Business Context and Reporting Period
Genie Energy Ltd. filed its Form 10-K for the fiscal year ended December 31, 2014, including fourth-quarter results. The company operates two segments: Genie Retail Energy (GRE), which resells electricity and natural gas and provides energy brokerage services, and Genie Oil and Gas (GOGAS), which conducts early-stage oil-shale and oil-and-gas exploration. GRE generated all consolidated revenue.
Financial Results and Key Metrics
| Metric | 2014 | 2013 | Change |
|---|---|---|---|
| Revenue | $275.0 million | $279.2 million | Down 1.5% |
| Gross profit | $51.9 million | $65.8 million | Down 21.0% |
| Gross margin | 18.9% | 23.6% | Down 4.7 percentage points |
| Loss from operations | $25.6 million | $0.6 million income | Unfavorable change |
| Net loss | $27.4 million | $5.3 million | Increased loss |
| Net loss attributable to Genie | $26.5 million | $5.9 million | Increased loss |
| Loss per common share | $1.31 | $0.36 | Increased loss |
| Cash flow from operations | $(19.1) million | $1.2 million | Unfavorable change |
Electricity revenue was $214.5 million, down 1.0%, while natural-gas revenue was $57.9 million, down 7.4%. GRE’s operating income fell to $3.5 million from $25.8 million. Electricity gross margin increased modestly to 22.8%, but natural-gas gross margin fell sharply to 4.9% from 28.7% because wholesale gas costs rose faster than customer rates.
GOGAS generated no revenue and recorded a $13.8 million operating loss, including $12.5 million of research and development expense. Corporate operating expenses were $15.4 million, including $7.9 million of stock-based compensation related to the amended arrangement with Howard S. Jonas.
At December 31, 2014, total assets were $152.9 million, working capital was $110.3 million, and cash, cash equivalents and certificates of deposit totaled $76.6 million. Including restricted cash, these holdings totaled $87.2 million. Total liabilities were $33.6 million. No amounts were drawn under the $25.0 million revolving credit facility, although $10.0 million was pledged as collateral and $7.6 million of letters of credit were outstanding.
Material Changes Versus the Prior Comparable Period
- The 2014 winter polar vortex caused exceptional wholesale electricity and natural-gas price volatility, higher customer rates, increased churn and lower margins. GRE paid approximately $5.0 million in customer rebates.
- GRE’s meters served declined 15.0%, to 363,000 from 427,000. Average monthly churn increased to 6.8% from 6.3%.
- Direct cost of revenues increased 4.5% despite slightly lower revenue, reducing gross profit by $13.8 million.
- Selling, general and administrative expense increased 14.0%, primarily from Diversegy and Epiq integration and growth costs, higher customer-acquisition costs and compensation.
- The company recorded a $3.6 million goodwill impairment for Diversegy and Epiq, reducing related goodwill to zero.
- GOGAS research and development expense increased to $12.5 million from $11.4 million. AMSO’s equity-method loss was zero in 2014 because Total absorbed initial losses after AMSO stopped funding capital calls.
- Cash flow from operations shifted from positive $1.2 million to negative $19.1 million, while financing cash flow was positive $20.7 million, primarily because Howard S. Jonas purchased 3.6 million Class B shares for $24.6 million.
- The company issued 404,732 shares of Series 2012-A Preferred Stock in exchange for Class B common shares, increasing the preferred-stock base dividend obligation.
Outlook, Commentary, Risks and Unusual Items
- Management expected existing liquidity and operating resources to fund anticipated 2015 requirements, including substantial Afek exploration expenditures. The company was also considering selling equity interests in GOGAS projects or in GOGAS.
- Afek began drilling its first exploratory well in the Golan Heights in February 2015 after Israeli courts rejected challenges to its permits.
- Genie Mongolia held exploration rights covering approximately 60,000 square kilometers and planned additional drilling in 2015.
- IEI’s application to construct and operate an oil-shale pilot facility was rejected in September 2014; its license was scheduled to expire in July 2015, subject to possible extension.
- AMSO’s Colorado pilot remained delayed after down-hole heater failures. AMSO’s ownership had been diluted to 43.1%, and its proposed 2015 funding requirement was approximately $1.5 million; further nonfunding could cause additional dilution.
- IDT Energy faced a Pennsylvania regulatory complaint and putative class actions in Pennsylvania, New York and New Jersey related to variable-rate pricing and sales practices. The company could not estimate potential damages.
- The BP preferred-supplier agreement, important to GRE’s procurement and liquidity structure, was scheduled to terminate June 30, 2015; renewal negotiations were ongoing at the filing date.
- Key risks include commodity-price volatility, customer churn, regulatory and licensing changes, dependence on utility purchase-of-receivables programs, litigation, required funding for exploration projects, political and permitting risks, and the lack of current oil-and-gas production.
- Material unusual items included the goodwill impairment, substantial stock-based compensation, customer rebates, the polar-vortex impact and a $0.2 million gain from reducing estimated acquisition-related contingent payments.
- Management reported that material weaknesses in internal control identified at December 31, 2013 had been remediated during 2014. Management and BDO USA, LLP concluded that internal control over financial reporting was effective as of December 31, 2014.
Important Facts for Investors to Verify
- Whether GRE can stabilize customer counts, churn and natural-gas margins after the 2014 pricing shock.
- The renewal and final terms of the BP supplier agreement and the company’s ability to maintain required collateral and liquidity.
- The status and potential financial exposure of the Pennsylvania regulatory proceeding and the three putative class actions.
- Afek’s drilling results, permitting status and the political implications of operations in the disputed Golan Heights.
- IEI’s license extension and any viable path to permitting its pilot project.
- AMSO’s revised heater technology, future funding requirements and the risk of further ownership dilution.
- The sustainability of common and preferred dividends while the company is reporting losses and negative operating cash flow.
- The potential impact of additional goodwill, tax-asset or other asset impairments, including the $27.7 million valuation allowance against deferred tax assets.