Montauk Renewables, Inc. Fair Value Disclosure
NOTE 11—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 December 31, 2024 and 2023, set forth by level, within the fair value hierarchy:
|
December 31, 2024 |
|
||||||||||
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
||||
Interest rate swap derivative asset |
$ |
— |
|
$ |
769 |
|
$ |
— |
|
$ |
769 |
|
Asset retirement obligations |
|
— |
|
|
— |
|
|
(6,338 |
) |
|
(6,338 |
) |
Pico earn-out liability |
|
— |
|
|
— |
|
|
(3,406 |
) |
|
(3,406 |
) |
|
$ |
— |
|
$ |
769 |
|
$ |
(9,744 |
) |
$ |
(8,975 |
) |
|
December 31, 2023 |
|
||||||||||
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
Total |
|
||||
Interest rate swap derivative asset |
$ |
— |
|
$ |
1,255 |
|
$ |
— |
|
$ |
1,255 |
|
Asset retirement obligations |
|
— |
|
|
— |
|
|
(5,900 |
) |
|
(5,900 |
) |
Pico earn-out liability |
|
— |
|
|
— |
|
|
(5,109 |
) |
|
(5,109 |
) |
|
$ |
— |
|
$ |
1,255 |
|
$ |
(11,009 |
) |
$ |
(9,754 |
) |
A summary of changes in the fair value of the Company’s Level 3 instrument, attributable to asset retirement obligations, for the years ended December 31, 2024, 2023 and 2022 is included in Note 9. The Company’s earn-out fair value liability at its Idaho agricultural digester site is determined by calculating the estimated present value of the future obligation. The present value is assessed quarterly and is based on macro-economic factors such as inflation and risk free US Treasury rates. Company specific estimates utilized include current and future interest rates, digester inlet gas flow and projected EBITDA. A weighted average probability approach is utilized for the variables discussed above. The undiscounted maximum payout of the earn-out ranges between 5% and 20% of EBITDA based on average inlet gas production ranging from 641 standard cubic feet per minute ("scfm") to greater than 944 scfm for each semiannual period in the remaining term, as defined in the underlying agreement. The contractual term ends in 2038. The earn-out is classified as a Level 3 financial instrument and changes in the balance are recorded in Accrued liabilities and Other liabilities within the Consolidated Balance Sheets and in Royalties, transportation, gathering and production fuel within the Consolidated Statements of Operations. Interest rate swap derivatives are classified as Level 2 financial instruments and are valued utilizing Secured Overnight Financing Rates. In addition, certain assets are measured at fair value on a non-recurring basis when an indicator of impairment is identified and the assets’ fair values are determined to be less than its carrying value. See Note 3 for additional information.
There were no transfer of assets or liabilities between Levels 1, 2 or 3 of the fair value hierarchy as of December 31, 2024 and 2023.
About Fair Value Disclosures
Fair value disclosures classify all assets and liabilities measured at fair value into a three-level hierarchy: Level 1 (quoted market prices), Level 2 (observable inputs like yield curves), and Level 3 (unobservable inputs requiring management estimates). The proportion of Level 3 assets directly reflects how much of the balance sheet depends on internal models rather than market evidence.
Key signals: a growing Level 3 balance relative to total fair-value assets increases valuation uncertainty and earnings volatility risk. Watch for transfers between levels — assets moving from Level 2 to Level 3 often signal deteriorating market liquidity. Unrealized gains and losses on Level 3 positions flow through earnings or other comprehensive income, so large swings deserve scrutiny. For financial institutions, examine the sensitivity disclosures that show how Level 3 valuations change under alternative assumptions. Compare the fair value of debt against its carrying amount to gauge hidden leverage.