Genie Energy Ltd. 2022 Q3 Form 10-Q Summary
Business context and reporting period
Genie Energy operates primarily through Genie Retail Energy (GRE), which resells electricity and natural gas to residential and small-business customers, and Genie Renewables, which provides solar, energy brokerage and related services. The filing covers the three and nine months ended September 30, 2022, with comparisons to the corresponding 2021 periods.
In the third quarter, the company discontinued its Lumo Finland and Lumo Sweden operations because of European energy-market volatility. These businesses, and prior-period results, are presented as discontinued operations. GRE International ceased to be a reportable segment, with remaining activities combined with Corporate.
Key financial metrics
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Total revenue | $81.3 million | $87.7 million | $234.2 million | $254.1 million |
| Gross profit | $43.1 million | $34.6 million | $120.1 million | $67.9 million |
| Gross margin | 53.1% | 39.5% | 51.3% | 26.7% |
| Income from operations | $23.5 million | $17.5 million | $62.3 million | $18.3 million |
| Net income from continuing operations | $17.4 million | $8.6 million | $44.2 million | $17.3 million |
| Net income attributable to common stockholders | $18.3 million | $(2.7) million | $69.7 million | $(0.02) million |
| Diluted EPS | $0.70 | $(0.10) | $2.65 | $0.00 |
Electricity revenue declined 10.9% in the quarter and 14.6% year to date, while natural-gas revenue increased 75.0% and 57.5%, respectively. GRE generated $79.9 million of third-quarter revenue and $27.4 million of operating income. Genie Renewables generated $1.4 million of revenue and recorded a $1.5 million operating loss in the quarter.
Consolidated selling, general and administrative expense increased 14.4% to $19.6 million in the quarter and 16.5% to $57.8 million year to date. The filing reports no material debt principal outstanding at September 30, 2022. The company maintained a $5.0 million JPMorgan letter-of-credit facility, secured by approximately $5.2 million of restricted cash, with no letters of credit issued under the facility.
Cash flow, liquidity and capital resources
- Cash and cash equivalents were $81.7 million at September 30, 2022, compared with $93.6 million at December 31, 2021.
- Restricted cash was $5.6 million, resulting in $87.3 million of cash, cash equivalents and restricted cash excluding discontinued-operation cash.
- Working capital was $128.5 million.
- Continuing operations generated $44.9 million of operating cash flow during the first nine months, compared with $0.9 million of cash used in 2021.
- Total operating cash flow, including discontinued operations, was $53.1 million. Investing activities used $47.8 million, primarily because of $43.9 million used by discontinued operations. Financing activities used $14.7 million.
- Management stated that operating cash flow and unrestricted cash were expected to fund anticipated requirements through at least November 9, 2023.
Material changes versus the prior comparable period
- Operating income increased 34.8% in the quarter and 240.7% year to date, primarily because of materially improved GRE gross margins and favorable derivative results.
- GRE gross margin increased to 54.1% in the quarter from 39.6% and to 52.3% year to date from 27.6%.
- Derivative gains recognized in cost of revenue increased to $35.0 million in the quarter and $102.1 million year to date, versus $13.8 million and $32.8 million, respectively, in 2021.
- GRE’s electricity customer meters declined to 193,000 at quarter-end from 289,000 a year earlier; total meters declined to 270,000 from 361,000. Management attributed the decline to a strategic pause in certain acquisition channels, customer transfers to underlying utilities and higher churn.
- Average monthly churn increased to 4.7% in the quarter from 4.0% and to 4.5% year to date from 4.2%.
- Genie Renewables shifted from operating income of $0.7 million year to date in 2021 to an operating loss of $1.0 million in 2022, as higher revenue was more than offset by increased cost of revenue and SG&A.
- The company resumed quarterly common-stock dividends in 2022 after suspending them in 2021, paid $4.0 million of common and preferred dividends during the first nine months, repurchased $4.4 million of Class B shares under its repurchase program and redeemed $3.0 million of preferred stock.
Outlook, risks, contingencies and unusual items
- Management expects capital expenditures of approximately $1.5 million to $3.0 million for the twelve months ending December 31, 2022.
- Energy-price volatility is a principal market risk. The company uses electricity and natural-gas options and swaps, but does not apply hedge accounting; changes in fair value therefore flow through earnings and can materially affect margins.
- GRE had $133.9 million of future purchase commitments at September 30, 2022, including $103.7 million for electricity and $30.1 million for renewable-energy credits. Outstanding performance bonds totaled $15.2 million.
- The company’s BP supply agreement runs through November 30, 2023 and requires collateral and covenant compliance. The filing presents differing BP payable amounts in its notes and MD&A; the collateral and related obligation should be verified against the filed financial statements.
- The discontinuation of Lumo Finland and Sweden produced $25.9 million of nine-month income from discontinued operations, including a $7.8 million gain from settlement of assets, but generated a $1.5 million loss in the third quarter.
- Orbit Energy remains subject to U.K. insolvency administration. Genie received a $5.4 million partial return in August 2022 and expects additional surplus funds, but the timing and amount are uncertain.
- Regulatory and legal matters include prior Connecticut settlements and an unresolved Illinois Attorney General investigation involving Residents Energy. Management states that no loss is currently probable or estimable for the Illinois matter.
- Disclosure controls were not effective as of September 30, 2022 because of a previously reported material weakness in internal control over financial reporting. Management expected remediation to be completed in 2022.
- In October 2022, the company elected to redeem 986,400 preferred shares for approximately $8.4 million plus accrued dividends, with the redemption scheduled for November 15, 2022.
Important facts for investors to verify
- Whether the unusually large derivative gains and GRE margin expansion are sustainable under future commodity-price conditions.
- The effect of the sharp decline in electricity meters, elevated churn and the continued pause in customer acquisition on future revenue and cash generation.
- The timing and recoverability of remaining Orbit administration proceeds and the final costs of winding down Lumo Finland and Sweden.
- The precise BP collateral and payable balances, which are not presented consistently in the filing text.
- Completion and effectiveness of remediation for the disclosed material weakness in internal controls.
- Cash requirements associated with the preferred-stock redemption, dividends, purchase commitments and other collateral obligations.