Genie Energy Ltd. annual report, FY2019

Genie Energy Ltd. — FY2019 Form 10-K Summary

Reporting period: Fiscal year ended December 31, 2019. The filing is an annual report, not a standalone fourth-quarter filing; quarterly information is included only where disclosed.

Business context

Genie Energy supplies electricity and natural gas to residential and small-business customers in the United States and internationally, and provides commercial energy brokerage and solar solutions. Reportable segments are Genie Retail Energy (GRE), GRE International, Genie Energy Services (GES), and Genie Oil & Gas (GOGAS).

GRE remained the core business, producing 90.9% of consolidated revenue.
GRE served 370,000 meters at year-end, versus 315,000 at December 31, 2018; average monthly churn declined to 5.3% from 6.5%.
GRE International expanded materially through the acquisition of Lumo in Finland, the launch of Japan operations, and growth in the U.K.; meters served increased to 127,000 from 8,000.
Genie acquired an initial 80% interest in Lumo in January 2019 and increased ownership to 89% in November 2019.

Financial results and key metrics

Metric	2019	2018	Change
Revenue	$315.3 million	$280.3 million	+12.5%
Gross profit	$82.9 million	$76.5 million	+8.3%
Gross margin	26.3%	27.3%	Down approximately 1.0 point
Income from operations	$9.8 million	$12.0 million	-18.0%
Net income	$1.4 million	$21.4 million	-93.6%
Net income attributable to Genie	$4.2 million	$22.8 million	-81.7%
Net income attributable to common stockholders	$2.7 million	$21.3 million	-87.4%
Basic EPS	$0.10	$0.85	Down $0.75
Cash flow from operations	$15.8 million	$19.4 million	-18.7%

Consolidated revenue growth was driven by electricity revenue of $263.1 million, up from $227.9 million, and other revenue of $12.3 million, up from $5.9 million. Natural gas revenue declined to $39.9 million from $46.6 million.

GRE: Revenue increased 4.4% to $286.6 million; gross profit increased 6.9% to $80.6 million; operating income declined 6.3% to $27.2 million. Gross margin improved to 28.1% from 27.5%, but SG&A rose 15.1% to $53.4 million, primarily because of higher customer acquisition commissions.
GRE International: Revenue was $16.6 million, compared with none reported in 2018 under the revised segment presentation; operating loss was $8.1 million, and the share of Shoreditch’s equity-method loss was $4.4 million.
GES: Revenue increased 112.2% to $12.1 million, primarily from Prism; operating loss increased to $2.9 million. The segment recorded a $0.4 million Prism goodwill impairment.
GOGAS: Revenue was immaterial; operating loss was $1.0 million. Afek’s exploration program remained suspended, although additional testing of an existing well was expected.

Liquidity, cash flow and capital structure

Unrestricted cash and cash equivalents were $31.2 million at December 31, 2019, compared with $41.6 million at year-end 2018. Total cash, cash equivalents and restricted cash were $38.6 million.
Working capital was $40.8 million; current assets were $112.9 million and current liabilities were $72.2 million.
Operating cash flow was $15.8 million; investing cash flow was negative $5.8 million; financing cash flow was negative $15.6 million. Financing outflows included $9.6 million of dividends and $5.6 million of Class B share repurchases.
Reported debt included a $2.5 million Vantage revolving balance, a $0.9 million Genie Japan loan, $0.9 million of Prism notes, and approximately $0.8 million of other current notes and loans. The filing states that the company was in compliance with applicable covenants.
GRE had $138.3 million of purchase commitments at year-end, including $102.1 million for future electricity purchases and $36.2 million for renewable energy credits.
Performance bonds totaled $12.5 million and unused letters of credit totaled $1.8 million. Restricted cash included collateral for BP and JPMorgan arrangements.
Management expected operating cash flow and unrestricted cash to cover anticipated requirements through at least March 16, 2021, based on the filing’s assessment.

Material changes versus 2018

Lumo was acquired and consolidated, Japan began commercial operations, and GRE International became a separate reportable segment.
GRE’s meter count increased 17.5%, helped by a New Jersey municipal aggregation deal adding approximately 35,000 meters.
Electricity consumption increased 7.3%, while natural gas consumption decreased 15.3%.
Customer acquisition activity increased substantially; GRE gross meter acquisitions rose to 308,000 from 197,000, and commission expense increased $6.1 million.
Interest expense increased because of Prism-related debt, while equity-method losses increased primarily because of Shoreditch.
The 2018 results benefited from a $15.1 million release of a deferred-tax valuation allowance. In 2019, the company recorded a $4.6 million tax provision, making reported earnings comparisons unusually sensitive to tax accounting.
The company remediated a previously reported material weakness related to application change management and segregation of duties. Management and BDO concluded that internal control over financial reporting was effective as of December 31, 2019, although Lumo’s controls were excluded from management’s assessment because of the timing of the acquisition.

Outlook, risks, contingencies and unusual items

The New York PSC’s December 2019 order, effective May 11, 2020, restricts certain retail energy pricing and renewable-product offerings. New York represented 24.4% of GRE meters and $63.2 million of 2019 gross revenue; management warned that compliance could reduce customer acquisition, renewals and profitability.
Connecticut proposed restrictions involving hardship customers and new marketing standards. Investigations also remained pending in Connecticut, Massachusetts and Illinois-related matters.
The company faces significant exposure to wholesale electricity and natural-gas prices, weather, customer churn, fixed-rate contracts, regulatory changes, licensing requirements and utility or supplier concentration. Hedging is used but is not comprehensive.
GRE’s BP supply agreement is described inconsistently in the filing as expiring November 30, 2020 in some sections and November 30, 2021 in others; the definitive agreement and subsequent amendments should be verified.
Solar operations face intense pricing competition, potential oversupply, dependence on government incentives, customer concentration and product-quality risks. Prism generated most of its revenue from a major customer.
Afek has no current oil or gas production and no clear commercial reserve determination; further well testing was planned but commercial viability remained uncertain.
A proposed settlement of an Aspirity-related claim was expected to require a $0.2 million payment, which the company accrued in the fourth quarter of 2019. The filing also reports ongoing litigation and regulatory inquiries for which losses were generally not considered probable or estimable.
The company disclosed coronavirus-related uncertainty as of the filing date, stating that the ultimate operational and financial impact could not be predicted.

Investor verification checklist

Verify the final maturity date and terms of the BP Preferred Supplier Agreement, given the filing’s conflicting 2020 and 2021 references.
Assess the effect of the New York PSC order and Connecticut regulatory proposals on customer additions, renewals, churn and GRE margins.
Separate recurring operating earnings from the 2018 deferred-tax valuation allowance release and other litigation-related reversals.
Review GRE acquisition costs, fixed-rate exposure, commodity hedges and the $138.3 million purchase commitment balance.
Monitor GRE International losses, Shoreditch funding requirements and Lumo’s integration and subsequent ownership increase to 92.5% in early 2020.
Evaluate Prism’s major-customer concentration, solar-margin pressure and the $0.4 million goodwill impairment.
Reconcile unrestricted versus restricted cash, collateral requirements, debt maturities and the company’s ability to maintain dividends and repurchases.