Montauk Renewables (MNTK) 10-K2021 FY Annual report

This Annual Report on Formuses 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 Annual Report on Formto:

This Annual Report on Formcontains “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. These statements may include words such as “anticipate,” “assume,” “believe,” “can have,” “contemplate,” “continue,” “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 amendment and the Montauk Ag project in North Carolina, the anticipated completion of the engine repairs and resumption of operations at the Security facility, 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:

See the “Risk Factors” section and elsewhere in this report for a more complete discussion of the risks and uncertainties mentioned above and for discussion of other risks and uncertainties we face that could cause actual results to differ materially from those expressed or implied by these forward-looking statements. All forward-looking statements attributable to us are expressly qualified in their entirety by these cautionary statements as well as others made in our other Securities and Exchange Commission (“”) filings and public communications. You should evaluate all forward-looking statements made by us in the context of these risks and uncertainties.

Our business is subject to a number of risks and uncertainties, including those highlighted in the section titled “Risk Factors” in this Annual Report on FormSome of these principal risks include the following and may be further exacerbated by thepandemic:

Montauk continuously evaluates sources of waste methane in the United States that could serve as potential future commercial-scale project opportunities. We also continue our growth through optimization of our existing assets and project portfolio, securing greenfield developments and acquiring existing projects. We also include in our growth other vertical integration opportunities adjacent to our core operations. Additionally, we are actively exploring third-party service offerings to further monetize Montauk’s deep experience in operating LFG and ADG projects. Our successful evaluation and execution of project opportunities is based on our ability to leverage our significant industry experience, relationships with customers and vendors, access to interconnections forand capabilities to construct pipeline and electrical interconnections that ensure the economic viability of opportunities we pursue. We exercise financial discipline in pursuing these projects by targeting project returns that are in line with the relative risk of the specific projects and associated feedstock costs, offtake contracts and any other related attributes that can be monetized.

Our revenues are generated from the sale of RNG and Renewable Electricity under termed agreements, along with the Environmental Attributes that are derived from these products. RNG has the same chemical composition as natural gas from fossil sources, but has unique Environmental Attributes assigned to it through government incentive programs due to its origin fromrenewable sources, which we can also monetize. Virtually all of the RNG we produce is used as a transportation fuel because this market generally provides the most value for our RNG production. The RNG we process is pipeline-quality and can be used for transportation fuel when converted to CNG or LNG. CNG has been the most common fuel used by fleets where medium-duty trucks are close to the fueling station, such as city fleets, local delivery trucks and waste haulers.

Whenever possible, we seek to mitigate our exposure to commodity and Environmental Attribute pricing volatility. Through contractual arrangements with our site hosts and counterparties, we typically share pricing and production risks while retaining our ability to benefit from potential upside. A portion of the RNG volume we produce is sold under bundled fixed-price arrangements for the RNG and Environmental Attributes, some of which include a sharing arrangement where we benefit from prices above certain thresholds. For our remaining RNG projects, we may enter intosharing arrangements where our partners receive the Environmental Attributes instead of a cash payment, thereby sharing in Environmental Attribute pricing risk.

RNG has the same chemical composition as natural gas from fossil sources, but has unique Environmental Attributes assigned to it due to its origin from organic sources. These attributes qualify RNG as a renewable fuel under the federal RFS program, established pursuant to the EPACT 2005 and EISA, allowing RNG to generate renewable fuel credits called RINs when the RNG is used as a transportation fuel.

CA LCFS credits are environmental credits generated in California in order to stimulate the use of cleaner, low-carbon fuels. This program encourages the production of low-carbon fuels by setting annual CI standards, which are intended to reduce GHG emissions from the state’s transportation sector. One of the key aspects of the program is that it encourages the use of low-carbon transportation fuel, such as CNG, in vehicles instead of gasoline. This program further encourages use of renewable fuels in vehicles over CNG from fossil fuels.

Electricity is a commodity that trades and is priced on a regional basis in and among regional control areas. Pricing for commodity-sold electricity can be based on day-ahead prices for scheduled deliveries or hourly, real-time prices for unscheduled deliveries. Prices vary across the country based on weather, load patterns and local power and transmission restrictions. The Renewable Electricity produced at our biogas-to-electricity projects is sold under long-term contracts to credit-worthy counterparties, typically under a fixed price with escalators. The terms of these contracts range from 5 to 22 years, with a weighted average remaining tenure of 14 years, based on 2021 expected electricity production.

. Biogas is considered to be a renewable resource in all 37 states that encourage or mandate the use of renewable energy. Thirty states, the District of Columbia, and Puerto Rico have RPS that require utilities to supply a percentage of power from renewable resources, and seven states have a Renewable Portfolio Goal that is similar to RPS, but it is an objective or goal and not a requirement. Many states allow utilities to comply with RPS through tradable RECs, which provide an additional revenue stream to RNG projects that produce electricity from biogas.

We undertook an agricultural project when we closed on the acquisition of Pico, the anaerobic digester and two Jenbacher engines at the Bettencourt dairy farm in Jerome, Idaho in September 2018The project sources manure from a dairy farm with up to approximately 18,500 milking cows. While Pico was initially a Renewable Electricity site, we brought an RNG facility at that location online in 2020. The facility sells transportation fuel into the California transportation marketThe collection of the fuel supply is much easier at dairy farms than at landfills due to higher quality, more uniform feedstock, less volatility in inlet gas and biogas collection in a more controlled environment. During the second quarter of 2021, we completed an amendment to our Pico feedstock agreement (“Pico Feedstock Amendment”). The amendment will increase the amount of feedstock supplied to the facility for processing over a one to three-year period.

During the second quarter of 2021, we, through a newly formed wholly-owned subsidiary, Montauk Ag Renewables, LLC (“Montauk Ag”), completed a series of transactions with Joseph P. Carroll, Jr. (“Carroll”), Martin A. Redeker (“Redeker”) and certain of their affiliates to purchase identified assets related to developing technology to recover residual natural resources from waste streams of modern agriculture and to refine and recycle such waste products through proprietary and other processes in order to produce high quality renewable natural gas,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. The real property includes the purchase of an approximate 9.35-acre parcel in Duplin County, North Carolina. Additionally, Messrs. Carroll and Redeker joined Montauk as full-time employees, focused on refining and scaling the technology and capabilities to develop new agricultural waste stream projects.

The drive toward voluntary and most likely regulatory-required organic waste diversion from landfills is of particular interest as we leverage our current experience base, and we believe this trend will provide long-term growth opportunities and that the market has not yet unlocked the full potential of RNG and Renewable Electricity. In August of 2021, Montauk Ag Renewables was granted a patent on technology to convert agricultural waste into multiplerenewable fuel alternatives. We believe this technology will provide a competitive advantage that will enable us to utilize a broader range of organic waste materials from the agricultural and WRFF sectors for the production of biogas and associated new RNG and/or Renewable Electricity projects. As our biogas processing technology continues to improve and the required energy intensity of the RNG and Renewable Electricity production process is reduced, we expect that we will be able to enter new markets for our products.

We treat our existing assets as an integrated portfolio rather than a collection of individual projects. This allows us to utilize any new business practices or technologies across our entire project portfolio quickly, including advances with respect to troubleshooting, optimization, cost savings, and host site interaction. Our integrated,andapproach helps us maintain strong relationships with our partners, which we seek to leverage to optimize the performance of our existing projects.

We also experience organic growth in production at our existing projects as a result of increases in biogas supply at our projects and on-going optimization initiatives. We size our projects to account for this increase in the biogas supply curve over timeFor example, at many of our newer projects, such as Apex and Galveston, we expect gradual increases in production as those landfill sites continue to growAdditionally, many of our capacity expansion efforts to date, such as those at McCarty and Rumpke, have helped to optimize our project capacity to take advantage of excess biogas at older landfills that are still open and growingNot only have our projects achieved an initial increase in production following the capacity expansion project, but we also expect to see continued gradual increases in production over time.

We periodically evaluate opportunities to convert existing projects from electricity generationto RNG productionThese opportunities tend to be attractive for our merchant electricity projects given the favorable economics for RNG plus RIN sales relative to merchant electricity rates plus REC salesTo date, we have converted two projects fromtoand a third project fromtoWe will continue to explore the feasibility of other opportunities across our existing Renewable Electricity portfolio.

We have a long history of operating our projects with partners, with our oldest relationship going back 48 years. On average, we have had anhistory with our current project site owners. As of December 31, 2021, our operating RNG projects have an average expected remaining useful life of approximately 19 years and our operating Renewable Electricity projects have an average expected remaining useful life of approximately 25 years.

Electricity is generated usingengines or turbine-driven electrical generators, which are designed to operate efficiently ongas. As such, electricity generation typically involves producinggas, which is then pumped into a generating facility. The electricity is metered and sold under long-term contracts to utilities and municipalities or at spot prices.

Our customers for electricity typically include investor-owned and municipal electricity utilities. For the sale of Renewable Electricity and RECs, the City of Anaheim represented approximately 9.6% of our operating revenues in 2021. These sales occurred under a PPA between us and the City of Anaheim, in which electricity and RECs are sold at fixed prices. In 2021, we converted 100% of the monetization of our Renewable Electricity production and Environmental Attributes under fixed-price agreements. For our electricity sales, all of our customers with whom we haveagreements are investment-grade entities with low credit risk.

We have made substantial investments in a centralized Enterprise Resource Planning (“”) system (Microsoft Dynamics) to better integrate operations across our projects. This system centralizes maintenance operations across all of our projects. Our proactive approach to maintenance, corrective maintenance, root cause analysis, failure reporting, project management, and budgeting are all completed using the ERP system.

Our primary competition is from other companies or solutions for access to biogas from waste. Evolving consumer preferences, regulatory conditions, ongoing waste industry trends, and project economics have a strong effect on the competitive landscape and our relative ability to continue to generate revenues and cash flows. We believe that our status as one of the largest operators ofprojects, ourtrack record of operating and developing projects, and our deep relationships with some of the largest landfill owners and dairy farms in the country position us very well to continue to operate and grow our portfolio, and respond to competitive pressures. We have demonstrated a track record of strategic flexibility across ourhistory which has allowed us to pivot towards projects and markets that we believe deliver optimal returns and stockholder value in response to changes in market, regulatory and competitive pressures.

We are aware of several competitors in the United States that have a similar business model to our own, including Archaea Energy and Morrow Renewables, as well as companies withfacilities as a segment or subsidiary of their operations, including DTE and Ameresco. In addition, certain landfill operators, such as Waste Management, have also chosen to selectively pursue biogas conversion projects at their sites.

Our recordable cases and total recordable incident rate (“TRIR”), excludingrelated incidents, was 1.68 in 2021, lower than the 2020 national average of 2.9 TRIR for all industries. We continue to focus on practices and measures to lower our TRIR.

We also make financial information, news releases and other information available on our corporate investor relations website at www.ir.montaukrenewables.com. Our annual reports on Formquarterly reports on Formcurrent reports on Formand any amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “”), are available free of charge on this website as soon as reasonably practicable after we file these reports and amendments with, or furnish them to, the SEC. The information contained on or connected to our website is not incorporated by reference into this Annual Report on Formand should not be considered part of this or any other report filed with the SEC.

We are a “controlled company” within the meaning of the Nasdaq Stock Market LLC (“”) corporate governance standards. Certain stockholders, which are affiliates of two of our directors, Mr. John A. Copelyn and Theventheran G. Govender, own approximately 52.3% of our common stock and have entered into a Consortium Agreement (the “”) whereby the parties thereto will agree to act in concert with respect to voting our common stock, including in the election of directors, among other matters. As a controlled company, we may elect not to comply with certain Nasdaq corporate governance standards. See “Risk Factors—Common Stock Risks” for certain risks related to our status as a controlled company.

In response to the COVID-19 pandemic and related mitigation measures, we began implementing changes in our business in March 2020 to protect our employees and customers, and to support appropriate health and safety protocols. For example, we arranged shifts at facilities to stagger employees to assist with following social distancing protocols, utilized overnight and weekend remote facility monitoring during normal operating shifts, implemented extensive cleaning and sanitation processes for both facilities and office spaces, incorporated temperature checks and facial covering requirements, instituted employee and visitor fitness questionnaires, restricted corporate travel and visitor access to sites and implemented work-from-home initiatives for certain employees. Further, we established the Infectious Disease and Response Committee (the “”) to lead the development and implementation of Montauk’s Infectious Disease and Response Plan and to oversee the company’s response to any infectious disease event. These measures resulted in additional costs, which we expect to continue as we continue to work to address employee safety.

Ouragreements for the sale of RNG are typically shorter in duration than our fuel supply agreements. Accordingly, if we are unable to renew or replace anagreement for a project for which we continue to produce RNG, we would be subject to the risks associated with selling the RNG produced at that project at then-current market prices. We may be required to make such sales at a time when the market price for natural gas as a whole or in the region where that project is located, is depressed. If this were to occur, we would be subject to the volatility of gas prices and be unable to predict our revenues from such project, and the sales prices for such RNG may be lower than what we could sell the RNG for under anagreement.

In addition, in June 2019, the EPA issued the final Affordable Clean Energy (“”) rule and repealed the Clean Power Plan (the “”), which had previously established standards to limit carbon dioxide emissions from existing fossil-fueled power generation facilities. Under the ACE rule, emissions from electric utility generation facilities would be regulated only through the use of various “inside the fence” or onsite efficiency improvements and emission control technologies. In contrast, the CPP allowed facility owners to reduce emissions with “outside the fence” measures, including those associated with renewable energy projects. On January 19, 2021, the United States Court of Appeals for the D.C. Circuit vacated the ACE rule and remanded the rule back to EPA for reconsideration of the “best system of emission reduction.” On February 22, 2021, the

Authorization for the use, construction, and operation of systems and associated transmission facilities on federal, state, and local lands will also require the assessment and evaluation of mineral rights, privateand other easements; environmental, agricultural, cultural, recreational, and aesthetic impacts; and the likely mitigation of adverse effects to these and other resources and uses. The inability to obtain the required permits and other federal, state and local approvals, and any excessive delays in obtaining such permits and approvals due, for example, to litigation or third-party appeals, could potentially prevent us from successfully constructing and operating such projects in a timely manner and could result in the potential forfeiture of any deposit we have made with respect to a given project. Moreover, project approvals subject to project modifications and conditions, including mitigation requirements and costs, could affect the financial success of a given project. Changing regulatory requirements and the discovery of unknown site conditions could also adversely affect the financial success of a given project.

Consolidated EBITDA, as used in the Amended Credit Agreement, may be calculated differently than EBITDA or Adjusted EBITDA, as used in this report. 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,unrealized derivative expense, (e) any extraordinary, unusual, oradjustments to certain components of operating income, as agreed upon by Comerica in certain circumstances, and (f) anyunrealized derivative income during such period, and various extraordinary, unusual,orincome or expenses and/or gains or losses included in determining our operating profit or loss or net income, as defined in the agreement, subject to approval of the agent. Additional information on Consolidated EBITDA as used in the Amended Credit Agreement can be found in Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations under “Liquidity and Capital Resources.”

As of December 31, 2021, we had U.S. federal net operating loss (“”) carryforwards of approximately $73.6 million, of which $32.9 million were incurred prior to the enactment of the U.S. Tax Cuts and Jobs Act of 2017 (the “”) and, therefore, can be carried forward for 20 years to fully offset taxable income in a future year, and of which $40.7 million were incurred in 2018 or later taxable years and, therefore, can generally be carried forward indefinitely to offset 80% of taxable income in a future year. The CARES Act temporarily lifts the 80% limitation, allowing us to use our NOLs to offset 100% of our taxable income for our 2018, 2019, and 2020 taxable years. Our NOL carryforwards incurred in 2017 or earlier taxable years expire between 2027 and 2037, while our NOL carryforwards incurred in 2018 or later taxable years survive indefinitely. Our ability to utilize our U.S. NOL carryforwards is dependent upon our ability to generate taxable income in future periods.

In addition, our U.S. NOL carryforwards and certain other tax attributes may be limited if we have experienced or experience an “ownership change” under Section 382 of the Internal Revenue Code of 1986, as amended (the “”), which generally occurs if one or more stockholders or groups of stockholders who own at least 5% of our shares increase their ownership by more than 50 percentage points over their lowest ownership percentage within a rolling period that begins on the later of three years prior to the testing date and the date of the last ownership change. Similar rules may apply under state tax laws. Previous issuances and sales of MNK’s ordinary shares or of our common stock, and future issuances and sales of our common stock (including certain transactions involving our common stock that are outside of our control) could have caused or could cause an “ownership change.” If an “ownership change” either had occurred or were to occur, Section 382 of the Internal Revenue Code of 1986, as amended (the Code) would impose an annual limit on the amount ofchange NOL carryforwards and other tax attributes we could use to reduce our taxable income, potentially increasing and accelerating our liability for income taxes, and also potentially causing certain tax attributes to expire unused. It is possible that such an ownership change could materially reduce our ability to use our U.S. NOL carryforwards or other tax attributes to offset taxable income, which could adversely affect our profitability.

We will remain an emerging growth company for up to five years after the IPO, although we will lose that status sooner if we have more than $1.07 billion of revenues in a fiscal year, have more than $700.0 million in market value of our common stock held byor issue more than $1.0 billion ofdebt over a three-year period.

Broad market and industry fluctuations, as well as general economic, political, regulatory and market conditions, may also adversely affect the market price of our common stock, particularly in light of uncertainties surrounding the ongoingpandemic and the related impacts.

During the third quarter of 2021, we continued to execute on our plans for the Montauk Ag Renewables Acquisition. In August 2021, we were granted a patent over 24 specific aspects of continuous-feed, closed-loop reactor technology acquired in the acquisition. We believe that the reactor enablesconversion of agricultural waste into multiplerenewable-fuel alternatives, is capable of producing multiple units of renewable energy for each unit of conventional energy consumed and is capable of sequestering multiple tons of greenhouse gas equivalent emissions (CO2e) for every ton emitted. We expect the reactor, with certain enhancements, to better address some of the environmental challenges of industrial agriculture, including lagoon capacity constraints, watershed contamination, odor issues, nutrient abundances and containment and

After the improvements were completed, production volumes have more than doubled in first quarter of 2022. As of December 31, 2021, we recorded an increase to the Picoliability of approximately $801 within royalties, transportation, gathering and production fuel based on our current estimate of expectations under this obligation. The improvement project has impacted the timeline for modeling Pico’s initial CI Score pathway model and subsequent auditing approval by CARB. We did not receive a temporary CI pathway in 2021 and were not able to generate LCFS credit revenue on 2021 production. We will be storing 2022 production while CARB completes its CI Score Pathway. We expect to receive the results of this approval during the second half of 2022. However, we do not currently expect to receive LCFS credit revenue on 2022 production until 2023.