SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
or
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number:
MONTAUK RENEWABLES, INC.
(Exact name of registrant as specified in its charter)
Delaware | 85-3189583 | |
(State or Other Jurisdiction of Incorporation or Organization) | (IRS Employer Identification No.) | |
Pittsburgh, Pennsylvania | 15205 | |
(Address of Principal Executive Offices) | (Zip Code) |
(412) 747-8700
(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 | ||
Common Stock, par value $0.01 per share | MNTK | The Nasdaq Capital Market |
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. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation(§ (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
Large accelerated filer | ☐ | 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
The number of outstanding shares of the registrant’s common stock on November 4, 2022May 5, 2023 was 143,603,681143,661,719 shares.
TABLE OF CONTENTS
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ITEM | 6 | |||||
ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | |||||
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ITEM 3. | ||||||
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ITEM 4. | 38 | |||||
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ITEM 1A. | 39 | |||||
ITEM 2. | ||||||
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ITEM 3. | ||||||
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ITEM 4. | ||||||
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ITEM | 39 | |||||
ITEM 6. | 40 | |||||
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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:10-Q to:
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• “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. • “RVOs” refers to renewable volume obligations. |
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3
3
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. You can identify forward-looking statements by the fact that they do not relate strictly to historical or current facts. TheseForward-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, expectations and plans of the Company, including expected benefits of the Pico feedstock amendment and the Montauk Ag project in North Carolina, the anticipated completion of the Raeger capital improvement project, Second Apex RNG Facility project, the Blue Granite RNG project, any Bowerman expansion project, the resolution of gas collection issues at the McCarty facility, our estimated and projected costs, expenditures, and growth rates, our plans and objectives for future operations, growth, or initiatives, or strategies 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:
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the impact of the ongoing COVID-19 pandemic on our business, financial condition and results of operations;
the length of development and optimization cycles for new projects, including the design and construction processes for our renewable energy projects;
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existing regulations and changes to regulations and policies that effect our operations;
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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.10-K.
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
5
ITEM 1. FINANCIAL STATEMENTS
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Montauk Renewables, Inc | ||||
Unaudited condensed consolidated financial statements | ||||
7 | ||||
8 | ||||
9 | ||||
10 | ||||
11 | ||||
6
MONTAUK RENEWABLES, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(in thousands, except share data):
As of September 30, 2022 | As of December 31, 2021 | |||||||
ASSETS | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 95,619 | $ | 53,266 | ||||
Accounts and other receivables | 12,264 | 9,338 | ||||||
Related party receivable | 8,940 | 8,940 | ||||||
Current portion of derivative instrument | 718 | — | ||||||
Prepaid expenses and other current assets | 4,110 | 2,846 | ||||||
Assets held for sale | — | 777 | ||||||
Total current assets | $ | 121,651 | $ | 75,167 | ||||
Restricted cash—non-current | $ | 407 | $ | 328 | ||||
Property, plant and equipment, net | 173,968 | 180,893 | ||||||
Goodwill and intangible assets, net | 15,897 | 14,113 | ||||||
Deferred tax assets | 4,568 | 10,570 | ||||||
Non-current portion of derivative instrument | 1,244 | — | ||||||
Operating lease right-of-use | 124 | 305 | ||||||
Finance lease right-of-use | 113 | — | ||||||
Other assets | 5,971 | 5,104 | ||||||
Total assets | $ | 323,943 | $ | 286,480 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 3,369 | $ | 4,973 | ||||
Accrued liabilities | 17,243 | 10,823 | ||||||
Income tax payable | 288 | — | ||||||
Current portion of derivative instrument | 1,440 | 650 | ||||||
Current portion of operating lease liability | 84 | 296 | ||||||
Current portion of finance lease liability | 69 | — | ||||||
Current portion of long-term debt | 7,854 | 7,815 | ||||||
Total current liabilities | $ | 30,347 | $ | 24,557 | ||||
Long-term debt, less current portion | $ | 65,485 | $ | 71,392 | ||||
Non-current portion of derivative instrument | — | 189 | ||||||
Non-current portion of operating lease liability | 21 | 27 | ||||||
Non-current portion of finance lease liability | 42 | — | ||||||
Asset retirement obligation | 5,397 | 5,301 | ||||||
Other liabilities | 3,843 | 2,721 | ||||||
Total liabilities | $ | 105,135 | $ | 104,187 | ||||
STOCKHOLDERS’ EQUITY | ||||||||
Common stock, $0.01 par value, authorized 690,000,000 shares; 143,603,681 and 143,584,827 shares issued at September 30, 2022 and December 31, 2021, respectively; 141,290,748 and 141,015,213 shares outstanding at September 30, 2022 and December 31, 2021, respectively | $ | 1,410 | $ | 1,410 | ||||
Treasury stock, at cost, 959,344 and 950,214 shares September 30, 2022 and December 31, 2021, respectively | (10,904 | ) | (10,813 | ) | ||||
Additional paid-in capital | 203,606 | 196,224 | ||||||
Retained earnings (deficit) | 24,696 | (4,528 | ) | |||||
Total stockholders’ equity | $ | 218,808 | $ | 182,293 | ||||
Total liabilities and stockholders’ equity | $ | 323,943 | $ | 286,480 | ||||
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| as of March 31, |
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| as of December 31, |
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ASSETS |
| 2023 |
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| 2022 |
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Current assets: |
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Cash and cash equivalents |
| $ | 78,043 |
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| $ | 105,177 |
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Accounts and other receivables |
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| 6,305 |
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| 7,222 |
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Related party receivable |
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| 9,008 |
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| 9,000 |
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Current portion of derivative instruments |
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| 835 |
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| 879 |
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Prepaid expenses and other current assets |
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| 2,440 |
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| 2,590 |
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Total current assets |
| $ | 96,631 |
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| $ | 124,868 |
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Non-current restricted cash |
| $ | 407 |
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| $ | 407 |
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Property, plant and equipment, net |
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| 183,800 |
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| 175,946 |
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Goodwill and intangible assets, net |
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| 15,512 |
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| 15,755 |
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Deferred tax assets |
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| 16,985 |
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| 3,952 |
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Non-current portion of derivative instruments |
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| 584 |
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| 936 |
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Operating lease right-of-use assets |
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| 4,635 |
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| 4,742 |
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Finance lease right-of-use assets |
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| 80 |
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| 96 |
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Other assets |
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| 5,703 |
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| 5,614 |
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Total assets |
| $ | 324,337 |
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| $ | 332,316 |
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LIABILITIES AND STOCKHOLDERS' EQUITY |
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Current liabilities: |
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Accounts payable |
| $ | 3,232 |
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| $ | 4,559 |
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Accrued liabilities |
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| 11,354 |
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| 15,090 |
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Income tax payable |
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| 905 |
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| 402 |
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Current portion of operating lease liability |
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| 411 |
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| 410 |
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Current portion of finance lease liability |
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| 74 |
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| 71 |
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Current portion of long-term debt |
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| 7,876 |
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| 7,870 |
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Total current liabilities |
| $ | 23,852 |
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| $ | 28,402 |
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Long-term debt, less current portion |
| $ | 61,533 |
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| $ | 63,505 |
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Non-current portion of operating lease liability |
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| 4,312 |
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| 4,341 |
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Non-current portion of finance lease liability |
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| 6 |
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| 25 |
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Asset retirement obligations |
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| 5,593 |
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| 5,493 |
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Other liabilities |
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| 3,968 |
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| 3,459 |
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Total liabilities |
| $ | 99,264 |
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| $ | 105,225 |
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STOCKHOLDERS’ EQUITY |
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Common stock, $0.01 par value, authorized 690,000,000 shares; 143,682,811 shares issued at March 31, 2023 and December 31, 2022, respectively; 141,633,417 shares outstanding at March 31, 2023 and December 31, 2022, respectively |
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| 1,416 |
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| 1,416 |
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Treasury stock, at cost, 971,306 shares March 31, 2023 and December 31, 2022, respectively |
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| (11,051 | ) |
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| (11,051 | ) |
Additional paid-in capital |
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| 207,830 |
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| 206,060 |
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Retained earnings |
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| 26,878 |
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| 30,666 |
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Total stockholders' equity |
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| 225,073 |
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| 227,091 |
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Total liabilities and stockholders' equity |
| $ | 324,337 |
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| $ | 332,316 |
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The accompanying notes to the unaudited condensed consolidated financial statements are an integral part of these statements.
7
MONTAUK RENEWABLES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(in thousands, except for share and per share data):
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
2022 | 2021 | 2022 | 2021 | |||||||||||||
Total operating revenues | $ | 55,860 | $ | 39,749 | $ | 155,916 | $ | 102,872 | ||||||||
Operating expenses: | ||||||||||||||||
Operating and maintenance expenses | $ | 14,134 | $ | 13,123 | $ | 42,205 | $ | 36,954 | ||||||||
General and administrative expenses | 8,466 | 7,520 | 25,715 | 35,280 | ||||||||||||
Royalties, transportation, gathering and production fuel | 12,188 | 6,636 | 34,484 | 18,840 | ||||||||||||
Depreciation, depletion and amortization | 5,167 | 5,666 | 15,453 | 17,062 | ||||||||||||
Gain on insurance proceeds | — | (157 | ) | (313 | ) | (238 | ) | |||||||||
Impairment loss | 2,273 | — | 2,393 | 626 | ||||||||||||
Transaction costs | — | 232 | 32 | 357 | ||||||||||||
Total operating expenses | $ | 42,228 | $ | 33,020 | $ | 119,969 | $ | 108,881 | ||||||||
Operating income (loss) | $ | 13,632 | $ | 6,729 | $ | 35,947 | $ | (6,009 | ) | |||||||
Other expenses (income): | ||||||||||||||||
Interest expense | $ | 36 | $ | 697 | $ | 339 | $ | 2,064 | ||||||||
Other (income) expense | (131 | ) | 617 | (463 | ) | 662 | ||||||||||
Total other (income) expense | $ | (95 | ) | $ | 1,314 | $ | (124 | ) | $ | 2,726 | ||||||
Income (loss) before income taxes | $ | 13,727 | 5,415 | $ | 36,071 | $ | (8,735 | ) | ||||||||
Income tax expense (benefit) | 2,540 | (3,481 | ) | 6,847 | 1,286 | |||||||||||
Net income (loss) | $ | 11,187 | $ | 8,896 | $ | 29,224 | $ | (10,021 | ) | |||||||
Earnings (loss) per share: | ||||||||||||||||
Basic | $ | 0.08 | $ | 0.06 | $ | 0.21 | $ | (0.07 | ) | |||||||
Diluted | $ | 0.08 | $ | 0.06 | $ | 0.20 | $ | (0.07 | ) | |||||||
Weighted-average common shares outstanding: | �� | |||||||||||||||
Basic | 141,290,748 | 141,015,213 | 141,156,126 | 141,015,213 | ||||||||||||
Diluted | 142,722,396 | 141,048,006 | 142,627,711 | 141,015,213 | ||||||||||||
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| Three months ended March 31, |
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| 2023 |
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| 2022 |
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Total operating revenues |
| $ | 19,154 |
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| $ | 32,169 |
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Operating expenses: |
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Operating and maintenance expenses |
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| 14,182 |
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| 13,201 |
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General and administrative expenses |
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| 9,475 |
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| 8,495 |
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Royalties, transportation, gathering and production fuel |
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| 3,933 |
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| 7,206 |
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Depreciation, depletion and amortization |
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| 5,196 |
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| 5,153 |
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Gain on insurance proceeds |
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| — |
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| (313 | ) |
Impairment loss |
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| 451 |
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| 51 |
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Transaction costs |
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| 83 |
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| 27 |
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Total operating expenses |
| $ | 33,320 |
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| $ | 33,820 |
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Operating loss |
| $ | (14,166 | ) |
| $ | (1,651 | ) |
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Other expenses (income): |
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Interest expense |
| $ | 1,675 |
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| $ | 32 |
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Other expense (income) |
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| 7 |
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| (310 | ) |
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Total other expense (income) |
| $ | 1,682 |
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| $ | (278 | ) |
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Loss before income taxes |
| $ | (15,848 | ) |
| $ | (1,373 | ) |
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Income tax benefit |
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| (12,060 | ) |
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| (258 | ) |
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Net loss |
| $ | (3,788 | ) |
| $ | (1,115 | ) |
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Loss per share: |
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Basic |
| $ | (0.03 | ) |
| $ | (0.01 | ) |
Diluted |
| $ | (0.03 | ) |
| $ | (0.01 | ) |
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Weighted-average common shares outstanding: |
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Basic |
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| 141,633,417 |
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| 141,045,477 |
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Diluted |
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| 141,633,417 |
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| 141,045,477 |
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The accompanying notes to the unaudited condensed consolidated financial statements are an integral part of these statements.
8
MONTAUK RENEWABLES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
(in thousands, except share data):
Common Stock | Treasury Stock | Additional Paid-in Capital | Retained Earnings | Total Equity | ||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||
Balance at June 30, 2022 | 141,290,748 | $ | 1,410 | 959,344 | $ | (10,904 | ) | $ | 200,855 | $ | 13,509 | $ | 204,870 | |||||||||||||||
Net income | — | — | — | — | — | 11,187 | 11,187 | |||||||||||||||||||||
Stock-based compensation | — | — | — | — | 2,751 | — | 2,751 | |||||||||||||||||||||
Balance at September 30, 2022 | 141,290,748 | $ | 1,410 | 959,344 | $ | (10,904 | ) | $ | 203,606 | $ | 24,696 | $ | 218,808 | |||||||||||||||
Common Stock | Treasury Stock | Additional Paid-in Capital | Retained Earnings (Deficit) | Total Equity | ||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||
Balance at June 30, 2021 | 141,015,213 | $ | 1,410 | 950,214 | $ | (10,813 | ) | $ | 190,944 | $ | (18,917 | ) | $ | 162,624 | ||||||||||||||
Net income | — | — | — | — | — | 8,896 | 8,896 | |||||||||||||||||||||
Stock-based compensation | — | — | — | — | 2,574 | — | 2,574 | |||||||||||||||||||||
Balance at September 30, 2021 | 141,015,213 | $ | 1,410 | 950,214 | $ | (10,813 | ) | $ | 193,518 | $ | (10,021 | ) | $ | 174,094 | ||||||||||||||
Common Stock | Treasury Stock | Additional Paid-in Capital | Retained Earnings (Deficit) | Total Equity | ||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||
Balance at December 31, 2021 | 141,015,213 | $ | 1,410 | 950,214 | $ | (10,813 | ) | $ | 196,224 | $ | (4,528 | ) | $ | 182,293 | ||||||||||||||
Vesting of stock awards | 275,535 | — | — | — | — | — | ||||||||||||||||||||||
Treasury stock | — | — | 9,130 | (91 | ) | — | — | (91 | ) | |||||||||||||||||||
Net income | — | — | — | — | — | 29,224 | 29,224 | |||||||||||||||||||||
Stock-based compensation | — | — | — | — | 7,382 | — | 7,382 | |||||||||||||||||||||
Balance at September 30, 2022 | 141,290,748 | $ | 1,410 | 959,344 | $ | (10,904 | ) | $ | 203,606 | $ | 24,696 | $ | 218,808 | |||||||||||||||
Common Stock | Treasury Stock | Members’ Equity | Additional Paid-in Capital | Retained Earnings (Deficit) | Total Equity | |||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||
Balance at December 31, 2020 | — | $ | — | — | $ | — | $ | 159,622 | $ | — | $ | — | $ | 159,622 | ||||||||||||||||||
Effect of reorganization transactions | 138,312,713 | 1,383 | — | — | (159,622 | ) | 158,239 | — | — | |||||||||||||||||||||||
IPO common stock | 2,702,500 | 27 | — | — | — | 15,566 | — | 15,593 | ||||||||||||||||||||||||
Treasury stock | — | — | 950,214 | $ | (10,813 | ) | — | — | — | (10,813 | ) | |||||||||||||||||||||
Net loss | — | — | — | — | — | — | (10,021 | ) | (10,021 | ) | ||||||||||||||||||||||
Stock-based compensation | — | — | — | — | — | 19,713 | — | 19,713 | ||||||||||||||||||||||||
Balance at September 30, 2021 | 141,015,213 | $ | 1,410 | 950,214 | $ | (10,813 | ) | — | 193,518 | $ | (10,021 | ) | $ | 174,094 | ||||||||||||||||||
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| Common Stock |
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| Treasury Stock |
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| Retained (Deficit) Earnings |
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| Total Equity |
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Balance at December 31, 2021 |
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| 141,015,213 |
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| $ | 1,410 |
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| 950,214 |
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| $ | (10,813 | ) |
| $ | 196,224 |
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| $ | (4,528 | ) |
| $ | 182,293 |
|
Issuance of common stock |
|
| 42,559 |
|
|
| — |
|
|
|
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
| |
Treasury stock |
| — |
|
|
| — |
|
|
| 9,130 |
|
|
| (91 | ) |
|
| — |
|
|
| — |
|
|
| (91 | ) | |
Net loss |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (1,115 | ) |
|
| (1,115 | ) | |
Stock-based compensation |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 2,334 |
|
|
|
|
|
| 2,334 |
| ||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Balance at March 31, 2022 |
|
| 141,057,772 |
|
| $ | 1,410 |
|
|
| 959,344 |
|
| $ | (10,904 | ) |
| $ | 198,558 |
|
| $ | (5,643 | ) |
| $ | 183,421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Balance at December 31, 2022 |
|
| 141,633,417 |
|
| $ | 1,416 |
|
|
| 971,306 |
|
| $ | (11,051 | ) |
| $ | 206,060 |
|
| $ | 30,666 |
|
| $ | 227,091 |
|
Net loss |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| (3,788 | ) |
|
| (3,788 | ) | |
Stock-based compensation |
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| 1,770 |
|
|
| — |
|
|
| 1,770 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||||
Balance at March 31, 2023 |
|
| 141,633,417 |
|
| $ | 1,416 |
|
|
| 971,306 |
|
| $ | (11,051 | ) |
| $ | 207,830 |
|
| $ | 26,878 |
|
| $ | 225,073 |
|
The accompanying notes to the unaudited condensed consolidated financial statements are an integral part of these statements.
9
MONTAUK RENEWABLES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands):
Nine Months Ended September 30, | ||||||||
2022 | 2021 | |||||||
Cash flows from operating activities: | ||||||||
Net income (loss) | $ | 29,224 | $ | (10,021 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | ||||||||
Depreciation, depletion and amortization | 15,453 | 17,062 | ||||||
Provision for deferred income taxes | 6,002 | 1,124 | ||||||
Stock-based compensation | 7,382 | 19,713 | ||||||
Derivative mark-to-market | (1,359 | ) | (1,011 | ) | ||||
Gain on property insurance proceeds | (313 | ) | (238 | ) | ||||
Earn out increase (decrease) | 1,122 | (694 | ) | |||||
Net (gain) loss on sale of assets | (250 | ) | 822 | |||||
Accretion of asset retirement obligations | 174 | 304 | ||||||
Amortization of debt issuance costs | 314 | 395 | ||||||
Impairment loss | 2,393 | 626 | ||||||
Changes in operating assets and liabilities: | ||||||||
Accounts and other receivables and other current assets | (5,252 | ) | (7,272 | ) | ||||
Accounts payable and other accrued expenses | 4,919 | 488 | ||||||
Net cash provided by operating activities | $ | 59,809 | $ | 21,298 | ||||
Cash flows from investing activities | ||||||||
Capital expenditures | $ | (12,750 | ) | $ | (7,702 | ) | ||
Asset acquisition | — | (4,142 | ) | |||||
Cash collateral deposits | 79 | 118 | ||||||
Proceeds from sale of assets | 1,088 | 74 | ||||||
Proceeds from insurance recovery | 313 | 238 | ||||||
Net cash used in investing activities | $ | (11,270 | ) | $ | (11,414 | ) | ||
Cash flows from financing activities: | ||||||||
Repayments of long-term debt | $ | (6,000 | ) | $ | (7,500 | ) | ||
Proceeds from initial public offering | — | 15,593 | ||||||
Treasury stock purchase | (91 | ) | (10,813 | ) | ||||
Loan to Montauk Holdings Limited | — | (7,140 | ) | |||||
Finance lease payments | (15 | ) | — | |||||
Net cash used in financing activities | $ | (6,106 | ) | $ | (9,860 | ) | ||
Net increase (decrease) in cash and cash equivalents and restricted cash | $ | 42,433 | $ | 24 | ||||
Cash and cash equivalents and restricted cash at beginning of period | $ | 53,612 | $ | 21,559 | ||||
Cash and cash equivalents and restricted cash at end of period | $ | 96,045 | $ | 21,583 | ||||
Reconciliation of cash, cash equivalents, and restricted cash at end of period: | ||||||||
Cash and cash equivalents | $ | 95,619 | $ | 20,892 | ||||
Restricted cash and cash equivalents - current | 19 | 118 | ||||||
Restricted cash and cash equivalents - non-current | 407 | 573 | ||||||
$ | 96,045 | $ | 21,583 | |||||
|
| Three Months Ended |
| |||||
|
| March 31, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
Cash flows from operating activities: |
|
|
|
|
|
| ||
Net loss |
| $ | (3,788 | ) |
| $ | (1,115 | ) |
Adjustments to reconcile net loss to net cash provided by operating activities: |
|
|
|
|
|
| ||
Depreciation, depletion and amortization |
|
| 5,196 |
|
|
| 5,153 |
|
Benefit for deferred income taxes |
|
| (13,033 | ) |
|
| (236 | ) |
Stock-based compensation |
|
| 1,770 |
|
|
| 2,334 |
|
Derivative mark-to-market adjustments and settlements |
|
| 396 |
|
|
| 2,415 |
|
Gain on property insurance proceeds |
|
| — |
|
|
| (313 | ) |
Accretion of asset retirement obligations |
|
| 100 |
|
|
| 98 |
|
Net loss (gain) on sale of assets |
|
| 37 |
|
|
| (293 | ) |
Increase in earn-out liability |
|
| 214 |
|
|
| — |
|
Amortization of debt issuance costs |
|
| 93 |
|
|
| 108 |
|
Impairment loss |
|
| 451 |
|
|
| 51 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
| ||
Accounts and other receivables and other current assets |
|
| 1,033 |
|
|
| 2,949 |
|
Accounts payable and other accrued expenses |
|
| (4,307 | ) |
|
| (1,554 | ) |
Net cash (used in) provided by operating activities |
| $ | (11,838 | ) |
| $ | 9,597 |
|
Cash flows from investing activities: |
|
|
|
|
|
| ||
Capital expenditures |
| $ | (13,278 | ) |
| $ | (2,378 | ) |
Proceeds from insurance recovery |
|
| — |
|
|
| 313 |
|
Proceeds from sale of assets |
|
| — |
|
|
| 1,088 |
|
Net cash used in investing activities |
| $ | (13,278 | ) |
| $ | (977 | ) |
Cash flows from financing activities: |
|
|
|
|
|
| ||
Repayments of long-term debt |
| $ | (2,000 | ) |
| $ | (2,000 | ) |
Treasury stock purchase |
|
| — |
|
|
| (91 | ) |
Finance lease payments |
|
| (18 | ) |
|
| — |
|
Net cash used in financing activities |
| $ | (2,018 | ) |
| $ | (2,091 | ) |
Net (decrease) increase in cash and cash equivalents and restricted cash |
| $ | (27,134 | ) |
| $ | 6,529 |
|
Cash and cash equivalents and restricted cash at beginning of period |
| $ | 105,606 |
|
| $ | 53,612 |
|
Cash and cash equivalents and restricted cash at end of period |
| $ | 78,472 |
|
| $ | 60,141 |
|
Reconciliation of cash, cash equivalents, and restricted cash at end of period: |
|
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 78,043 |
|
| $ | 59,794 |
|
Restricted cash and cash equivalents - current |
|
| 22 |
|
|
| 19 |
|
Restricted cash and cash equivalents - non-current |
|
| 407 |
|
|
| 328 |
|
| $ | 78,472 |
|
| $ | 60,141 |
| |
The accompanying notes to the unaudited condensed consolidated financial statements are an integral part of these statements.
10
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 30 years of experience in the development, operation and management of landfill methane-fueled renewable energy projects. The Company has current operations at 15 operating projects located in California, Idaho, Ohio, Oklahoma, Pennsylvania, North Carolina, South Carolina and Texas. The Company sells RNG and Renewable Electricity, taking advantage of Environmental Attribute premiums available under federal and state policies that incentivize their use.
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 60%60% greenhouse gas reduction requirement) RIN. The RINs are compliance units for fuel blenders that were created by the RFS program in order to reduce greenhouse gases and imported petroleum into the United States.
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
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, 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, 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 Form20212022 included in the Company’s Annual Report on Form20222023 (the “2021“2022 Annual Report”). The results of operations for the three months and nine months ended September 30, 2022March 31, 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, 2021,2022, 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, 20212022 in the 20212022 Annual Report.
Segment Reporting
The Company reports segment information in three segments: RNG, Renewable Electricity Generation and Corporate. This is consistent with the internal reporting provided to the chief operating decision maker who evaluates operating results and performance. The aforementioned business services and offerings described in Note 1 are grouped and defined by management as two distinct operating segments: RNG and Renewable Electricity Generation. Below is a description of the Company’s operating segments and other activities.
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 & Other 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 GAAPaccounting 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 expensesexpenses during the reportingperiod.thosethose estimates.
Recently Adopted Accounting Standards Codification (“ASC”) 718,Compensation—Stock Compensation, (“ASC 718”). ASC 718 requires compensation costs related to share-based payment transactions, measured based on the fair value of the instruments issued, be recognized in the consolidated financial statements over the requisite service period of the award. Stock options are initially measured on the grant date using the Black-Scholes valuation model, which requires the use of subjective assumptions related to the expected stock price volatility, term, risk-free interest rate and dividend yield. For restricted stock and restricted stock units, the Company determines the grant date fair value based on the closing market price per share of the stock on the date of the grant.
In SeptemberJune 2016, the Financial Accounting Standards Board (“FASB”)FASB issued Accounting Standards Update 2016-13, Measurement of Credit Losses on Financial Instruments (“ASU”ASU 2016-13”)No. 2016-13,The new guidance changes how entities measure credit losses on financial instruments and the timingApplication of when such losses are recorded. The new standard isASC 326 was effective for SEC Issuers (excluding smaller reporting companies) for fiscal years beginning after December 15, 2022, with early adoption permitted. The Company is currently evaluating2019. Adoption for smaller reporting companies, emerging growth companies and nonpublic entities was deferred due to the impact this ASU will have on its consolidated financial statementsCOVID-19 pandemic and related disclosures.
Recently Issued Accounting Standards
In March 2020, the FASB issued ASU
12
NOTE 3 – ASSET IMPAIRMENT
The Company recorded $2,273an impairment loss of $451 and $0 in impairment losses$51 for the three months ended September 30,March 31, 2023 and 2022, and 2021, respectively and $2,393 and $626 for the nine months ended September 30, 2022 and 2021, respectively. The first quarter 2023 impairment was for a feedstock processing machine component at an RNG site that was not in operational use. The first quarter 2022 impairment primarily related to a REG site ($2,133) wherein the forecasted future cash flows did not exceed the carrying value of the
NOTE 4 – REVENUES FROM CONTRACTS WITH CUSTOMERS
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 nine months ended September 30, 2022March 31, 2023 and 2021:2022:
|
| Three months ended March 31, 2023 |
| |||||||||
|
| Goods transferred at a point in time |
|
| Goods transferred over time |
|
| Total |
| |||
Major goods/Service line: |
|
|
|
|
|
|
|
|
| |||
Natural gas commodity |
| $ | 204 |
|
| $ | 7,877 |
|
| $ | 8,081 |
|
Natural gas environmental attributes |
|
| 6,644 |
|
|
| — |
|
|
| 6,644 |
|
Electric commodity |
|
| — |
|
|
| 2,621 |
|
|
| 2,621 |
|
Electric environmental attributes |
|
| 1,808 |
|
|
| — |
|
|
| 1,808 |
|
| $ | 8,656 |
|
| $ | 10,498 |
|
| $ | 19,154 |
| |
Operating segment: |
|
|
|
|
|
|
|
|
| |||
RNG |
| $ | 6,848 |
|
| $ | 7,877 |
|
| $ | 14,725 |
|
REG |
|
| 1,808 |
|
|
| 2,621 |
|
|
| 4,429 |
|
| $ | 8,656 |
|
| $ | 10,498 |
|
| $ | 19,154 |
| |
|
| Three months ended March 31, 2022 |
| |||||||||
|
| Goods transferred at a point in time |
|
| Goods transferred over time |
|
| Total |
| |||
Major goods/Service line: |
|
|
|
|
|
|
|
|
| |||
Natural gas commodity |
| $ | 405 |
|
| $ | 9,488 |
|
| $ | 9,893 |
|
Natural gas environmental attributes |
|
| 22,710 |
|
|
| — |
|
|
| 22,710 |
|
Electric commodity |
|
| — |
|
|
| 2,385 |
|
|
| 2,385 |
|
Electric environmental attributes |
|
| 1,649 |
|
|
| — |
|
|
| 1,649 |
|
| $ | 24,764 |
|
| $ | 11,873 |
|
| $ | 36,637 |
| |
Operating segment: |
|
|
|
|
|
|
|
|
| |||
RNG |
| $ | 23,115 |
|
| $ | 9,488 |
|
| $ | 32,603 |
|
REG |
|
| 1,649 |
|
|
| 2,385 |
|
|
| 4,034 |
|
|
| $ | 24,764 |
|
| $ | 11,873 |
|
| $ | 36,637 |
|
Three months ended September 30, 2022 | ||||||||||||
Goods transferred at a point in time | Goods transferred over time | Total | ||||||||||
Major goods/Service line: | ||||||||||||
Natural gas commodity | $ | 197 | $ | 15,770 | $ | 15,967 | ||||||
Natural gas environmental attributes | 38,264 | — | 38,264 | |||||||||
Electric commodity | — | 2,736 | 2,736 | |||||||||
Electric environmental attributes | 1,727 | — | 1,727 | |||||||||
| $ | 40,188 | $ | 18,506 | $ | 58,694 | |||||||
Operating segment: | ||||||||||||
RNG | $ | 38,461 | $ | 15,770 | $ | 54,231 | ||||||
REG | 1,727 | 2,736 | 4,463 | |||||||||
| $ | 40,188 | $ | 18,506 | $ | 58,694 | |||||||
Three months ended September 30, 2021 | ||||||||||||
Goods transferred at a point in time | Goods transferred over time | Total | ||||||||||
Major goods/Service line: | ||||||||||||
Natural gas commodity | $ | 2,983 | $ | 8,570 | $ | 11,553 | ||||||
Natural gas environmental attributes | 24,223 | — | 24,223 | |||||||||
Electric commodity | — | 2,305 | 2,305 | |||||||||
Electric environmental attributes | 1,668 | — | 1,668 | |||||||||
| $ | 28,874 | $ | 10,875 | $ | 39,749 | |||||||
Operating Segment: | ||||||||||||
RNG | $ | 27,206 | $ | 8,570 | $ | 35,776 | ||||||
REG | 1,668 | 2,305 | 3,973 | |||||||||
| $ | 28,874 | $ | 10,875 | $ | 39,749 | |||||||
Nine months ended September 30, 2022 | ||||||||||||
Goods transferred at a point in time | Goods transferred over time | Total | ||||||||||
Major goods/Service line: | ||||||||||||
Natural gas commodity | $ | 1,852 | $ | 39,896 | $ | 41,748 | ||||||
Natural gas environmental attributes | 109,620 | — | 109,620 | |||||||||
Electric commodity | — | 7,768 | 7,768 | |||||||||
Electric environmental attributes | 5,092 | — | 5,092 | |||||||||
| $ | 116,564 | $ | 47,664 | $ | 164,228 | |||||||
Operating Segment: | ||||||||||||
RNG | $ | 111,472 | $ | 39,896 | $ | 151,368 | ||||||
REG | 5,092 | 7,768 | 12,860 | |||||||||
| $ | 116,564 | $ | 47,664 | $ | 164,228 | |||||||
Nine months ended September 30, 2021 | ||||||||||||
Goods transferred at a point in time | Goods transferred over time | Total | ||||||||||
Major goods/Service line: | ||||||||||||
Natural gas commodity | $ | 13,293 | $ | 21,620 | $ | 34,913 | ||||||
Natural gas environmental attributes | 56,297 | — | 56,297 | |||||||||
Electric commodity | — | 7,150 | 7,150 | |||||||||
Electric environmental attributes | 4,512 | — | 4,512 | |||||||||
| $ | 74,102 | $ | 28,770 | $ | 102,872 | |||||||
Operating Segment: | ||||||||||||
RNG | $ | 69,590 | $ | 21,620 | $ | 91,210 | ||||||
REG | 4,512 | 7,150 | 11,662 | |||||||||
| $ | 74,102 | $ | 28,770 | $ | 102,872 | |||||||
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 Generalgeneral and administrative expenses in the condensed consolidated statements of operations. ForNo reserve expense was recorded for the three and nine months ended September 30, 2022March 31, 2023 and 2021, there were no reserves for uncollectible accounts.
Accounts and other receivables consist of the following as of September 30, 2022March 31, 2023 and December 31, 2021:
September 30, 2022 | December, 31 2021 | |||||||
Accounts receivables | $ | 12,204 | $ | 9,281 | ||||
Other receivables | 56 | 26 | ||||||
Reimbursable expenses | 4 | 31 | ||||||
Accounts and other receivables | $ | 12,264 | $ | 9,338 | ||||
| March 31, 2023 |
| December 31, 2022 |
| ||
Accounts receivables | $ | 6,214 |
| $ | 7,148 |
|
Other receivables |
| 73 |
|
| 57 |
|
Reimbursable expenses |
| 18 |
|
| 17 |
|
Accounts and other receivables, net | $ | 6,305 |
| $ | 7,222 |
|
13
NOTE 76 – PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment consists of the following as of September 30, 2022March 31, 2023 and December 31, 2021:2022:
| March 31, 2023 |
| December 31, 2022 |
| ||
|
|
|
|
| ||
Land | $ | 595 |
| $ | 595 |
|
Buildings and improvements |
| 29,224 |
|
| 29,268 |
|
Machinery and equipment |
| 247,216 |
|
| 247,631 |
|
Gas mineral rights |
| 35,526 |
|
| 34,526 |
|
Construction work in progress |
| 32,362 |
|
| 20,745 |
|
Total | $ | 344,923 |
| $ | 332,765 |
|
Less: Accumulated depreciation and amortization |
| (161,123 | ) |
| (156,819 | ) |
Property, plant & equipment, net | $ | 183,800 |
| $ | 175,946 |
|
September 30, 2022 | December 31, 2021 | |||||||
Land | $ | 595 | $ | 595 | ||||
Buildings and improvements | 29,081 | 28,693 | ||||||
Machinery and equipment | 244,990 | 246,670 | ||||||
Gas mineral rights | 34,526 | 34,551 | ||||||
Construction work in progress | 17,043 | 12,725 | ||||||
Total | 326,235 | 323,234 | ||||||
Less: Accumulated depreciation and amortization | (152,267 | ) | (142,341 | ) | ||||
Property, plant & equipment, net | $ | 173,968 | $ | 180,893 | ||||
Depreciation expense for property, plant and equipment was $4,808$4,807 and $4,839 for the three months ended September 30, 2022$4,810 and 2021, respectively, and $14,407 and $14,637 for the nine months ended September 30, 2022 and 2021, respectively. Amortizationamortization expense for gas mineral rights was $129 and $446$128 for both the three months ended September 30,March 31, 2023 and 2022, and 2021, respectively, and $385 and $1,382respectively.
NOTE 87 – GOODWILL AND INTANGIBLE ASSETS, NET
Goodwill and Intangible assets consist of the following as of September 30, 2022March 31, 2023 and December 31, 2021:2022:
|
| March 31, 2023 |
|
| December 31, 2022 |
| ||
Goodwill |
| $ | 60 |
|
| $ | 60 |
|
Intangible assets with indefinite lives: |
|
|
|
|
|
| ||
Land use rights |
|
| 329 |
|
|
| 329 |
|
Total intangible assets with indefinite lives: |
| $ | 329 |
|
| $ | 329 |
|
Intangible assets with finite lives: |
|
|
|
|
|
| ||
Interconnection, net of accumulated amortization of $3,292 and $3,107 |
| $ | 11,501 |
|
| $ | 11,686 |
|
Customer contracts, net of accumulated amortization of $17,080 and $17,022 |
|
| 3,622 |
|
|
| 3,680 |
|
Total intangible assets with finite lives: |
| $ | 15,123 |
|
| $ | 15,366 |
|
Total Goodwill and Intangible assets |
| $ | 15,512 |
|
| $ | 15,755 |
|
September 30, 2022 | December 31, 2021 | |||||||
Goodwill | $ | 60 | $ | 60 | ||||
Intangible assets with indefinite lives: | ||||||||
Land use rights | 329 | 329 | ||||||
Intangible assets with finite lives: | ||||||||
Interconnections, net of accumulated amortization of $2,921 and $3,034 | $ | 11,871 | $ | 12,526 | ||||
Customer contracts, net of accumulated amortization of $16,964 and $17,085 | $ | 3,637 | $ | 1,198 | ||||
Total intangible assets with finite lives: | $ | 15,508 | $ | 13,724 | ||||
Total Goodwill and Intangible assets | $ | 15,897 | $ | 14,113 | ||||
As of March 31, 2023, the weighted average remaining useful life of the customer contracts and interconnection is approximately were both 16 years for both intangible classes.. Amortization expense was $230$243 and $381$215 for the three months ended September 30,March 31, 2023 and 2022, and 2021, respectively, and $661 and $1,043respectively.
NOTE 98 – ASSET RETIREMENT OBLIGATIONS
The following table summarizes the activity associated with asset retirement obligations of the Company as of September 30, 2022March 31, 2023 and December 31, 2021:2022:
| Three months ended March 31, 2023 |
| Year ended December 31, 2022 |
| ||
Asset retirement obligations—beginning of period | $ | 5,493 |
| $ | 5,301 |
|
Accretion expense |
| 100 |
|
| 296 |
|
Decommissioning | — |
|
| (104 | ) | |
Asset retirement obligations—end of period | $ | 5,593 |
| $ | 5,493 |
|
Nine months ended September 30, 2022 | Year ended December 31, 2021 | |||||||
Asset retirement obligations - beginning of period | $ | 5,301 | $ | 5,689 | ||||
Accretion expense | 174 | (160 | ) | |||||
Decommissioning | (78 | ) | (228 | ) | ||||
Asset retirement obligations - end of period | $ | 5,397 | $ | 5,301 | ||||
NOTE 109 – 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. As a result of the economic hedging strategies employed, the
14
Company had the following realized and unrealized gains and losses in the condensed consolidated statements of operations for the three and nine months ended September 30, 2022March 31, 2023 and 2021:2022:
Derivative Instrument | Location | Three months ended March 31, 2023 |
| Three months ended March 31, 2022 |
| ||
Commodity contracts: |
|
|
|
|
| ||
Realized natural gas | Operating revenue | $ | — |
| $ | (1,016 | ) |
Unrealized natural gas | Operating revenue |
| — |
|
| (3,451 | ) |
Interest rate swaps | Interest expense |
| (396 | ) |
| 1,036 |
|
Net loss |
| $ | (396 | ) | $ | (3,431 | ) |
Three months ended | ||||||||
Derivative Instrument | September 30, 2022 | September 30, 2021 | ||||||
Commodity contracts: | ||||||||
Realized natural gas | $ | (3,201 | ) | $ | — | |||
Unrealized natural gas | 367 | — | ||||||
Interest rate swaps | 1,149 | 287 | ||||||
Net gain (loss) | $ | (1,685 | ) | $ | 287 | |||
Nine months ended | ||||||||
Derivative Instrument | September 30, 2022 | September 30, 2021 | ||||||
Commodity contracts: | ||||||||
Realized natural gas | $ | (6,872 | ) | $ | — | |||
Unrealized natural gas | (1,440 | ) | — | |||||
Interest rate swaps | 2,799 | 1,011 | ||||||
Net gain (loss) | $ | (5,513 | ) | $ | 1,011 | |||
NOTE 1110 – 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 September 30, 2022March 31, 2023 and December 31, 2021,2022, set forth by level, within the fair value hierarchy:
| March 31, 2023 |
| ||||||||||
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| ||||
Interest rate swap derivative asset | $ | — |
| $ | 1,419 |
|
|
| $ | 1,419 |
| |
Asset retirement obligations |
| — |
|
| — |
|
| (5,593 | ) |
| (5,593 | ) |
Pico earn-out liability |
| — |
|
| — |
|
| (4,057 | ) |
| (4,057 | ) |
|
|
|
|
|
|
|
| |||||
$ | — |
| $ | 1,419 |
| $ | (9,650 | ) | $ | (8,231 | ) | |
| December 31, 2022 |
| ||||||||||
| Level 1 |
| Level 2 |
| Level 3 |
| Total |
| ||||
Interest rate swap derivative asset | $ | — |
| $ | 1,815 |
| $ | — |
| $ | 1,815 |
|
Asset retirement obligations |
| — |
|
| — |
|
| (5,493 | ) |
| (5,493 | ) |
Pico earn-out liability |
| — |
|
| — |
|
| (3,843 | ) |
| (3,843 | ) |
|
|
|
|
|
|
|
| |||||
$ | — |
| $ | 1,815 |
| $ | (9,336 | ) | $ | (7,521 | ) | |
September 30, 2022 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Commodity derivative liability | $ | (1,440 | ) | — | — | $ | (1,440 | ) | ||||||||
Interest rate swap derivative asset | — | 1,962 | — | 1,962 | ||||||||||||
Asset retirement obligations | — | — | (5,397 | ) | (5,397 | ) | ||||||||||
Earn-out liability | — | — | (3,843 | ) | (3,843 | ) | ||||||||||
| $ | (1,440 | ) | $ | 1,962 | $ | (9,240 | ) | $ | (8,718 | ) | ||||||
December 31, 2021 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Interest rate swap derivative liability | $ | — | $ | (839 | ) | $ | — | $ | (839 | ) | ||||||
Asset retirement obligations | — | — | (5,301 | ) | (5,301 | ) | ||||||||||
Earn-out liability | — | — | (2,721 | ) | (2,721 | ) | ||||||||||
| $ | — | $ | (839 | ) | $ | (8,022 | ) | $ | (8,861 | ) | ||||||
A summary of changes in the fair values of the Company’s Level 3 instruments, attributable to asset retirement obligations, for the ninethree months ended September 30, 2022March 31, 2023 and the year ended December 31, 20212022 is included in Note 9.8. In addition, certain assets are measured at fair value on a
NOTE 1211 – ACCRUED LIABILITIES
The Company’s accrued liabilities consists of the following as of September 30, 2022March 31, 2023 and December 31, 2021:2022:
| March 31, 2023 |
| December 31, 2022 |
| ||
Accrued expenses | $ | 5,241 |
| $ | 3,221 |
|
Payroll and related benefits |
| 1,640 |
|
| 1,561 |
|
Royalty |
| 2,220 |
|
| 7,836 |
|
Utility |
| 1,401 |
|
| 1,605 |
|
Other |
| 852 |
|
| 867 |
|
Accrued liabilities | $ | 11,354 |
| $ | 15,090 |
|
15
September 30, 2022 | December 31, 2021 | |||||||
Accrued expenses | $ | 5,454 | $ | 3,551 | ||||
Payroll and related benefits | 2,498 | 1,239 | ||||||
Royalty | 6,796 | 4,630 | ||||||
Utility | 1,569 | 1,274 | ||||||
Other | 926 | 129 | ||||||
Accrued liabilities | $ | 17,243 | $ | 10,823 | ||||
NOTE 1312 – DEBT
The Company’s debt consists of the following as of September 30, 2022March 31, 2023 and December 31, 2021:2022:
| March 31, 2023 |
| December 31, 2022 |
| ||
Term loans | $ | 70,000 |
| $ | 72,000 |
|
Less: current principal maturities |
| (8,000 | ) |
| (8,000 | ) |
Less: debt issuance costs (on long-term debt) |
| (467 | ) |
| (495 | ) |
Long-term debt | $ | 61,533 |
| $ | 63,505 |
|
Current portion of long-term debt |
| 7,876 |
|
| 7,870 |
|
| $ | 69,409 |
| $ | 71,375 |
|
September 30, 2022 | December 31, 2021 | |||||||
Term loans | $ | 74,000 | $ | 80,000 | ||||
Less: current principal maturities | (8,000 | ) | (8,000 | ) | ||||
Less: debt issuance costs (on long-term debt) | (515 | ) | (608 | ) | ||||
Long-term debt | $ | 65,485 | $ | 71,392 | ||||
Current portion of long- term debt | 7,854 | 7,815 | ||||||
$ | 73,339 | $ | 79,207 | |||||
Amended Credit Agreement
On December 12, 2018, Montauk Energy Holdings LLC (“MEH”) 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.
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 IPO to be completed.
On December 21, 2021, MEH entered into the Fourth Amendmentfourth amendment to the Second Amended and Restated Revolving Credit and Term Loan Agreement (the “Fourth Amendment”("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 $80,000$80,000 term loan and a $120,000$120,000 revolving credit facility. The term loan amortizes in quarterly installments of $2,000$2,000 through 2024, then increases to $3,000$3,000 from 2025 to 2026 with a final payment of $32,000$32,000 in late 2026.
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 $2,027 in fees. Of this amount, $326 was expensed and $1,701 was capitalized and will be amortized over the life of the Credit Agreement. Amortized debt issuance expense was $93 and $108 for the three months ended March 31, 2023 and 2022, respectively and was recorded as interest expense on the statement of operations.
As of September 30, 2022, $74,000March 31, 2023, $70,000 was outstanding under the term loan. In addition, the Company had $3,905$4,477 of outstanding letters of credit as of September 30, 2022.March 31, 2023. Amounts available under the revolving credit facility are reduced by any amounts outstanding under letters of credit. As of September 30, 2022,March 31, 2023, the Company’s capacity available for borrowing under the revolving credit facility was $116,095.$115,523. Borrowings of the term loans and revolving credit facility bear interest at the Bloomberg Short-Term Bank Yield Index Rate plus an applicable margin. Interest rates as of September 30, 2022March 31, 2023 and December 31, 20212022 were 3.28%6.64% and 2.91%4.12%, respectively.
As of September 30, 2022,March 31, 2023, the Company was in compliance with all applicable financial covenants under the Credit Agreement.
16
NOTE 1413 – INCOME TAXES
The Company’s provision for income taxes in interim periods is typically computed by applying the estimated annual effective tax ratesrate to income or loss before income taxes for the period. In addition,periodperiod(s) in which they occur. For
|
| Three Months Ended |
| |||||
|
| March 31, 2023 |
|
| March 31, 2022 |
| ||
Benefit for income taxes |
| $ | (12,060 | ) |
| $ | (258 | ) |
Effective tax rate |
|
| 76 | % |
|
| 19 | % |
Income tax expense for the three months ended September 30, 2022, the Company utilized full yearpre-taxincome andMarch 31, 2023 was calculated an estimated effective tax rate. The Company utilizedusing an estimated effective tax rate which differs from the U.S. federal statutory rate of 21% primarily due to the adjustment for the nine months ended September 30, 2022. For the nine months ended September 30, 2021, the Company calculated an unusually high estimated annualproduction tax credits and 162(m) compensation limit adjustment. The effective tax rate such that a reliable estimate of the annual effective tax rate could not be made. As such, the Company utilized the actual effective tax rate for the three and nine months endedSeptember 30, 2021.
Three Months Ended | ||||||||
September 30, 2022 | September 30, 2021 | |||||||
Provision (benefit) for income taxes | $ | 2,540 | $ | (3,481 | ) | |||
Effective tax rate | 19 | % | (64 | )% | ||||
Nine Months Ended | ||||||||
September 30, 2022 | September 30, 2021 | |||||||
Provision for income taxes | $ | 6,847 | $ | 1,286 | ||||
Effective tax rate | 19 | % | (15 | )% | ||||
Income tax expense for the three months ended March 31, 2022 was calculated using an estimated effective tax rate which differs from the U.S. federal statutory rate of 21% primarily due to the current year permanent disallowance of officers’ compensation being less than the prior year permanent disallowance of officers’ compensation under Section 162(m) of the Internal Revenue Code of 1986, as amended (the “Code”).
NOTE 1514 – 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 ofstockshare awards to the employees of Montauk Renewables and its subsidiaries in January 2021. In connection with the restricted stockshare awards, the officers of the Company made elections under Section 83(b) of the Code. Pursuant to such elections, the Company withheld 950,214 shares of common stock from such awards at a price of $11.38$11.38 per share from such awards. The Company records and reports share-based compensation for stock options, restricted stock,shares and restricted stock units overwhen vested and in the requisite vesting period, andcase of options, when such awards are settled in the Company’s common stock. As of March 31, 2023, unrecognized MRI EICP compensation expense for awards the Company expects to vest was $15,332 and will be settled in shares of common stock of Montauk Renewables.
In connection with a May 2021 asset acquisition, 1,250,000 restricted stockshare awards (“RS Awards”) were granted to two
The amended awards vest through 2026.
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 the award was granted and the exercise and settlement of options into shares as of the exercise date.date(s). The fair value of the MRI EICP options werewas estimated using the Black-Scholes option pricing model with the following weighted-average assumptions (no dividends were expected):
|
| Grant Date |
| |
Risk-free interest rate |
|
| 0.5 | % |
Expected volatility |
|
| 32.0 | % |
Expected option life (in years) |
|
| 5.5 |
|
Grant-date fair value |
| $ | 3.44 |
|
Grant Date | ||||
Risk-free interest rate | 0.5 | % | ||
Expected volatility | 32.0 | % | ||
Expected option life (in years) | 5.5 | |||
Grant-date fair value | $ | 3.44 | ||
17
The following table summarizes the restricted shares, restricted stock units and options outstanding under the MRI EICP as September 30,of March 31, 2023 and March 31, 2022, and September 30, 2021, respectively:
|
| Restricted Shares |
|
| Restricted Stock Units |
|
| Options |
| |||||||||||||||
|
| Number of |
|
| Weighted |
|
| Number of |
|
| Weighted |
|
| Number of |
|
| Weighted |
| ||||||
End of period - December 31, 2022 |
|
| 2,028,301 |
|
| $ | 11.80 |
|
|
| 280,000 |
|
| $ | 10.13 |
|
|
| — |
|
| $ | — |
|
Beginning of period - January 1, 2023 |
|
| 2,028,301 |
|
| $ | 11.80 |
|
|
| 280,000 |
|
| $ | 10.13 |
|
|
| — |
|
| $ | — |
|
Granted |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Vested |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Forfeited |
|
| — |
|
|
| — |
|
|
| (80,000 | ) |
| 10.23 |
|
|
| — |
|
|
| — |
| |
Exercised |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
End of period - March 31, 2023 |
|
| 2,028,301 |
|
| $ | 11.80 |
|
|
| 200,000 |
|
| $ | 10.09 |
|
|
| — |
|
| $ | — |
|
|
| Restricted Shares |
|
| Restricted Stock Units |
|
| Options |
| |||||||||||||||
|
| Number of |
|
| Weighted |
|
| Number of |
|
| Weighted |
|
| Number of |
|
| Weighted |
| ||||||
End of period - December 31, 2021 |
|
| 2,569,613 |
|
| $ | 10.08 |
|
|
| 377,984 |
|
| $ | 10.23 |
|
|
| 950,214 |
|
| $ | 11.38 |
|
Beginning of period - January 1, 2022 |
|
| 2,569,613 |
|
| $ | 10.08 |
|
|
| 377,984 |
|
| $ | 10.23 |
|
|
| 950,214 |
|
| $ | 11.38 |
|
Granted |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Vested |
|
| (23,705 | ) |
|
| 11.38 |
|
|
| (27,984 | ) |
|
| 11.38 |
|
|
| (950,214 | ) |
|
| 11.38 |
|
Forfeited |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
Exercised |
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
|
| — |
|
End of period - March 31, 2022 |
|
| 2,545,908 |
|
| $ | 10.07 |
|
|
| 350,000 |
|
| $ | 10.13 |
|
|
| — |
|
| $ | — |
|
Restricted Shares | Restricted Stock Units | Options | ||||||||||||||||||||||
Number of Shares | Weighted Average Grant Date Fair Value | Number of Shares | Weighted Average Grant Date Fair Value | Number of Shares | Weighted Average Exercise Price | |||||||||||||||||||
End of period - December 31, 2021 | 2,569,613 | $ | 10.08 | 377,984 | $ | 10.23 | 950,214 | $ | 11.38 | |||||||||||||||
Beginning of period - January 1, 2022 | 2,569,613 | $ | 10.08 | 377,984 | $ | 10.23 | 950,214 | $ | 11.38 | |||||||||||||||
Granted | 1,250,000 | 12.40 | — | — | — | — | ||||||||||||||||||
Vested | (256,681 | ) | 11.38 | (27,984 | ) | 11.38 | (950,214 | ) | 11.38 | |||||||||||||||
Forfeited | (1,250,000 | ) | 9.04 | — | — | — | — | |||||||||||||||||
End of period – September 30, 2022 | 2,312,932 | $ | 11.75 | 350,000 | $ | 10.13 | — | $ | — | |||||||||||||||
As of March 31, 2023 none of the 950,214 vested options were exercised during either the three or nine months ended September 30, 2022.have been exercised.
Restricted Shares | Restricted Stock Units | Options | ||||||||||||||||||||||
Number of Shares | Weighted Average Grant Date Fair Value | Number of Shares | Weighted Average Grant Date Fair Value | Number of Shares | Weighted Average Exercise Price | |||||||||||||||||||
End of period - December 31, 2020 | — | $ | — | — | $ | — | — | $ | — | |||||||||||||||
Beginning of period - January 1, 2021 | — | $ | — | — | $ | — | — | $ | — | |||||||||||||||
Granted | 3,519,827 | 10.43 | 29,304 | 11.38 | 950,214 | 11.38 | ||||||||||||||||||
Vested | (950,214 | ) | 11.38 | — | — | — | — | |||||||||||||||||
Forfeited | — | — | (1,056 | ) | 11.38 | — | — | |||||||||||||||||
Exercised | — | — | — | — | — | — | ||||||||||||||||||
End of period – September 30, 2021 | 2,569,613 | $ | 10.08 | 28,248 | $ | 11.38 | 950,214 | $ | 11.38 | |||||||||||||||
NOTE 1615 – DEFINED CONTRIBUTION PLAN
The Company maintains a 401(k) defined contribution plan for eligible employees. The Company matches 50%50% of an employee’s deferrals up to 4%4%. The Company also contributes 3%3% of eligible employee’s compensation expense as a safe harbor contribution. The matching contributions vest ratably over four years of service, while the safe harbor contributions vest immediately. Incurred expense related to the 401(k) plan was $166$143 and $145$167 for the three months ended September 30,March 31, 2023 and 2022, and 2021, respectively, and $519 and $414 for the nine months ended September 30, 2022 and 2021, respectively.
Note 1716 – RELATED PARTY TRANSACTIONS
On January 26, 2021, the Company entered into a Loan Agreement and Secured Promissory Note (the “Promissory“Initial Promissory Note”) with MNK.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 $5,000$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, and December, 22, 2021, the Company and MNK amendedentered into an Amended and restated theRestated Promissory Note (together, the(the “Amended Promissory Note”) to increase the principal amount of the loan to a total of $8,940,$7,140, in the aggregate, and on December 22, 2021 entered into the Second 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 of the Second Amended and Restated Loan Agreement and Secured Promissory Note (the “First Amendment of Second Amended Promissory Note”) to amend the maturity date of 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. The terms of the Amended Promissory Note provide the Company a security interest of 800,000
Under applicable guidance for variable interest entities in ASC 810,
18
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 secondary listing on the JSE,secondarily listed Johannesburg Stock Exchange trading symbol, for expenses incurred on behalf of the Company. Amounts reimbursed were $4$59 and $134$3 for the three months ended September 30,March 31, 2023 and 2022, respectively. $41and 2021, respectively, and $12 and $863 for the nine months ended September 30, 2022 and 2021, respectively. $52 and $0$26 were owed as of September 30, 2022March 31, 2023 and December 31, 2021,2022, respectively.
NOTE 1817 – SEGMENT INFORMATION
The Company’s reportable segments for the three and nine months ended September 30,March 31, 2023 and 2022 and 2021 are Renewable Natural Gas,Generation and Corporate. Generation. Renewable Natural
|
| Three Months Ended March 31, 2023 |
| |||||||||||||
|
| RNG |
|
| REG |
|
| Corporate |
|
| Total |
| ||||
Total revenue |
| $ | 14,785 |
|
| $ | 4,369 |
|
| $ | - |
|
| $ | 19,154 |
|
Net (loss) income |
|
| (4,340 | ) |
|
| (265 | ) |
|
| 817 |
|
|
| (3,788 | ) |
EBITDA |
|
| (493 | ) |
|
| 1,022 |
|
|
| (9,506 | ) |
|
| (8,977 | ) |
Adjusted EBITDA (1) |
|
| (5 | ) |
|
| 1,022 |
|
|
| (9,423 | ) |
|
| (8,406 | ) |
Total assets |
|
| 156,750 |
|
|
| 54,846 |
|
|
| 112,741 |
|
|
| 324,337 |
|
Capital expenditures |
|
| 10,241 |
|
|
| 3,031 |
|
|
| 6 |
|
|
| 13,278 |
|
Three Months Ended September 30, 2022 | ||||||||||||||||
RNG | REG | Corporate | Total | |||||||||||||
Total revenue | $ | 54,343 | $ | 4,351 | $ | (2,834 | ) | $ | 55,860 | |||||||
Net income (loss) | 26,841 | (1,689 | ) | (13,965 | ) | 11,187 | ||||||||||
EBITDA (1) | 30,572 | (326 | ) | (11,316 | ) | 18,930 | ||||||||||
Adjusted EBITDA (1) | 30,615 | 1,807 | (11,543 | ) | 20,879 | |||||||||||
Total assets | 152,113 | 53,303 | 118,527 | 323,943 | ||||||||||||
Capital expenditures | 6,225 | 1,061 | 315 | 7,601 | ||||||||||||
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 September 30, 2022:
Three Months Ended September 30, 2022 | ||||||||||||||||
RNG | REG | Corporate | Total | |||||||||||||
Net income (loss) | $ | 26,841 | $ | (1,689 | ) | $ | (13,965 | ) | $ | 11,187 | ||||||
Depreciation and amortization | 3,731 | 1,363 | 73 | 5,167 | ||||||||||||
Interest expense | — | — | 36 | 36 | ||||||||||||
Income tax expense | — | — | 2,540 | 2,540 | ||||||||||||
EBITDA | $ | 30,572 | $ | (326 | ) | $ | (11,316 | ) | $ | 18,930 | ||||||
Net loss on sale of assets | 43 | — | — | 43 | ||||||||||||
Impairment loss | — | 2,133 | 140 | 2,273 | ||||||||||||
Unrealized gains on hedging activities | — | — | (367 | ) | (367 | ) | ||||||||||
Adjusted EBITDA | $ | 30,615 | $ | 1,807 | $ | (11,543 | ) | $ | 20,879 | |||||||
Three Months Ended September 30, 2021 | ||||||||||||||||
RNG | REG | Corporate | Total | |||||||||||||
Total revenue | $ | 35,002 | $ | 3,872 | $ | 875 | $ | 39,749 | ||||||||
Net income (loss) | 15,071 | (1,379 | ) | (4,796 | ) | 8,896 | ||||||||||
EBITDA (1) | 19,358 | (44 | ) | (7,536 | ) | 11,778 | ||||||||||
Adjusted EBITDA (1) | 20,180 | (24 | ) | (7,324 | ) | 12,832 | ||||||||||
Total assets | 153,108 | 53,711 | 52,926 | 259,745 | ||||||||||||
Capital expenditures | 1,864 | 1,321 | 49 | 3,234 | ||||||||||||
|
| Three Months Ended March 31, 2023 |
| |||||||||||||
|
| RNG |
|
| REG |
|
| Corporate |
|
| Total |
| ||||
Net (loss) income |
| $ | (4,340 | ) |
| $ | (265 | ) |
| $ | 817 |
|
| $ | (3,788 | ) |
Depreciation, depletion and amortization |
|
| 3,847 |
|
|
| 1,287 |
|
|
| 62 |
|
|
| 5,196 |
|
Interest expense |
|
| — |
|
|
| — |
|
|
| 1,675 |
|
|
| 1,675 |
|
Income tax benefit |
|
| — |
|
|
| — |
|
|
| (12,060 | ) |
|
| (12,060 | ) |
EBITDA |
| $ | (493 | ) |
| $ | 1,022 |
|
| $ | (9,506 | ) |
| $ | (8,977 | ) |
Impairment loss |
|
| 451 |
|
|
| — |
|
|
| — |
|
|
| 451 |
|
Net loss on sale of assets |
|
| 37 |
|
|
| — |
|
|
| — |
|
|
| 37 |
|
Transaction costs |
|
| — |
|
|
| — |
|
|
| 83 |
|
|
| 83 |
|
Adjusted EBITDA |
| $ | (5 | ) |
| $ | 1,022 |
|
| $ | (9,423 | ) |
| $ | (8,406 | ) |
19
|
| Three Months Ended March 31, 2022 |
| |||||||||||||
|
| RNG |
|
| REG |
|
| Corporate |
|
| Total |
| ||||
Total revenue |
| $ | 32,665 |
|
| $ | 3,971 |
|
| $ | (4,467 | ) |
| $ | 32,169 |
|
Net Income (loss) |
|
| 12,940 |
|
|
| (1,178 | ) |
|
| (12,877 | ) |
|
| (1,115 | ) |
EBITDA |
|
| 16,620 |
|
|
| 214 |
|
|
| (13,022 | ) |
|
| 3,812 |
|
Adjusted EBITDA (1) |
|
| 16,327 |
|
|
| 214 |
|
|
| (9,493 | ) |
|
| 7,048 |
|
Total assets |
|
| 147,981 |
|
|
| 56,818 |
|
|
| 82,183 |
|
|
| 286,982 |
|
Capital expenditures |
|
| 1,012 |
|
|
| 1,361 |
|
|
| 5 |
|
|
| 2,378 |
|
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 September 30, 2021:March 31, 2022:
|
| Three Months Ended March 31, 2022 |
| |||||||||||||
|
| RNG |
|
| REG |
|
| Corporate |
|
| Total |
| ||||
Net Income (loss) |
| $ | 12,940 |
|
| $ | (1,178 | ) |
| $ | (12,877 | ) |
| $ | (1,115 | ) |
Depreciation, depletion and amortization |
|
| 3,680 |
|
|
| 1,392 |
|
|
| 81 |
|
|
| 5,153 |
|
Interest expense |
|
| — |
|
|
| — |
|
|
| 32 |
|
|
| 32 |
|
Income tax benefit |
|
| — |
|
|
| — |
|
|
| (258 | ) |
|
| (258 | ) |
EBITDA |
| $ | 16,620 |
|
| $ | 214 |
|
| $ | (13,022 | ) |
| $ | 3,812 |
|
Impairment loss |
|
| — |
|
|
| — |
|
|
| 51 |
|
|
| 51 |
|
Net gain on sale of assets |
|
| (293 | ) |
|
|
|
|
|
|
|
| (293 | ) | ||
Transaction costs |
|
| — |
|
|
| — |
|
|
| 27 |
|
|
| 27 |
|
Non cash hedging charges |
|
| — |
|
|
| — |
|
|
| 3,451 |
|
|
| 3,451 |
|
Adjusted EBITDA |
| $ | 16,327 |
|
| $ | 214 |
|
| $ | (9,493 | ) |
| $ | 7,048 |
|
Three Months Ended September 30, 2021 | ||||||||||||||||
RNG | REG | Corporate | Total | |||||||||||||
Net income (loss) | $ | 15,071 | $ | (1,379 | ) | $ | (4,796 | ) | $ | 8,896 | ||||||
Depreciation and amortization | 4,287 | 1,335 | 44 | 5,666 | ||||||||||||
Interest expense | — | — | 697 | 697 | ||||||||||||
Income tax benefit | — | — | (3,481 | ) | (3,481 | ) | ||||||||||
EBITDA | $ | 19,358 | $ | (44 | ) | $ | (7,536 | ) | $ | 11,778 | ||||||
Net loss sale of assets | 822 | — | — | 822 | ||||||||||||
Transaction costs | — | 20 | 212 | 232 | ||||||||||||
Adjusted EBITDA | $ | 20,180 | $ | (24 | ) | $ | (7,324 | ) | $ | 12,832 | ||||||
For the three months ended September 30,March 31, 2023 and 2022, and 2021, two and three customers, respectively, made up greater than 10% of total revenues.
Three Months Ended September 30, 2022 | ||||||||||||||||
RNG | REG | Corporate | Total | |||||||||||||
Customer A | 43.9 | % | — | — | 43.9 | % | ||||||||||
Customer B | 12.4 | % | — | — | 12.4 | % | ||||||||||
Three Months Ended September 30, 2021 | ||||||||||||||||
RNG | REG | Corporate | Total | |||||||||||||
Customer A | 19.6 | % | — | — | 19.6 | % | ||||||||||
Customer B | 15.4 | % | — | — | 15.4 | % | ||||||||||
Customer C | 11.4 | % | — | — | 11.4 | % | ||||||||||
Nine Months Ended September 30, 2022 | ||||||||||||||||
RNG | REG | Corporate | Total | |||||||||||||
Total revenue | $ | 151,577 | $ | 12,651 | $ | (8,312 | ) | $ | 155,916 | |||||||
Net income (loss) | 75,021 | (4,284 | ) | (41,513 | ) | 29,224 | ||||||||||
EBITDA (1) | 86,109 | (126 | ) | (34,120 | ) | 51,863 | ||||||||||
Adjusted EBITDA (1) | 86,197 | 1,738 | (32,457 | ) | 55,478 | |||||||||||
Total assets | 152,113 | 53,303 | 118,527 | 323,943 | ||||||||||||
Capital expenditures | 10,039 | 2,390 | 321 | 12,750 | ||||||||||||
Nine Months Ended September 30, 2022 | ||||||||||||||||
RNG | REG | Corporate | Total | |||||||||||||
Net Income (loss) | $ | 75,021 | $ | (4,284 | ) | $ | (41,513 | ) | $ | 29,224 | ||||||
Depreciation and amortization | 11,088 | 4,158 | 207 | 15,453 | ||||||||||||
Interest expense | — | — | 339 | 339 | ||||||||||||
Income tax expense | — | — | 6,847 | 6,847 | ||||||||||||
EBITDA | $ | 86,109 | $ | (126 | ) | $ | (34,120 | ) | $ | 51,863 | ||||||
Net loss (gain) sale of assets | 61 | (311 | ) | — | (250 | ) | ||||||||||
Impairment loss | 27 | 2,175 | 191 | 2,393 | ||||||||||||
Unrealized losses on hedging activities | — | — | 1,440 | 1,440 | ||||||||||||
Transaction costs | — | — | 32 | 32 | ||||||||||||
Adjusted EBITDA | $ | 86,197 | $ | 1,738 | $ | (32,457 | ) | $ | 55,478 | |||||||
Nine Months Ended September 30, 2021 | ||||||||||||||||
RNG | REG | Corporate | Total | |||||||||||||
Total revenue | $ | 90,707 | $ | 11,290 | $ | 875 | $ | 102,872 | ||||||||
Net income (loss) | 33,205 | (3,647 | ) | (39,579 | ) | (10,021 | ) | |||||||||
EBITDA (1) | 45,991 | 498 | (36,098 | ) | 10,391 | |||||||||||
Adjusted EBITDA (1) | 46,813 | 1,144 | (35,761 | ) | 12,196 | |||||||||||
Total assets | 153,108 | 53,711 | 52,926 | 259,745 | ||||||||||||
Capital expenditures | 5,883 | 1,770 | 49 | 7,702 | ||||||||||||
Nine Months Ended September 30, 2021 | ||||||||||||||||
RNG | REG | Corporate | Total | |||||||||||||
Net income (loss) | $ | 33,205 | $ | (3,647 | ) | $ | (39,579 | ) | $ | (10,021 | ) | |||||
Depreciation and amortization | 12,786 | 4,143 | 133 | 17,062 | ||||||||||||
Interest expense | — | — | 2,064 | 2,064 | ||||||||||||
Income tax expense | — | 2 | 1,284 | 1,286 | ||||||||||||
EBITDA | $ | 45,991 | $ | 498 | $ | (36,098 | ) | $ | 10,391 | |||||||
Net loss sale of assets | 822 | — | — | 822 | ||||||||||||
Impairment loss | — | 626 | — | 626 | ||||||||||||
Transaction costs | — | 20 | 337 | 357 | ||||||||||||
Adjusted EBITDA | $ | 46,813 | $ | 1,144 | $ | (35,761 | ) | $ | 12,196 | |||||||
|
| Three Months Ended March 31, 2023 |
| |||||||||||||
|
| RNG |
|
| REG |
|
| Corporate |
|
| Total |
| ||||
Customer A |
|
| — |
|
|
| 21.0 | % |
|
| — |
|
|
| 21.0 | % |
Customer B |
|
| 19.8 | % |
|
| — |
|
|
| — |
|
|
| 19.8 | % |
Customer C |
|
| 17.3 | % |
|
| — |
|
|
| — |
|
|
| 17.3 | % |
Customer D |
|
| 10.5 | % |
|
| — |
|
|
| — |
|
|
| 10.5 | % |
|
| Three Months Ended March 31, 2022 |
| |||||||||||||
|
| RNG |
|
| REG |
|
| Corporate |
|
| Total |
| ||||
Customer A |
|
| 24.3 | % |
|
| — |
|
|
| — |
|
|
| 24.3 | % |
Customer B |
|
| 16.1 | % |
|
| — |
|
|
| — |
|
|
| 16.1 | % |
Customer C |
|
| — |
|
|
| 11.2 | % |
|
| — |
|
|
| 11.2 | % |
Customer D |
|
| 10.6 | % |
|
| — |
|
|
| — |
|
|
| 10.6 | % |
Customer E |
|
| 10.3 | % |
|
| — |
|
|
| — |
|
|
| 10.3 | % |
Nine Months Ended September 30, 2022 | ||||||||||||||||
RNG | REG | Corporate | Total | |||||||||||||
Customer A | 31.6 | % | — | — | 31.6 | % | ||||||||||
Customer B | 13.2 | % | — | — | 13.2 | % | ||||||||||
Nine Months Ended September 30, 2021 | ||||||||||||||||
RNG | REG | Corporate | Total | |||||||||||||
Customer A | 12.8 | % | — | — | 12.8 | % | ||||||||||
Customer B | 12.4 | % | — | — | 12.4 | % | ||||||||||
Customer C | 11.3 | % | — | — | 11.3 | % | ||||||||||
Customer D | 10.5 | % | — | — | 10.5 | % | ||||||||||
Customer E | — | 10.2 | % | — | 10.2 | % | ||||||||||
NOTE 1918 – 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 2027.2033. 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,Lease Accounting.
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.
20
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
The Company has elected, as a practical expedient, not to separate
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.
Supplemental information related to operating lease arrangements was as follows:
|
| Three months ended |
| |||||
|
| March 31, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
Cash paid for amounts included in the measurement of operating lease liabilities |
| $ | 86 |
|
| $ | 64 |
|
Weighted average remaining lease term (in years) |
|
| 5.92 |
|
|
| 1.05 |
|
Weighted average discount rate |
|
| 5.00 | % |
|
| 5.00 | % |
Three months ended September 30, | ||||||||
2022 | 2021 | |||||||
Cash paid for amounts included in the measurement of operating lease liabilities | $ | 83 | $ | 76 | ||||
Weighted average remaining lease term (in years) | 1.50 | 1.83 | ||||||
Weighted average discount rate | 5.00 | % | 5.00 | % | ||||
Nine months ended September 30, | ||||||||
2022 | 2021 | |||||||
Cash paid for amounts included in the measurement of operating lease liabilities | $ | 282 | $ | 227 | ||||
Weighted average remaining lease term (in years) | 1.50 | 1.83 | ||||||
Weighted average discount rate | 5.00 | % | 5.00 | % | ||||
Future minimum operating lease payments are as follows:
Year Ending |
|
|
| |
Remainder of 2023 |
| $ | 344 |
|
2024 |
|
| 611 |
|
2025 |
|
| 624 |
|
2026 |
|
| 573 |
|
2027 |
|
| 583 |
|
Thereafter |
|
| 3,307 |
|
Interest |
|
| (1,319 | ) |
Total |
| $ | 4,723 |
|
Year Ending | ||||
Remainder of 2022 | $ | 83 | ||
2023 | 11 | |||
2024 | 5 | |||
2025 | 4 | |||
2026 | 4 | |||
2027 | 1 | |||
Interest | (3 | ) | ||
Total | $ | 105 |
Supplemental information related to finance lease arrangements was as follows:
|
| Three months ended |
| |||||
|
| March 31, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
Cash paid for amounts included in the measurement of financing lease liabilities |
| $ | 19 |
|
| $ | — |
|
Weighted average remaining lease term (in years) |
|
| 1.14 |
|
|
| — |
|
Weighted average discount rate |
|
| 5.00 | % |
|
| — |
|
Three months ended September 30, | ||||||||
2022 | 2021 | |||||||
Cash paid for amounts included in the measurement of financing lease liabilities | $ | 12 | $ | — | ||||
Weighted average remaining lease term (in years) | 1.58 | — | ||||||
Weighted average discount rate | 5.00 | % | — | |||||
Nine months ended September 30, | ||||||||
2022 | 2021 | |||||||
Cash paid for amounts included in the measurement of finance lease liabilities | $ | 18 | — | |||||
Weighted average remaining lease term (in years) | 1.58 | — | ||||||
Weighted average discount rate | 5.00 | % | — | |||||
Future minimum finance lease payments are as follows:
Year Ending |
|
|
| |
Remainder of 2023 |
| $ | 57 |
|
2024 |
|
| 25 |
|
Interest |
|
| (2 | ) |
Total |
| $ | 80 |
|
21
Year Ending | ||||
Remainder of 2022 | $ | 18 | ||
2023 | 75 | |||
2024 | 23 | |||
Interest | (5 | ) | ||
Total | $ | 111 |
NOTE 2019 – INCOME (LOSS)LOSS PER SHARE
Basic and diluted income (loss)loss per share was computed using the following common share data for the three and nine months ended September 30, 2022:March 31, 2023 and March 31, 2022, respectively:
|
| Three months ended March 31, 2023 |
|
| Three months ended March 31, 2022 |
| ||
Net loss |
| $ | (3,788 | ) |
| $ | (1,115 | ) |
Basic weighted-average shares outstanding |
|
| 141,633,417 |
|
|
| 141,045,477 |
|
Dilutive effect of share-based awards |
|
| — |
|
|
| — |
|
Diluted weighted-average shares outstanding |
|
| 141,633,417 |
|
|
| 141,045,477 |
|
Basic loss per share |
| $ | (0.03 | ) |
| $ | (0.01 | ) |
Diluted loss per share |
| $ | (0.03 | ) |
| $ | (0.01 | ) |
Three months ended September 30, 2022 | Three months ended September 30, 2021 | |||||||
Net income | $ | 11,187 | $ | 8,896 | ||||
Basic weighted-average shares outstanding | 141,290,748 | 141,015,213 | ||||||
Dilutive effect of share-based awards | 1,431,648 | 32,793 | ||||||
Diluted weighted-average shares outstanding | 142,722,396 | 141,048,006 | ||||||
Basic income per share | $ | 0.08 | $ | 0.06 | ||||
Diluted income per share | $ | 0.08 | $ | 0.06 | ||||
Nine months ended September 30, 2022 | Nine months ended September 30, 2021 | |||||||
Net income (loss) | $ | 29,224 | $ | (10,021 | ) | |||
Basic weighted-average shares outstanding | 141,156,126 | 141,015,213 | ||||||
Dilutive effect of share-based awards | 1,471,585 | — | ||||||
Diluted weighted-average shares outstanding | 142,627,711 | 141,015,213 | ||||||
Basic income (loss) per share | $ | 0.21 | $ | (0.07 | ) | |||
Diluted income (loss) per share | $ | 0.20 | $ | (0.07 | ) | |||
As a result of incurring a net loss for the ninethree months ended September 30, 2021, 493,166
NOTE 2120 – SUBSEQUENT EVENTS
The Company evaluated its September 30, 2022March 31, 2023 condensed consolidated financial statements through the date the financial statements were issued. On April 19, 2023, the Company granted 2,100,000 stock options to certain executive officers. The Companyexercise price of the options is not aware$6.77 and they vest in one third increments beginning in 2026. The stock option awards expire one year after vesting.
22
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 20212022 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
Second ApexRINs Generated but Unsold
Our profitability is highly dependent on the market price of Environmental Attributes, including the market price for RINs. As we self-market a significant portion of our RINs, a strategic decision not to commit to transfer available RINs during a period will impact our operating revenue and operating profit. The industry experienced volatile D3 RIN index prices since the EPAs release of the 2023 RVO in December 2022. The RVO released in December 2022 also included a three-year volume compliance schedule rather than annual volume obligations. The final RVO is due to be released in June 2023 which has temporarily impacted the timing of D3 RIN transfers from 2023 RNG Facilityproduction.
Though the average market price of D3 RINs since the 2023 RVO release was approximately $2.18, the market price declined as low as $1.88 in February 2023 from a D3 RIN index price of $2.43 on the day of the 2023 RVO release. We viewed this reduction in price as temporary and, accordingly, we determined not to transfer a significant amount of D3 RINs generated and available for transfer from 2023 RNG production during the first quarter of 2023. As a result, at March 31, 2023, we had approximately 7,325 RINs in inventory from 2023 RNG production. We sold the majority of D3 RINs generated and available for transfer from 2022 RNG production.
We have committed to transfer a significant amount of RINs generated but unsold as of March 31, 2023 and expect to transfer the majority of these RINs during the second quarter of 2023. The average D3 RIN index price during the month of May 2023 was approximately $1.97.
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Blue Granite RNG Project
In August 2022,the first quarter of 2023, we announced the planned constructionentrance into South Carolina with the development of a second RNG processing facility at the Apex landfill. Thisnew landfill gas-to-RNG facility. The planned project is being driven by projections in biogas feedstock availability from the host landfill. We anticipate an approximate 40% increase in RNG processing capacity with the addition of the second facility. This expansion is expected to increase daily productioncontribute approximately 2,100900 MMBtu per day and expandof production capacity upon commissioning. We expect to incur capital expenditures beginning in the infrastructure for the conversionsecond quarter of LFG to RNG. We2023 and expect the project to be complete and become commercially operational in 2024. We do not currently anticipate this project to have a significant impact on 2022 development capital expenditures.2025.
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 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.report and generate LCFS credits. We beganplan to release the remaining gas from storage in the thirdsecond 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 fourth quarter of 2022. We currently expect to commit available RINs and recognize 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.
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 twothree 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 increased feedstock volumes which we currentlycurrent expect to increase by five to ten percent in connection withonce 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 have begun incurringcontinue 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.
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Montauk Ag RenewablesAsset Acquisition
In the second quarter of 2021, through our wholly owneda wholly-owned subsidiary Montauk Ag Renewables, we completed the 2021an 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, bio-oil and biochar (the “Montauk Ag Renewables Acquisition”). The assets acquired include real property, intellectual property, mobile equipment, and other equipment related to operating the business and real property of an approximate 9.35 acre parcel in Magnolia, North Carolina. We subsequently closed on a transaction to acquire approximately 146 acres and an approximately 500,000 square foot existing structure in Turkey, North Carolina which we plan to use as we expand the production processes purchased in the Montauk Ag Renewables Acquisition.
We continue to work with our engineer of record through the optimization of improvements to the now patented reactor technology, which is currently functional in Magnolia. Wetechnology. However, we have not completed our improvements, however, and we have not reached commercial operations at thisthe Turkey, NC location. The improvements to the reactor technology are intended to be deployed at the Turkey, NC location. In the first quarter of 2023, we completed the relocation of the reactor in Magnolia, NC to the Turkey, NC location to centralize processing at one 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. The North Carolina Utilities Commission (“NCUC”)Accordingly, our Turkey location has placedbeen approved to participate in the Piedmont Natural Gas Renewable Gas Pilot Program which is a three-year moratorium onstep towards obtaining the designation of any new New Renewable Energy Facility (“NREF”) whiledesignation under the NCUC monitor and assess gas quality. We requestedNorth Carolina Utilities Commission. Due to our consolidation of operations at the Turkey, NC location and based on our current expectations related to both be designated as ancommercial operations, we have paused our registration process to obtain NREF and to be accepted into the NCUC pilot project portfolio. The NCUC designatedstatus for the Turkey, location as an NREF and was accepted intoNC location.
In the pilot project portfolio. Our Magnolia, North Carolina location has an existing electricityfirst quarter of 2023, we signed a receipt interconnection which can be reactivated.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. Also during the first quarter of 2023, we signed a lease agreement with Piedmont Natural Gas to provide access to the Turkey, NC property during construction of the interconnection. We are also in varying stages of discussions with potential power purchasers.
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 during 2022 basedBased on theour current development timeline. We alsotimeline expectations, we do not expect to commence significant revenue generating activities until 2024. We intend to contract with additional farms to secure feedstock sources as we commission commercial production and increase our production capabilities, which we anticipate will secure additional feedstock for future production processes.
Bowerman Power RNG Expansion Project
We monitor biogas supply availability across our portfolio and seek to maximize production at existing projects by expanding operations when economically feasible. In the second quarter of 2023, we entered into late stages of negotiation of a development opportunity to develop, own, and operate an RNG facility alongside our existing REG facility in Irvine, California. We intend to
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beneficially process the available feedstock, of which we currently estimate to be approximately 2,485 MMBtu in excess of what the REG facility can process. While we believe we are in the late stages of negotiation and expect to finalize the development opportunity, no assurances can be given that our plans related to this negotiation will meet our expectations.
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:
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• Demand for compressed natural gas (“CNG”) from natural gas-fueled vehicles. The RNG we create is pipeline quality and can be used for transportation fuel when converted to CNG. CNG is commonly used by medium-duty fleets that are close to fueling stations, such as city fleets, local delivery trucks and waste haulers. • |
Regulatory requirements, market pressure and public relations challenges increase the time, cost and difficulty of permittingpermitting new fossil fuel-fired facilities.
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.
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Acquisition and Development Pipeline
The timing and extent of our development pipeline affects our operating results due to:
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Increased Construction Costs or Length Related to Material Cost Inflation or Supply Chain Disruptions: Due to the variability of our development and construction cycle of approximately 12 to 24 months, we believe that we could incur increased raw material costs for development projects related to inflation or supply chain disruptions. Although these factors have not had a material impact on our business or results of operations to date for development projects, these price increases and disruptions in construction could lead to future material, design, or transportation delays, which could increase the costs of our development.
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. In accordance with the consent decree entered into between the EPA and Growth Energy approved by the U.S. District Court for the District of Columbia, theOn December 30, 2022 EPA issued proposed rules in the finalFederal Register for Renewable Fuel Standard (RFS) Program Standards for 2020, 2021, and 2022 on June 3, 2022.2023-2025. Final volumes for cellulosic biofuel were set at 510, 560720, 1,420 and 6302,130 million RINs for the three years 2020, 20212023, 2024 and 2022,2025, respectively. While finalThe proposed standards also introduced the new regulatory program governing renewable electricity with eRINs which is scheduled to start January 1, 2024. The cellulosic biofuel volumes set for all three years were lower than proposed,include a portion dedicated to eRINs. In 2024, 600 million of the EPA partially offsettotal 1,420 million and in 2025 1,200 million of the lower volumes by issuing its final notice, also on June 3, 2022, to denytotal 2,130 million are the remaining 69 petitions for RFS Small Refinery Exemptions. It is not certain whether the EPA will set RFS volume obligations for one year or multiple years going forward, however,from eRINs. The proposed standards also introduced significant changes to the existing RFS program that will require the RNG industry to modify how all RINs are generated. Final RFS Program rules are to be issued by June 14, 2023 per a court-ordered deadline established by the settlement agreement with Growth Energy, the EPA must issue a proposed 2023 RVO no later than November 16, 2022 with final volume requirements established by June 11, 2023. On November 4, the U.S. Environmental Protection Agency (EPA) filed a notice with the U.S. District Court for the District of Columbia indicating that EPA and Growth Energy have agreed to extend the deadline for signing the proposed rule for the 2023 renewable fuel standards. The deadline under a Consent Decree entered to resolve litigation between the two parties had been set as November 16, 2022. Under the stipulated extension, the date is now November 30, 2022 to sign a notice of proposed rulemaking. The notice indicates that the stipulation is based on an understanding that EPA does not intend to seek further extensions of any deadline for action established by the Consent Decree.Energy.
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. CARB has provided notice that they finalized their review of the Pico facility’s provisional CI application and released it to the validation body (“VB”) during the third quarter of 2022. We currently expect the VB will complete the validation of the Pico facility’s provisional CI application during the fourth quarter of 2022. 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. CARB certified our temporary CI score application during the fourth quarter of 2022.
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.
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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 described belowsuch 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.statements
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Our 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.
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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.
A 2021 cold weather event impacted our Atascocita, Galveston, McCarty, and Coastal Plains facilities located in Texas. Production at these facilities was temporarily idled due to the loss of power from February 14 through February 20, 2021 and force majeure events were declared by certain of our counterparties or by us for the period February 12 through February 22, 2021 related to these weather events. Operations at these facilities have subsequently resumed.
The landfill host at our McCarty facility recently changed its wellfield collection system which has contributed to elevated nitrogen in the feedstock received by our facility. Additionally, the landfill host modified the wellfield bifurcation approach which has impacted the quantity of feedstock received at the facility. We are working with the landfill host but have currently experienced lower volumes of feedstock available to be processed at the McCarty facility. We currently expect lower than historical volumes through the end of 2022.
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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.
OurDuring the first quarter of 2023, our Pico dairy farm project is expected to bewas 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. A decisionWe did not to commit to transfer available RINs duringforward sell a period will impact our revenue and operating profit. As of September 30, 2022, we had approximately 2,357 RINs in inventory as compared to 308 RINs in inventory for the period ended September 30, 2021. Our current RIN commitments scheduled for transfer are at an average D3 RIN price of approximately $3.52 with commitments substantively through December 2022. We have currently committed an insignificantsignificant portion of our expected 2022 fourth quarter2023 RIN generation. We believe a portion of the reduction and volatility in RIN price during the third and fourth quarter of 2022 could be temporary and related to uncertainty due to the upcoming release by the EPA of the 2023 RVO in November 2022. We expect to transfer the majority of RINs generated after the release of the RVO in the fourth quarter. 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, impairment loss and transaction costs. Our operating expenses can be subject to inflationary cost increases that are largely out of our control. During 2022, increased commodity index prices have mitigated these increases but these inflationary increases could have an impact
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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:
• Production volumes: We review performance by site based on unit of production calculations for RNG and Renewable Electricity, measured interms of MMBtu and MWh, respectively. While unit of production measurements can be influenced by schedule facility maintenance schedules, the metric is used to measure the efficiency of operations and the impact of optimization improvement initiatives. We monetize a majority of our RNG commodity production under variable-price agreements, based on indices. A portion of our Renewable Natural Gas segment commodity production is monetized under fixed-priced contracts. Our Renewable Electricity Generation segment commodity production is primarily monetized under fixed-priced PPAs. • Production of Environmental Attributes: We monetize Environmental Attributes derived from our production of RNG and Renewable Electricity.We carry-over a portion of the RINs generated from RNG production to the following year and monetize the carried over RINs in such following calendar year. A majority of our Renewable Natural Gas segment Environmental Attributes are self-monetized, though a portion are generated and monetized by third parties under counterparty sharing agreements. A majority of our Renewable Electricity Generation segment Environmental Attributes are monetized as a component of our fixed-price PPAs. • Average realized price per unit of production: Our profitability is highly dependent on the commodity prices for natural gas and electricity, and theEnvironmental Attribute prices for RINs, LCFS credits, and RECs. Realized prices for Environmental Attributes monetized in a year may not correspond directly with that year’s production as attributes may be carried over and subsequently monetized. Realized prices for Environmental Attributes monetized in a year may not correspond directly to index prices due to the forward selling of commitments. |
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Comparison of Three Months Ended September 30,March 31, 2023 and 2022 and 2021
The following table summarizes the key operating metrics described above, which metrics we use to measure performance.
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| (in thousands, unless otherwise indicated) | Three Months Ended September 30, | Change | Change % |
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Revenues |
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Renewable Natural Gas Total Revenues | $ | 54,343 | $ | 35,002 | $ | 19,341 | 55.3 | % |
| $ | 14,785 |
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| $ | 32,666 |
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| $ | (17,881 | ) |
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| (54.7 | %) | ||||||||
Renewable Electricity Generation Total Revenues | $ | 4,351 | $ | 3,872 | $ | 479 | 12.4 | % |
| $ | 4,369 |
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| $ | 3,971 |
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| $ | 398 |
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RNG Metrics |
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CY RNG production volumes (MMBtu) | 1,437 | 1,510 | (73 | ) | (4.8 | %) |
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| 1,352 |
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| 1,369 |
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| (17 | ) |
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Less: Current period RNG volumes under fixed/floor-price contracts | (333 | ) | (333 | ) | — | — |
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| (304 | ) |
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| (310 | ) |
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| 6 |
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Plus: Prior period RNG volumes dispensed in current period | 367 | 309 | 58 | 18.8 | % |
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| 368 |
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| 372 |
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Less: Current period RNG production volumes not dispensed | (439 | ) | (379 | ) | (60 | ) | 15.8 | % |
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| (418 | ) |
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| (410 | ) |
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| (8 | ) |
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| 2.0 | % | ||||||||
Total RNG volumes available for RIN generation (1) | 1,032 | 1,107 | (75 | ) | (6.8 | %) |
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| 998 |
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| 1,021 |
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RIN Metrics |
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Current RIN generation ( x 11.727) (2) | 12,100 | 12,985 | (885 | ) | (6.8 | %) |
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| 11,700 |
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| 11,967 |
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Less: Counterparty share (RINs) | (1,399 | ) | (1,415 | ) | 16 | (1.1 | %) |
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| (1,224 | ) |
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| (1,216 | ) |
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Plus: Prior period RINs carried into CY | 1,547 | 1,586 | (39 | ) | (2.5 | %) | ||||||||||||||||||||||||||
Plus: Prior period RINs carried into current period |
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| 739 |
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| 128 |
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| 611 |
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Less: CY RINs carried into next CY | — | — | — | — |
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Total RINs available for sale (3) | 12,248 | 13,156 | (908 | ) | (6.9 | %) |
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| 11,215 |
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| 336 |
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Less: RINs sold | (10,850 | ) | (13,250 | ) | (2,400 | ) | (18.1 | %) |
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| 3,536 |
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RIN Inventory | 1,398 | (94 | ) | 1,492 | (1587.2 | %) |
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| 8,266 |
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| 4,394 |
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| 3,872 |
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RNG Inventory (volumes not dispensed for RINs) (4) | 439 | 379 | 60 | 15.8 | % |
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| 418 |
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| 410 |
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Average Realized RIN price | $ | 3.49 | $ | 1.65 | $ | 1.84 | 111.5 | % |
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Operating Expenses |
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Renewable Natural Gas Operating Expenses | $ | 23,785 | $ | 14,916 | $ | 8,869 | 59.5 | % |
| $ | 14,808 |
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| $ | 16,345 |
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| $ | (1,537 | ) |
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Operating Expenses per MMBtu (actual) | $ | 16.55 | $ | 9.88 | $ | 6.67 | 67.5 | % |
| $ | 10.95 |
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| $ | 11.94 |
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| $ | (0.99 | ) |
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Renewable Electricity Generation Operating Expenses | $ | 2,525 | $ | 3,961 | $ | (1,436 | ) | (36.3 | %) | |||||||||||||||||||||||
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REG Operating Expenses |
| $ | 3,328 |
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| $ | 3,737 |
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| $ | (409 | ) |
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$/MWh (actual) | $ | 51.53 | $ | 93.00 | $ | (41.47 | ) | (44.6 | %) |
| $ | 72.35 |
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| $ | 83.04 |
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| $ | (10.69 | ) |
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Other Metrics |
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Renewable Electricity Generation Volumes Produced (MWh) | 49 | 43 | 6 | 14.0 | % |
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| 46 |
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| 45 |
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Average Realized Price $/MWh (actual) | $ | 88.80 | $ | 90.93 | $ | (2.13 | ) | (2.3 | %) |
| $ | 94.98 |
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| $ | 88.27 |
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| $ | 6.71 |
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(1) RINs are generated in the month that the gas is dispensed to generate RINs, which occurs the month after the gas is produced. Volumes under fixed/floor-price arrangements generate RINs which we do not self-market. (2) One MMBtu of RNG has the same energy content as 11.727 gallons of ethanol, and thus may generate 11.727 RINs under the RFS program. (3) Represents RINs available to be self-marketed by us during the reporting period. (4) Represents gas production which has not been dispensed to generate RINs. |
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The following table summarizes our revenues, expenses and net income for the periods set forth below:
| (in thousands, unless otherwise indicated) | Three Months Ended September 30, | Change % | ||||||||||||||||||||||||||||||
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Total operating revenues | $ | 55,860 | $ | 39,749 | $ | 16,111 |
| $ | 19,154 |
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| $ | 32,169 |
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| $ | (13,015 | ) |
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| (40.5 | )% | ||||||||||
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||
Operating and maintenance expenses | 14,134 | 13,123 | 1,011 | 7.7 | % |
|
| 14,182 |
|
|
| 13,201 |
|
|
| 981 |
|
|
| 7.4 | % | |||||||||||
General and administrative expenses | 8,466 | 7,520 | 946 | 12.6 | % |
|
| 9,475 |
|
|
| 8,495 |
|
|
| 980 |
|
|
| 11.5 | % | |||||||||||
Royalties, transportation, gathering and production fuel | 12,188 | 6,636 | 5,552 | 83.7 | % |
|
| 3,933 |
|
|
| 7,206 |
|
|
| (3,273 | ) |
|
| (45.4 | )% | |||||||||||
Depreciation and amortization | 5,167 | 5,666 | (499 | ) | (8.8 | %) | ||||||||||||||||||||||||||
Depreciation, depletion and amortization |
|
| 5,196 |
|
|
| 5,153 |
|
|
| 43 |
|
|
| 0.8 | % | ||||||||||||||||
Gain on insurance proceeds | — | (157 | ) | 157 | (100.0 | %) |
|
| - |
|
|
| (313 | ) |
|
| 313 |
|
|
| (100.0 | )% | ||||||||||
Impairment loss | 2,273 | — | 2,273 | — |
|
| 451 |
|
|
| 51 |
|
|
| 400 |
|
|
| 784.3 | % | ||||||||||||
Transaction costs | — | 232 | (232 | ) | (100.0 | %) |
|
| 83 |
|
|
| 27 |
|
|
| 56 |
|
|
| 207.4 | % | ||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Total operating expenses | 42,228 | 33,020 | 9,208 | 27.9 | % |
|
| 33,320 |
|
|
| 33,820 |
|
|
| (500 | ) |
|
| (1.5 | )% | |||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Operating income | $ | 13,632 | $ | 6,729 | $ | 6,903 | 102.6 | % | ||||||||||||||||||||||||
Other (income) expenses: | (95 | ) | 1,314 | (1,409 | ) | (107.2 | %) | |||||||||||||||||||||||||
Income tax expense (benefit) | 2,540 | (3,481 | ) | 6,021 | (173.0 | %) | ||||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Net income | $ | 11,187 | $ | 8,896 | $ | 2,291 | 25.8 | % | ||||||||||||||||||||||||
|
|
|
| |||||||||||||||||||||||||||||
Operating loss |
| $ | (14,166 | ) |
| $ | (1,651 | ) |
| $ | (12,515 | ) |
|
| 758.0 | % | ||||||||||||||||
Other expenses/ (income): |
|
| 1,682 |
|
|
| (278 | ) |
|
| 1,960 |
|
|
| (705.0 | )% | ||||||||||||||||
Income tax benefit |
|
| (12,060 | ) |
|
| (258 | ) |
|
| (11,802 | ) |
|
| 4,574.4 | % | ||||||||||||||||
Net loss |
| $ | (3,788 | ) |
| $ | (1,115 | ) |
| $ | (2,673 | ) |
|
| 239.7 | % | ||||||||||||||||
Revenues for the Three Months Ended September 30,March 31, 2023 and 2022 and 2021
Total revenues in the thirdfirst quarter of 20222023 were $55,860 an increase$19,154 a decrease of $16,111$13,015 (40.5%) compared to $39,749$32,169 in the thirdfirst quarter of 2021.2022. The increasedecrease is primarily related to an increaseour strategic decision to not self market a significant amount of RINs from 2023 RNG production due to our belief that first quarter of 2023 D3 RIN index volatility was temporary. Of the 6,485 RINs sold in pricing of gas commodity indices and average realized RIN pricing during the thirdfirst quarter of 2022, compared3,800 RINs were related to the third quarter of 2021. Gas commodity indices increased 104.5%2021 RNG production. The decrease is partially offset by losses recognized in the thirdfirst quarter of 2022 of $3,451 which is related to $8.20 compared to $4.01 in the third quarter of 2021. Realized RIN pricing increased 111.5% during the third quarter of 2022 compared to the third quarter of 2021. The increase was offset by there being no revenues recognized under our counterparty sharing agreements in the third quarter of 2022 compared to $2,795 in the third quarter of 2021.gas commodity hedge program that has since expired.
Renewable Natural Gas Revenues
We produced 1,4371,352 MMBtu of RNG during the thirdfirst quarter of 2022,2023, a decrease of 7317 MMBtu over the 1,5101,369 MMBtu (4.8%(1.2%) produced in the thirdfirst quarter of 2021.2022. Our Rumpke facility produced 17 more MMBtu in the first quarter of 2023 compared to the first quarter of 2022 as a result of process equipment failure in the first quarter of 2022. Our Apex facility produced 2615 more MMBtu in the first quarter of 2023 compared to the first quarter of 2022 as a result of process equipment failure in the first quarter of 2022. Our Galveston facility produced 33 fewer MMBtu in the thirdfirst quarter of 20222023 compared to the thirdfirst quarter of 20212022 as a result of landfill filling patterns resulting in lower production.temporary reduction of feedstock inlet during modifications to process equipment. Also contributing to the decrease is our AtascocitaPico facility producing 53which produced 16 fewer MMBtu in the thirdfirst quarter of 20222023 compared to the thirdfirst quarter of 20212022 as a result of increased contaminantsoperational process challenges in the feedstock which lowered processing efficiency.first quarter of 2023.
Revenues from the Renewable Natural Gas segment in the thirdfirst quarter of 20222023 were $54,343, an increase$14,785, a decrease of $19,341 (55.3%$17,881 (54.7%) compared to $35,002$32,666 in the thirdfirst quarter of 2021.2022. Average commodity pricing for natural gas for the thirdfirst quarter of 20222023 was $8.20$3.42 per MMBtu, 104.5% higher30.9% lower than the thirdfirst quarter of 2021.2022. During the thirdfirst quarter of 2022,2023, we self-monetized 10,8502,949 RINs, representing a 2,4003,536 decrease (18.1%(54.5%) compared to 13,2506,485 in the thirdfirst quarter of 2021.2022. The decrease was primarily related to our prior periodstrategic decision to forward commitnot self market a larger portionsignificant amount of expected RIN sales. We also sold market purchased RINs during the third quarter of 2021.from 2023 RNG production. Average pricing realized on RIN sales during the thirdfirst quarter of 2023 was $2.01 as compared to $3.46 in the first quarter of 2022, was $3.49 as compared to $1.65 in the third quartera decrease of 2021, an increase of 111.5%41.9%. This compares to the average D3 RIN index price for the thirdfirst quarter of 20222023 of $2.83$2.03 being approximately 8.8%37.5% lower than the average D3 RIN index price in the thirdfirst quarter of 2021.2022. At September 30, 2022,March 31, 2023, we had approximately 439418 MMBtu available for RIN generation and we had approximately 1,3988,266 RINs generated and unsold. At September 30, 2021,March 31, 2022, we had approximately 379410 MMBtu available for RIN generation and no4,394 RINs generated and unsold.
40
Renewable Electricity Generation Revenues
We produced approximately 4946 MWh in Renewable Electricity in the thirdfirst quarter of 2022,2023, an increase of 61 MWh (14.0%(2.2%) from 4345 MWh in the thirdfirst quarter of 2021. Our Security facility produced approximately 3 MWh in the third quarter of 2022 compared to no production in the third quarter of 2021 as a result of the prior period engine restoration project.2022. Our Bowerman facility produced 42 MWh more in the thirdfirst quarter of 20222023 compared to the thirdfirst quarter of 20212022 as a result of preventative engine maintenance performed during the thirdfirst quarter of 2021.2022. Our Tulsa facility produced approximately 1 MWh less in the thirdfirst quarter of 2023 compared to the first quarter of 2022 compareddue to engine component failures in the thirdfirst quarter of 2021 due to reduced feedstock availability at the landfill.2023.
30
Revenues from Renewable Electricity facilities in the thirdfirst quarter of 20222023 were $4,351,$4,369, an increase of $479 (12.4%$398 (10.0%) compared to $3,872$3,971 in the thirdfirst quarter of 2021.2022. The increase is primarily driven by the increase in our Bowerman facility production volumes.
In the thirdfirst quarter of 2022, 99.6%2023, 99.8% of Renewable Electricity Generation segment revenues were derived from the monetization of Renewable Electricity at fixed prices associated with underlying PPAs, as compared to 100% in the thirdfirst quarter of 2021.2022. This provides the Company with certainty of price resulting from our Renewable Electricity sites.
Corporate Analysis
InWhile we did not have any gas commodity hedge programs in the thirdfirst quarter of 2022,2023, our gas commodity hedge program during the first quarter of 2022 was priced atas rates below actual index prices. However, we did recognize a gainprices resulting in realized losses of $367 as a result of favorable index price movements under our gas commodity hedge activities. We did not have any gas hedge programs in the third quarter of 2021. Based on current rates, we expect our gas commodity hedge program to continue to be priced below actual index prices through the year-end$3,451. 2022 at which time the hedge program will expire. In the third quarter of 2021, we recorded revenue of $875 related to the RINs purchased in the second quarter of 2021. We did not have market purchased RIN revenue during the third quarter of 2022.
Expenses for the Three Months Ended September 30,March 31, 2023 and 2022 and 2021
General and Administrative Expenses
Total general and administrative expenses were $8,466$9,475 for the thirdfirst quarter of 2022,2023, an increase of $946$980 (12.6%) compared to $7,520$8,495 for the thirdfirst quarter of 2021.2022. Our general and administrative expense for the thirdfirst quarter of 20222023 increased approximately $1,102$1,136 compared to the thirdfirst quarter of 20212022 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.acquisition. Partially offsetting this increase is a reversal of approximately $328 stock based compensation expense related to forfeited stock awards. Also, our professional fees increased approximately $783 (61.1%) in the first quarter of 2023 as compared to the first quarter of 2022.
Renewable Natural Gas Expenses
Operating and maintenance expenses for our RNG facilities in the thirdfirst quarter of 20222023 were $12,052,$11,342, an increase of $3,344 (38.4%$1,782 (18.6%) as compared to $8,708$9,560 in the thirdfirst quarter of 2021.2022. Our McCarty facility incurred increased scheduled preventative maintenance expenses of approximately $314. Our Apex facility operating and maintenance expenses increased approximately $950 as a result of timing of preventative maintenance and increased waste disposal costs in the thirdfirst quarter of 20222023 as compared to thirdfirst quarter of 2021. Utility expense for our RNG facilities in the third quarter of 2022 increased approximately $2,224 (68.4%) compared to the utility expense for our RNG facilities in the third quarter of 2021.2022.
Royalties, transportation, gathering and production fuel expenses for the Company’s RNG facilities for the thirdfirst quarter of 20222023 were $11,733, an increase$3,466, a decrease of $5,525 (89.0%$3,319 (48.9%) compared to $6,208$6,785 in the thirdfirst quarter of 2021.2022. Royalties, transportation, gathering and production fuel expenses increased as a percentage of RNG revenues to 21.6%23.4% for the thirdfirst quarter of 20222023 from 17.7%20.8% in the thirdfirst quarter of 2021.2022. The increasedecrease in royalties, transportation, gathering and production fuel expenses is primarily related to the increasedecrease in RNG revenues in the thirdfirst quarter of 20222023 compared to the thirdfirst quarter of 2021.2022.
41
Renewable Electricity Expenses
Operating and maintenance expenses for our Renewable Electricity facilities in the thirdfirst quarter of 20222023 were $2,070,$2,861, a decrease of $1,463 (41.4%$455 (13.7%) compared to $3,533$3,316 in the thirdfirst quarter of 2021.2022. The decrease is primarily related to scheduled preventative maintenance at our Bowerman facility, which was approximately $1,598$832 higher in the thirdfirst quarter of 20212022 compared to the thirdfirst quarter of 2022.2023.
Royalties, transportation, gathering and production fuel expenses for our Renewable Electricity facilities for the thirdfirst quarter of 20222023 were $455,$467, an increase of $27 (6.3%$46 (10.9%) compared to $428 in$421in the thirdfirst quarter of 2021.2022. As a percentage of Renewable Electricity Generation segment revenues, royalties, transportation, gathering and production fuel expenses decreased to 10.5%10.7% from 11.1%10.6%.
Royalty Payments
Royalties, transportation, gathering, and production fuel expenses in the thirdfirst quarter of 20222023 were $12,188, an increase$3,933, a decrease of $5,552 (83.7%$3,273 (45.4%) compared to $6,636$7,206 in the thirdfirst quarter of 2021.2022. 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.
31
Depreciation
Depreciation and amortization in the thirdfirst quarter of 20222023 was $5,167, a decrease$5,196, an increase of $499 (8.8%$43 (0.8%) compared to $5,666$5,153 in the thirdfirst quarter of 2021.2022. The decreaseincrease is associated with assets remaining in service being fully amortized and depleted.the payments related to the Pico Feedstock Agreement.
Impairment loss
We calculated and recorded an impairment loss of $2,273$451 in the thirdfirst quarter of 2023, an increase of $400 (784.3%) compared to $51 in the first quarter of 2022. The impairment loss recordedin the first quarter of $2,133 is primarily2023 was related to REGa feedstock processing machine component at an RNG facility where forecasted cash flows didthat was not exceed the carrying value of the long-lived assets. We did not haveoperating at an impairment loss in the third quarter of 2021.
Other (Income) Expenses
Other income in the thirdoptimal level. The first quarter of 2022 impairment was $95,related to computer software and hardware no longer being utilized.
Other Expense (Income)
Other expense in the first quarter of 2023 was $1,682, an increase of $1,409 (107.2%$1,960 (705.0%) compared to other expensesincome of $1,314$278 in the thirdfirst quarter of 2021.2022. The increase is primarily related to our favorable interest rate swap contract resultingan increase in a reduction of interest expense of $661$1,643 from the thirdfirst quarter of 2023 compared to the first quarter of 2022. In the first quarter of 2022, compared towe recognized a gain of $311 from the third quartersale of 2021. We also had asset disposal costs of $865 relating to asset disposal costs at our Galveston and Pico facilities in the third quarter of 2021.NOx emissions allowances credits.
Income Tax Expense
Income tax expense for the three months ended September 30, 2022March 31,2023 was calculated using an estimated effective tax rate which differs from the U.S. federal statutory rate of 21% primarily due to the adjustmentadjustments for production tax credits.credits and 162(m) compensation limitation.
The effective tax rate of 18.5%76.10% for the three months ended September 30, 2022March 31, 2023 was higher than the rate for the three months ended September 30, 2021March 31, 2022 of (64.3%)18.79% primarily due to current period pre-tax book income increases and a required Code Section 162(m) executive compensation limitation permanent adjustment.being higher in 2022. The September 30, 2022March 31,2023 rate also includes utilization of production tax credits and certain discrete items.
Operating Profit (Loss)Loss (Profit) for the Three Months Ended September 30,March 31, 2023 and 2022 and 2021
Operating profit in the third quarter of 2022 was $13,632, an increase of $6,903 (102.6%) compared to $6,729 in the third quarter of 2021. RNG operating profit for the third quarter of 2022 was $26,828, an increase of $10,873 (68.1%) compared to $15,955 in the third quarter of 2021. Renewable Electricity Generation operating loss for the third quarter of 2022 was $1,670, a decrease of $246 (17.3%) compared $1,424 for the third quarter of 2021.
42
Results of Operations
Comparison of Nine Months Ended September 30, 2022 and 2021
The following table summarizes the key operating metrics described above, which metrics we use to measure performance.
| (in thousands, unless otherwise indicated) | Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | Change | Change % | |||||||||||||
Revenues | ||||||||||||||||
Renewable Natural Gas Total Revenues | $ | 151,577 | $ | 90,707 | $ | 60,870 | 67.1 | % | ||||||||
Renewable Electricity Generation Total Revenues | $ | 12,652 | $ | 11,290 | $ | 1,362 | 12.1 | % | ||||||||
RNG Metrics | ||||||||||||||||
CY RNG production volumes (MMBtu) | 4,275 | 4,274 | 1 | 0.0 | % | |||||||||||
Less: Current period RNG volumes under fixed/floor-price contracts | (972 | ) | (1,273 | ) | 301 | 23.6 | % | |||||||||
Plus: Prior period RNG volumes dispensed in current period | 372 | 353 | 19 | 5.4 | % | |||||||||||
Less: Current period RNG production volumes not dispensed | (439 | ) | (379 | ) | (60 | ) | 15.8 | % | ||||||||
Total RNG volumes available for RIN generation (1) | 3,236 | 2,975 | 261 | 8.8 | % | |||||||||||
RIN Metrics | ||||||||||||||||
Current RIN generation ( x 11.727) (2) | 37,951 | 34,883 | 3,068 | 8.8 | % | |||||||||||
Less: Counterparty share (RINs) | (3,961 | ) | (3,810 | ) | (151 | ) | 4.0 | % | ||||||||
Plus: Prior period RINs carried into CY | 140 | 110 | 30 | 27.3 | % | |||||||||||
Less: CY RINs carried into next CY | — | — | — | — | ||||||||||||
Total RINs available for sale (3) | 34,130 | 31,183 | 2,947 | 9.5 | % | |||||||||||
Less: RINs sold | (31,773 | ) | (30,875 | ) | (898 | ) | 2.9 | % | ||||||||
RIN Inventory | 2,357 | 308 | 2,049 | 665.3 | % | |||||||||||
RNG Inventory (volumes not dispensed for RINs) (4) | 439 | 379 | 60 | 15.8 | % | |||||||||||
Average Realized RIN price | $ | 3.43 | $ | 1.77 | $ | 1.66 | 93.8 | % | ||||||||
Operating Expenses | ||||||||||||||||
Renewable Natural Gas Operating Expenses | $ | 65,735 | $ | 44,004 | $ | 21,731 | 49.4 | % | ||||||||
Operating Expenses per MMBtu (actual) | $ | 15.38 | $ | 10.30 | $ | 5.08 | 49.3 | % | ||||||||
Renewable Electricity Generation Operating Expenses | $ | 10,546 | $ | 10,130 | $ | 416 | 4.1 | % | ||||||||
$/MWh (actual) | $ | 74.79 | $ | 74.00 | $ | 0.79 | 1.1 | % | ||||||||
Other Metrics | ||||||||||||||||
Renewable Electricity Generation Volumes Produced (MWh) | 141 | 137 | 4 | 2.9 | % | |||||||||||
Average Realized Price $/MWh (actual) | $ | 89.73 | $ | 82.47 | $ | 7.26 | 8.8 | % | ||||||||
|
|
|
|
43
The following table summarizes our revenues, expenses and net income for the periods set forth below:
| (in thousands, unless otherwise indicated) | Nine Months Ended September 30, | |||||||||||||||
| 2022 | 2021 | Change | Change % | |||||||||||||
Total operating revenues | $ | 155,916 | $ | 102,872 | $ | 53,044 | 51.6 | % | ||||||||
Operating expenses: | ||||||||||||||||
Operating and maintenance expenses | 42,205 | 36,954 | 5,251 | 14.2 | % | |||||||||||
General and administrative expenses | 25,715 | 35,280 | (9,565 | ) | (27.1 | %) | ||||||||||
Royalties, transportation, gathering and production fuel | 34,484 | 18,840 | 15,644 | 83.0 | % | |||||||||||
Depreciation and amortization | 15,453 | 17,062 | (1,609 | ) | (9.4 | %) | ||||||||||
Gain on insurance proceeds | (313 | ) | (238 | ) | (75 | ) | 31.5 | % | ||||||||
Impairment loss | 2,393 | 626 | 1,767 | 282.3 | % | |||||||||||
Transaction costs | 32 | 357 | (325 | ) | (91.0 | %) | ||||||||||
|
|
|
|
|
|
|
| |||||||||
Total operating expenses | 119,969 | 108,881 | 11,088 | 10.2 | % | |||||||||||
|
|
|
|
|
|
|
| |||||||||
Operating income (loss) | $ | 35,947 | $ | (6,009 | ) | $ | 41,956 | (698.2 | %) | |||||||
Other (income) expenses: | (124 | ) | 2,726 | (2,850 | ) | (104.5 | %) | |||||||||
Income tax expense | 6,847 | 1,286 | 5,561 | 432.4 | % | |||||||||||
|
|
|
|
|
| |||||||||||
Net income (loss) | $ | 29,224 | $ | (10,021 | ) | $ | 39,245 | (391.6 | %) | |||||||
|
|
|
|
|
|
|
| |||||||||
Revenues for the Nine Months Ended September 30, 2022 and 2021
Total revenues in the first nine months of 2022 were $155,916, an increase of $53,044 (51.6%) compared to $102,872 in the first nine months of 2021. The increase is primarily related to an increase in pricing of gas commodity indices and average realized RIN pricing during the first nine months of 2022 compared to the first nine months of 2021. Gas commodity indices increased 112.9% in the first nine months of 2022 to $6.77 compared to $3.18 in the first nine months of 2021. Realized RIN pricing increased 93.8% during the first nine months of 2022 compared to the first nine months of 2021. The increase was offset by lower revenues recognized under our counterparty sharing agreements of $1,246 in the first nine months of 2022 compared to $12,725 in the first nine months of 2021.
Renewable Natural Gas Revenues
We produced 4,275 MMBtu of RNG during the first nine months of 2022, consistent with the 4,274 MMBtu (0.0%) produced in the first nine months of 2021. Our Pico facility produced 86 MMBtu more in the first nine months of 2022 compared to the first nine months of 2021 as a result of improvements related to the existing digestion process. Our Galveston facility produced 98 MMBtu more in the first nine months of 2022 compared to the first nine months of 2021 as a result of higher inlet gas due to wellfield changes and plant efficiency optimization of process equipment. Offsetting the increase are lower production volumes at our McCarty, Atascocita, and Apex facilities. Our McCarty facility produced 33 fewer MMBtu in the first nine months of 2022 compared to the first nine months due to wellfield changes by our landfill host. Also, our Atascocita facility produced 100 fewer MMBtu in the first nine months of 2022 compared to the first nine months of 2021 due to a process equipment failure that has since been repaired. Our Apex facility produced 40 fewer MMBtu in the first nine months of 2022 compared to the first nine months of 2021 due to landfill filling patterns resulting in lower production.
Revenues from the Renewable Natural Gas segment in the first nine months of 2022 were $151,577, an increase of $60,870 (67.1%) compared to $90,707 in the first nine months of 2021. Average commodity pricing for natural gas for the first nine months of 2022 was $6.77, 112.9% higher than the first nine months of 2021. During the first nine months of 2022, we self-monetized 31,773 RINs, representing an 898 increase (2.9%) compared to 30,875 in the first nine months of 2021. The increase was primarily related to inter-period timing on transfers of RINs as the majority of our RINs are self-marketed resulting in higher commitments for the first nine months of 2022 versus the first nine months of 2021. Average pricing realized on RIN sales during the first nine months of 2022 was $3.43 as compared to $1.77 in the first nine months of 2021, an increase of 93.8%. This compares to the average D3 RIN index price for the first nine months of 2022 of $3.10 being approximately 6.5% higher than the average D3 RIN index price in the first nine months of 2021. At September 30, 2022, we had approximately 439 MMBtu available for RIN generation and we had approximately 2,357 RINs generated and unsold. At September 30, 2021, we had approximately 379 MMBtu available for RIN generation and approximately 308 RINs generated and unsold.
44
Renewable Electricity Generation Revenues
We produced 141 MWh in Renewable Electricity during the first nine months of 2022, an increase of 4 MWh (2.9%) over the 137 MWh produced in the first nine months of 2021. Our Security facility produced approximately 7 MWh in the third quarter of 2022 compared to zero production in the third quarter of 2021 as a result of our engine restoration project. Our Pico facility produced 4 MWh less in the third quarter of 2022 compared to the third quarter of 2021 due to preventative engine maintenance.
Revenues from Renewable Electricity facilities in the first nine months of 2022 were $12,652, an increase of $1,362 (12.1%) compared to $11,290 in the first nine months of 2021. Our Bowerman facility was impacted in the fourth quarter of 2020 by the California wildfires forcing it to temporarily shut down the facility. This shut down delayed the timing of monetization of the Environmental Attributes associated with the Bowerman facility and resulted in approximately $600 in reduced revenues in the first nine months of 2021 as compared to the first nine months of 2022. Also contributing to the increase is our Security engine restoration resulting in $466 in higher revenues for the first nine months of 2022 as compared to zero in first nine months of 2021.
In the first nine months of 2022, 99.5% of Renewable Electricity Generation segment revenues were derived from the monetization of Renewable Electricity at fixed prices associated with underlying PPAs, as compared to 100% in the first nine months of 2021. This provides the Company with certainty of price resulting from our Renewable Electricity sites.
Corporate Analysis
In the first nine months of 2022, our gas commodity hedge program was priced at rates below actual index prices, resulting in recognized losses of $1,440. We did not have any gas hedge programs in the first nine months of 2021. Based on current rates, we expect our gas commodity hedge program to continue to be priced below actual index prices through the year-end 2022 at which time the hedge program will expire. In the first nine months of 2021, we recorded revenue of $875 related to the RINs purchased in the second quarter of 2021. This is included within operating revenues in the unaudited condensed consolidated financial statements for the period ended September 30, 2021. Also in the first nine months of 2021, we recorded an adjustment of $710, associated with our purchase of RINs, to reduce the carrying value of those RINs to net realizable value. This adjustment was included within operating and maintenance expenses in the unaudited condensed consolidated statement of operations. We did not have market purchased RINs or other purchases of environment attributes during the first nine months of 2022.
Expenses for the Nine Months Ended September 30, 2022 and 2021
General and Administrative Expenses
Total general and administrative expenses were $25,715 for the first nine months of 2022, a decrease of $9,565 (27.1%) compared to $35,280 for the first nine months of 2021. Employee related costs, including stock-based compensation, decreased approximately $10,764 (41.2%) in the first nine months of 2022 as compared to the first nine months of 2021. This decrease is primarily related to our accounting for the cancellation of MNK options and January 2021 grants of restricted stock, non-qualified stock options, and restricted stock units to the Company’s employees. Our corporate insurance premiums increased approximately $342 (8.5%) during the first nine months of 2022 compared to the first nine months of 2021, primarily related to premium increases. Our board of directors approved the payments of cash fees to non-employee directors resulting in increased fees of approximately $336 in the first nine months of 2022.
Renewable Natural Gas Expenses
Operating and maintenance expenses for our RNG facilities in the first nine months of 2022 were $32,592, an increase of $6,124 (23.1%) compared to $26,468 in the first nine months of 2021. The increase is driven by increased RNG utilities of approximately $5,206 (77.5%) in first nine months of 2022 compared to the first nine months of 2021. The increase is caused by a weather eventloss in the first quarter of 2021 impacting our Houston based facilities being favorably impacted by lower utility rates.
Royalties, transportation, gathering and production fuel expenses for2023 was $14,166, an increase of $12,515 (757.9%) compared to $1,651 in the Company’sfirst quarter of 2022. RNG facilitiesoperating loss for the first nine monthsquarter of 2022 were $33,142, an increase2023 was $4,285, a decrease of $15,606 (89.0%$17,258 (133.0%) compared to $17,536operating profit of $12,973 in the first nine months of 2021. Royalties, transportation, gathering and production fuel expenses increased as a percentage of RNG revenues to 21.9% for the first nine months of 2022 from 19.3% in the first nine months of 2021. The increase in royalties, transportation, gathering and production fuel expenses is primarily related to the increase in RNG revenues in the first nine months of 2022 compared to the first nine months of 2021. We also recorded an increase to the Pico facility earn-out liability of $1,122 during the first nine months of 2022 compared to a reduction of $694 during the third quarter of 2021.
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Renewable Electricity Expenses
Operating and maintenance expenses for our Renewable Electricity facilities in the first nine months of 2022 were $9,204, an increase of $378 (4.3%) compared to $8,826 in the first nine months of 2021. The increase is primarily related to operating expenses related to Montauk Ag Renewables Acquisition.
Royalties, transportation, gathering and production fuel expenses for our Renewable Electricity facilities for the first nine months of 2022 were $1,342, an increase of $38 (2.9%) compared to $1,304 in the first nine months of 2021. As a percentage of Renewable Electricity Generation segment revenues, royalties, transportation, gathering and production fuel expenses decreased to 10.6% from 11.5%.
Royalty Payments
Royalties, transportation, gathering, and production fuel expenses in the first nine months of 2022 were $34,484, an increase of $15,644 (83.0%) compared to $18,840 in the first nine months of 2021. 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 nine months of 2022 was $15,453, a decrease of $1,609 (9.4%) compared to $17,062 in the first nine months of 2021. The decrease is associated with assets remaining in service being fully amortized and depleted.
Impairment loss
We calculated and recorded an impairment loss of $2,393 in the first nine months of 2022, an increase of $1,767 (282.3%) compared to $626 in the first nine months of 2021. The impairment loss recorded in the first nine months of 2022 was primarily related to an REG facility where forecasted cash flows did not exceed the carrying value of the long-lived assets.
Other (Income) Expenses
Other income in the first nine months of 2022 was $124, an increase of $2,850 (104.5%) compared to other expenses of $2,726 in the first nine months of 2021. Of the increase, $1,725 is related to our favorable interest rate swap contract resulting in reduction of interest expense from the first nine months of 2022 compared to the first nine months of 2021. Also impacting the increase is $865 relating to asset disposal costs at our Galveston and Pico facilities in the first nine months of 2021.
Income Tax Expense
Income tax expense for the nine months ended September 30, 2022 was calculated using an estimated effective tax rate which differs from the U.S. federal statutory rate of 21% primarily due to the adjustment for production tax credits.
The effective tax rate of 19.0% for the nine months ended September 30, 2022 was higher than the rate for the nine months ended September 30, 2021 of (14.7%) primarily due to current period pre-tax income increases used to complete the effective tax rate calculation and a required Code Section 162(m) executive compensation limitation permanent adjustment. The September 30, 2022 rate also includes utilization of production tax credits and certain discrete items.
Operating Profit for the Nine Months Ended September 30, 2022 and 2021
Operating profit in the first nine months of 2022 was $35,947, an increase of $41,956 (698.2%) compared to an operating loss of $6,009 in the first nine months of 2021. RNG operating profit for the first nine months of 2022 was $75,040, an increase of $40,886 (119.7%) compared to $34,154 in the first nine months of 2021.2022. Renewable Electricity Generation operating loss for the first nine monthsquarter of 20222023 was $4,226,$247, a decrease of $600 (16.5%$1,225 (83.2%) compared to an operating loss of $3,626$1,471 for the first nine monthsquarter of 2021.2022.
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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 (loss) income 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.
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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 three months ended September 30, 2022March 31, 2023 and 2021:2022:
|
|
|
|
|
|
|
|
| ||
|
|
| Three Months Ended |
|
| |||||
|
|
| 2023 |
|
| 2022 |
|
| ||
| Net Loss |
| $ | (3,788 | ) |
| $ | (1,115 | ) |
|
| Depreciation, depletion and amortization |
|
| 5,196 |
|
|
| 5,153 |
|
|
| Interest expense |
|
| 1,675 |
|
|
| 32 |
|
|
| Income tax benefit |
|
| (12,060 | ) |
|
| (258 | ) |
|
| Consolidated EBITDA |
|
| (8,977 | ) |
|
| 3,812 |
|
|
|
|
|
|
|
|
|
| |||
| Impairment loss (1) |
|
| 451 |
|
|
| 51 |
|
|
| Net loss (gain) of sale of assets |
|
| 37 |
|
|
| (293 | ) |
|
| Transaction costs |
|
| 83 |
|
|
| 27 |
|
|
| Non-cash hedging charges |
|
| — |
|
|
| 3,451 |
|
|
| Adjusted EBITDA |
| $ | (8,406 | ) |
| $ | 7,048 |
|
|
|
|
|
|
|
|
|
|
| ||
| Three Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
Net income | $ | 11,187 | $ | 8,896 | ||||
Depreciation and amortization | 5,167 | 5,666 | ||||||
Interest expense | 36 | 697 | ||||||
Income tax expense (benefit) | 2,540 | (3,481 | ) | |||||
|
|
|
| |||||
Consolidated EBITDA | 18,930 | 11,778 | ||||||
Net loss on sale of assets | 43 | 822 | ||||||
Impairment loss (1) | 2,273 | — | ||||||
Unrealized gains on hedging activities | (367 | ) | — | |||||
Transaction costs | — | 232 | ||||||
|
|
|
| |||||
Adjusted EBITDA | $ | 20,879 | $ | 12,832 | ||||
|
|
|
| |||||
(1) During the three |
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 nine months ended September 30,March 31, 2023, we recorded an impairment loss of $451 in connection to a feedstock processing machine component that was not operating at an optimal level. During the three months ended March 31, 2022, we recorded an impairment loss of $51 related to computer software and 2021:
| Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
Net income (loss) | $ | 29,224 | $ | (10,021 | ) | |||
Depreciation and amortization | 15,453 | 17,062 | ||||||
Interest expense | 339 | 2,064 | ||||||
Income tax expense | 6,847 | 1,286 | ||||||
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|
|
| |||||
Consolidated EBITDA | 51,863 | 10,391 | ||||||
Net (gain) loss on sale of assets | (250 | ) | 822 | |||||
Impairment loss (1) | 2,393 | 626 | ||||||
Unrealized losses on hedging activities | 1,440 | — | ||||||
Transaction costs | 32 | 357 | ||||||
|
|
|
| |||||
Adjusted EBITDA | $ | 55,478 | $ | 12,196 | ||||
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| |||||
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Liquidity and Capital Resources
Sources of Liquidity
At September 30,March 31, 2023 and March 31, 2022, and September 30, 2021, our cash and cash equivalents, net of restricted cash, was $95,619$78,043 and $20,892$59,794 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 September 30, 2022,March 31, 2023, we had debt before debt issuance costs of $74,000,$70,000, compared to debt before debt issuance costs of $80,000$72,000 at December 31, 2021.2022.
Our debt before issuance costs (in thousands) are as follows:
| September 30, 2022 | December 31, 2021 | |||||||
Term Loans | $ | 74,000 | $ | 80,000 | ||||
Revolving Credit Facility | — | — | ||||||
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Debt before debt issuance costs | $ | 74,000 | $ | 80,000 | ||||
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|
| March 31, 2023 |
|
| December 31, 2022 |
| ||
Term loan |
| $ | 70,000 |
|
|
| 72,000 |
|
Revolving credit facility |
|
| — |
|
|
| — |
|
Debt before debt issuance costs |
| $ | 70,000 |
|
| $ | 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 September 30, 2022, $74,000March 31, 2023, $70,000 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 3.28%6.64% and 2.91%4.12% at September 30, 2022March 31, 2023 and December 31, 2021,2022, 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
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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 September 30, 2022,March 31, 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 14—12— Debt to our unaudited condensed consolidated financial statements.
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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 2022 2023 capital expenditures to range between $12,000$15,000 and $14,000.$19,000. Our 20222023 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 20222023 development capital expenditures will range between $25,000$70,000 and $30,000.$100,000. The majority of our 20222023 development capital expenditures are related to our Pico digestion capacity increase, the ongoing development of Montauk Ag Renewables, our second Apex facility, and our recently announced second Apex facility.Blue Granite 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 eightseven LFG RNG sites 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 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 ninethree months ended September 30, 2022March 31, 2023 and 2021:2022:
| Nine Months Ended September 30, | ||||||||
| 2022 | 2021 | |||||||
Net cash flows provided by operating activities | 59,809 | $ | 21,298 | |||||
Net cash flows used in investing activities | (11,270 | ) | (11,414 | ) | ||||
Net cash flows used in financing activities | (6,106 | ) | (9,860 | ) | ||||
Net increase in cash and cash equivalents | 42,433 | 24 | ||||||
Restricted cash, end of period | 426 | 691 | ||||||
Cash and cash equivalents and restricted, end of period | 96,045 | 21,583 | ||||||
|
| Three Months Ended March 31, |
| |||||
|
| 2023 |
|
| 2022 |
| ||
Net cash (used in) provided by: |
|
|
|
|
|
| ||
Operating activities |
| $ | (11,838 | ) |
| $ | 9,597 |
|
Investing activities |
|
| (13,278 | ) |
|
| (977 | ) |
Financing activities |
|
| (2,018 | ) |
|
| (2,091 | ) |
Net (decrease) increase in cash and cash equivalents |
|
| (27,134 | ) |
|
| 6,529 |
|
Restricted cash, end of the period |
|
| 429 |
|
|
| 347 |
|
Cash and cash equivalents, end of period |
|
| 78,472 |
|
|
| 60,141 |
|
For the first ninethree months of 2022,2023, we generated $59,809used $11,838 of cash from operating activities a 180.8% increase from $21,298compared to $9,597 of cash provided by operating activities in the first ninethree months of 2021.2022. For the first ninethree months of 2022,2023, income and adjustments to income from operating activities were $60,141used $8,565 compared to $28,082income and adjustments to income providing $8,202 in first ninethree months of 2021.2022.
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Included within income and adjustments to income from operating activities for the first three months of 2023 was an increase of $12,797 related to the deferred tax provision adjustment. Working capital and other assets and liabilities used $(333)$3,274 in the first ninethree months of 20222023 compared to $(6,784) usedworking capital and other assets and liabilities providing $1,395 in the first ninethree months of 2021.2022.
Our net cash flows used in investing activities has historically focused on project development and facility maintenance. Our capital expenditures for the first ninethree months of 20222023 were $12,750,$13,278, of which $5,439$5,440, $2,689, and $1,604$1,954 were related to the ongoing development of the Pico facility digestion capacity increase, and the Montauk Ag Renewables in North Carolina, and second Apex RNG facility, respectively. Partially offsetting this use were proceeds of $1,088 related to the sale of NOx emissions allowance credits in the first nine months of 2022.
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Our net cash flows used in financing activities of $6,106$2,018 for the first ninethree months of 20222023 decreased by $3,754$73 compared to cash used in financing activities in the first ninethree months of 20212022 of $9,860. The closing of our January 2021 IPO provided $12,401 in proceeds after payment of commissions and expenses. In connection with withholding shares from restricted stock awards pursuant to elections made by employees under Section 83(b) of the Code, the Company reacquired 950,214 shares with a value of approximately $10,813. Additionally, in connection with the Distribution, we loaned $8,940, in the aggregate to MNK for its dividends tax liability arising under the South African Income Tax Act, 1962, as amended. The Company has a security interest in 800,000 shares of its common stock owned by MNK, which if sold by MNK, MNK has agreed to use towards repaying this loan.$2,091.
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 108 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 1412 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 ninethree months of 2022,2023, we had approximately $3,905$4,477 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 ninethree months of 2021,2022, 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 2018 in the unaudited condensed consolidated financial statements for further information related to the lease obligations. In 2022, the Company entered into a new, ten year corporate office lease with monthly rent payments of approximately $43 per month beginning in 2023, the first full year of the lease. The lease includes annual rent increases. During the fourth quarter of 2022, the Company expects to enter into a three year lease extension for its regional corporate office with monthly rent payments of approximately $5 per month beginning in 2023. The lease will include annual rent increases.
The Company has other contractual obligations associated with our fuel supply agreements. The expiration of these agreements range between 5-214-20 years. The minimum royalty and capital obligation associated with these agreements range from $7$8 to $1,380.$1,385.
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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
35
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.
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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.
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”“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.
36
52
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.
During the third quarter of 2022, we performed interim recoverability tests for our Tulsa facility asset group when it was determined it was more likely than not the carrying value of the long-lived asset group would not be recoverable. The results of our testing indicated that the long-lived assets related to the Tulsa facility within our REG segment had carrying values in excess of the asset group’s fair value. Based upon level 3 unobservable inputs, we incorporated assumptions that we believe would be a reasonable market participant’s view in a hypothetical transaction in developing a cash flow analysis. Significant level 3 inputs included estimates of future revenue growth, gross margin, EBITDA, and positive cash flow generation. As a result of the analysis, the Company recorded a $2,089 property, plant and equipment impairment related to the REG site for the three and nine months ended September 30, 2022. As to the remaining long lived asset groups, the Company further concluded, based on our interim cashflow assessment conducted for monitoring potential indicators of impairment, that the cashflows to be generated are significantly in excess of their carrying values of our operating sites primarily due to the lengths of the underlying gas rights agreements and the Company did not record any other impairments related to its cash flows assessment. Separate from our cash flows assessment, we We identified discrete events and recorded impairment of $233$451 and $626$51 for the ninethree months ended September 30,March 31, 2023 and 2022, and 2021, 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.
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Recent Accounting Pronouncements
For a description of our recently adopted accounting pronouncements and recently issued accounting standards not yet adopted, see Note 2 “Summary of Significant Accounting Policies” of Part I, Item 1 of our unaudited condensed consolidated financial statements in this report.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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There have been no material changes since our disclosure in Quantitative and Qualitative Disclosures About Market Risk included as Item 7A in our 20212022 Annual Report.
ITEM 4. CONTROLS AND PROCEDURES
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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.
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PART II OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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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
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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 2021 Annual Report. The impact of COVID-19 may exacerbate the risks discussed in Part I, “Item 1A. Risk Factors” in our 20212022 Annual Report any of which could have a material effect on us.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
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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.
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SinceFrom the closing of the IPO through March 31, 2023, approximately $12.8$15.0 million of the net proceeds from the IPO have been used by Montauk Renewables in connection with due diligence andfor the consummation offollowing: the Montauk Ag RenewablesAsset Acquisition in May 2021, the purchase of the real estatereal-estate and property in October 2021 related to Montauk Ag, Renewables, and subsequent development activities related to Montauk Ag Renewables. An immaterial amount has been used relating to other possible acquisitions and projects. The remainingAs of March 31, 2023, all net proceeds of approximately $2.2 million is held as cash.have been used by the Company.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES |
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None.
None.
ITEM 4. MINE SAFETY DISCLOSURES
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Not applicable.
ITEM 5. OTHER INFORMATION |
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None.
None.
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ITEM 6. EXHIBITS |
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Exhibit Number | Description | |
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) |
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SIGNATURES
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.
May 10, 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) | ||||||||
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