MONTAUK RENEWABLES, INC. 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 2021 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 largestU.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, while 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
RINs 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 decision not to commit to transfer available RINs during a period will impact our revenue and operating profit. The industry experienced volatile D3 RIN index prices during the first quarter endedMarch 31, 2022 . Though the average market price of D3 RINs during the first quarter endedMarch 31, 2022 was approximately$3.25 , the market price declined as low as$2.85 and generally decreased during the first quarter. 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. As a result, for the period endedMarch 31, 2022 , we had approximately 4,394 RINs in inventory as compared to 622 RINs in inventory for the period endedMarch 31, 2021 . The market price of D3 RINs index has subsequently improved during the second quarter of 2022 with an average year to date D3 RIN index price of approximately$3.27 . We have entered into commitments to transfer all RINs in inventory, subsequent toMarch 31, 2022 . We have also entered into agreements to transfer the majority of RINs expected to be generated and available for transfer during the second quarter of 2022. The average realized price of these commitments is approximately$3.40 . The average D3 RIN index price during the month of April was approximately$3.33 . We have not currently committed to transfer a significant amount of RINs during the second half of 2022.
Pico Digestion Capacity Increase
Our Pico facility continues to meet our expectations after the completion of the
improvements to the existing digestion process. Production has more than doubled
in the first quarter of 2022 as compared to production volumes in the first
quarter of 2021. We continue to anticipate that CARB will complete their review
of our CI Score Pathway and we expect to receive approval of our score during
the second half of 2022. While we continue to store gas in 2022, we expect to
begin to release gas from storage in the third quarter of 2022. While we do not
expect to receive LCFS credit revenue on 2022 production until 2023, we do
anticipate recognizing revenues on RINs generated from gas released from storage
over the second half of 2022.
Related to our Pico Feedstock Amendment, we expect the dairy to begin to deliver
increased feedstock volumes in the second half of 2022. The improved
efficiencies of our existing digestion process has provided the opportunity to
pursue additional process changes related to water management. The volume of
water in the existing digestion process limits the amount of feedstock we can
process. We expect that our water management improvements will enable us to
process the increased feedstock volumes expected from the dairy in the second
half of 2022. Our improved water management has allowed us to further work with
the dairy to meet their needs and interests related to enhanced water
purification. Changes to water purification benefits the dairy by improving the
quality of water being sent to lagoons, and has the potential of reducing our
costs of operations, though has elongated the timeline of certain components of
the overall capacity expansion. We expect the final phase of designing our
digestion capacity project to be completed during the third quarter of 2022,
including the water management and purification improvements.
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Montauk Ag Renewables
In the second quarter of 2021, through our newly formed wholly owned subsidiary, Montauk Ag Renewables, we completed the 2021 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 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 inMagnolia, North Carolina . We subsequently closed on a transaction to acquire approximately 146 acres and an existing approximately 500,000 square foot structure inTurkey, 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 inMagnolia . We have not completed our improvements, however, and have not reached commercial operations at this location. The improvements to the reactor technology are intended to be deployed at theTurkey location. While these project developments continue, we are in various stages of discussion with regulatory agencies inNorth Carolina related to the resulting power generation derived from swine waste to ensure its eligibility for Renewable Energy Credits underNorth Carolina's Renewable Energy Portfolio Standards in anticipation of commercial production. OurMagnolia, North Carolina location has an existing electricity interconnection which can be reactivated pending those discussions. We are also in varying stages of corresponding negotiations with 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 production. We do not currently expect production to commence during 2022 based on the current development timeline. 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. 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:
• Regulatory or policy initiatives, including the federal RFS program and
state-level
low-carbon
fuel programs in states such as California and Oregon , that drive
demand for RNG and its derivative Environmental Attributes (as further
described below).
• Efficiency, mobility and capital cost flexibility in RNG operations
enable them to compete successfully in multiple markets. Our operating
model is nimble, as we commonly use modular equipment; our RNG
processing equipment is more efficient than its fossil-fuel
counterparts.
• 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 permitting 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 asAtascocita and Coastal Plains. 28
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Acquisition and Development Pipeline
The timing and extent of our development pipeline affects our operating results due to:
• Impact of Higher Selling, General and Administrative Expenses Prior to the
Commencement of a Project's Operation: We incur significant expenses in the
development of new RNG projects. Further, the receipt of RINs is delayed, and
typically does not commence for a period of four to six months after the
commencement of injecting RNG into a pipeline, pending final registration
approval of the project by the
third-party quality assurance plan certification. During such time, the RNG
is either physically or theoretically stored and later withdrawn from storage
to allow for the generation of RINs.
• Shifts in Revenue Composition for Projects from New Fuel Sources: As we
expand into livestock farm projects, our revenue composition from
Environmental Attributes will change. We believe that livestock farms offer
us a lucrative opportunity, as the value of LCFS credits for dairy farm
projects, for example, are a multiple of those realized from landfill
projects due to the significantly more attractive CI score of livestock
farms.
• Incurrence of Expenses Associated with Pursuing Prospective Projects That Do
Not Come to Fruition: We incur expenses to pursue prospective projects with
the goal of a site host accepting our proposal or being awarded a project in
a competitive bidding process. Historically, we have evaluated opportunities
which we decided not to pursue further due to the prospective project not
meeting our internal investment thresholds or a lack of success in a
competitive bidding process. To the extent we seek to pursue a greater number
of projects or bidding for projects becomes more competitive, our expenses
may increase.
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. OnDecember 7, 2021 , theEPA issued a proposed rule modifying the RVOs for 2020 and setting the RVOs for 2021 and 2022. In addition, the proposed rule included the addition of a supplemental volume of renewable fuel obligation in 2022 to address theUnited States Court of Appeals for the D.C. Circuit's 2017 remand of the 2014-2016 standards and also laid out a proposed regulatory framework to allow biointermediates to be included in the program. The manner in which theEPA will establish RVOs beginning in 2023 and when the statutory RVO mandates are set to expire, is expected to create additional uncertainty as to RIN pricing.EPA decisions on SRE petitions also has strong potential to introduce RIN pricing volatility. OnDecember 7, 2021 , theEPA proposed a decision to deny 65 pending petitions for extensions between compliance years 2016 - 2021. InApril 2022 , theEPA issued final denials for 36 petitions for the 2018 compliance year with compliance flexibility in a separate action for 31 of those denials. Remaining petitions are still being considered for compliance years 2016 - 2021. OnApril 22, 2022 , theU.S. District Court for the District of Columbia approved a consent decree entered into between theEPA and Growth Energy, which requires theEPA to issue the final Renewable Fuel Standards for 2021 and 2022 byJune 3, 2022 . TheEPA 's proposed 2021 and 2022 standards include a proposed revision to the 2020 standards that theEPA had previously set in 2019. Changes to the LCFS program require annual verification of the CI score assigned to a project. Annual verification could significantly affect the profitability of a project, particularly in the case of a livestock farm project.
Factors Affecting Revenue
Our total operating revenues include renewable energy and related sales of
Environmental Attributes. Renewable energy sales primarily consist of the sale
of biogas, including LFG and ADG, which is either sold or converted to Renewable
Electricity. Environmental Attributes are generated and monetized from the
renewable energy.
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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 below and 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.
• Renewable Natural Gas Revenues
: We record revenues from the production and sale of RNG and the generation
and sale of the Environmental
Attributes derived from RNG, such as RINs and LCFS credits. Our RNG revenues
from Environmental Attributes are recorded net of a portion of Environmental
Attributes shared with
off-take
counterparties as consideration for such counterparties using the RNG as a
transportation fuel. We monetize a portion of our RNG production under
fixed-price and counterparty sharing agreements, which provide floor prices
in excess of commodity indices and sharing percentages of the monetization of
Environmental Attributes. Under these sharing arrangements, we receive a
portion of the profits derived from counterparty monetization of the
Environmental Attributes in excess of the floor prices. We have entered into
fixed-price agreements to replace the counter-party sharing arrangements
expiring during 2022.
• Renewable Electricity Generation Revenues:We record revenues from the production and sale of Renewable Electricity and
the generation and
sale of the Environmental Attributes, such as RECs, derived from Renewable
Electricity. All of our Renewable Electricity production is monetized under
fixed-price PPAs from our existing operating projects.
• Corporate Revenues:Corporate reports realized and unrealized gains or losses under our gas hedge
programs. Based on current rates, we expect our gas commodity hedge program
to continue to be priced below actual index prices through the end of this
fiscal year at which time the hedge program will expire. Corporate also
relates to additional
discrete financial information for the corporate function; primarily used as
a shared service center for maintaining functions such as executive,
accounting, treasury, legal, human resources, tax, environmental, engineering
and other operations functions not otherwise allocated to a segment.
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. 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.
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 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 impacted our
Plains facilities located in
temporarily idled due to the loss of power from
counter-parties or by us for the period
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 expect lower than historical volumes through 2022.
• Our Pico facility has resumed operations and ramp up activities related to
the existing digester cleanout activities have been substantially completed.
Production volume performance continues to meet our expectations during the
post cleanout period. Our improvement project has impacted the timeline
related to modeling the CI Score pathway model. Our 2022 production will be
stored until CARB completes its CI Score Pathway. We do not currently expect
to receive LCFS credit revenue on 2022 production until 2023.
• Quality of Biogas :We are reliant upon the quality and availability of biogas from our site
partners. The quality of the waste at our landfill project
sites is subject to change based on the volume and type of waste accepted.
Variations in the quality of the biogas could affect our RNG production
levels. At three of our projects, we operate the wellfield collection system,
which allows greater control over the quality and consistency of the
collected biogas. At two of our projects, we have operating and management
agreements by which we earn revenue for managing the wellfield collection
systems. Additionally, our dairy farm project benefits from the consistency
of feedstock and controlled environment of collection of waste to improve
biogas quality.
• RNG Production from Our Growth Projects:We anticipate increased production at certain of our existing projects as
open landfills continue to
take in additional waste and the amount of gas available for collection
increases. Delays in commencement of production or extended commissioning
issues at a new project or a conversion project would delay any realization
of production from that project.
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Pricing
OurRenewable 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 a 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.
Our Pico project is expected to be 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. Our current RIN commitments scheduled for transfer are at an average D3 RIN price of approximately$3.41 with commitments throughJune 2022 . We have not currently committed a significant portion of expected 2022 RIN generation for the second half of 2022. 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.
• Project Operating and Maintenance Expenses
: Operating and maintenance expenses primarily consist of expenses related to
the collection and processing of biogas, including biogas collection system
operating and maintenance expenses, biogas processing, operating and
maintenance expenses, and related labor and overhead expenses. At the project
level, this includes all labor and benefit costs, ongoing corrective and
proactive maintenance, project level utility charges, rent, health andsafety, employee communication, and other general project level expenses.
• Royalties, Transportation, Gathering and Production Fuel Expenses:
Royalties represent payments made to our facility hosts, typically structured
as a percentage of revenue. Transportation and gathering expenses include
capacity and metering expenses representing the costs of delivering our RNG
and Renewable Electricity production to our customers. These expenses include
payments to pipeline operators and other agencies that allow for the
transmission of our gas and electricity commodities to end users. Production
fuel expenses generally represent alternative royalty payments based on
quantity usage of biogas feedstock.
• General and Administrative Expenses:
General and administrative expenses primarily consist of corporate expenses
and unallocated support functions for our operating facilities, including
personnel costs for executive, finance, accounting, investor relations,
legal, human resources, operations, engineering, environmental registration
and reporting, health and safety, IT and other administrative personnel and
professional fees and general corporate expenses. We expect increased general
and administrative expenses associated with our ongoing development of
Montauk Ag Renewables in 2022. We also expect increased general and
administrative expenses associated with our board of directors approving the
payment of cash fees to non-employee directors beginning in 2022. The Company
accounts for share-based compensation related to grants made through its
equity and incentive compensation plan under FASB ASC 718.
For more information, see Note 15 to our unaudited condensed consolidated
financial statements related to share-based compensation.
• Depreciation and Amortization:Expenses related to the recognition of the useful lives of our intangible and
fixed assets. We spend significant
capital to build and own our facilities. In addition to development capital,
we annually reinvest to maintain these facilities.
• Impairment Loss:Expenses related to reductions in the carrying value(s) of fixed and/or
intangible assets based on periodic evaluations whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable.
• Transaction Costs:Transaction costs primarily consist of expenses incurred for due diligence
and other activities related to potential acquisitions
and other strategic transactions.
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 in
terms 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
fixed-priced contracts. Our Renewable Electricity Generation segment
commodity production is primarily monetized under fixed-priced PPAs.
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• 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
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 the
Environmental 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.
The following table summarizes the key operating metrics described above, which metrics we use to measure performance.
Three Months
(in thousands, unless otherwise indicated) Ended March 31, Change
2022 2021 Change %
Revenues
Renewable Natural Gas Total Revenues $ 32,666 $ 28,123 $ 4,543 16.2 %
Renewable Electricity Generation Total Revenues $ 3,971 $ 3,324 RNG Metrics CY RNG production volumes (MMBtu) 1,369 1,348 21 1.5 % Less: Current period RNG volumes under fixed/floor-price contracts (310 ) (453 ) 143 31.6 % Plus: Prior period RNG volumes dispensed in current period 372 353 19 5.4 % Less: Current period RNG production volumes not dispensed (410 ) (350 ) (60 ) 17.1 % Total RNG volumes available for RIN generation (1) 1,021 898
123 13.7 %
RIN Metrics Current RIN generation ( x 11.727) (2) 11,967 10,534 1,433 13.6 % Less: Counterparty share (RINs) (1,216 ) (1,147 ) (69 ) (6.0 %) Plus: Prior period RINs carried into CY 128 110 18 16.4 % Less: CY RINs carried into next CY - - - - Total RINs available for sale (3) 10,879 9,497 1,382 14.6 % Less: RINs sold (6,485 ) (8,875 ) 2,390 26.9 % RIN Inventory 4,394 622 3,772 606.4 % RNG Inventory (volumes not dispensed for RINs) (4) 410 350 60 17.1 % Average Realized RIN price$ 3.46 $ 1.91 $ 1.55 81.2 % Operating Expenses Renewable Natural Gas Operating Expenses$ 16,345 $ 13,134 $ 3,211 24.4 % Operating Expenses per MMBtu (actual)$ 11.94 $ 9.74 $ 2.20 22.6 % Renewable Electricity Generation Operating Expenses$ 3,737 $ 3,393 $ 344 10.1 % $/MWh (actual)$ 83.04 $ 71.70 $ 11.34 15.8 % Other Metrics Renewable Electricity Generation Volumes Produced (MWh) 45 47 (2 ) (4.2 %) Average Realized Price $/MWh (actual)$ 88.27 $ 70.24 $ 18.03 25.7 %
(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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Results of Operations
Comparison of Three Months Ended
The following table summarizes our revenues, expenses and net income for the periods set forth below:
Three Months
(in thousands, except per share data) Ended March 31, Change
2022 2021 Change %
Total operating revenues $ 32,169 $ 31,447 $ 722 2.3 %
Operating expenses:
Operating and maintenance expenses 13,201 10,612 2,589 24.4 %
General and administrative expenses 8,495 20,452 (11,957 ) (58.5 %)
Royalties, transportation, gathering and
production fuel 7,206 6,218 988 15.9 %
Depreciation and amortization 5,153 5,737 (584 ) (10.2 %)
Gain on insurance proceeds (313 ) (82 ) (231 ) (281.7 %)
Impairment loss 51 626 (575 ) (91.9 %)
Transaction costs 27 88 (61 ) (69.3 %)
Total operating expenses 33,820 43,651 (9,831 ) (22.5 %)
Operating loss$ (1,651 ) $ (12,204 ) $ 10,553 86.5 % Other (income) expenses: (278 ) 679 (957 ) (140.9 %) Income tax (benefit) expense (258 ) 1,382 (1,640 ) (118.7 %) Net loss$ (1,115 ) $ (14,265 ) $ (13,150 ) (92.2 %)
Revenues for the Three Months Ended
Total revenues in the first quarter of 2022 were$32,169 , an increase of$722 (2.3%) compared to$31,447 in the first quarter of 2021. The increase is primarily related to an increase in realized pricing of gas commodity indices and average realized RIN pricing during the first quarter of 2022 compared to the first quarter of 2021. Realized gas commodity indices increased 84.0% in the first quarter of 2022 of$4.95 compared to$2.69 in the first quarter of 2021. Realized RIN pricing increased 81.2% during the first quarter of 2022 compared to the first quarter of 2021. The increase was offset by lower revenues recognized under our counter party sharing agreements of$187 in the first quarter of 2022 compared to$3,787 in the first quarter of 2021. Also offsetting the increase are losses recognized on in the first quarter of 2022 related to gas commodity hedging settlements of$3,451 .
Renewable Natural Gas Revenues
We produced 1,369 MMBtu of RNG during the first quarter of 2022, an increase of 21 MMBtu over the 1,348 MMBtu (1.5%) produced in the first quarter of 2021. OurGalveston facility produced 66 MMBtu more in the first quarter of 2022 compared to the first quarter 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 andAtascocita facilities. Our McCarty facility produced 31 fewer MMBtu in the first quarter of 2022 compared to the first quarter of 2021 due to wellfield changes by our landfill host. Also, ourAtascocita facility produced 24 fewer MMBtu in the first quarter of 2022 compared to the first quarter of 2021 due to a process equipment failure that has since been repaired. Revenues from theRenewable Natural Gas segment in the first quarter of 2022 were$32,666 , an increase of$4,543 (16.2%) compared to$28,123 in the first quarter of 2021. Average commodity pricing for natural gas for the first quarter of 2022 was$4.95 per MMBtu, 84.0% higher than the first quarter of 2021. During the first quarter of 2022, we self-monetized 6,485 RINs, representing a 2,390 decrease (26.9%) compared to 8,875 in the first quarter of 2021. The decrease was primarily related to our decision not to self-market a significant amount of RINs due to our belief that D3 RIN index volatility was temporary. Average pricing realized on RIN sales during the first quarter of 2022 was$3.46 as compared to$1.91 in the first quarter of 2021, an increase of 81.2%. This compares to the average D3 RIN index price for the first quarter of 2022 of$3.25 being approximately 28.0% higher than the average D3 RIN index price in the first quarter of 2021. AtMarch 31, 2022 , we had approximately 410 MMBtu available for RIN generation and we had approximately 4,394 RINs generated and unsold. AtMarch 31, 2021 , we had approximately 350 MMBtu available for RIN generation and approximately 622 RINs generated and unsold. 33
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Renewable Electricity Generation Revenues
We produced 45 MWh in Renewable Electricity during the first quarter of 2022, a decrease of 2 MWh (4.2%) over the 47 MWh produced in the first quarter of 2021. Our Bowerman facility produced 2 MWh less in the first quarter of 2022 compared to the first quarter of 2021 due to preventative engine maintenance. Revenues from Renewable Electricity facilities in the first quarter of 2022 were$3,971 , an increase of$647 (19.5%) compared to$3,324 in the first quarter of 2021. Our Bowerman facility was impacted in the fourth quarter of 2020 by theCalifornia 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$598 in reduced revenues in the first quarter of 2021 as compared to the first quarter of 2022. In the first quarter of 2022, 100% 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 quarter of 2021. This provides the Company with certainty of price resulting from our Renewable Electricity sites.
Corporate Analysis
In the first quarter of 2022, our gas commodity hedge program was priced at rates below actual index prices, resulting in realized losses of$3,451 . We did not have any gas hedge programs in the first 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 2022 at which time the hedge program will expire.
Expenses for the Three Months Ended
General and Administrative Expenses
Total general and administrative expenses were$8,495 for the first quarter of 2022, a decrease of$11,957 (58.5%) compared to$20,452 for the first quarter of 2021. Of the total in the first quarter of 2021,$14,353 related to stock-based compensation costs associated with the IPO and Reorganization Transactions. Employee related costs, including stock-based compensation, decreased approximately$11,938 (71.0%) in the first quarter of 2022 as compared to the first quarter of 2021. This decrease is related to our accounting for the cancellation of MNK options and recording approximately$2,050 in previously unvested stock-based compensation expense. We recorded approximately$12,549 in stock-based compensation expense associated with the grants of restricted stock, non-qualified stock options, and restricted stock units associated with the board of directors'January 2021 grants to the Company's employees. Additionally, professional fees decreased approximately$671 (34.4%) during the first quarter of 2022 primarily driven by higher professional fees incurred during the first quarter of 2021 related to the successful completion of the IPO and Reorganization Transactions. Our corporate insurance premiums increased approximately$187 (16.0%) during the first quarter of 2022 compared to the first quarter of 2021, primarily related to premium increases associated with the completion of the IPO. Our board of directors approved the payment of cash fees to non-employee members beginning in 2022 leading to increased fees of$175 in the first quarter of 2022. Finally, our general and administrative expense for the first quarter of 2022 increased approximately$455 compared to the first quarter of 2021 associated with the operations of the Montauk Ag Renewables Acquisition.
Renewable Natural Gas Expenses
Operating and maintenance expenses for our RNG facilities in the first quarter of 2022 were$9,560 , an increase of$1,958 (25.8%) as compared to$7,602 in the first quarter of 2021. The primary reason for this increase is because ourHouston based facilities were favorably impacted by lower utility rates during the first quarter of 2021. Certain of our utility contracts have provisions that when we are not using utilities, the providers are able to contribute that capacity back into the market and we receive credit against our future bills. The weather event that occurred in the first quarter of 2021 temporarily impacted ourHouston facilities' utility consumption and resulted in our RNG utilities being approximately$2,183 lower in the first quarter of 2021 as compared to the first quarter of 2022. Royalties, transportation, gathering and production fuel expenses for the Company's RNG facilities for the first quarter of 2022 were$6,785 , an increase of$1,253 (22.7%) compared to$5,532 in the first quarter of 2021. Royalties, transportation, gathering and production fuel expenses increased as a percentage of RNG revenues to 20.8% for the first quarter of 2022 from 19.7% in the first quarter of 2021. The increase in royalties, transportation, gathering and production fuel expenses is primarily related to the increase in RNG revenues in the first quarter of 2022 compared to the first quarter of 2021. 34
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Renewable Electricity Expenses
Operating and maintenance expenses for our Renewable Electricity facilities in the first quarter of 2022 were$3,316 , an increase of$350 (11.8%) compared to$2,966 in the first quarter of 2021. The increase is primarily related to scheduled preventative engine maintenance at our Bowerman facility, which was approximately$457 higher in the first quarter of 2022 compared to the first quarter of 2021. Royalties, transportation, gathering and production fuel expenses for our Renewable Electricity facilities for the first quarter of 2022 were$421 , a decrease of$6 (1.4%) compared to$427 in the first quarter of 2021. As a percentage of Renewable Electricity Generation segment revenues, royalties, transportation, gathering and production fuel expenses decreased to 10.6% from 12.8%. This decrease relates to an increase in grid access fees that were incurred in first quarter of 2021 as a result of the 2020 California wildfires, that did not occur in the first quarter of 2022.
Royalty Payments
Royalties, transportation, gathering, and production fuel expenses in the first quarter of 2022 were$7,206 , an increase of$988 (15.9%) compared to$6,218 in the first quarter 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 quarter of 2022 was$5,153 , a decrease of$584 (10.2%) compared to$5,737 in the first quarter 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$51 in the first quarter of 2022, a decrease of$575 (91.9%) compared to$626 in the first quarter of 2021. The impairment in the first quarter of 2022 was related to computer software and hardware no longer being utilized. The impairment in the first quarter of 2021 was due to decommissioning a previously converted electricity site to RNG as we had been contractually obligated to maintain the site.
Other (Income) Expenses
Other income in the first quarter of 2022 were$278 , an increase of$957 (140.9%) compared to other expenses of$679 in the first quarter of 2021. Of the increase,$614 is related to a reduction of interest expense from the first quarter of 2022 compared to the first quarter of 2021. Also driving part of the increase were NOx emissions allowances credits, which were sold for$1,088 and resulted in a$311 gain on the sale of these credits.
Income Tax Expense (Benefit)
Income tax expense for the three months ended
The effective tax rate of 18.8% for the three months endedMarch 31, 2022 was higher than the rate for the three months endedMarch 31, 2021 of (10.7)% primarily due to the use of year to date pre-tax income used to complete the effective tax rate calculation and a required 162(m) executive compensation limitation permanent adjustment. TheMarch 31, 2022 rate included utilization of production tax credits and certain discrete items.
Operating Loss for the Three Months Ended
Operating loss in the first quarter of 2022 was$1,651 , a decrease of$10,553 (86.5%) compared to an operating loss of$12,204 in the first quarter of 2021. The primary driver of the decrease relates to stock-based compensation expense of$14,598 recognized in the first quarter of 2021, which was related to the IPO and Reorganization Transactions. RNG operating profit for the first quarter of 2022 was$12,973 , an increase of$2,378 (22.4%) compared to$10,595 in the first quarter of 2021. Renewable Electricity Generation operating loss for the first quarter of 2022 was$1,471 , a decrease of$747 (33.7%) compared to an operating loss of$2,218 for the first quarter of 2021. 35
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Table of Contents Non-GAAP Financial Measures: The following table presents EBITDA and Adjusted EBITDA, non-GAAP financial measures for each of the periods presented below. We present EBITDA and Adjusted EBITDA because we believe the measures assist investors in analyzing our performance across reporting periods on a consistent basis by excluding items that we do not believe are indicative of our core operating performance. In addition, EBITDA and Adjusted EBITDA are financial measurements of performance that management and the board of directors use in their financial and operational decision-making and in the determination of certain compensation programs. EBITDA and Adjusted EBITDA are supplemental performance measures that are not required by or presented in accordance with GAAP. EBITDA and Adjusted EBITDA should not be considered alternatives to net income 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.
The following table provides our EBITDA and Adjusted EBITDA for the periods presented, as well as a reconciliation to net income:
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