| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Delaware | 85-3189583 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
5313 Campbells Run Roa d, Suite 200 Pittsburgh, | ||
(Address of principal executive offices) | (Zip Code) | |
Title of each class | Trading Symbol | Name of each exchange on which registered | ||
Common Stock, par value $0.01 per share | MNTK | The Nasdaq Capital Market |
| Large Accelerated Filer | ☐ | Accelerated Filer | ☒ | |||
Non-accelerated filer | ☐ | Smaller Reporting Company | ☐ | |||
| Emerging Growth Company | ☒ | |||||
TABLE OF CONTENTS
Page | ||||||||
| 1 | ||||||||
| ITEM 1. | 1 | |||||||
| ITEM 1A. | 19 | |||||||
ITEM 1B. | ||||||||
| ITEM 2. | ||||||||
| ITEM 3. | ||||||||
| ITEM 4. | ||||||||
| ITEM 5. | ||||||||
| ITEM 6. | ||||||||
| ITEM 7. | ||||||||
| ITEM 7A. | ||||||||
| ITEM 8. | ||||||||
| ITEM 9. | 102 | |||||||
| ITEM 9A. | 102 | |||||||
| ITEM 9B. | 102 | |||||||
| ITEM 9C. | DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS | 103 | ||||||
| 103 | ||||||||
| ITEM | 103 | |||||||
| ITEM | ||||||||
| ITEM 12. | ||||||||
| ITEM 13. | ||||||||
| ITEM 14. | ||||||||
| ITEM 15. | ||||||||
| ITEM 16. | ||||||||
-i-
Glossary of Key Terms
This Annual Report on Form
| • | “ADG” refers to anaerobic digested gas. |
| • | “CARB” refers to the California Air Resource Board. |
| • | “CNG” refers to compressed natural gas. |
| • | “CI” refers to carbon intensity. |
| • | “CWCs” refers to cellulosic waiver credits. |
| • | “D3” refers to cellulosic biofuel with a 60% GHG reduction requirement. |
| • | “D5” refers to advanced biofuels with a 50% GHG reduction requirement. |
| • | “EHS” refers to environment, health and safety. |
| • | “EIA” refers to the U.S. Energy Information Administration. |
| • | “EPA” refers to the U.S. Environmental Protection Agency. |
| • | “Environmental Attributes” refer to federal, state and local government incentives in the United States, provided in the form of RINs, RECs, LCFS credits, rebates, tax credits and other incentives to end users, distributors, system integrators and manufacturers of renewable energy projects, that promote the use of renewable energy. |
| • | “FERC” refers to the U.S. Federal Energy Regulatory Commission. |
| • | “GHG” refers to greenhouse gases. |
| • | “JSE” refers to the Johannesburg Stock Exchange. |
| • | “LCFS” refers to Low Carbon Fuel Standard. |
| • | “LFG” refers to landfill gas. |
| • | “LNG” refers to liquefied natural gas. |
| • | “PPAs” refers to power purchase agreements. |
“
| • | “RECs” refers to Renewable Energy Credits. |
| • | “Renewable Electricity” refers to electricity generated from renewable sources. |
| • | “RFS” refers to the EPA’s Renewable Fuel Standard. |
| • | “RINs” refers to Renewable Identification Numbers. |
| • | “RNG” refers to renewable natural gas. |
| • | “RPS” refers to Renewable Portfolio Standards. |
| • | “RVOs” refers to renewable volume obligations. |
| • | “WRRFs” refers to water resource recovery facilities. |
-ii-
Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form
our ability to develop and operate new renewable energy projects, including with livestock farms;farms, and related challenges associated with new projects, such as identifying suitable locations and potential delays in acquisition financing, construction, and development;
reduction or elimination of government economic incentives to the renewable energy market;
the inability to complete strategic development opportunities;
deterioration in acquisition, financing, construction and developmentgeneral economic conditions outside our control including the impacts of new projects, including expansion plans into new areas such as agricultural waste;
continued inflation could raise our operating costs or increase the construction costs of businessesour existing or facilities,new projects;
rising interest rates could increase the borrowing costs of future indebtedness;
the potential failure to retain and attract qualified personnel of the associated costs and inflation related thereto;Company or a possible increased reliance on third-party contractors as a result;
the length of development and optimization cycles for new projects, including the design and construction processes for our renewable energy projects;
dependence on third parties for the manufacture of products and services;services and our landfill operations;
the quantity, quality and consistency of our feedstock volumes from both landfill and livestock farm operations;
reliance on interconnections with and access to electric utility distribution and transmission productsfacilities and gas transportation pipelines for our Renewable Natural Gas and Renewable Electricity Generation segments;
our projects not producing expected levels of output;
the anticipated benefits of the Raeger capital improvement project, Pico feedstock amendment, Second Apex RNG facility and the Montauk Ag project in North Carolina andCarolina;
-iii-
potential benefits associated with the anticipated completion of engine repairs and resumption of operations at the Security facility;combustion-based oxygen removal condensate neutralization technology;
resolution of gas collection issues at the McCarty facility;
concentration of revenues from a small number of customers and projects;
our outstanding indebtedness and restrictions under our credit facility;
our ability to extend our fuel supply agreements prior to expiration;
our ability to meet milestone requirements under our PPAs;
existing regulations and changes to regulations and policies that effect our operations;
expected benefits from the extension of the Production Tax Credit under the Inflation Reduction Act of 2022;
decline in public acceptance and support of renewable energy development and projects;
our expectations regarding Environmental Attribute volume requirements and prices and commodity prices;
our expectations regarding the period during which we qualify as an emerging growth company under the Jumpstart Our Business StartupStartups Act (“JOBS Act”);
our expectations regarding future capital expenditures, including for the maintenance of facilities;
our expectations regarding the use of net operating losses before expiration;
our expectations regarding more attractive CI scores by regulatory agencies for our livestock farm projects;
market volatility and fluctuations in commodity prices and the market prices of Environmental Attributes and the impact of any related hedging activity;
regulatory changes in federal, state and international environmental attribute programs;
profitability of our planned livestock farm projects;
sustained demand for renewable energy;
security threats, including cyber-security attacks;
potential liabilities from contamination and environmental conditions;
potential exposure to costs and liabilities due to extensive environmental, health and safety laws;
impacts of climate change, changing weather patterns and conditions, and natural disasters;
failure of our information technology and data security systems;
increased competition in our markets;
continuing to keep up with technology innovations;
concentrated stock ownership by a few stockholders and related control over the outcome of all matters subject to a stockholder vote;vote and
the other risks and uncertainties detailed in the section titled “Risk Factors.”
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.
-iv-
See the “Risk Factors” section and elsewhere in this report for a more complete discussion of the risks and uncertainties mentioned above and for discussion of other risks and uncertainties we face that could cause actual results to differ materially from those expressed or implied by these forward-looking statements. 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 (“
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.
-v-
Summary of Risks Associated with Our Business
Our business is subject to a number of risks and uncertainties, including those highlighted in the section titled “Risk Factors” in this Annual Report on Form
Our commercial success depends on our operationsability to identify, acquire, develop and financial results.operate individual renewable energy projects, as well as our ability to maintain and expand production at our current projects.
Our renewable energy projects may not generate expected levels of output.
The concentration in revenues from five of our projects and geographic concentration of our projects expose us to greater risks of production interruptions from severe weather or other interruptions of production or transmission.
Our use and enjoyment of real property rights for our projects may be adversely affected by the rights of lienholders and leaseholders that are superior to those of the grantors of those real property rights to our projects.
We may face intense competition and may not be able to successfully compete.
Technological innovation may render us uncompetitive or our processes obsolete.
We may not be able to obtain long-term contracts for the sale of power produced by our projects on favorable terms and we may not meet certain milestones and other performance criteria under existing PPAs.
If there is insufficient demand for renewable energy, or if renewable energy projects do not develop or take longer to develop than we anticipate, we may be unable to achieve our investment objectives.
Acquisition, financing, construction and development of new projects and project expansions and conversions may not commence on anticipated timelines or at all.
Our fuel supply agreements with site hosts have defined contractual periods, and we cannot assure you that we will be able to successfully extend these agreements.
| • | Our PPAs, fuel-supply agreements, RNG off-take agreements and other agreements contain complex price adjustments, calculations and other terms based on gas price indices and other metrics, the interpretation of which could result in disputes with counterparties that could affect our results of operations and customer relationships. |
In order to secure contracts for new projects, we typically face a long and variable development cycle that requires significant resource commitments and a long lead time before we realize revenues.
We plan to expand our business in part through developing RNG recovery projects at landfills and livestock farms, but we may not be able to identify suitable locations or complete development of new projects.
Our dairy farm project has, and any future digester project will have, different economic models and risk profiles than our landfill facilities, and we may not be able to achieve the operating results we expect from these projects.
While we currently focus on converting methane into renewable energy, in the future we may decide to expand our strategy to include other types of projects. Any future energy projects may present unforeseen challenges and result in a competitive disadvantage relative to our more established competitors.
Any future acquisitions, investments or other strategic relationships that we make could disrupt our business, cause dilution to our stockholders or harm our business, financial condition or operating results.
-vi-
Our revenues may be subject to the risk of fluctuations in commodity prices and pricing volatility of Environmental Attributes.
We are exposed to the risk of failing to meet our contractual commitments to sell RINs from our production.
We may be unable obtain, modify, or maintain the regulatory permits, approvals and consents required to construct and operate our projects.
Negative attitudes toward renewable energy projects from the U.S. government, other lawmakers and regulators, and activists could adversely affect our business, financial condition and results of operations.
Revenue from any projects we complete may be adversely affected if there is a decline in public acceptance or support of renewable energy, or regulatory agencies, local communities, or other third parties delay, prevent, or increase the cost of constructing and operating our projects.
Existing regulations and policies, and future changes to these regulations and policies, may present technical, regulatory and economic barriers to the generation, purchase and use of renewable energy, and may adversely affect the market for credits associated with the production of renewable energy.
Our business is subject to the risk of climate change and extreme or changing weather patterns.
Our business could be negatively affected by security threats, including cybersecurity threats and other information technology-related disruptions.
Failure of third parties to manufacture quality products or provide reliable services in a timely manner could cause delays in developing and operating our projects, which could damage our reputation, adversely affect our partner relationships or adversely affect our growth.
Our projects rely on interconnections to distribution and transmission facilities that are owned and operated by third parties, and as a result, are exposed to interconnection and transmission facility development and curtailment risks.
We are dependent upon our relationships with Waste Management and Republic Services for the operation and maintenance of landfills on which several of our RNG and Renewable Electricity projects operate.
We have significant customer concentration, with a limited number of customers accounting for a substantial portion of our revenues.
Our fuel supply agreements with site hosts have defined contractual periods, and we cannot assure you that we will be able to successfully extend these agreements.
Our senior credit facility contains financial and operating restrictions that may limit our business activities and our access to credit.
| • | We may be required to write-off or impair capitalized costs or intangible assets in the future or we may incur restructuring costs or other charges, each of which would harm our earnings. |
Our ability to use our U.S. net operating loss carryforwards to offset future taxable income may be subject to certain limitations.
We also face risks related to our common stock, being a controlled company, being an emerging growth company, and risks generally applicable to publicly-traded companies.
Public health threats or outbreaks of communicable diseases could have a material effect on our operations and financial results.
-vii-
PART I
ITEM 1. | BUSINESS. |
Unless the context requires otherwise, references to “Montauk,” the “Company,” “we,” “us” or “our” refer to Montauk Renewables, Inc. and its consolidated subsidiaries.
Overview
We are a renewable energy company specializing in the recovery and processing of biogas from landfills and other
Corporate History
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 (the “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. Prior to the Reorganization Transactions, MNK’s business and operations were conducted entirely through Montauk USA and its U.S. subsidiaries, and MNK held no substantial assets other than equity of Montauk USA. The Company had no significant operations or assets prior to January 4, 2021 when it engaged in the equity exchange with Montauk USA and MNK.
After completion of the Reorganization Transactions, (i) Montauk USA ceased to own any substantial assets and (ii) all entities through which MNK’s business and operations were conducted became owned, directly or indirectly, by the Company. MNK adopted a plan contemporaneously with the completion of the Reorganization Transactions that authorized the future liquidation and dissolution of MNK.
On January 15, 2021, MNK sold the membership interest of Montauk USA to a third party. On January 26, 2021, MNK distributed all of the outstanding shares of the Company’s common stock as a pro rata dividend to the holders of MNK’s ordinary shares (the “Distribution”), subject to any tax withholding obligations under applicable South African law. Each ordinary share of MNK outstanding on January 21, 2021, the record date for the Distribution, entitled the holder thereof to receive one share of the Company’s common stock.
On January 26, 2021, the Company closed the initial public offering of its common stock on the Nasdaq Capital Market (the “IPO”) with the shares traded under the symbol “MNTK.” Montauk Renewables issued 2,702,500 shares at $8.50 per share and received gross proceeds of $22,971. The Company’s common stock was also secondarily listed on the Johannesburg Stock Exchange under the trading symbol “MKR.”
On January 26, 2021, the Company entered into a Loan Agreement and Secured Promissory Note (the “Initial Promissory Note”) with 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 $5,000 to MNK for MNK to pay its dividends tax liability arising from the Reorganization Transactions under the South African Income Tax Act, 1962 (Act No. 58 of 1962), as amended (the “South African Income Tax Act”). On February 22, 2021, the Company and MNK entered into an Amended and Restated Promissory Note (the “Amended Promissory Note”) to increase the principal amount of the loan to a total of $7,140, in the aggregate, on December 22, 2021 entered into the Second
-1-
Amended and Restated Loan Agreement and Secured Promissory Note (the “Second Amended Promissory Note”) to increase the principal amount of the loan to a total of $8,940, in the aggregate, and on December 22, 2022, entered into the First Amendment to the Second Amended Promissory Note, which extended the maturity date of the loan to June 30, 2023, each in accordance with the Company’s obligations set forth in the Transaction Implementation Agreement entered into by and among the Company, MNK and the other party thereto, dated November 6, 2020, and amended on January 14, 2021.
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.
Products Sold
The revenues Montauk receives from selling renewable energy consist of two main components. The first component is revenues from the commodity value of the natural gas or electricity generated, which we sell through a variety of term-length agreements. The second component is from the Environmental Attributes derived from the production of RNG and Renewable Electricity.
Our current operating projects produce either RNG or Renewable Electricity by processing biogas from landfill sites or agricultural waste from livestock farms. 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 sellOnce collected, biogas can be processed into pipeline-quality RNG or converted into electricity. The conversion facility is typically located on landfill property away from the RNG and Renewable Electricity through a variety of term length agreements.active fill operations where additional waste is added to the landfill site. Because we are capturing waste methane and making use of a renewable source of energy, ourthe RNG and Renewable Electricity generatewe produce also generates valuable Environmental Attributes which we can monetize under federal and state renewable initiatives.
RNG
The RNG produced from biogas remains strong due to increasing public policy initiatives focused on reducing greenhouse gas emissions, including methane, as well as continued publicwe process is pipeline-quality and private sector interest in the development of additional renewable energy sources to offset traditional fossil fuels. The Biden Administration has noted the importance of regulating the emission of methane as a key part of mitigating climate change, including through, among other actions, the U.S. Environmental Protection Agency’s November 15, 2021 proposed regulation of methane emissions associated with oil and gas operations. We believe the renewed regulatory focus on controlling methane emissions as part of a wider greenhouse gas reduction strategy, relatively untapped domestic agricultural waste feedstock and continued strong public and private support for renewable energy development supports the continued expansion of RNG production from landfill and agriculturally derived sources of biogas in the U.S.
RNG, like traditional natural gas, is traded nationally. Once in an interstate pipeline, RNG can be transported to vehicle fueling stations to be used as a transportation fuel, to utilities to generate power, or for use in generating fuel cell energy anywhere within the North American pipeline system. This flexibility enables us to capture value from the renewable attributes of biogas by delivering RNG to markets and customers that place a premium on renewable energy. Although RNG has the same chemical composition as natural gas from fossil sources, it has unique Environmental Attributes assigned to it through government incentive programs due to its origin from low-carbon, renewable sources, which we also monetize.
RNG is priced in-line with the wholesale natural gas market, based on Henry Hub pricing, with regional variation according to demand. We sell the RNG produced from our projects under a variety of short-term and medium-term agreements to counterparties, with tenures 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. We also share a portion of our Environmental Attributes with certain pathway providers as consideration for the counterparty using our RNG as a transportation fuel.
-2-
Renewable Electricity
Renewable electricity is generated using gas-fueled engines or turbine-driven electrical generators, which are designed to operate efficiently on medium-Btu gas. As such, electricity generation typically involves producing medium-Btu gas, which is then pumped into a generating facility. Electricity is a commodity that trades and is priced on a regional basis in and among regional control areas. Pricing for commodity-sold electricity can be based on day-ahead prices for scheduled deliveries or hourly, real-time prices for unscheduled deliveries. Prices vary across the country based on weather, load patterns and local power and transmission restrictions. The Renewable Electricity produced at our biogas-to-electricity projects is sold under long-term contracts to creditworthy counterparties, typically under a fixed price with escalators. The terms of these contracts range from 4 to 21 years, excluding renewal periods, with a weighted average remaining tenure of 13 years, based on 2022 electricity production.
Environmental Attributes
When used as a transportation fuel or to produce electricity, RNG can generate additional revenue streams through the generation and sale of Environmental Attributes under various programs, including the national renewable fuels standard and state-level California LCFS. The Environmental Attributes that we generate and sell are composed of RINs and LCFS credits, which are generated from the conversion of biogas to RNG that is used as a transportation fuel, as well as RECs generated from the conversion of biogas to Renewable Electricity. In addition to revenues generated from our product sales, we also generate revenues by providing various value-added services to certain of our biogas site partners. In 20212022 and 2020,2021, our projects generated approximately 11.0%8.1% and 13.5%11.0%, respectively, of all D3 RINs in the United States. During 2021, we entered into an agreement to sell a portion of our production as a renewable component of refinery fuel exports into the European Union’s Renewable Energy Directive from certain RNG production facilities that have achieved International Sustainability & Carbon Certification registration. This diversification strategy accounted for approximately 0.7%1.5% of the reduction in generation of D3 RINs.
Whenever possible, we seek to mitigate our exposure to commodity and Environmental Attribute pricing volatility. Through contractual arrangements with our site hosts and counterparties, we typically share pricing and production risks while retaining our ability to benefit from potential upside. A portion of the RNG volume we produce is sold under bundled fixed-price arrangements for the RNG and Environmental Attributes, some of which includeincluded a sharing arrangement where we benefit from prices above certain thresholds. For our remaining RNG projects, weour partners may enter into
On the electricity side of our business, all of our products and related Environmental Attributes are sold under fixed-price contracts with escalators, limiting our pricing risk. Finally, our contracts with site hosts often require payments to our site hosts in the form of royalties based on realized revenues, direct development contributions, or, in some select cases, based on production volumes.
D3 RINs when used as a transportation fuel. In addition, RNG can generate an additional revenue stream when used as a transportation fuel in states that have adopted low-carbon fuel incentive programs. The primary Environmental Attributes derived from the production of electricity from renewable resources are RECs, which translate into additional revenues for units of Renewable Electricity produced.
RNG has the same chemical composition as natural gas from fossil sources, but has unique Environmental Attributes assigned to it due to its origin from organic sources. These attributes qualify RNG as a renewable fuel under the federal RFS program, established pursuant to the EPACT 2005 and EISA, allowing RNG to generate renewable fuel credits called RINs when the RNG is used as a transportation fuel.
RINs are saleable regulatory credits that represent a quantity of qualifying fuel and are used by refiners and importers to evidence compliance with their RFS obligations. Given that the RFS is a national program, the price of a RIN is the same anywhere in the United States. The RFS program originally contemplated 1.75 billion gallons of fuel from cellulosic biofuels by 2014, the use of which would be tracked through D3 RINs. However,
-3-
cellulosic biofuel production grew slower than expected and prompted the EPA to expand the definition of biofuels that could qualify for D3 RINs to include fuels from cellulosic biogas, including biogas from landfills, livestock farms, and WRRFs. This significantly increased the quantity of D3 RINs produced, with production increasing to approximately 33 million net RINs in 2014 and 505approximately 660 million net RINs in 2021.2022. In addition, given the historic shortage in supply of D3 RINs to meet blending requirements, the EPA allows obligated refiners to satisfy RFS compliance obligations for D3 RINs by either purchasing CWC plus D5 RINs or by purchasing D3 RINs. CWC prices arewere set annually and are typically published by the EPA each November, with an estimated CWC price for 2022 of approximately $2.23 based on calculation methodology. TheNovember. Historically, the value of a D3 RIN is therefore a derivative of the market price for D5 RINs and CWCs, which in turn, are inversely linked to the wholesale price of gasoline.
We have been active in the RFS program since 2014 and expect to remain a significant contributor to the overall generation of RINs from RNG. We monetize our portion of the RINs, directly, at auction or through third-party agents or marketers.
CA LCFS.
CA LCFS credits are environmental credits generated in California in order to stimulate the use of cleaner, low-carbon fuels. This program encourages the production of low-carbon fuels by setting annual CI standards, which are intended to reduce GHG emissions from the state’s transportation sector. One of the key aspects of the program is that it encourages the use of low-carbon transportation fuel, such as CNG, in vehicles instead of gasoline. This program further encourages use of renewable fuels in vehicles over CNG from fossil fuels.
The value of an CA LCFS credit varies according to the CI value of the fuel source as determined by CARB. Fuels that have a lower CI score benefit from a higher percentage of a CA LCFS credit. RNG from LFG
and livestock digester biogas that are used as a transportation fuel both qualify for CA LCFS credits. The number of CA LCFS credits for RNG from livestock digesters is significantly higher than the number of CA LCFS credits for RNG from landfills, due to the relative CI scores of the two fuels. Fuel that is eligible for RINs can also receive CA LCFS credits. As a result, CA LCFS credits represent a revenue stream incremental to the value RNG producers receive for RINs. For livestock digester RNG projects, CA LCFS credits are a substantial revenue driver. We have seven projects which are currently approved and eligible to earn CA LCFS credits, and we expect the revenue generated by CA LCFS credits to increase as we continue to develop and bring additional livestock digester projects online over the next few years.
Several states in the United States also have or are considering adopting this model. Oregon’s Clean Fuels Program, enacted in 2009 and implemented in 2016, which operates using a credit system similar to the CA LCFS program. Washington’s Clean Fuel Standard was passed in 2021 and will be implemented in 2023 utilizing a similar credit system as Oregon and California. Similar to RINs, LCFS credits can be sold separately from the RNG fuel sold, allowing us to monetize LCFS credits for fuel produced and purchased outside of states that have LCFS programs.
RECs.
The primary Environmental Attributes derived from the production of electricity from renewable resources are RECs, which translate into additional revenues for commodity-sold electricity can be based on day-ahead prices for scheduled deliveries or hourly, real-time prices for unscheduled deliveries. Prices vary across the country based on weather, load patterns and local power and transmission restrictions. Theunits of Renewable Electricity produced at our biogas-to-electricity projects is sold under long-term contracts to credit-worthy counterparties, typically under a fixed price with escalators. The terms of these contracts range from 5 to 22 years, with a weighted average remaining tenure of 14 years, based on 2021 expected electricity production.
-4-
The value of a REC is dependent on each state’s renewable energy requirements as mandated by its RPS. REC values are higher in states which require a percentage of total electricity to come from renewable resources. In states with no renewable energy requirements, RECs can have no value at all. In some markets, we have entered into PPAs under which we sell RECs bundled with the power being sold at a combined price. This occurs where the utility off-take counterparty offers a combined rate for the renewable energy it needs to satisfy RPS or other business requirements that is the best combined price for one of our projects.
Strategic Overview
Our business strategy in fiscal 2021 to focusfocuses on the following three areas that we believe present the greatest growth opportunities for the Company at this time. A detailed discussion of each strategy pillar is included in the narrative below.
| • | Continued Expansion into Agricultural Feedstocks for RNG Production |
| • | Optimize Existing Assets and Project Portfolio and Opportunistically Develop New Projects |
| • | Valued-added Service Offerings |
Continued Expansion into Agricultural Feedstocks for RNG Production
As part of our long-term strategy, we are focused on diversifying our project portfolio beyond LFG through expansion into additional methane producing assets, while opportunistically adding third-party developed technology capabilities to boost financial performance and our overall cost competitiveness. We are commercially operating our first agricultural waste project (dairy manure), actively pursuing new fuel supply opportunities in WRRFs, and looking at long-term organic waste and sludge opportunities for the generation of biogas.
We view dairy farms and other forms of organic agricultural waste as a significant opportunity for us to expand our RNG business, as processing biogas from dairy farms and from other forms of organic agricultural waste requires similar expertise and capabilities as processing biogas from landfills. Many of the existing biogas processing in these industries is for electricity production, which creates additional opportunities for acquisition and conversion to higher-value RNG facilities.
Pico Facility
We undertook an agricultural project when we closed on the acquisition of Pico, the anaerobic digester and two Jenbacher engines at the Bettencourt dairy farm in Jerome, Idaho in September 2018
As part of our overall capacity expansion at the Pico facility, in 2021 and 2022, we undertook significant efforts to improve the performance of the existing digestion process at our Pico facility. We temporarily idled RNG production at this facility in order to clean out settled solids in the digester, replace the cover of the digester, and make various other efficiency improvements. We have subsequentlyThe Pico facility resumed operations during the first quarter of 2022. The dairy began delivering the first and second increases in feedstock during the third quarter of 2022 and we have made two payments to the dairy as required in the Pico Feedstock Amendment. The improved efficiencies of our existing digestion process and the water management improvements have enabled us to
-5-
process the increased feedstock volumes. We completed the design of the digestion capacity expansion project in the third quarter of 2022 and have begun incurring capital expenditures related to the construction of the project. We currently expect the dairy to begin delivering the final increase in feedstock volumes during 2024.
The improvement project has impacted the timeline for modeling Pico’s initial CI Score pathway model and subsequent auditing approval by CARB. During the fourth quarter of 2022, we learned through CARB that our dairy project CI Score Pathway will be subject to a public comment period. Due to this public comment period, we now currently expect to receive approval of our score during the first quarter of 2023. This public comment period follows the completion of the validation of the CI Score, which CARB finalized in the first quarter of 2023. We began to release gas from storage in the third quarter of 2022. We do not expect to recognize LCFS credit revenue on 2022 production until 2023 when we anticipate recognizing LCFS credit revenues during the first half of 2023 for all of 2022 production. Related to 2023 production, we expect to normalize the timing of LCFS credit revenue recognition, generally, six months after the month of production. We began releasing gas from storage during the third quarter of 2022 and recognized revenues from a portion of the RINs generated and currently expect to complete storage release during the third quarter of 2023. We committed RINs and recognized revenues from RINs generated in the fourth quarter of 2022. During the fourth quarter of 2022, CARB certified our temporary CI Score Pathway application for the third and fourth quarter of 2022. The approval of this temporary application will prevent us from not being able to generate LCFS credit revenue on 2022 production in 2023. We did not receive a temporary CI pathway in 2021 and were not able to generate LCFS credit revenue on 2021 production. We will be storing 2022 production while CARB completes its CI Score Pathway. We expect to receive the results of this approval during the second half of 2022. However, we do not currently expect to receive LCFS credit revenue on 2022 production until 2023.
Montauk Ag Renewables
In the second quarter of 2021, we, through a newly formed wholly-ownedour wholly owned subsidiary, Montauk Ag Renewables, LLC (“Montauk Ag”),we completed a series of transactions with Joseph P. Carroll, Jr. (“Carroll”), Martin A. Redeker (“Redeker”) and certain of their affiliates tothe 2021 asset purchase identified assets 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,
We continue to work with our engineer of record through the optimization of improvements to the now patented reactor technology. We have relocated certain assets from Magnolia, NC to Turkey, NC and have recorded an impairment of approximately $1,393 related to assets which will no longer be used in the production process. However, we have not completed our improvements and have not yet reached commercial operations at the Turkey location.
While these project developments continue, we continue to engage with regulatory agencies in North Carolina related to the resulting power generation derived from swine waste to confirm its eligibility for Renewable Energy Credits under North Carolina’s Renewable Energy Portfolio Standards in anticipation of commercial production. Accordingly, we requested that our Turkey location be 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. Due to our consolidation of production at the Turkey, NC location and based on our current expectations related to commercial operations, we have paused our registration process to obtain NREF status for the Turkey, NC location. Our Turkey, NC location has been accepted into the Piedmont Natural Gas Renewable Gas Pilot Program.
We are at the beginning stages of developing the opportunities associated 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 facility to be used for commercial production. We do not currently expect commercial production to commence until 2024 based on the current development timeline. We intend to
-6-
contract with additional farms to secure feedstock sources, as full-time employees, focused on refiningwe commission commercial production and scaling the technology andincrease our production capabilities, to develop new agricultural waste stream projects.
Other Opportunities
Other industries that present opportunities of scale for biogas conversion include swine farms and WRRFs. Like dairy farms, biogas production from swine farms is a nascent biogas industry, with less than 1% of swine
Optimize Existing Assets and Project Portfolio and Opportunistically Develop New Projects
Expanding Operations at Existing Project Sites
We treat our existing assets as an integrated portfolio rather than a collection of individual projects. This allows us to utilize any new business practices or technologies across our entire project portfolio quickly, including advances with respect to troubleshooting, optimization, cost savings, and host site interaction. Our integrated,
We also experience organic growth in production at our existing projects as a result of increases in biogas supply at our projects and on-going optimization initiatives. We size our projects to account for this increase in the biogas supply curve over time
Converting Existing Renewable Electricity Projects to RNG.
Opportunistic Development of New RNG Projects
-7-
contracts and any other related Environmental Attributes that can be monetized. We are currently evaluating threetwo project expansion opportunities at existing project sites. We regularly analyze potential new projects that are at various stages of negotiation, engineering design and financial review. The potential projects typically include a mix of new project sites and strategic acquisitions. Currently, no new potential projects are subject to definitive agreements and each potential opportunity is subject to competitive market conditions
Developing LFG to Renewable Electricity Projects. Included within the proposed Renewable Fuel Standard for 2023, 2024 and 2025 issued by the EPA on December 1, 2023 included volumes of eRINs to be generated from renewable electricity and used as transportation fuel. The proposed eRIN volume obligations are 600 million and 1,200 million for 2024 and 2025, respectively. With the release of the proposed eRIN volumes, we are expanding the potential new projects we analyze to include site from which we would generate renewable electricity. This evaluation of potential new renewable electricity projects would be reviewed with the same financially disciplined model we use to evaluate new RNG projects.
The RNG industry remains highly fragmented. We believe continued industry fragmentation presents an opportunity for further industry consolidation. We are well-positioned to take advantage of this consolidation opportunity because of our scale, operational and managerial capabilities, and execution track record in integrating acquisitions. Over the last ten years, we have acquired 13 projects and members of our current management team have led all of those acquisitions. We expect that as we continue to scale up our business, our increased size, capabilities and access to capital will provide us with increased strategic acquisition opportunities.
Valued-Added Service Offerings
Over our three decades of experience, we have developed the full range of RNG project related capabilities from engineering, construction, management and operations, through EHS oversight and Environmental Attributes management. By vertically integrating across RNG services, we are able to reduce development and operations costs, optimize efficiencies and improve operations. Our full suite of capabilities allows us to serve a multi-project partner for certain project hosts across multiple transactions, including through strategic transactions. To that end, we actively identify and evaluate opportunities to acquire entities that will further our vertically-integrated services.
-8-
Our Current Operating Portfolio
We currently own and operate 15 projects, 12 of which are RNG projects and three of which are Renewable Electricity projects. Of our three Renewable Electricity projects we currently operate, we are considering options to convert one of them to produce RNG. In addition to the
| Renewable Electricity Generation | ||||||
| Site | COD (1) | Capacity (MW) | Source | |||
Bowerman Irvine, CA | 2016 | 23.6 | Landfill | |||
Security Houston, TX | 2003 | 3.4 | Landfill | |||
AEL Sand Spring, OK | 2013 | 3.2 | Landfill | |||
Total Capacity (MW) | 30.2 | |||||
Renewable Natural Gas | ||||||
| Site | COD(1) | Capacity (MMBtu/ day) (2) | Source | |||
Rumpke | 1986 | 7,271 | Landfill | |||
Atascocita | 2002*/ 2018 | 5,570 | Landfill | |||
McCarty | 1986 | 4,415 | Landfill | |||
Apex | 2018 | 2,673 | Landfill | |||
Monroeville | 2004 | 2,372 | Landfill | |||
Valley | 2004 | 2,372 | Landfill | |||
Galveston | 2019 | 1,857 | Landfill | |||
Raeger | 2006 | 1,857 | Landfill | |||
Shade | 2007 | 1,857 | Landfill (3) | |||
Coastal | 2020 | 1,775 | Landfill | |||
Southern | 2007 | 928 | Landfill | |||
Pico | 2020 | 903 | Livestock (Dairy) | |||
Total Capacity (MMBtu/day) | 33,850 | |||||
Renewable Electricity Generation | ||||||
Site | COD (1) | Capacity (MW) | Source | |||
Bowerman Irvine, CA | 2016 | 23.6 | Landfill | |||
Security Houston, TX | 2003 | 3.4 | Landfill | |||
AEL Sand Spring, OK | 2013 | 3.2 | Landfill | |||
Total Capacity (MW) | 30.2 | |||||
Renewable Natural Gas | ||||||
Site | COD(1) | Capacity (MMBtu/ day) (2) | Source | |||
Rumpke Cincinnati, OH | 1986 | 7,271 | Landfill | |||
Atascocita Humble, TX | 2002*/ 2018 | 5,570 | Landfill | |||
McCarty Houston, TX | 1986 | 4,415 | Landfill | |||
Apex Amsterdam, OH | 2018 | 2,673 | Landfill | |||
Monroeville Monroeville, PA | 2004 | 2,372 | Landfill | |||
Valley Harrison City, PA | 2004 | 2,372 | Landfill | |||
Galveston Galveston, TX | 2019 | 1,857 | Landfill | |||
Raeger Johnston, PA | 2006 | 1,857 | Landfill | |||
Shade Cairnbrook, PA | 2007 | 1,857 | Landfill (3) | |||
Coastal Plains Alvin, TX | 2020 | 1,775 | Landfill | |||
Southern Davidsville, PA | 2007 | 928 | Landfill | |||
Pico Jerome, ID | 2020 | 903 | Livestock (Dairy) | |||
Total Capacity (MMBtu/day) | 33,850 | |||||
| = Renewable Natural Gas Project | |
| = Renewable Electricity Project |
| (1) | “COD” refers to the commercial operation date of each site. |
| (2) | This is equivalent to the project’s design capacity and assumes inlet methane content of 56% for all sites other than Pico, which assumes inlet methane content of 62%, and process efficiency of 91%. |
| (3) | All of our landfill sites are accepting waste except our Shade site. Our Shade site is closed to accepting new waste, but is currently expected to continue to generate a commercial level of RNG for an additional ten years. Our operating RNG projects have an average expected remaining useful life of approximately |
We have a long history of operating our projects with partners, with our oldest relationship going back 48nearly 50 years. On average, we have had an
-9-
Approximately 93%78% of our 20212022 RNG production has been monetized under fuel supply agreements with expiration dates more than 15 years from December 31, 2021. Additionally, nearly all2022. Approximately 95% of our 20212022 Renewable
