Genie Energy Ltd. — FY2017 Form 10-K Summary
Business context and reporting period
Genie Energy reported fiscal-year results for the year ended December 31, 2017; the filing also provides unaudited fourth-quarter data. The company primarily operates through Genie Retail Energy, which resells electricity and natural gas through retail energy providers and provides energy brokerage and advisory services. Genie Oil and Gas activities remain inactive, except for Atid, an early-stage drilling-services business.
GRE generated all consolidated revenue. The company acquired Mirabito Natural Gas in August 2017 and launched the Orbit Energy joint venture in the United Kingdom, which began limited customer acquisition in December 2017.
Key financial metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Revenue | $264.2 million | $212.1 million | +24.6% |
| Gross profit | $85.5 million | $76.9 million | +11.1% |
| Gross margin | 32.4% | 36.3% | -3.9 percentage points |
| Loss from operations | $(6.5) million | $(30.5) million | Improved by $24.0 million |
| Net loss | $(8.6) million | $(32.2) million | Improved by $23.6 million |
| Net loss attributable to Genie | $(7.0) million | $(24.5) million | Improved by $17.5 million |
| Loss per common share | $(0.36) | $(1.14) | Improved |
| Cash flow from operations | $9.3 million | $15.6 million | Down $6.3 million |
| Cash and cash equivalents | $29.9 million | $35.2 million | Down $5.3 million |
| Working capital | $35.4 million | Not clearly provided in the filing text | |
| Total assets | $125.8 million | $121.8 million | +3.3% |
| Long-term obligations | $2.5 million | None reported | New revolving debt |
Electricity revenue increased 23.8% to $222.2 million, while natural gas revenue increased 29.2% to $40.1 million. Cost of revenues grew 32.2% to $178.7 million, exceeding revenue growth and reducing gross margin. GRE’s operating income declined to $16.6 million from $26.5 million, primarily because of higher commodity costs, customer acquisition spending, higher selling, general and administrative expense, and lower electricity and natural gas margins.
Fourth-quarter revenue was $73.1 million, with a $0.4 million operating profit and an $0.8 million net loss. The quarter included a $6.5 million Afek exploration-cost write-off.
Liquidity, debt and cash flow
- Operating cash flow was positive at $9.3 million, but below 2016 levels because of working-capital requirements, including an $8.0 million increase in trade accounts receivable.
- Investing cash flow was $(16.5) million, including $5.5 million of Afek exploration spending, $4.2 million for the Mirabito acquisition, $4.0 million invested in Shoreditch, and $3.3 million of capital expenditures.
- Financing cash flow was $1.9 million. The company paid $8.9 million of dividends, borrowed $14.5 million under revolving facilities and repaid $12.7 million.
- A $20 million Vantage revolving credit facility matures April 3, 2020. Borrowings were $2.5 million at December 31, 2017, bearing an effective rate of 5.99%; the company reported compliance with covenants.
- Management stated that operating cash flow and $29.9 million of unrestricted cash were expected to cover anticipated requirements through 2018.
- Contractual obligations totaled $65.9 million, including $46.4 million of purchase commitments and $15.6 million of renewable-energy-credit commitments. GRE also had $11.8 million of performance bonds outstanding.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by the full-year contribution from the 2016 Town Square Energy acquisition, higher electricity consumption, higher natural gas rates and the Mirabito acquisition.
- Average monthly customer churn increased to 6.6% from 6.0%, while year-end total meters were approximately flat at 412,000. Electricity meters increased to 307,000 from 296,000, offset by a decline in natural gas meters to 105,000 from 116,000.
- Gross margin fell to 32.4% from 36.3%, reflecting commodity-cost increases that exceeded rate increases charged to customers.
- Consolidated selling, general and administrative expense increased to $80.1 million from $61.6 million, including higher customer acquisition, payroll and amortization costs and a $5.4 million class-action settlement expense.
- Afek suspended exploration after preliminary results from its northern Israel well indicated no commercially producible quantities of oil or gas and recorded a $6.5 million write-off, compared with a $41.0 million write-off in 2016.
- The company’s 2017 quarterly financial data was restated for errors in estimating weather effects on unbilled revenue between the first and second quarters; cumulative six-month results were unaffected.
- Management reported that material weaknesses in internal control identified during 2017 were remediated by December 31, 2017. Mirabito was excluded from the internal-control assessment because of the timing of its acquisition.
Guidance, outlook, commentary and risks
- Management expected 2018 capital expenditures of approximately $1 million to $2 million and stated that no next phase of Afek exploration was currently planned.
- Orbit Energy may require additional contributions of up to £2.2 million, or approximately $3.0 million at year-end exchange rates, by August 1, 2018, subject to performance milestones.
- The New York Public Service Commission’s continuing review of the retail energy market could materially affect GRE. New York represented 36% of GRE’s meters and 28% of its RCEs at year-end. Separately, approximately 21,000 meters, representing 12,000 RCEs, were expected to transfer from GRE to incumbent utilities during the first half of 2018 under the low-income-program order.
- The company recorded a $9.0 million liability for a proposed settlement of class actions in New York, Pennsylvania and New Jersey; the eventual payment could reach $10.1 million and remained subject to final court approval. A separate New Jersey regulatory matter resulted in a $1.5 million accrual.
- Key operating risks include commodity-price volatility, fixed-rate exposure, weather sensitivity, customer churn, regulatory restrictions, customer-acquisition costs, dependence on utility purchase-of-receivables programs, supplier liquidity and the BP preferred-supplier agreement, which could terminate in 2018 or otherwise expires in 2019.
- The company uses electricity and natural-gas options and swaps to manage price risk but does not apply hedge accounting; 2017 derivative losses recognized in cost of revenues were $1.3 million.
- The Tax Cuts and Jobs Act was accounted for using provisional estimates. The company maintained a $48.3 million valuation allowance against deferred tax assets at year-end.
- The company continued to report net losses and paid $8.9 million in common and preferred dividends during 2017, creating a cash-flow consideration despite the lack of consolidated profitability.
Investor verification checklist
- Verify the final court approval and cash payout for the approximately $9.0 million class-action settlement and the resolution of the $1.5 million New Jersey matter.
- Monitor New York PSC proceedings, customer transfers and their effect on meters, RCEs, revenue and customer-acquisition strategy.
- Reconcile revenue growth with declining gross margin, higher churn and commodity-cost trends.
- Review cash conversion, receivables growth, purchase commitments, performance bonds and collateral pledged to BP.
- Confirm the status and renewal or termination terms of the BP supplier agreement and compliance with the Vantage revolving-credit covenants.
- Assess whether Orbit Energy and Mirabito generate sufficient returns relative to required investment and integration costs.
- Review the remediation of internal-control weaknesses and the integration of Mirabito into the company’s control assessment.
- Evaluate the sustainability of common and preferred dividends given recurring net losses and 2017 cash balances.