Genie Energy Ltd. — Form 10-Q Summary
Business context and reporting period
Genie Energy operates retail electricity and natural-gas providers through Genie Retail Energy, primarily serving residential and small-business customers in the Eastern and Midwestern United States. It also has United Kingdom and Japan initiatives, oil-and-gas exploration activities, and related drilling operations. The filing covers the three and nine months ended September 30, 2018; results are unaudited and seasonally affected by weather and energy demand.
Key financial metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Revenue | $71.8 million | $69.5 million | $217.5 million | $191.1 million |
| Gross profit | $21.3 million | $21.8 million | $61.8 million | $58.8 million |
| Gross margin | 29.6% | 31.3% | 28.4% | 30.7% |
| Operating income | $6.0 million | $1.4 million | $10.4 million | $(7.0) million |
| Net income | $5.7 million | $1.0 million | $9.0 million | $(7.8) million |
| Net income attributable to Genie | $5.9 million | $0.8 million | $10.2 million | $(7.2) million |
| Net income attributable to common stockholders | $5.5 million | $0.4 million | $9.0 million | $(8.3) million |
| Basic and diluted EPS | $0.21 | $0.02 | $0.36 | $(0.35) |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $20.2 million | $3.2 million |
Revenue increased 3.4% in the quarter and 13.8% year to date. Operating margins were approximately 8.4% in Q3 and 4.8% year to date. Selling, general and administrative expense declined to $13.9 million in Q3 from $19.5 million and to $46.4 million year to date from $63.0 million, primarily reflecting lower customer-acquisition costs and reductions in legal-settlement accruals.
At September 30, 2018, cash and cash equivalents were $45.9 million, or $47.2 million including restricted cash. Working capital was $52.3 million. Total liabilities were $52.5 million, including $2.5 million outstanding under a $20 million revolving facility, bearing interest at LIBOR plus 4.5% and maturing April 2020. Management stated that cash from operations and unrestricted cash were expected to cover anticipated requirements through at least November 9, 2019.
Material changes versus the prior comparable period
- Electricity revenue rose 1.7% in Q3 and 10.7% for the first nine months; natural-gas revenue rose 32.8% and 32.4%, respectively. Customer consumption increased, but average meters served declined.
- Total meters served fell to 342,000 at September 30, 2018 from 446,000 a year earlier; total RCEs declined to 275,000 from 325,000. Gross meter acquisitions also declined substantially.
- Gross margin contracted because electricity pricing declined more than unit costs; electricity gross margin fell to 28.8% in Q3 from 31.6%. Natural-gas gross margin improved to 40.0% from 18.8%, partly reflecting Mirabito and pricing changes.
- Operating results improved materially, helped by lower selling and marketing expenses, lower settlement accruals, reduced exploration activity, and improved Afek results.
- Operating cash flow increased to $20.2 million from $3.2 million. Investing cash use declined to $3.3 million from $13.3 million, while financing cash use declined to $1.7 million from $5.9 million.
- The company sold $6.0 million of Class B common stock and warrants, including a $5.0 million transaction with Chairman Howard Jonas, and increased its GOGAS ownership from 92% to 97% through an equity exchange.
Guidance, outlook, risks, contingencies, and unusual items
- Management provided no formal revenue or earnings guidance. It expected capital expenditures of approximately $0.5 million to $1.0 million for the twelve months ending September 30, 2019.
- In September 2018, the company divested a majority interest in Atid Drilling and recorded asset write-downs of $0.5 million in Q3 and $2.7 million year to date. Its remaining exposure was stated to be approximately $0.9 million of investment and $0.2 million of notes receivable.
- Shoreditch Energy, the United Kingdom joint venture, generated a $1.2 million net loss in Q3 and a $3.0 million loss year to date. Genie contributed $0.7 million in September and was obligated to contribute an additional approximately $0.7 million in January 2019.
- Subsequent to quarter-end, GRE acquired a 60% interest in Prism Solar for total consideration of $4.0 million, including conversion of $1.4 million of bridge loans, $1.1 million in cash, and a commitment to fund an additional $1.5 million within 60 days.
- New York regulatory proceedings could substantially affect operations. New York represented 31.1% of meters served, 23.2% of RCEs, and $58.2 million of nine-month gross revenue. Approximately 18,700 low-income customer meters were transferred to incumbent utilities during the first quarter.
- The company recorded a $3.0 million liability reducing electricity revenue related to a potential Illinois settlement. It also faces Ohio and Connecticut regulatory investigations involving alleged sales and marketing practices; losses related to Connecticut were not considered probable or estimable.
- A putative Telephone Consumer Protection Act class action was filed against IDT Energy after quarter-end; management stated that a loss was not probable or estimable as of September 30, 2018.
- Future purchase commitments included $69.6 million of electricity, $15.2 million of renewable-energy credits, and $12.7 million of performance bonds. Restricted cash and receivables were pledged as collateral to BP for $13.4 million of trade payables.
- Commodity-price volatility remains a principal market risk. The company uses options and swaps without hedge accounting; derivative gains and losses flow through cost of revenues.
- The company adopted ASC 606 on January 1, 2018 and reported no impact on revenue recognition or measurement. It planned to adopt the new lease standard on January 1, 2019.
Most important facts for investors to verify
- Whether regulatory actions in New York, Illinois, Ohio, and Connecticut affect customer retention, pricing, marketing, revenue, or required payments.
- Whether declining meters and RCEs can be offset by higher consumption per customer and improved churn.
- The sustainability of lower SG&A and improved operating income after settlement-related reversals and other unusual items.
- The funding requirements, losses, and potential dilution associated with Shoreditch, Prism Solar, Japan, and other strategic investments.
- The company’s ability to meet electricity, renewable-credit, BP collateral, dividend, and other contractual commitments while maintaining liquidity.
- The final accounting and purchase-price allocation for the post-quarter-end Prism acquisition.
- The filing contains an apparent inconsistency between the consolidated income statement’s Q3 weighted-average basic share count and the EPS note; investors should reconcile the share counts and EPS calculations to the filed financial statements.