Genie Energy Ltd. — 2020 Q1 Form 10-Q Summary
Business Context and Reporting Period
Genie Energy reported unaudited results for the three months ended March 31, 2020. Its principal businesses include U.S. retail electricity and natural gas through Genie Retail Energy, international retail energy operations, energy brokerage and solar activities, and inactive oil and gas exploration projects.
Financial Performance and Position
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Revenue | $104.1 million | $86.6 million | 20.1% increase |
| Gross profit | $28.9 million | $25.6 million | 12.9% increase |
| Gross margin | 27.8% | 29.5% | Decreased |
| Income from operations | $9.2 million | $9.8 million | 6.3% decrease |
| Net income | $6.4 million | $6.2 million | 4.2% increase |
| Net income attributable to Genie | $5.8 million | $6.1 million | 3.9% decrease |
| Net income attributable to common stockholders | $5.5 million | $5.7 million | 4.2% decrease |
| Diluted EPS | $0.20 | $0.21 | Decreased |
| Operating cash flow | $(2.7) million | $7.0 million | Declined |
- Electricity revenue increased to $70.0 million from $62.6 million, while natural gas revenue declined to $16.1 million from $18.7 million. Other revenue increased to $18.0 million from $5.3 million, primarily reflecting solar-panel deliveries.
- Gross margin declined because consolidated revenue growth included lower-margin solar activity and higher derivative-related costs. GRE’s gross margin improved to 34.9% from 32.3%.
- Cash, cash equivalents and restricted cash totaled $36.4 million at March 31, 2020, including $29.7 million of unrestricted cash. Working capital was approximately $51.1 million.
- Total debt and borrowings were approximately $4.4 million, consisting primarily of a $3.5 million revolving line of credit and a $0.9 million Tokyo Star Bank loan. The revolving line expired and was repaid in April 2020.
- Total assets were $157.2 million and total equity was $85.2 million at March 31, 2020.
Material Changes Versus the Prior Comparable Period
- GRE electricity consumption increased 16.6% and average meters served increased 18.0%; average monthly churn decreased to 4.7% from 5.3%.
- GRE’s operating income declined 3.6% to $13.0 million as higher customer-acquisition, personnel and marketing expenses offset improved gross profit.
- GRE International revenue increased 43.6% to $7.0 million, but its operating loss widened to $2.5 million. Growth reflected Genie Japan’s operations and increased Lumo activity.
- GES revenue increased 241.5% to $18.0 million due to significant solar-panel deliveries, and the segment generated $0.3 million of operating income versus a $0.2 million loss.
- Operating cash flow turned negative, primarily because a significant solar-panel advance payment received in late 2019 was recognized as revenue and the related products were delivered in Q1 2020, together with additional cash collateral posted for hedge positions.
- Derivative losses recorded in cost of revenues increased to $12.4 million from $2.9 million.
Guidance, Outlook, Risks and Unusual Items
- Management stated that unrestricted cash and expected operating cash flow should fund anticipated requirements through at least May 10, 2021, although operating cash flow can vary significantly by quarter.
- Capital expenditures for 2020 were expected to be approximately $0.5 million to $1.0 million.
- Management reported minimal direct financial impact from COVID-19 through March 31, 2020. Increased residential electricity usage and lower acquisition costs could help results, while suspended door-to-door sales, slower customer additions and potential meter attrition could hurt performance. The ultimate impact remained uncertain.
- The company initiated a plan to sell Prism’s property, plant and equipment and classified $2.8 million of assets and $0.9 million of liabilities as held for sale. It recorded a $0.2 million impairment.
- Future purchase commitments totaled $141.6 million, including $94.0 million for electricity and $47.6 million for renewable energy credits. Performance bonds totaled $13.7 million and unused letters of credit totaled $1.8 million.
- The New York Public Service Commission’s retail-energy-market changes were scheduled to take effect August 10, 2020 and could adversely affect customer acquisition, renewals and profitability. New York represented 22.3% of GRE meters and generated $17.5 million of Q1 gross revenue.
- Pending TCPA class actions, Connecticut and Illinois regulatory matters, and other investigations were disclosed. Management did not consider losses probable or estimable for the principal unresolved matters. A $0.2 million settlement related to the Aspirity bankruptcy dispute was awaiting court approval after quarter-end.
- The company continued to hedge electricity and natural gas price exposure through options and swaps, without hedge accounting. Derivative fair-value changes therefore flow through earnings.
Investor Verification Checklist
- Verify whether COVID-19 restrictions materially affected customer additions, churn, consumption, bad-debt expense and cash collections after March 31, 2020.
- Monitor derivative positions, collateral requirements and commodity-price movements given the substantial Q1 derivative loss.
- Assess liquidity after repayment of the $3.5 million revolving facility and the May 2020 maturity of the $0.9 million Tokyo Star Bank loan.
- Track execution and proceeds from the Prism asset sale and any further impairment or restructuring charges.
- Review the impact of New York and other state regulatory changes on customer retention, pricing, marketing and margins.
- Reconcile the company’s large purchase commitments and renewable-credit obligations with expected operating cash flow and available liquidity.