest expense |
|
|
|
|
||
gain (loss) |
|
$ |
|
$ |
( |
) |
|
NOTE 10 – FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company’s assets and liabilities that are measured at fair value on a recurring basis include the following as of June 30, 2023 and December 31, 2022, set forth by level, within the fair value hierarchy:
|
June 30, 2023 |
|
||||||||||
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
||||
Interest rate swap derivative asset |
$ |
|
$ |
|
$ |
— |
|
$ |
|
|||
Asset retirement obligations |
|
|
|
|
|
( |
) |
|
( |
) |
||
Pico earn-out liability |
|
|
|
|
|
( |
) |
|
( |
) |
||
|
$ |
|
$ |
|
$ |
( |
) |
$ |
( |
) |
||
|
December 31, 2022 |
|
||||||||||
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
||||
Interest rate swap derivative asset |
$ |
|
$ |
|
$ |
|
$ |
|
||||
Asset retirement obligations |
|
|
|
|
|
( |
) |
|
( |
) |
||
Pico earn-out liability |
|
|
|
|
|
( |
) |
|
( |
) |
||
|
$ |
|
$ |
|
$ |
( |
) |
$ |
( |
) |
||
The three levels of the fair value hierarchy under authoritative guidance are described as follows:
Level 1: Observable inputs that reflect unadjusted quoted market prices in active markets for identical assets or liabilities.
Level 2: Inputs are market data, other than Level 1, that are observable either directly or indirectly. Level 2 inputs include quoted market prices for similar assets or liabilities, quoted market prices for similar assets or liabilities in inactive markets and other observable information that can be corroborated by market data.
Level 3: Unobservable inputs that are not corroborated by market data, but significant to the fair value measurement.
A summary of changes in the fair values of the Company’s Level 3 instruments, attributable to asset retirement obligations, for the six months ended June 30, 2023 and the year ended December 31, 2022 is included in Note 8. In addition, certain assets are measured at fair value on a non-recurring basis when an indicator of impairment is identified and the assets’ fair values are determined to be less than its carrying value. See Note 3 for additional information.
16
Table of Contents
NOTE 11 – ACCRUED LIABILITIES
The Company’s accrued liabilities consists of the following as of June 30, 2023 and December 31, 2022:
|
June 30, 2023 |
|
December 31, 2022 |
|
||
Accrued expenses |
$ |
|
$ |
|
||
Payroll and related benefits |
|
|
|
|
||
Royalty |
|
|
|
|
||
Utility |
|
|
|
|
||
Other |
|
|
|
|
||
Accrued liabilities |
$ |
|
$ |
|
||
NOTE 12 – DEBT
The Company’s debt consists of the following as of June 30, 2023 and December 31, 2022:
|
June 30, 2023 |
|
December 31, 2022 |
|
||
Term loans |
$ |
|
$ |
|
||
Less: current principal maturities |
|
( |
) |
|
( |
) |
Less: debt issuance costs (on long-term debt) |
|
( |
) |
|
( |
) |
Long-term debt |
$ |
|
$ |
|
||
Current portion of long-term debt |
|
|
|
|
||
|
$ |
|
$ |
|
||
Amended Credit Agreement
On December 12, 2018, Montauk Energy Holdings LLC (“MEH”), a wholly owned subsidiary of the Company, entered into the Second Amended and Restated Revolving Credit and Term Loan Agreement (as amended, “Credit Agreement”), by and among MEH, the financial institutions from time to time party thereto as lenders and Comerica Bank, as the administrative agent, sole lead arranger and sole bookrunner (“Comerica”). The Credit Agreement (i) amended and restated in its entirety MEH’s prior revolving credit and term loan facility, dated as of August 4, 2017, as amended, with Comerica and certain other financial institutions and (ii) replaced in its entirety the prior credit agreement, dated as of August 4, 2017, as amended, between Comerica and Bowerman Power LFG, LLC, a wholly-owned subsidiary of MEH.
On March 21, 2019, MEH entered into the first amendment to the Credit Agreement (the “First Amendment”), which clarified a variety of terms, definitions and calculations in the Credit Agreement. The Credit Agreement requires the Company to maintain customary affirmative and negative covenants, including certain financial covenants, which are measured at the end of each fiscal quarter. On September 12, 2019, the Company entered into the second amendment to the Credit Agreement (the "Second Amendment"). Among other matters, the Second Amendment redefined the Fixed Charge Coverage Ratio (as defined in the Credit Agreement), reduced the commitments under the revolving credit facility to $
On January 4, 2021, the Company, Montauk Holdings Limited (“MNK”) and Montauk Holdings USA, LLC (a direct wholly-owned subsidiary of MNK at the time, “Montauk USA”) entered into a series of transactions, including an equity exchange and a distribution collectively referred to as the “Reorganization Transactions,” that resulted in the Company owning all of the assets and entities (other than Montauk USA) previously owned by Montauk USA, and Montauk Renewables became a direct wholly-owned subsidiary of MNK. In connection with the completion of the Reorganization Transactions and the IPO, the Company entered into the third amendment to the Credit Agreement (the “Third Amendment”). This amendment permitted the Change of Control provisions, as defined in the underlying agreement, to permit the Reorganization Transactions and the IPO to be completed.
On December 21, 2021, MEH entered into the fourth amendment to the Second Amended and Restated Revolving Credit and Term Loan Agreement ("the Fourth Amendment"). The current credit agreement, which is secured by a lien on substantially all assets of the Company and certain of its subsidiaries, provides for a $
17
Table of Contents
The Company accounted for the Fourth Amendment as both a debt modification and debt extinguishment in accordance with ASC 470, Debt (“ASC 470”). In connection with the Credit Agreement, the Company paid $
As of June 30, 2023, $
As of June 30, 2023, the Company was in compliance with all applicable financial covenants under the Credit Agreement.
NOTE 13 – INCOME TAXES
The Company’s provision for income taxes in interim periods is typically computed by applying the estimated annual effective tax rates to income or loss before income taxes for the period. In addition, non-recurring or discrete items are recorded during the period in which they occur. For the three and six months ended June 30, 2023, the Company utilized an estimated effective tax rate.
|
Three months ended |
|
||||
|
June 30, 2023 |
|
June 30, 2022 |
|
||
Expense provision for income taxes |
$ |
|
$ |
|
||
Effective tax rate |
|
% |
|
% |
||
|
|
|
|
|
||
|
Six Months Ended |
|
||||
|
June 30, 2023 |
|
June 30, 2022 |
|
||
(Benefit) expense provision for income taxes |
$ |
( |
) |
$ |
|
|
Effective tax rate |
|
% |
|
% |
||
The effective tax rate of
The effective tax rate of
Income tax expense for the three and six months ended June 30, 2023 was calculated using an estimated effective tax rate which differs from the U.S. federal statutory rate of
NOTE 14 – SHARE-BASED COMPENSATION
The board of directors of Montauk Renewables adopted the Montauk Renewables, Inc. Equity and Incentive Compensation Plan (“MRI EICP”) in January 2021. Following the closing of the IPO, the board of directors of Montauk Renewables approved the grant of non-qualified stock options, restricted stock units and restricted share awards to the employees of Montauk Renewables and its subsidiaries in January 2021. In connection with the restricted share awards, the officers of the Company made elections under Section 83(b) of the Code. Pursuant to such elections, the Company withheld
In connection with a May 2021 asset acquisition,
18
Table of Contents
In April 2023, the board of directors of the Company approved the grant of non-qualified stock options to the executive officers of the Company which vest ratably over a period of three to five years. Stock compensation expense related to these awards was $
The restricted shares, restricted stock units and option awards are subject to vesting schedules and are subject to the terms and conditions of the MRI EICP and related award agreements including, in the case of the restricted share awards, each officer having made an election under Section 83(b) of the Code.
Options granted under the MRI EICP allow the recipient to receive the Company’s common stock equal to the appreciation in the fair market value of the Company’s common stock between the grant date and the exercise and settlement of options into shares as of the exercise dates. The fair value of the MRI EICP options was estimated using the Black-Scholes option pricing model. Two blocks of options have been awarded since inception of the plan with the following weighted-average assumptions (no dividends were expected):
|
|
April 2023 Awards |
|
|
Options awarded |
|
|
|
|
Risk-free interest rate |
|
|
||
Expected volatility |
|
|
||
Expected option life (in years) |
|
|
||
Grant-date fair value |
|
$ |
|
|
|
|
|
|
|
|
|
January 2021 Awards |
|
|
Options awarded |
|
|
|
|
Risk-free interest rate |
|
|
% |
|
Expected volatility |
|
|
% |
|
Expected option life (in years) |
|
|
|
|
Grant-date fair value |
|
$ |
|
|
The following table summarizes the restricted shares, restricted stock units and options outstanding under the MRI EICP as of June 30, 2023 and June 30, 2022, respectively:
|
|
Restricted Shares |
|
|
Restricted Stock Units |
|
|
Options |
|
|||||||||||||||
|
|
Number of |
|
|
Weighted |
|
|
Number of |
|
|
Weighted |
|
|
Number of |
|
|
Weighted |
|
||||||
End of period - December 31, 2022 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||||
Beginning of period - January 1, 2023 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||||
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Forfeited |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|
|
|||||
End of period - June 30, 2023 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||||
|
|
Restricted Shares |
|
|
Restricted Stock Units |
|
|
Options |
|
|||||||||||||||
|
|
Number of |
|
|
Weighted |
|
|
Number of |
|
|
Weighted |
|
|
Number of |
|
|
Weighted |
|
||||||
End of period - December 31, 2021 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||||
Beginning of period - January 1, 2022 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||||
Granted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||||
Vested |
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|
|
( |
) |
|
|
|
|||
Forfeited |
|
|
( |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||
End of period - June 30, 2022 |
|
|
|
|
$ |
|
|
|
|
|
$ |
|
|
|
|
|
$ |
|
||||||
As of June 30, 2023 none of the
19
Table of Contents
NOTE 15 – DEFINED CONTRIBUTION PLAN
The Company maintains a 401(k) defined contribution plan for eligible employees. The Company matches
NOTE 16 – RELATED PARTY TRANSACTIONS
On January 26, 2021, the Company entered into a Loan Agreement and Secured Promissory Note (the “Initial Promissory Note”) with Montauk Holdings Limited (“MNK”). MNK is currently an affiliate of the Company and certain of the Company’s directors and executive officers are also directors and executive officers of MNK. Pursuant to the Initial Promissory Note, the Company advanced a cash loan of $
Under applicable guidance for variable interest entities in ASC 810, Consolidation, the Company determined that MNK is a variable interest entity. The Company concluded that it is not the primary beneficiary of the variable interest entity, as the Company does not have a controlling financial interest and does not have the power to direct the activities that most significantly impact the economic performance of MNK. Accordingly, the Company concluded that presentation of the Amended Promissory Note as a related party receivable remains appropriate.
MNK was delisted from the JSE on January 26, 2021. The MNK Board of Directors and Shareholders held its annual general meeting in March 2023 and voted to take MNK private.
Related Party Reimbursements
Periodically the Company will reimburse MNK and HCI Managerial Services Proprietary Limited, the administrator for the Company’s secondarily listed Johannesburg Stock Exchange trading symbol, for expenses incurred on behalf of the Company. Amounts reimbursed were $
NOTE 17 – SEGMENT INFORMATION
The Company’s reportable segments for the three and six months ended June 30, 2023 and 2022 are Renewable Natural Gas and Renewable Electricity Generation. Renewable Natural Gas includes the production of RNG. Renewable Electricity Generation includes generation of electricity at biogas-to-electricity plants. The corporate entity is not determined to be an operating segment but is discretely disclosed for purposes of reconciliation of the Company’s condensed consolidated financial statements.
20
Table of Contents
allocates the Company’s resources. In the following tables, “RNG” refers to Renewable Natural Gas and “REG” refer to Renewable Electricity Generation.
|
|
Three months ended June 30, 2023 |
|
|||||||||||||
|
|
RNG |
|
|
REG |
|
|
Corporate |
|
|
Total |
|
||||
Total revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Net income (loss) |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
||
EBITDA |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Adjusted EBITDA (1) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Total assets |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Capital expenditures |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
The following table is a reconciliation of the Company’s reportable segments’ net income (loss) from continuing operations to Adjusted EBITDA for the three months ended June 30, 2023:
|
|
Three months ended June 30, 2023 |
|
|||||||||||||
|
|
RNG |
|
|
REG |
|
|
Corporate |
|
|
Total |
|
||||
Net income (loss) |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||
Depreciation, depletion and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Income tax expense |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
EBITDA |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
Impairment loss |
|
|
|
|
|
— |
|
|
|
— |
|
|
|
|
||
Transaction costs |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Adjusted EBITDA |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
|
|
Three months ended June 30, 2022 |
|
|||||||||||||
|
|
RNG |
|
|
REG |
|
|
Corporate |
|
|
Total |
|
||||
Total revenue |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
Net Income (loss) |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
||
EBITDA |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
||
Adjusted EBITDA (1) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Total assets |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Capital expenditures |
|
|
|
|
|
( |
) |
|
|
|
|
|
|
|||
The following table is a reconciliation of the Company’s reportable segments’ net income from continuing operations to Adjusted EBITDA for the three months ended June 30, 2022:
|
|
Three months ended June 30, 2022 |
|
|||||||||||||
|
|
RNG |
|
|
REG |
|
|
Corporate |
|
|
Total |
|
||||
Net Income (loss) |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||
Depreciation, depletion and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Income tax expense |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
EBITDA |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||
Impairment loss |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Transaction costs |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Non cash hedging charges |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
Adjusted EBITDA |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
21
Table of Contents
For the three months ended June 30, 2023 and 2022, three and four customers, respectively, made up greater than 10% of total revenues.
|
|
Three months ended June 30, 2023 |
|
|||||||||||||
|
|
RNG |
|
|
REG |
|
|
Corporate |
|
|
Total |
|
||||
Customer A |
|
|
% |
|
|
— |
|
|
|
— |
|
|
|
% |
||
Customer B |
|
|
% |
|
|
— |
|
|
|
— |
|
|
|
% |
||
Customer C |
|
|
% |
|
|
— |
|
|
|
— |
|
|
|
% |
||
|
|
Three months ended June 30, 2022 |
|
|||||||||||||
|
|
RNG |
|
|
REG |
|
|
Corporate |
|
|
Total |
|
||||
Customer A |
|
|
% |
|
|
— |
|
|
|
— |
|
|
|
% |
||
Customer B |
|
|
% |
|
|
— |
|
|
|
— |
|
|
|
% |
||
Customer C |
|
|
% |
|
|
— |
|
|
|
— |
|
|
|
% |
||
Customer D |
|
|
% |
|
|
— |
|
|
|
— |
|
|
|
% |
||
The Company’s reportable segments for the six months ended June 30, 2023 and 2022 are Renewable Natural Gas and Renewable Electricity Generation.
|
|
Six months ended June 30, 2023 |
|
|||||||||||||
|
|
RNG |
|
|
REG |
|
|
Corporate |
|
|
Total |
|
||||
Total revenue |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
||||
Net income (loss) |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
( |
) |
|
EBITDA |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Adjusted EBITDA (1) |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Total assets |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Capital expenditures |
|
|
|
|
|
|
|
|
|
|
|
|
||||
(1)
The following table is a reconciliation of the Company’s reportable segments’ net income (loss) from continuing operations to Adjusted EBITDA for the six months ended June 30, 2023:
|
|
Six months ended June 30, 2023 |
|
|||||||||||||
|
|
RNG |
|
|
REG |
|
|
Corporate |
|
|
Total |
|
||||
Net income (loss) |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
( |
) |
|
Depreciation, depletion and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Income tax benefit |
|
|
— |
|
|
|
— |
|
|
|
( |
) |
|
|
( |
) |
EBITDA |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
Impairment loss |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|||
Net loss on sale of assets |
|
|
|
|
|
— |
|
|
|
|
|
|
|
|||
Transaction costs |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Adjusted EBITDA |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
|
|
Six months ended June 30, 2022 |
|
|||||||||||||
|
|
RNG |
|
|
REG |
|
|
Corporate |
|
|
Total |
|
||||
Total revenue |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
Net income (loss) |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
||
EBITDA |
|
|
|
|
|
|
|
|
( |
) |
|
|
|
|||
Adjusted EBITDA (1) |
|
|
|
|
|
( |
) |
|
|
( |
) |
|
|
|
||
Total assets |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Capital expenditures |
|
|
|
|
|
|
|
|
|
|
|
|
||||
(1)
22
Table of Contents
The following table is a reconciliation of the Company’s reportable segments’ net income (loss) from continuing operations to Adjusted EBITDA for the six months ended June 30, 2022:
|
|
Six months ended June 30, 2022 |
|
|||||||||||||
|
|
RNG |
|
|
REG |
|
|
Corporate |
|
|
Total |
|
||||
Net Income (loss) |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||
Depreciation, depletion and amortization |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Interest expense |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Income tax expense |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
EBITDA |
|
$ |
|
|
$ |
|
|
$ |
( |
) |
|
$ |
|
|||
Impairment loss |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Net loss (gain) on sale of assets |
|
|
|
|
|
( |
) |
|
|
— |
|
|
|
( |
) |
|
Transaction costs |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Non cash hedging charges |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
||
Adjusted EBITDA |
|
$ |
|
|
$ |
( |
) |
|
$ |
( |
) |
|
$ |
|
||
For both the six months ended June 30, 2023 and 2022, three customers made up greater than 10% of total revenues.
|
|
Six months ended June 30, 2023 |
|
|||||||||||||
|
|
RNG |
|
|
REG |
|
|
Corporate |
|
|
Total |
|
||||
Customer A |
|
|
% |
|
|
— |
|
|
|
— |
|
|
|
% |
||
Customer B |
|
|
% |
|
|
— |
|
|
|
— |
|
|
|
% |
||
Customer C |
|
|
— |
|
|
|
% |
|
|
— |
|
|
|
% |
||
|
|
Six months ended June 30, 2022 |
|
|||||||||||||
|
|
RNG |
|
|
REG |
|
|
Corporate |
|
|
Total |
|
||||
Customer A |
|
|
% |
|
|
— |
|
|
|
— |
|
|
|
% |
||
Customer B |
|
|
% |
|
|
— |
|
|
|
— |
|
|
|
% |
||
Customer C |
|
|
% |
|
|
— |
|
|
|
— |
|
|
|
% |
||
NOTE 18 – LEASES
The Company leases office space and other office equipment under operating lease arrangements (with initial terms greater than twelve months), expiring in various years through 2033. These leases have been entered into to better enable the Company to conduct business operations. Office space is leased to provide adequate workspace for all employees in Pittsburgh, Pennsylvania and Houston, Texas. Office space and office equipment agreements that exceed 12 months are accounted for as operating leases in accordance with ASC 842, Leases.
The Company also leases safety equipment for the various operational sites in the United States. The term of certain equipment exceeds twelve months and is accordingly classified as a finance lease under ASC 842. The finance leases expire in 2024 and were entered into in order to provide a safe work environment for operational employees.
The Company determines if an arrangement is, or contains, a lease at inception based on whether that contract conveys the right to control the use of an identified asset in exchange for consideration for a period of time. For all operating and finance lease arrangements, the Company presents at the commencement date: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term.
The Company has elected, as a practical expedient, not to separate non-lease components from lease components, and instead account for each separate component as a single lease component for all lease arrangements, as lessee. In addition, the Company has elected, as a practical expedient, not to apply lease recognition requirements to leases with a term of one year or less. In determination of the lease term, the Company considers the likelihood of lease renewal options and lease termination provisions.
The Company uses its incremental borrowing rate, as the basis to calculate the present value of future lease payments, at lease commencement. The incremental borrowing rate represents the rate that would approximate the rate to borrow funds on a collateralized basis over a similar term and in a similar economic environment.
23
Table of Contents
Supplemental information related to operating lease arrangements was as follows:
|
|
Three Months Ended |
|
|||||
|
|
June 30, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Cash paid for amounts included in the measurement of operating lease liabilities |
|
$ |
|
|
$ |
|
||
Weighted average remaining lease term (in years) |
|
|
|
|
|
|
||
Weighted average discount rate |
|
|
% |
|
|
% |
||
|
|
Six Months Ended |
|
|||||
|
|
June 30, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Cash paid for amounts included in the measurement of operating lease liabilities |
|
$ |
|
|
$ |
|
||
Weighted average remaining lease term (in years) |
|
|
|
|
|
|
||
Weighted average discount rate |
|
|
% |
|
|
% |
||
Future minimum operating lease payments are as follows:
Year Ending |
|
|
|
|
Remainder of 2023 |
|
$ |
|
|
2024 |
|
|
|
|
2025 |
|
|
|
|
2026 |
|
|
|
|
2027 |
|
|
|
|
Thereafter |
|
|
|
|
Interest |
|
|
( |
) |
Total |
|
$ |
|
|
Supplemental information related to finance lease arrangements was as follows:
|
|
Three Months Ended |
|
|||||
|
|
June 30, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Cash paid for amounts included in the measurement of financing lease liabilities |
|
$ |
|
|
$ |
|
||
Weighted average remaining lease term (in years) |
|
|
|
|
|
|
||
Weighted average discount rate |
|
|
% |
|
|
% |
||
|
|
Six Months Ended |
|
|||||
|
|
June 30, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Cash paid for amounts included in the measurement of financing lease liabilities |
|
$ |
|
|
$ |
|
||
Weighted average remaining lease term (in years) |
|
|
|
|
|
|
||
Weighted average discount rate |
|
|
% |
|
|
% |
||
Future minimum finance lease payments are as follows:
Year Ending |
|
|
|
|
Remainder of 2023 |
|
$ |
|
|
2024 |
|
|
|
|
Interest |
|
|
( |
) |
Total |
|
$ |
|
|
24
Table of Contents
NOTE 19 – INCOME (LOSS) PER SHARE
Basic and diluted income (loss) per share was computed using the following common share data for the three and six months ended June 30, 2023 and June 30, 2022, respectively:
|
|
Three months ended June 30, 2023 |
|
|
Three months ended June 30, 2022 |
|
||
Net income |
|
$ |
|
|
$ |
|
||
Basic weighted-average shares outstanding |
|
|
|
|
|
|
||
Dilutive effect of share-based awards |
|
|
|
|
|
|
||
Diluted weighted-average shares outstanding |
|
|
|
|
|
|
||
Basic income per share |
|
$ |
|
|
$ |
|
||
Diluted income per share |
|
$ |
|
|
$ |
|
||
|
|
Six months ended June 30, 2023 |
|
|
Six months ended June 30, 2022 |
|
||
Net (loss) income |
|
$ |
( |
) |
|
$ |
|
|
Basic weighted-average shares outstanding |
|
|
|
|
|
|
||
Dilutive effect of share-based awards |
|
|
|
|
|
|
||
Diluted weighted-average shares outstanding |
|
|
|
|
|
|
||
Basic (loss) income per share |
|
$ |
( |
) |
|
$ |
|
|
Diluted (loss) income per share |
|
$ |
( |
) |
|
$ |
|
|
As a result of incurring a net loss for the six months ended June 30, 2023 potential common shares of
NOTE 20 – SUBSEQUENT EVENTS
The Company evaluated its June 30, 2023 condensed consolidated financial statements through the date the financial statements were issued. The Company is not aware of any subsequent events which would require recognition or disclosure in the consolidated financial statements.
25
Table of Contents
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and the related notes to those statements included elsewhere in this Quarterly Report on Form 10-Q. Throughout this section, dollar amounts are expressed in thousands, except for per share amounts and MMBtu and RIN pricing amounts and unless otherwise indicated.
In addition to historical financial information, the following discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors, including those discussed under “Cautionary Note Regarding Forward-Looking Statements,” “Item 1A.–Risk Factors” of our 2022 Annual Report and elsewhere in this report.
Overview
Montauk Renewables is a renewable energy company specializing in the recovery and processing of biogas from landfills and other non-fossil fuel sources for beneficial use as a replacement to fossil fuels. We develop, own, and operate RNG projects, using proven technologies that supply RNG into the transportation industry and use RNG to produce Renewable Electricity. We are one of the largest U.S. producers of RNG, having participated in the industry for over 30 years. We established our operating portfolio of 12 RNG and three Renewable Electricity projects through self-development, partnerships, and acquisitions that span six states.
Biogas is produced by microbes as they break down organic matter in the absence of oxygen (during a process called anaerobic digestion). Our two current sources of commercial scale biogas are LFG or ADG. We typically secure our biogas feedstock through long-term fuel supply agreements and property lease agreements with biogas site hosts. Once we secure long-term fuel supply rights, we design, build, own, and operate facilities that convert the biogas into RNG or use the processed biogas to produce Renewable Electricity. We sell the RNG and Renewable Electricity through a variety of term length agreements. Because we are capturing waste methane and making use of a renewable source of energy, our RNG and Renewable Electricity generate valuable Environmental Attributes which we are able to monetize under federal and state renewable initiatives.
Our current operating projects produce either RNG or Renewable Electricity by processing biogas from landfill sites or agricultural waste from livestock farms. We view agricultural waste from livestock farms as a significant opportunity for us to expand our RNG business, and we continue to evaluate other agricultural feedstock opportunities. We believe that our business model and technology are highly scalable given availability of biogas from agriculturally derived sources, which will allow us to continue to grow through prudent development and complimentary acquisitions.
Recent Developments
Capital Development Summary
The following summarizes our ongoing development growth plans expected volume contribution, anticipated commencement of operations, and capital expenditure estimate, respectively:
Development Opportunity |
Estimated Volume Contribution (MMBtu/day) |
Anticipated Commencement Date |
Estimated Capital Expenditure |
Pico Digestion Capacity Increase |
300 |
Second half of 2023 |
Up to $18,000 |
Second Apex RNG Facility |
2,100 |
Second half of 2024 |
$25,000-$35,000 |
Blue Granite RNG Facility |
900 |
2025 |
$25,000-$35,000 |
Bowerman RNG Facility |
3,600 |
2026 |
$85,000-$95,000 |
Pico Digestion Capacity Increase
During the first quarter of 2023, CARB finalized the engineering review of the Pico facility's provisional CI application and released it for public comment. The public comment period ended March 14, 2023 and we did not receive any significant comments. CARB certified our Tier 2 application and the certified CI value will be used starting in the fourth quarter of 2022 to report and generate LCFS credits. We released the remaining gas from storage in the second quarter of 2023.
Related to our Pico feedstock amendment, which increased the amount of feedstock supplied to the facility for processing over a one to three-year period (the “Pico Feedstock Amendment”), the dairy began delivering the first and second increases in feedstock during the third quarter of 2022 and we have made three payments to the dairy as required in the Pico Feedstock Agreement. The improved efficiencies of our existing digestion process and the water management improvements have enabled us to process the
26
Table of Contents
increased feedstock volumes which we current expect to increase by five to ten percent once all increased feedstock deliveries have been received from the dairy. We completed the design of the digestion capacity project in the third quarter of 2022 and continue to incur capital expenditures related to the construction of the project. We currently expect the construction of the project to be functionally completed during the third quarter of 2023. We currently expect the dairy to begin delivering the final increase in feedstock volumes during 2024.
Blue Granite RNG Project
In the first quarter of 2023, we announced the planned entrance into South Carolina with the development of a new landfill gas-to-RNG facility. The planned project is expected to contribute approximately 900 MMBtu per day of production capacity upon commissioning. Capital expenditures are ongoing and we continue to expect the project to be complete and become commercially operational in 2025.
Bowerman RNG Project
In the second quarter of 2023, we announced a planned development of a renewable natural gas landfill project in Irvine, CA at the Frank R. Bowerman Landfill. The project is anticipated to process the large and growing volumes of biogas in excess of the existing capacity of the REG facility. With a targeted commissioning date in 2026, we currently expect the capital investment to range between $85,000 - $95,000, which is anticipated to have production nameplate capacity of approximately 3,600 MMBtu per day, assuming currently forecasted biogas feedstock volumes that are projected to be available from the host landfill at the time of commissioning.
Montauk Ag Asset Acquisition
In 2021, through a wholly-owned subsidiary Montauk Ag Renewables, we completed an asset purchase related to developing technology to recover residual natural resources from waste streams of modern agriculture and to refine and recycle such waste products through proprietary and other processes in order to produce high quality renewable natural gas and biochar (the “Montauk Ag Renewables Acquisition”).
We intend to deploy our patented emissions reduction reactor technology at our centralized conversion location in Turkey, NC. The Turkey location was approved to participate in the Piedmont Natural Gas Renewable Gas Pilot Program which is a step towards obtaining the New Renewable Energy Facility (“NREF”) designation under the North Carolina Utilities Commission. We signed a receipt interconnection agreement with Piedmont Natural Gas for the Turkey, NC location. This agreement is structured to coincide with the development timeline at the Turkey, NC location.
In July 2023, we signed a REC agreement with Duke Energy (“Duke”) under which Duke will purchase the swine waste RECs from the conversion of swine waste feedstock into renewable energy as required under the North Carolina Renewable Energy Portfolio Standard. Once fully commissioned, we expect the facility to sell up to an estimated 47 RECs annually.
We continue to develop the opportunities with Montauk Ag Renewables and can give no assurances that our plans related to this acquisition will meet our expectations. We continue to design and plan for the development of the Turkey, NC facility to be used for commercial production. We are evaluating uses for the Magnolia, NC location. Based on our current development timeline expectations, we do not expect to commence significant revenue generating activities until the first half of 2025. We intend to contract with additional farms to secure feedstock sources for future production processes.
Carbon Dioxide Beneficial Use Opportunity
In July 2023, we entered into a letter of intent (“LOI”) with a North American subsidiary of Denmark-based European Energy (“EENA”) which reserves the use of the biogenic carbon dioxide (“CO2”) from our Texas facilities. Under the terms of LOI, we expect to contract CO2 volumes from facilities to EENA sufficient for EENA’s large scale production of E-methanol. Upon final agreement execution, the delivery term is expected to last up to 15 years with first delivery expected to begin in 2026. The LOI terms allow for our capital commitments to be based on choosing technology most suited for optimal delivery of the CO2 volumes to EENA. While we have a signed LOI, no assurances can be given that EENA will develop this large scale production and no assurances can be given that a definitive agreement will be executed.
27
Table of Contents
Key Trends
Market Trends Affecting the Renewable Fuel Market
We believe demand for RNG produced from biogas remains strong due to increasing public policy initiatives focused on reducing greenhouse gas emissions, including methane, as well as continued public and private sector interest in the development of additional renewable energy sources to offset traditional fossil fuel energy sources.
Key drivers for the long-term growth of RNG include the following factors:
Factors Affecting Our Future Operating Results:
Conversion of Electricity Projects to RNG Projects:
We periodically evaluate opportunities to convert existing facilities from Renewable Electricity to RNG production. These opportunities tend to be most attractive for any merchant electricity facilities given the favorable economics for the sale of RNG plus RINs relative to the sale of market rate electricity plus RECs. This strategy has been an increasingly attractive avenue for growth since 2014 when RNG from landfills became eligible for D3 RINs. However, during the conversion of a project, there is a gap in production while the electricity project is offline until it commences operation as an RNG facility, which can adversely affect us. This timing effect may adversely affect our operating results as a result of our potential conversion of Renewable Electricity projects. Upon completion of a conversion, we expect that the increase in revenue upon commencement of RNG production will more than offset the loss of revenue from Renewable Electricity production. Historically, we have taken advantage of these opportunities on a gradual basis at our merchant electricity facilities, such as Atascocita and Coastal Plains. We are not currently considering any conversion of electricity projects.
Acquisition and Development Pipeline
The timing and extent of our development pipeline affects our operating results due to:
28
Table of Contents
Regulatory, Environmental and Social Trends
Regulatory, environmental and social factors are key drivers that incentivize the development of RNG and Renewable Electricity projects and influence the economics of these projects. We are subject to the possibility of legislative and regulatory changes to certain incentives, such as RINs, RECs and GHG initiatives. On July 12, 2023, the EPA issued final rules in the Federal Register for the RFS volume requirements for 2023-2025. Final volumes for cellulosic biofuel were set at 838, 1,090 and 1,376 million RINs for the three years 2023, 2024 and 2025, respectively. The EPA did not finalize the eRIN program in this ruling, however, it indicated that it will continue to work on potential paths forward for the eRIN program. However, the EPA did not set a new date for a revised eRIN program. The cellulosic biofuel volumes in the final rule for 2024 and 2025 are lower than the proposed volume as they do not include cellulosic biofuel from eRINs. The final rule also included significant changes to the existing RFS program, referred to as biogas regulatory reform, that will require the RNG industry to modify how all RINs are generated. New RFS participating facilities that register July 1, 2024 or after will have to meet the biogas regulatory reform provisions beginning July 1, 2024. Existing RFS participating facilities which registered prior to July 1, 2024 will have until January 1, 2025 to come into compliance with biogas regulatory reforms. For existing registrants, registration updates must be submitted by October 1, 2024. On January 1, 2025, all RFS participants must comply with biogas regulatory reform provisions. The EPA finalized a limitation that biogas from one facility has a single use under the RFS as proposed (i.e., biointermediate, RNG or CNG/LNG via biogas closed distribution system). The EPA clarified that this does not preclude non-RFS uses at same facility.
Changes to the LCFS program require annual verification of the CI score assigned to a project. Annual verification could significantly affect the profitability of a project, particularly in the case of a livestock farm project.
Factors Affecting Revenue
Our total operating revenues include renewable energy and related sales of Environmental Attributes. Renewable energy sales primarily consist of the sale of biogas, including LFG and ADG, which is either sold or converted to Renewable Electricity. Environmental Attributes are generated and monetized from the renewable energy.
We report revenues from two operating segments: Renewable Natural Gas and Renewable Electricity Generation. Corporate relates to additional discrete financial information for the corporate function; primarily used as a shared service center for maintaining functions such as executive, accounting, treasury, legal, human resources, tax, environmental, engineering, and other operations functions not otherwise allocated to a segment. As such, the corporate entity is not determined to be an operating segment but is discretely disclosed for purposes of reconciliation to the Company’s consolidated financial statements.
Our operating revenues are priced based on published index prices which can be influenced by factors outside our control, such as market impacts on commodity pricing and regulatory developments. Strategic decisions to not monetize RINs available to be transferred will have an impact on our operating revenues and operating profit. As we self market a significant portion of our RINs and as the RFS is based on annual compliance, any strategic decision to not monetize available RINs in a quarter could impact the timing of operating revenues recognized during a fiscal year. With our royalty payments structured as a percentage of revenue, royalty payments fluctuate with changes in revenues. Due to these factors, we place a primary focus on managing production volumes and operating and maintenance expenses as these factors are more controllable by us.
29
Table of Contents
RNG Production
Our RNG production levels are subject to fluctuations based on numerous factors, including:
Disruptions to Production: Disruptions to waste placement operations at our active landfill sites, severe weather events, failure or degradation of our or a landfill operator’s equipment, our inability to fill open or newly created positions, or interconnection or transmission problems could result in a reduction of our RNG production. We strive to proactively address any issues that may arise through preventative maintenance, process improvement and flexible redeployment of equipment to maximize production and useful life.
Pricing
Our Renewable Natural Gas and Renewable Electricity Generation segments’ revenues are primarily driven by the prices under our off-take agreements and PPAs and the amount of RNG and Renewable Electricity that we produce. We sell the RNG produced from our projects under a variety of termed agreements to counterparties, with contract terms varying from three years to five years. Our contracts with counterparties are typically structured to be based on varying natural gas price indices for the RNG produced. All of the Renewable Electricity produced at our biogas-to-electricity projects is sold under long-term contracts to creditworthy counterparties, typically under a fixed price arrangement with escalators.
The pricing of Environmental Attributes, which accounts for a substantial portion of our revenues, is subject to volatility based on a variety of factors, including regulatory and administrative actions and commodity pricing.
During the first quarter of 2023, our Pico dairy farm project was awarded a more attractive CI by CARB, thereby generating LCFS credits at a multiple of those generated by our landfill projects.
The sale of RINs, which is subject to market price fluctuations, accounts for a substantial portion of our revenues. We manage against the risk of these fluctuations through forward sales of RINs, although currently we only sell RINs in the calendar year they are generated. We have sold all RINs generated and unsold as of June 30, 2023 and committed a significant portion of our expected 2023 third quarter RIN generation, though, we have not entered into forward sell commitments beyond the fourth quarter of 2023 RIN generation. The average realized price of these July 2023 commitments were priced at or above the average D3 RIN index price. Realized prices for Environmental Attributes monetized in a year may not correspond directly to index prices due to the forward selling of commitments
Factors Affecting Operating Expenses
Our operating expenses include royalties, transportation, gathering and production fuel expenses, project operating and maintenance expenses, general and administrative expenses, depreciation and amortization, net loss (gain) on sale of assets,
30
Table of Contents
impairment loss and transaction costs. Our operating expenses can be subject to inflationary cost increases that are largely out of our control.
Key Operating Metrics
Total operating revenues reflect both sales of renewable energy and sales of related Environmental Attributes. As a result, our revenues are primarily affected by unit production of RNG and Renewable Electricity, production of Environmental Attributes, and the prices at which we monetize such production. Set forth below is an overview of these key metrics:
31
Table of Contents
Comparison of Three Months Ended June 30, 2023 and 2022
The following table summarizes the key operating metrics described above, which metrics we use to measure performance.
|
|
Three Months Ended |
|
|
|
|
|
Change |
|
|||||||
|
|
2023 |
|
|
2022 |
|
|
Change |
|
|
% |
|
||||
(in thousands, unless otherwise indicated) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Renewable Natural Gas Total Revenues |
|
$ |
48,609 |
|
|
$ |
64,566 |
|
|
$ |
(15,957 |
) |
|
|
(24.7 |
%) |
Renewable Electricity Generation Total Revenues |
|
$ |
4,647 |
|
|
$ |
4,329 |
|
|
$ |
318 |
|
|
|
7.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
RNG Metrics |
|
|
|
|
|
|
|
|
|
|
|
|
||||
CY RNG production volumes (MMBtu) |
|
|
1,431 |
|
|
|
1,469 |
|
|
|
(38 |
) |
|
|
(2.6 |
%) |
Less: Current period RNG volumes under fixed/floor-price contracts |
|
|
(325 |
) |
|
|
(328 |
) |
|
|
3 |
|
|
|
(0.9 |
%) |
Plus: Prior period RNG volumes dispensed in current period |
|
|
418 |
|
|
|
372 |
|
|
|
46 |
|
|
|
12.4 |
% |
Less: Current period RNG production volumes not dispensed |
|
|
(367 |
) |
|
|
(447 |
) |
|
|
80 |
|
|
|
(17.9 |
%) |
Total RNG volumes available for RIN generation (1) |
|
|
1,157 |
|
|
|
1,066 |
|
|
|
91 |
|
|
|
8.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
RIN Metrics |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Current RIN generation ( x 11.727) (2) |
|
|
13,568 |
|
|
|
12,499 |
|
|
|
1,069 |
|
|
|
8.6 |
% |
Less: Counterparty share (RINs) |
|
|
(1,427 |
) |
|
|
(1,346 |
) |
|
|
(81 |
) |
|
|
6.0 |
% |
Plus: Prior period RINs carried into current period |
|
|
8,266 |
|
|
|
4,394 |
|
|
|
3,872 |
|
|
|
88.1 |
% |
Less: CY RINs carried into next CY |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total RINs available for sale (3) |
|
|
20,407 |
|
|
|
15,547 |
|
|
|
4,860 |
|
|
|
31.3 |
% |
Less: RINs sold |
|
|
(17,441 |
) |
|
|
(14,438 |
) |
|
|
(3,003 |
) |
|
|
20.8 |
% |
RIN Inventory |
|
|
2,966 |
|
|
|
1,109 |
|
|
|
1,857 |
|
|
|
167.5 |
% |
RNG Inventory (volumes not dispensed for RINs) (4) |
|
|
418 |
|
|
|
447 |
|
|
|
(29 |
) |
|
|
(6.5 |
%) |
Average Realized RIN price |
|
$ |
2.16 |
|
|
$ |
3.38 |
|
|
$ |
(1.22 |
) |
|
|
(36.1 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Renewable Natural Gas Operating Expenses |
|
$ |
21,412 |
|
|
$ |
25,605 |
|
|
$ |
(4,193 |
) |
|
|
(16.4 |
%) |
Operating Expenses per MMBtu (actual) |
|
$ |
14.96 |
|
|
$ |
17.43 |
|
|
$ |
(2.47 |
) |
|
|
(14.2 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
REG Operating Expenses |
|
$ |
3,926 |
|
|
$ |
4,284 |
|
|
$ |
(358 |
) |
|
|
(8.4 |
%) |
$/MWh (actual) |
|
$ |
80.12 |
|
|
$ |
91.15 |
|
|
$ |
(11.02 |
) |
|
|
(12.1 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other Metrics |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Renewable Electricity Generation Volumes Produced (MWh) |
|
|
49 |
|
|
|
47 |
|
|
|
2 |
|
|
|
4.3 |
% |
Average Realized Price $/MWh (actual) |
|
$ |
94.84 |
|
|
$ |
92.11 |
|
|
$ |
2.73 |
|
|
|
3.0 |
% |
32
Table of Contents
The following table summarizes our revenues, expenses and net income for the periods set forth below:
|
|
Three Months Ended |
|
|
|
|
|
Change |
|
|||||||
|
|
2023 |
|
|
2022 |
|
|
Change |
|
|
% |
|
||||
Total operating revenues |
|
$ |
53,256 |
|
|
$ |
67,884 |
|
|
$ |
(14,628 |
) |
|
|
(21.5 |
)% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating and maintenance expenses |
|
|
15,221 |
|
|
|
14,870 |
|
|
|
351 |
|
|
|
2.4 |
% |
General and administrative expenses |
|
|
8,745 |
|
|
|
8,753 |
|
|
|
(8 |
) |
|
|
(0.1 |
)% |
Royalties, transportation, gathering and production fuel |
|
|
10,205 |
|
|
|
15,090 |
|
|
|
(4,885 |
) |
|
|
(32.4 |
)% |
Depreciation, depletion and amortization |
|
|
5,251 |
|
|
|
5,134 |
|
|
|
117 |
|
|
|
2.3 |
% |
Impairment loss |
|
|
274 |
|
|
|
69 |
|
|
|
205 |
|
|
|
297.4 |
% |
Transaction costs |
|
|
3 |
|
|
|
5 |
|
|
|
(2 |
) |
|
|
(42.2 |
)% |
Total operating expenses |
|
|
39,699 |
|
|
|
43,921 |
|
|
|
(4,222 |
) |
|
|
(9.6 |
)% |
Operating income |
|
$ |
13,557 |
|
|
$ |
23,963 |
|
|
$ |
(10,406 |
) |
|
|
(43.4 |
)% |
Other expenses: |
|
|
621 |
|
|
|
246 |
|
|
|
375 |
|
|
|
152.5 |
% |
Income tax expense |
|
|
11,933 |
|
|
|
4,565 |
|
|
|
7,368 |
|
|
|
161.4 |
% |
Net income |
|
$ |
1,003 |
|
|
$ |
19,152 |
|
|
$ |
(18,149 |
) |
|
|
(94.8 |
)% |
Revenues for the Three Months Ended June 30, 2023 and 2022
Total revenues in the second quarter of 2023 were $53,256 a decrease of $14,628 (21.5%) compared to $67,884 in the second quarter of 2022. The decrease is primarily related to a decrease in pricing of gas commodity indices and average realized RIN pricing during the second quarter of 2023 compared to the second quarter of 2022. Gas commodity indices decreased 70.7% during the second quarter of 2023 compared to the second quarter of 2022. Realized RIN pricing decreased 36.1% during the second quarter of 2023 compared to the second quarter 2022. Also contributing to the decrease are gains recognized in the second quarter of 2022 of $1,644 which is related to a gas commodity hedge program that has since expired. The decrease is also driven by no revenues recognized in the second quarter of 2023 as compared to $1,059 in the second quarter of 2022 under our counter party sharing agreements.
Renewable Natural Gas Revenues
We produced 1,431 MMBtu of RNG during the second quarter of 2023, a decrease of 38 MMBtu (2.6%) over the 1,469 MMBtu produced in the second quarter of 2022. Our Rumpke facility produced 53 fewer MMBtu in the second quarter of 2023 compared to the second quarter of 2022 as a result of process equipment failure in the second quarter of 2023 which temporarily impacted production. The process equipment which failed has been repaired. Also contributing to the decrease is our Pico facility which produced 16 fewer MMBtu in the second quarter of 2023 compared to the second quarter of 2022 as a result of feedstock processing challenges in the second quarter of 2023. Offsetting the decrease is our Galveston facility which produced 22 more MMBtu in the second quarter of 2023 as compared to the second quarter of 2022 as a result of process equipment modification.
Revenues from the Renewable Natural Gas segment in the second quarter of 2023 were $48,609, a decrease of $15,957 (24.7%) compared to $64,566 in the second quarter of 2022. Average commodity pricing for natural gas for the second quarter of 2023 was $2.10 per MMBtu, 70.7% lower than the second quarter of 2022. During the second quarter of 2023, we self-monetized 17,441 RINs, representing a 3,003 increase (20.8%) compared to 14,438 in the second quarter of 2022. Average pricing realized on RIN sales during the second quarter of 2023 was $2.16 as compared to $3.38 in the second quarter of 2022, a decrease of 36.1%. This compares to the average D3 RIN index price for the second quarter of 2023 of $2.16 being approximately 32.9% lower than the average D3 RIN index price in the second quarter of 2022. At June 30, 2023, we had approximately 367 MMBtu available for RIN generation and we had approximately 2,966 RINs generated and unsold. At June 30, 2022, we had approximately 447 MMBtu available for RIN generation and 1,109 RINs generated and unsold.
Renewable Electricity Generation Revenues
We produced approximately 49 MWh in Renewable Electricity in the second quarter of 2023, an increase of 2 MWh (4.3%) from 47 MWh in the second quarter of 2022. Our Bowerman facility produced 1 MWh more in the second quarter of 2023 compared to the second quarter of 2022 as a result of preventative engine maintenance performed during the second quarter of 2022. Our Security facility produced approximately 1 MWh more in the second quarter of 2023 compared to the second quarter of 2022 due to engine maintenance completed in the second quarter of 2022.
33
Table of Contents
Revenues from Renewable Electricity facilities in the second quarter of 2023 were $4,647, an increase of $318 (7.3%) compared to $4,329 in the second quarter of 2022. The increase is primarily driven by the increase in our Bowerman facility production volumes.
In the second quarter of 2023, 100.0% of Renewable Electricity Generation segment revenues were derived from the monetization of Renewable Electricity at fixed prices associated with underlying PPAs, as compared to 99.0% in the second quarter of 2022. This provides the Company with certainty of price resulting from our Renewable Electricity sites.
Corporate Analysis
While we did not have any gas commodity hedge programs in the second quarter of 2023, our gas commodity hedge program during the second quarter of 2022 was priced as rates below actual index prices resulting in realized losses of $1,644.
Expenses for the Three Months Ended June 30, 2023 and 2022
General and Administrative Expenses
Total general and administrative expenses were $8,745 for the second quarter of 2023, a decrease of $8 (0.1%) compared to $8,753 for the second quarter of 2022. Our general and administrative expense for the second quarter of 2023 increased approximately $1,074 compared to the second quarter of 2022 associated with the Montauk Ag Renewables. The increase was primarily driven by stock-based compensation expense as a result of the 2022 amendments to restricted share awards issued in the Montauk Ag Renewables acquisition and professional fees. Offsetting this increase is a decrease in stock-based compensation of approximately $696 from forfeited stock awards in the second quarter of 2023. The decrease was partially offset by the April 2023 grant of stock option awards. Our professional fees were $679 in the second quarter of 2023, a decrease of $635 (48.3%) compared to $1,314 for the second quarter of 2022. Finally, our rent expense for the second quarter was $176, an increase $82 (87.2%) compared to $94 for the second quarter of 2022 associated with our new headquarters lease.
Renewable Natural Gas Expenses
Operating and maintenance expenses for our RNG facilities in the second quarter of 2023 were $11,697, an increase of $716 (6.5%) as compared to $10,981 in the second quarter of 2022. Our Apex facility operating and maintenance expenses increased approximately $380 as a result of timing of preventative maintenance, increased waste disposal costs, and utility expenses in the second quarter of 2023 as compared to second quarter of 2022. Our Atascocita facility operating maintenance expenses increased approximately $144 as a result of wellfield operational enhancements and timing of preventative maintenance in the second quarter of 2023 as compared to the second quarter of 2022. Our Coastal facility operating and maintenance expenses increased approximately $144 as a result of wellfield operational enhancements. Our total RNG facilities reported reduced utility expenses of approximately $409 in the second quarter of 2023 as compared to the second quarter of 2022.
Royalties, transportation, gathering and production fuel expenses for the Company’s RNG facilities for the second quarter of 2023 were $9,715, a decrease of $4,909 (33.6%) compared to $14,624 in the second quarter of 2022. Royalties, transportation, gathering and production fuel expenses decreased as a percentage of RNG revenues to 20.0% for the second quarter of 2023 from 22.6% in the second quarter of 2022. The decrease in royalties, transportation, gathering and production fuel expenses is primarily related to the decrease in RNG revenues in the second quarter of 2023 compared to the second quarter of 2022.
Renewable Electricity Expenses
Operating and maintenance expenses for our Renewable Electricity facilities in the second quarter of 2023 were $3,436, a decrease of $382 (10.0%) compared to $3,818 in the second quarter of 2022. The decrease is primarily related to scheduled preventative maintenance at our Bowerman facility, which was approximately $677 higher in the second quarter of 2022 compared to the second quarter of 2023. Our Tulsa facility operating and maintenance expenses increased approximately $217 as a result of scheduled preventative maintenance and wellfield maintenance. Our Turkey Creek facility operating and maintenance expenses increased approximately $151 as a result of non-capitalizable costs from Montauk Ag Renewables.
Royalties, transportation, gathering and production fuel expenses for our Renewable Electricity facilities for the second quarter of 2023 were $490, an increase of $24 (5.2%) compared to $466 in the second quarter of 2022. As a percentage of Renewable Electricity Generation segment revenues, royalties, transportation, gathering and production fuel expenses decreased to 10.5% from 10.8%.
34
Table of Contents
Royalty Payments
Royalties, transportation, gathering, and production fuel expenses in the second quarter of 2023 were $10,205, a decrease of $4,885 (32.4%) compared to $15,090 in the second quarter of 2022. We make royalty payments to our fuel supply site partners on the commodities we produce and the associated Environmental Attributes. These royalty payments are typically structured as a percentage of revenue subject to a cap, with fixed minimum payments when Environmental Attribute prices fall below a defined threshold. To the extent commodity and Environmental Attributes’ prices fluctuate, our royalty payments may fluctuate upon renewal or extension of a fuel supply agreement or in connection with new projects. Our fuel supply agreements are typically structured as 20-year contracts, providing long-term visibility into the margin impact of future royalty payments.
Depreciation
Depreciation and amortization in the second quarter of 2023 was $5,251, an increase of $117 (2.3%) compared to $5,134 in the second quarter of 2022. The increase is associated with the payments related to the Pico Feedstock Agreement.
Impairment loss
We calculated and recorded an impairment loss of $274 in the second quarter of 2023, an increase of $205 (297.4%) compared to $69 in the second quarter of 2022. The impairments in the second quarter of 2023 were for specifically identified RNG machinery and equipment that were no longer in operational use. The impairments recorded in the second quarter of 2022 relate to an amended customer contract ($27) and miscellaneous capital assets no longer in use under current operations ($42).
Other Expenses
Other expenses in the second quarter of 2023 was $621, an increase of $375 (152.5%) compared to other expenses of $246 in the second quarter of 2022. The increase is primarily related to an increase in interest expense of $440 from the second quarter of 2023 compared to the second quarter of 2022.
Income Tax Expense
Income tax expense for the three months ended June 30,2023 was calculated using an estimated effective tax rate which differs from the U.S. federal statutory rate of 21% primarily due to the benefit from production tax credits.
The effective tax rate of 92.2% for the three months ended June 30, 2023 was higher than the rate for the three months ended June 30, 2022 of 19.2% primarily due to the increase in forecasted income in 2023 with respect to the annual estimated tax credit benefit, which remained the same from the first quarter of 2023.
Operating Income (Loss) for the Three Months Ended June 30, 2023 and 2022
Operating income in the second quarter of 2023 was $13,557, a decrease of $10,406 (43.4%) compared to $23,963 in the second quarter of 2022. RNG operating income for the second quarter of 2023 was $23,029, a decrease of $12,226 (34.7%) compared to $35,255 in the second quarter of 2022. Renewable Electricity Generation operating loss for the second quarter of 2023 was $576, a decrease of $820 (58.7%) compared $1,396 for the second quarter of 2022.
35
Table of Contents
Comparison of Six Months Ended June 30, 2023 and 2022
The following table summarizes the key operating metrics described above, which metrics we use to measure performance.
|
|
Six Months Ended |
|
|
|
|
|
Change |
|
|||||||
|
|
2023 |
|
|
2022 |
|
|
Change |
|
|
% |
|
||||
(in thousands, unless otherwise indicated) |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Renewable Natural Gas Total Revenues |
|
$ |
63,393 |
|
|
$ |
97,233 |
|
|
$ |
(33,840 |
) |
|
|
(34.8 |
%) |
Renewable Electricity Generation Total Revenues |
|
$ |
9,016 |
|
|
$ |
8,300 |
|
|
$ |
716 |
|
|
|
8.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
RNG Metrics |
|
|
|
|
|
|
|
|
|
|
|
|
||||
CY RNG production volumes (MMBtu) |
|
|
2,783 |
|
|
|
2,838 |
|
|
|
(55 |
) |
|
|
(1.9 |
%) |
Less: Current period RNG volumes under fixed/floor-price contracts |
|
|
(630 |
) |
|
|
(639 |
) |
|
|
9 |
|
|
|
(1.4 |
%) |
Plus: Prior period RNG volumes dispensed in current period |
|
|
368 |
|
|
|
372 |
|
|
|
(4 |
) |
|
|
(1.1 |
%) |
Less: Current period RNG production volumes not dispensed |
|
|
(367 |
) |
|
|
(447 |
) |
|
|
80 |
|
|
|
(17.9 |
%) |
Total RNG volumes available for RIN generation (1) |
|
|
2,154 |
|
|
|
2,124 |
|
|
|
30 |
|
|
|
1.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
RIN Metrics |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Current RIN generation ( x 11.727) (2) |
|
|
25,268 |
|
|
|
24,907 |
|
|
|
361 |
|
|
|
1.4 |
% |
Less: Counterparty share (RINs) |
|
|
(2,651 |
) |
|
|
(2,562 |
) |
|
|
(89 |
) |
|
|
3.5 |
% |
Plus: Prior period RINs carried into current period |
|
|
739 |
|
|
|
140 |
|
|
|
599 |
|
|
|
427.9 |
% |
Less: CY RINs carried into next CY |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total RINs available for sale (3) |
|
|
23,356 |
|
|
|
22,485 |
|
|
|
871 |
|
|
|
3.9 |
% |
Less: RINs sold |
|
|
(20,390 |
) |
|
|
(20,923 |
) |
|
|
533 |
|
|
|
(2.5 |
%) |
RIN Inventory |
|
|
2,966 |
|
|
|
1,562 |
|
|
|
1,404 |
|
|
|
89.9 |
% |
RNG Inventory (volumes not dispensed for RINs) (4) |
|
|
367 |
|
|
|
447 |
|
|
|
(80 |
) |
|
|
(17.9 |
%) |
Average Realized RIN price |
|
$ |
2.28 |
|
|
$ |
3.39 |
|
|
$ |
(1.11 |
) |
|
|
(32.7 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating Expenses |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Renewable Natural Gas Operating Expenses |
|
$ |
36,220 |
|
|
$ |
41,950 |
|
|
$ |
(5,730 |
) |
|
|
(13.7 |
%) |
Operating Expenses per MMBtu (actual) |
|
$ |
13.01 |
|
|
$ |
14.78 |
|
|
$ |
(1.77 |
) |
|
|
(12.0 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
REG Operating Expenses |
|
$ |
7,255 |
|
|
$ |
8,021 |
|
|
$ |
(766 |
) |
|
|
(9.5 |
%) |
$/MWh (actual) |
|
$ |
76.37 |
|
|
$ |
87.18 |
|
|
$ |
(10.81 |
) |
|
|
(12.4 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
Other Metrics |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Renewable Electricity Generation Volumes Produced (MWh) |
|
|
95 |
|
|
|
92 |
|
|
|
3 |
|
|
|
3.3 |
% |
Average Realized Price $/MWh (actual) |
|
$ |
94.91 |
|
|
$ |
90.22 |
|
|
$ |
4.69 |
|
|
|
5.2 |
% |
36
Table of Contents
The following table summarizes our revenues, expenses and net income for the periods set forth below:
|
|
Six Months Ended |
|
|
|
|
|
Change |
|
|||||||
|
|
2023 |
|
|
2022 |
|
|
Change |
|
|
% |
|
||||
Total operating revenues |
|
$ |
72,409 |
|
|
$ |
100,055 |
|
|
$ |
(27,646 |
) |
|
|
(27.6 |
)% |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
||||
Operating and maintenance expenses |
|
|
29,402 |
|
|
|
28,072 |
|
|
|
1,330 |
|
|
|
4.7 |
% |
General and administrative expenses |
|
|
18,220 |
|
|
|
17,248 |
|
|
|
972 |
|
|
|
5.6 |
% |
Royalties, transportation, gathering and production fuel |
|
|
14,138 |
|
|
|
22,296 |
|
|
|
(8,158 |
) |
|
|
(36.6 |
)% |
Depreciation, depletion and amortization |
|
|
10,447 |
|
|
|
10,286 |
|
|
|
161 |
|
|
|
1.6 |
% |
Gain on insurance proceeds |
|
|
— |
|
|
|
(313 |
) |
|
|
313 |
|
|
|
(100.0 |
)% |
Impairment loss |
|
|
726 |
|
|
|
120 |
|
|
|
606 |
|
|
|
504.7 |
% |
Transaction costs |
|
|
86 |
|
|
|
32 |
|
|
|
54 |
|
|
|
168.5 |
% |
Total operating expenses |
|
|
73,019 |
|
|
|
77,741 |
|
|
|
(4,722 |
) |
|
|
(6.1 |
)% |
Operating (loss) income |
|
$ |
(610 |
) |
|
$ |
22,314 |
|
|
$ |
(22,924 |
) |
|
|
(102.7 |
)% |
Other expenses (income): |
|
|
2,302 |
|
|
|
(30 |
) |
|
|
2,332 |
|
|
|
(7,774.5 |
)% |
Income tax (benefit) expense |
|
|
(127 |
) |
|
|
4,307 |
|
|
|
(4,434 |
) |
|
|
(102.9 |
)% |
Net (loss) income |
|
$ |
(2,785 |
) |
|
$ |
18,037 |
|
|
$ |
(20,822 |
) |
|
|
(115.4 |
)% |
Revenues for the Six Months Ended June 30, 2023 and 2022
Total revenues in the first six months of 2023 were $72,409 a decrease of $27,646 (27.6%) compared to $100,055 in the first six months of 2022. The decrease is primarily related to a decrease in pricing of gas commodity indices and average realized RIN pricing in the first six months of 2023 compared to the first six months of 2022. Gas commodity indices decreased 54.5% during the first six months of 2023 compared to the first six months of 2022. Realized RIN pricing decreased 32.7% during the first six months of 2023 compared to the first six months of 2022.
Renewable Natural Gas Revenues
We produced 2,783 MMBtu of RNG during the first six months of 2023, a decrease of 55 MMBtu (1.9%) over the 2,838 MMBtu produced in the first six months of 2022. Our Rumpke facility produced 36 fewer MMBtu in the first six months of 2023 compared to the first six months of 2022 as a result of process equipment failure in the first six months of 2023. Also contributing to the decrease is our Pico facility which produced 27 fewer MMBtu in the first six months of 2023 compared to the first six months of 2022 as a result of operational feedstock processing challenges in the first six months of 2023. Our Apex facility produced 14 MMBtu more in the first six months of 2023 compared to the first six months of 2022 as a result of process equipment failure in the first quarter of 2022.
Revenues from the Renewable Natural Gas segment in the first six months of 2023 were $63,393, a decrease of $33,840 (34.8%) compared to $97,233 in the first six months of 2022. Average commodity pricing for natural gas for the first six months of 2023 was $2.76 per MMBtu, 54.5% lower than the first six months of 2022. During the first six months of 2023, we self-monetized 20,390 RINs, representing a 533 decrease (2.5%) compared to 20,923 in the first six months of 2022. Average pricing realized on RIN sales during the first six months of 2023 was $2.28 as compared to $3.39 in the first six months of 2022, a decrease of 32.7%. This compares to the average D3 RIN index price for the first six months of 2023 of $2.10 being approximately 35.1% lower than the average D3 RIN index price in the first six months of 2022. At June 30, 2023, we had approximately 367 MMBtu available for RIN generation and we had approximately 2,966 RINs generated and unsold. At June 30, 2022, we had approximately 447 MMBtu available for RIN generation and 1,562 RINs generated and unsold. Of the RINs generated and unsold as of June 30,2023, we entered into commitments to transfer all RINs generated and unsold in July 2023, at average realized prices in excess of the July 2023 average D3 RIN index price of $3.05.
Renewable Electricity Generation Revenues
We produced approximately 95 MWh in Renewable Electricity in the first six months of 2023, an increase of 3 MWh (3.3%) from 92 MWh in the first six months of 2022. Our Bowerman facility produced 4 MWh more in the first six months of 2023 compared to the first six months of 2022 as a result of preventative engine maintenance performed during the first six months of 2022.
37
Table of Contents
Revenues from Renewable Electricity facilities in the first six months of 2023 were $9,016, an increase of $716 (8.6%) compared to $8,300 in the first six months of 2022. The increase is primarily driven by the increase in our Bowerman facility production volumes.
In the first six months of 2023, 99.9% of Renewable Electricity Generation segment revenues were derived from the monetization of Renewable Electricity at fixed prices associated with underlying PPAs, as compared to 99.0% in the first six months of 2022. This provides the Company with certainty of price resulting from our Renewable Electricity sites.
Corporate Analysis
While we did not have any gas commodity hedge programs in the first six months of 2023, our gas commodity hedge program during the first six months of 2022 was priced at rates below actual index prices resulting in realized losses of $1,807.
Expenses for the Six Months Ended June 30, 2023 and 2022
General and Administrative Expenses
Total general and administrative expenses were $18,220 for the first six months of 2023, an increase of $972 (5.6%) compared to $17,248 for the first six months of 2022. Our general and administrative expense for the first six months of 2023 increased approximately $2,211 compared to the first six months of 2022 associated with the Montauk Ag Renewables. The increase was primarily driven by stock-based compensation expense as a result of the 2022 amendments to restricted share awards issued in the Montauk Ag Renewables acquisition and professional fees. Our stock-based compensation expense increased as a result of the April 2023 grant of stock option awards. Partially offsetting this increase is a reversal of approximately $1,024 stock based compensation expense related to forfeited stock awards. Finally, our rent expense was $352 for the first six months of 2023, an increase $168 (91.3%) compared to $184 for the first six months 2022.
Renewable Natural Gas Expenses
Operating and maintenance expenses for our RNG facilities in the first six months of 2023 were $23,040, an increase of $2,500 (12.2%) as compared to $20,540 in the first six months of 2022. Our Apex facility operating and maintenance expenses increased approximately $622 as a result of timing of preventative maintenance, increased waste disposal costs and utility costs in the first six months of 2023 as compared to first six months of 2022. Our Pico facility operating and maintenance expenses increased approximately $489 as a result of the Pico Capacity Expansion project and utility costs in the first six months of 2023 as compared to first six months of 2022. Our Rumpke facility operating and maintenance expenses increased approximately $434 as a result of timing of preventative maintenance and utility costs in the first six months of 2023 as compared to first six months of 2022. Our Galveston operating and maintenance expenses increased approximately $291 as a result of timing of preventative maintenance and wellfield operational enhancements costs in the first six months of 2023 as compared to first six months of 2022. Our McCarty operating and maintenance expenses increased approximately $273 as a result of timing of preventative maintenance in the first six months of 2023 as compared to first six months of 2022. Total RNG facilities utility costs decreased $322 during the first six months of 2023 as compared to the first six months of 2022.
Royalties, transportation, gathering and production fuel expenses for the Company’s RNG facilities for the first six months of 2023 were $13,180, a decrease of $8,230 (38.4%) compared to $21,410 in the first six months of 2022. Royalties, transportation, gathering and production fuel expenses decreased as a percentage of RNG revenues to 20.8% for the first six months of 2023 from 22.0% in the first six months of 2022. The decrease in royalties, transportation, gathering and production fuel expenses is primarily related to the decrease in RNG revenues in the first six months of 2023 compared to the first six months of 2022.
Renewable Electricity Expenses
Operating and maintenance expenses for our Renewable Electricity facilities in the first six months of 2023 were $6,297, a decrease of $837 (11.7%) compared to $7,134 in the first six months of 2022. The decrease is primarily related to scheduled preventative maintenance at our Bowerman facility, which was approximately $1,600 higher in the first six months of 2022 compared to the first six months of 2023. Our Tulsa facility operating and maintenance expenses increased approximately $323 as a result of scheduled preventative maintenance and wellfield maintenance. Our Turkey Creek facility operating and maintenance expenses increased approximately $262 as a result of the non-capitalizable costs of Montauk Ag Renewables.
Royalties, transportation, gathering and production fuel expenses for our Renewable Electricity facilities for the first six months of 2023 were $958, an increase of $71 (8.0%) compared to $887 in the first six months of 2022. As a percentage of Renewable Electricity Generation segment revenues, royalties, transportation, gathering and production fuel expenses decreased to 10.6% from 10.7%.
38
Table of Contents
Royalty Payments
Royalties, transportation, gathering, and production fuel expenses in the first six months of 2023 were $14,138, a decrease of $8,158 (36.6%) compared to $22,296 in the first six months of 2022. We make royalty payments to our fuel supply site partners on the commodities we produce and the associated Environmental Attributes. These royalty payments are typically structured as a percentage of revenue subject to a cap, with fixed minimum payments when Environmental Attribute prices fall below a defined threshold. To the extent commodity and Environmental Attributes’ prices fluctuate, our royalty payments may fluctuate upon renewal or extension of a fuel supply agreement or in connection with new projects. Our fuel supply agreements are typically structured as 20-year contracts, providing long-term visibility into the margin impact of future royalty payments.
Depreciation
Depreciation and amortization in the first six months of 2023 was $10,447, an increase of $161 (1.6%) compared to $10,286 in the first six months of 2022. The increase is associated with the payments related to the Pico Feedstock Agreement.
Impairment loss
We calculated and recorded an impairment loss of $726 in the first six months of 2023, an increase of $606 (504.7%) compared to $120 in the first six months of 2022. The 2023 impairments were for specifically identified RNG machinery and feedstock processing equipment that were no longer in operational use. The 2022 impairments recorded relate to computer software and hardware no longer being utilized ($51), an amended customer contract ($27) and miscellaneous capital assets no longer in use under current operations ($42).
Other Expense (Income)
Other expense in the first six months of 2023 was $2,302, a decrease of $2,332 (7,774.5%) compared to other income of $30 in the first six months of 2022. The increase is primarily related to an increase in interest expense of $2,083 from the first six months of 2023 compared to the first six months of 2022.
Income Tax Expense
Income tax expense for the six months ended June 30, 2023 was calculated using an estimated effective tax rate which differs from the U.S. federal statutory rate of 21% primarily due to the benefit from production tax credits.
The effective tax rate of 4.4% for the six months ended June 30, 2023 was lower than the rate for the six months ended June 30, 2022 of 19.3% primarily due to discrete tax expense recorded in 2023. The June 30, 2023 rate also includes utilization of production tax credits.
Operating Loss (Income) for the Six Months Ended June 30, 2023 and 2022
Operating loss in the first six months of 2023 was $610, a decrease of $22,924 (102.7%) compared to operating profit of $22,314 in the first six months of 2022. RNG operating profit for the first six months of 2023 was $18,745, a decrease of $29,466 (61.1%) compared to operating profit of $48,211 in the first six months of 2022. Renewable Electricity Generation operating loss for the first six months of 2023 was $823, a decrease of $1,734 (67.8%) compared $2,557 for the first six months of 2022.
Non-GAAP Financial Measures:
The following table presents EBITDA and Adjusted EBITDA, non-GAAP financial measures for each of the periods presented below. We present EBITDA and Adjusted EBITDA because we believe the measures assist investors in analyzing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition, EBITDA and Adjusted EBITDA are financial measurements of performance that management and the board of directors use in their financial and operational decision-making and in the determination of certain compensation programs. EBITDA and Adjusted EBITDA are supplemental performance measures that are not required by or presented in accordance with GAAP. EBITDA and Adjusted EBITDA should not be considered alternatives to net income (loss) or any other performance measure derived in accordance with GAAP, or as an alternative to cash flows from operating activities or a measure of our liquidity or profitability.
39
Table of Contents
The following table provides our EBITDA and Adjusted EBITDA for the periods presented, as well as a reconciliation to net income, which is the most directly comparable GAAP measure, for the three months ended June 30, 2023 and 2022:
|
|
|
|
|
|
|
|
|
||
|
|
|
Three Months Ended |
|
|
|||||
|
|
|
2023 |
|
|
2022 |
|
|
||
|
Net income |
|
$ |
1,003 |
|
|
$ |
19,152 |
|
|
|
Depreciation, depletion and amortization |
|
|
5,251 |
|
|
|
5,134 |
|
|
|
Interest expense |
|
|
711 |
|
|
|
271 |
|
|
|
Income tax expense |
|
|
11,933 |
|
|
|
4,565 |
|
|
|
Consolidated EBITDA |
|
|
18,898 |
|
|
|
29,122 |
|
|
|
|
|
|
|
|
|
|
|
||
|
Impairment loss (1) |
|
|
274 |
|
|
|
69 |
|
|
|
Transaction costs |
|
|
3 |
|
|
|
5 |
|
|
|
Non-cash hedging charges |
|
|
— |
|
|
|
(1,644 |
) |
|
|
Adjusted EBITDA |
|
$ |
19,175 |
|
|
$ |
27,552 |
|
|
|
|
|
|
|
|
|
|
|
||
The following table provides our EBITDA and Adjusted EBITDA for the periods presented, as well as a reconciliation to net (loss) income, which is the most directly comparable GAAP measure, for the six months ended June 30, 2023 and 2022:
|
|
Six Months Ended |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Net (loss) income |
|
$ |
(2,785 |
) |
|
$ |
18,037 |
|
Depreciation, depletion and amortization |
|
|
10,447 |
|
|
|
10,286 |
|
Interest expense |
|
|
2,386 |
|
|
|
303 |
|
Income tax (benefit) expense |
|
|
(127 |
) |
|
|
4,307 |
|
Consolidated EBITDA |
|
|
9,921 |
|
|
|
32,933 |
|
|
|
|
|
|
|
|
||
Impairment loss (1) |
|
|
726 |
|
|
|
120 |
|
Net loss (gain) of sale of assets |
|
|
37 |
|
|
|
(293 |
) |
Transaction costs |
|
|
86 |
|
|
|
32 |
|
Non-cash hedging charges |
|
|
— |
|
|
|
1,807 |
|
Adjusted EBITDA |
|
$ |
10,770 |
|
|
$ |
34,599 |
|
Liquidity and Capital Resources
Sources of Liquidity
At June 30, 2023 and June 30, 2022, our cash and cash equivalents, net of restricted cash, was $77,630 and $72,195 respectively. We intend to fund near-term development projects using cash flows from operations and borrowings under our revolving credit facility. We believe that we will have sufficient cash flows from operations and borrowing availability under our credit facility to meet our debt service obligations and anticipated required capital expenditures (including for projects under development) for at least the next 12 months. However, we are subject to business and operational risks that could adversely affect our cash flows and liquidity.
At June 30, 2023, we had debt before debt issuance costs of $68,000, compared to debt before debt issuance costs of $72,000 at December 31, 2022.
40
Table of Contents
Our debt before issuance costs (in thousands) are as follows:
|
|
June 30, 2023 |
|
|
December 31, 2022 |
|
||
Term loan |
|
$ |
68,000 |
|
|
|
72,000 |
|
Revolving credit facility |
|
|
— |
|
|
|
— |
|
Debt before debt issuance costs |
|
$ |
68,000 |
|
|
$ |
72,000 |
|
Amended Credit Agreement
On December 21, 2021, the Company entered into the Fourth Amendment with Comerica and certain other financial institutions. The current credit agreement, which is secured by a lien on substantially all of our assets and assets of certain of our subsidiaries, provides for a five-year $80,000 term loan and a five-year $120,000 revolving credit facility.
As of June 30, 2023, $68,000 was outstanding under the term loan and we had no outstanding borrowings under the revolving credit facility. The term loan amortizes in quarterly installments of $2,000 through 2024, then increases to $3,000 through 2026, with a final payment of $32,000 in late 2026 with an interest rate of 6.49% and 4.12% at June 30, 2023 and December 31, 2022, respectively. The revolving and term loans under the Amended Credit Agreement bear interest at the Bloomberg Short-Term Bank Yield Index Rate plus an applicable margin based on our Total Leverage Ratio (in each case, as those terms are defined in the Amended Credit Agreement).
The Amended Credit Agreement contains customary covenants applicable to us and certain of our subsidiaries, including financial covenants. The Amended Credit Agreement is subject to customary events of default, and contemplates that we would be in default if, for any fiscal quarter (x) the average monthly D3 RIN price (as determined in accordance with the Amended Credit Agreement) is less than $0.80 per RIN and (y) the consolidated EBITDA for such quarter is less than $6,000. Consolidated EBITDA is defined under the Amended Credit Agreement as net income plus (a) income tax expense, (b) interest expense, (c) depreciation, depletion, and amortization expense, (d) non-cash unrealized derivative expense and (e) any other extraordinary, unusual, or non-recurring adjustments to certain components of net income, as agreed upon by Comerica in certain circumstances.
Under the Amended Credit Agreement, we are required to maintain the following ratios:
As of June 30, 2023, we were in compliance with all applicable financial covenants under the Amended Credit Agreement.
The Amended Credit Agreement replaced our prior credit agreements with Comerica and a portion of the proceeds of the term loan made under the Amended Credit Agreement were used by us to, among other things, fully satisfy an aggregate of $59,197 outstanding principal under such credit agreements. For additional information regarding the Amended Credit Agreement, see Note 12— Debt to our unaudited condensed consolidated financial statements.
Capital Expenditures
We have historically funded our growth and capital expenditures with our working capital, cash flow from operations and debt financing. We expect our non-development 2023 capital expenditures to range between $15,000 and $19,000. Our 2023 capital plans include annual preventative maintenance expenditures, annual wellfield expansion projects, other specific facility improvements, and information technology improvements. Additionally, we currently estimate that our existing 2023 development capital expenditures will range between $70,000 and $100,000. The majority of our 2023 development capital expenditures are related to our Pico digestion capacity increase, the ongoing development of Montauk Ag Renewables, our second Apex facility, Blue Granite RNG and our recently announced Bowerman RNG project. Our Amended Credit Agreement provides us with a $120,000 revolving credit facility, with a $75,000 accordion option, providing us with access to additional capital to implement our acquisition and development strategy. We are currently in various stages of discussions regarding a variety of strategic growth opportunities. Included amongst these opportunities are: approximately up to eight LFG RNG, ADG RNG, and waste water treatment to RNG opportunities. If we ultimately enter into definitive agreements for any of these opportunities, we expect to incur material capital expenditures related to either acquisition costs or development costs, or both. As we continue to explore strategic growth opportunities and while we have entered into nonbinding letters of intent for certain of these opportunities, we provide no assurances that our plans related to any or all
41
Table of Contents
of these strategic opportunities will progress to definitive agreements. We believe that our existing cash and cash equivalents, cash generated from operations, and credit availability under our Amended Credit Agreement would allow us to pursue and close on our identified strategic growth opportunities in addition to the previously discussed non-development and development capital expenditures.
Cash Flow
The following table presents information regarding our cash flows and cash equivalents for the six months ended June 30, 2023 and 2022:
|
|
Six Months Ended June 30, |
|
|||||
|
|
2023 |
|
|
2022 |
|
||
Net cash provided by (used in): |
|
|
|
|
|
|
||
Operating activities |
|
$ |
6,077 |
|
|
$ |
26,772 |
|
Investing activities |
|
|
(29,587 |
) |
|
|
(3,747 |
) |
Financing activities |
|
|
(4,036 |
) |
|
|
(4,095 |
) |
Net (decrease) increase in cash and cash equivalents |
|
|
(27,546 |
) |
|
|
18,930 |
|
Restricted cash, end of the period |
|
|
430 |
|
|
|
347 |
|
Cash and cash equivalents, end of period |
|
|
78,060 |
|
|
|
72,542 |
|
For the first six months of 2023, we generated $6,077 of cash provided by operating activities compared to $26,772 of cash provided by operating activities in the first six months of 2022. For the first six months of 2023, income and adjustments to income from operating activities provided $12,624 compared to income and adjustments to income providing $38,157 in first six months of 2022. Included within income and adjustments to income from operating activities for the first six months of 2023 was an increase of $12,797 related to the deferred tax provision adjustment. Working capital and other assets and liabilities provided $6,547 in the first six months of 2023 compared to working capital and other assets and liabilities providing $11,385 in the first six months of 2022.
Our net cash flows used in investing activities has historically focused on project development and facility maintenance. Our capital expenditures for the first six months of 2023 were $29,587, of which $9,772, $4,977, $6,745, and 2,997 were related to the ongoing development of the Pico facility digestion capacity increase, the Montauk Ag Renewables in North Carolina, second Apex RNG facility, and Blue Granite RNG project, respectively.
Our net cash flows used in financing activities of $4,036 for the first six months of 2023 decreased by $59 compared to cash used in financing activities in the first six months of 2022 of $4,095.
Contractual Obligations and Commitments
Off-balance sheet arrangements comprise those arrangements that may potentially impact our liquidity, capital resources and results of operations, even though such arrangements are not recorded as liabilities under GAAP. Our off-balance sheet arrangements are limited to the outstanding letters of credit described below. Although these arrangements serve a variety of our business purposes, we are not dependent on them to maintain our liquidity and capital resources, and we are not aware of any circumstances that are reasonably likely to cause the off-balance sheet arrangements to have a material adverse effect on liquidity and capital resources.
The Company has contractual obligations involving asset retirement obligations. See Note 8 in the unaudited condensed consolidated financial statements for further information regarding the asset retirement obligations.
The Company has contractual obligations under our debt agreement, including interest payments and principal repayments. See Note 12 in the unaudited condensed consolidated financial statements for further discussion of the contractual commitments under our debt agreements, including the timing of principal repayments. During the first six months of 2023, we had approximately $2,405 of off-balance sheet arrangements of outstanding letters of credit. These letters of credit reduce the borrowing capacity of our revolving credit facility under our Amended Credit Agreement. Certain of our contracts require these letters of credit to be issued to provide additional performance assurances. There have been no draw downs on these outstanding letters of credit. During the first six months of 2022, we did not have off-balance sheet arrangements other than outstanding letters of credit of approximately $3,905.
The Company has contractual obligations involving operating leases. The Company leases office space and other office equipment under operating lease arrangements, expiring in various years through 2033. See Note 18 in the unaudited condensed consolidated financial statements for further information related to the lease obligations.
The Company has other contractual obligations associated with our fuel supply agreements. The expiration of these agreements range between 3-20 years. The minimum royalty and capital obligation associated with these agreements range from $8 to $1,635.
42
Table of Contents
Critical Accounting Policies and Estimates
Our unaudited condensed consolidated financial statements are prepared in conformity with GAAP and require our management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, costs and expenses and related disclosures. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from these estimates, and such estimates may change if the underlying conditions or assumptions change.
Revenue Recognition
Our revenues are comprised of renewable energy and the related Environmental Attribute sales provided under a variety of short-term and medium-term agreements with our customers. All revenue is recognized when we satisfy our performance obligation(s) under the contract (either implicit or explicit) by transferring the promised product to the customer either when (or as) the customer obtains control of the product. A performance obligation is a promise in a contract to transfer a distinct product or service to a customer. A contract’s transaction price is allocated to each distinct performance obligation. We allocate the contract’s transaction price to each performance obligation using the product’s observable market standalone selling price for each distinct product in the contract.
Revenue is measured as the amount of consideration we expect to receive in exchange for transferring our products. As such, revenue is recorded net of allowances and customer discounts as well as net of transportation and gathering costs incurred. To the extent applicable, sales, value add, and other taxes collected from customers and remitted to governmental authorities are accounted for on a net (excluded from revenues) basis.
The nature of the Company’s contracts may give rise to several types of variable consideration, such as periodic price increases. This variable consideration is outside of the Company’s influence as the variable consideration is dictated by the market. Therefore, the variable consideration associated with the long-term contracts is considered fully constrained.
RINs
We generate D3 RINs through our production and sale of RNG used for transportation purposes as prescribed under the RFS program. Our operating costs are associated with the production of RNG. The RINs are government incentives that are generated through our renewable operating projects and not a result of physical attributes of our RNG production. The RINs that we generate are able to be separated and sold as credits independently from the energy produced. Therefore, no cost is allocated to the RIN when it is generated. Revenue is recognized on these Environmental Attributes when there is an agreement in place to monetize the credits at an agreed upon price with a customer and transfer of control has occurred. We enter into forward commitments to transfer RINs. These forward commitments are based on D3 RIN index prices at the time of the commitment. Realized prices for RINs monetized in a year may not correspond directly to index prices due to the forward selling of commitments.
RECs
We generate RECs through our production and conversion of landfill methane into Renewable Electricity in various states, including California, Oklahoma, and Texas. These states have various laws requiring utilities to purchase a portion of their energy from renewable resources. Our operating costs are associated with the production of Renewable Electricity. The RECs are generated as an output of our renewable operating projects. The RECs that we generate are able to be separated and sold independently from the electricity produced. Therefore, no cost is allocated to the REC when it is generated. Revenue is recognized on these Environmental Attributes when there is an agreement in place to monetize the credits at an agreed upon price with a customer and transfer of control has occurred.
Income Taxes
We are subject to income taxes in the U.S. federal jurisdiction and various state and local jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply.
Our net deferred tax asset position is a result of net operating losses (“NOLs”), fixed assets, intangibles, and tax credit carryforwards. The realization of deferred tax assets is dependent upon our ability to generate sufficient future taxable income during the periods in which those temporary differences become deductible, prior to the expiration of the tax attributes. The evaluation of deferred tax assets requires judgment in assessing the likely future tax consequences of events that have been recognized in our financial statements or tax returns and forecasting future profitability by tax jurisdiction.
43
Table of Contents
We evaluate our deferred tax assets at reporting periods on a jurisdictional basis to determine whether adjustments to the valuation allowance are appropriate considering changes in facts or circumstances. As of each reporting date, management considers new evidence, both positive and negative, when determining the future realization of our deferred tax assets. We account for uncertain tax positions using a “more-likely-than-not” threshold for recognizing and resolving uncertain tax positions. The evaluation of uncertain tax positions is based on factors that include, but are not limited to, changes in tax law, the measurement of tax positions taken or expected to be taken in tax returns, the effective settlement of matters subject to audit, new audit activity and changes in facts or circumstances related to a tax position. Given our current level of pre-tax earnings and forecasted future pre-tax earnings, we expect to generate income before taxes in the United States in future periods at a level that would fully utilize our U.S. federal NOL carryforwards and the majority of its state NOL carryforwards prior to their expiration.
Intangible Assets
Separately identifiable intangible assets are recorded at their fair values upon acquisition. We account for intangible assets in accordance with ASC 350, Intangibles—Goodwill and Other. Finite-lived intangible assets include interconnections, customer contracts, and trade names and trademarks. The interconnection intangible asset is the exclusive right to utilize an interconnection line between the operating project and a utility substation to transmit produced electricity. Included in that right is full maintenance provided on this line by the utility. Intangible assets with finite useful lives are amortized on a straight-line basis over their estimated useful life. We evaluate our finite-lived intangible assets for impairment as events or changes in circumstances indicate the carrying value of these assets may not be fully recoverable. Events that could result in an impairment include, among others, a significant decrease in the market price or the decision to close a site.
If finite-lived or indefinite-lived intangible assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. The fair value is determined based on the present value of expected future cash flows. We use our best estimates in making these evaluations, however, actual future pricing, operating costs and discount rates could vary from the assumptions used in our estimates and the impact of such variations could be material.
Our assessment of the recoverability of finite-lived and indefinite-lived intangible assets is determined by performing monitoring assessment of the future cash flows associated with the underlying gas rights agreements. The cash flows estimates are performed at the operating unit level and based on the average remaining length of the gas rights agreements. Based on our analysis, we concluded the cashflows generated to be well in excess of the carrying amounts. Changes in market conditions related to the various price indexes used in estimating these cash flows could adversely affect these estimates.
Finite-Lived Asset Impairment
In accordance with FASB ASC Topic 360, Property, Plant and Equipment and intangible assets with finite useful lives are evaluated for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by comparing the carrying amount of an asset or asset group to future undiscounted cash flows expected to be generated by the asset or asset group. Such estimates are based on certain assumptions, which are subject to uncertainty and may materially differ from actual results, including considering project specific assumptions for long-term credit prices, escalated future project operating costs and expected site operations. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Fair value is generally determined by considering (i) internally developed discounted cash flows for the asset group, (ii) third-party valuations, and/or (iii) information available regarding the current market value for such assets. We use our best estimates in making these evaluations and consider various factors, including future pricing and operating costs. However, actual future market prices and project costs could vary from the assumptions used in our estimates and the impact of such variations could be material. We identified discrete events and recorded impairment of $726 and $120 for the six months ended June 30, 2023 and 2022, respectively. See Note 3 in the unaudited condensed consolidated financial statements for further information related to asset impairments.
Emerging Growth Company
We are an emerging growth company, as defined in the JOBS Act. The JOBS Act allows emerging growth companies to delay the adoption of new or revised accounting standards until such time as those standards apply to private companies. We intend to utilize these transition periods, which may make it difficult to compare our financial statements to those of non-emerging growth companies and other emerging growth companies that have opted out of the transition periods afforded under the JOBS Act.
44
Table of Contents
Recent Accounting Pronouncements
For a description of our recently adopted accounting pronouncements and recently issued accounting standards not yet adopted, see Note 2 of our unaudited condensed consolidated financial statements in this report.
45
Table of Contents
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes since our disclosure in Quantitative and Qualitative Disclosures About Market Risk included as Item 7A in our 2022 Annual Report.
ITEM 4. CONTROLS AND PROCEDURES
Management’s Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our principal executive officer and principal financial officer, evaluated the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act, as of the end of the period covered by this quarterly report. Disclosure controls and procedures are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives, and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Our management, including our principal executive officer and principal financial officer, after evaluating the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report, concluded that as of such date, our disclosure controls and procedures were effective at a reasonable level of assurance.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
46
Table of Contents
PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we and our subsidiaries may be parties to legal proceedings arising in the normal course of our business. We and our subsidiaries are currently not a party, nor is our property subject, to any material pending legal proceedings.
ITEM 1A. RISK FACTORS
We face a number of risks that could materially and adversely affect our business, results of operations, cash flow, liquidity, or financial condition. A discussion of our risk factors can be found in Part I, “Item 1A Risk Factors” in our 2022 Annual Report any of which could have a material effect on us.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
Use of Proceeds from Sale of Registered Securities
On January 21, 2021, our Registration Statement on Form S-1, as amended (File No. 333-251312) (the “Registration Statement”), was declared effective by the SEC in connection with our IPO. The underwriter for the IPO was Roth Capital Partners. A total of 3,399,515 shares of our common stock were sold pursuant to the Registration Statement, which was comprised of (1) 2,702,500 shares of new common stock issued by the Company and (2) 697,015 shares of the Company’s common stock held by MNK. The 3,399,515 shares were sold at an offering price of $8.50 per share and resulting in net proceeds to the Company of approximately $15.0 million, after deducting the underwriting discount of approximately $1.6 million and offering expenses payable by the Company of approximately $6.2 million.
The IPO closed on January 26, 2021. No payments for such expenses were made directly or indirectly to (i) any of our officers or directors or their associates, (ii) any persons owning 10% or more of any class of our equity securities or (iii) any of our affiliates.
From the closing of the IPO through June 30, 2023, approximately $15.0 million of the net proceeds from the IPO have been used by Montauk for the following: the Montauk Ag Asset Acquisition in May 2021, the purchase of the real-estate and property in October 2021 related to Montauk Ag, and subsequent development activities related to Montauk Ag Renewables. An immaterial amount has been used relating to other possible acquisitions and projects. As of March 31, 2023, all net proceeds were used by the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
ITEM 5. OTHER INFORMATION
On
On
47
Table of Contents
ITEM 6. EXHIBITS
Exhibit Number |
|
Description |
|
|
|
10.14.3†+ |
|
|
|
|
|
10.19.3 |
|
|
|
|
|
31.1 |
|
|
|
|
|
31.2 |
|
|
|
|
|
32.1 |
|
|
|
|
|
32.2 |
|
|
|
|
|
101.INS |
|
Inline XBRL Instance Document |
|
|
|
101.SCH |
|
Inline XBRL Taxonomy Extension Schema Document |
|
|
|
101.CAL |
|
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
|
|
|
101.DEF |
|
Inline XBRL Taxonomy Extension Definition Linkbase Document |
|
|
|
101.LAB |
|
Inline XBRL Taxonomy Extension Label Linkbase Document |
|
|
|
101.PRE |
|
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
|
|
|
104 |
|
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) |
|
|
|
+ |
|
Exhibits marked with a (+) exclude certain immaterial schedules and exhibits pursuant to the provisions of Regulation S-K, Item 601(a)(5) or Item 601(a)(6). A copy of any of the omitted schedules and exhibits pursuant to Regulation S-K, Item 601(a)(5) will be furnished to the Securities and Exchange Commission upon request. |
|
|
|
† |
|
Exhibits marked with a (†) exclude certain portions of the exhibit pursuant to Item 601(b)(10)(iv) of Regulation S-K. A copy of the omitted portions will be furnished to the Securities and Exchange Commission upon request. |
48
Table of Contents
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
August 9, 2023 |
|
MONTAUK RENEWABLES, INC. |
|
|
|
|
|
|
|
By: |
/s/ SEAN F. MCCLAIN |
|
|
|
Sean F. McClain |
|
|
|
President, Chief Executive Officer and Director (Principal Executive Officer) |
|
|
|
|
|
|
By: |
/s/ KEVIN A. VAN ASDALAN |
|
|
|
Kevin A. Van Asdalan |
|
|
|
Chief Financial Officer (Principal Financial and Accounting Officer) |
49
Exhibit 31.1
CERTIFICATION PURSUANT TO RULES 13a-14(a) AND 15d-14(a)
UNDER THE SECURITIES EXCHANGE ACT, AS AMENDED
I, Sean F. McClain, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Montauk Renewables, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: August 9, 2023
/s/ Sean F. McClain
|
Sean F. McClain |
Chief Executive Officer and President |
(Principal Executive Officer) |
Exhibit 31.2
CERTIFICATION PURSUANT TO RULES 13a-14(a) AND 15d-14(a)
UNDER THE SECURITIES EXCHANGE ACT, AS AMENDED
I, Kevin A. Van Asdalan, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Montauk Renewables, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
Date: August 9, 2023
/s/ Kevin A. Van Asdalan
|
Kevin A. Van Asdalan Chief Financial Officer |
(Principal Financial Officer) |
Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Montauk Renewables, Inc. (the “Company”) for the period ended June 30, 2023, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.
Date: August 9, 2023
/s/ Sean F. McClain
|
Sean F. McClain |
Chief Executive Officer and President |
(Principal Executive Officer) |
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Montauk Renewables, Inc. (the “Company”) for the period ended June 30, 2023, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), the undersigned hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that, to his knowledge:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods expressed in the Report.
Date: August 9, 2023
/s/ Kevin A. Van Asdalan
|
Kevin A. Van Asdalan |
Chief Financial Officer (Principal Financial Officer) |