Genie Energy Ltd. 2016 Form 10-K Summary
Business Context and Reporting Period
Genie Energy reported for the fiscal year ended December 31, 2016; the filing was signed March 16, 2017. The company operates two principal businesses: Genie Retail Energy (GRE), which resells electricity and natural gas to residential and small-business customers, and Genie Oil and Gas, which conducts oil and gas exploration through Afek Oil and Gas in Northern Israel and maintains several inactive projects.
GRE generated all consolidated revenue. In November 2016, GRE acquired Retail Energy Holdings, LLC, operating as Town Square Energy, for approximately $10.9 million including working capital. The acquisition added approximately 48,000 residential customer equivalents and expanded GRE into four additional states.
Financial Performance and Key Metrics
| Metric | 2016 | 2015 |
|---|---|---|
| Revenue | $212.1 million | $213.1 million |
| Gross profit | $76.9 million | $66.6 million |
| Gross margin | 36.3% | 31.3% |
| Loss from operations | $(30.5) million | $(8.3) million |
| Net loss | $(32.2) million | $(8.6) million |
| Net loss attributable to Genie | $(24.5) million | $(7.5) million |
| Loss per common share | $(1.14) | $(0.40) |
| Cash flow from operations | $15.6 million | $(3.1) million |
- Electricity revenue increased 5.4% to $179.5 million, while natural gas revenue declined 23.9% to $31.0 million. Electricity represented approximately 85% of revenue.
- GRE operating income increased to $26.5 million from $11.1 million. GRE gross margin improved to 36.3% from 31.3%, aided by lower wholesale commodity costs and improved margins on electricity and natural gas.
- Consolidated results were dominated by a $41.0 million write-off of Afek capitalized exploration costs. Afek recorded a $48.3 million operating loss and generated no revenue.
- Fourth-quarter revenue was $51.5 million, with a $1.3 million operating loss and a $1.3 million net loss. Net loss attributable to Genie was $0.8 million.
- Year-end cash and cash equivalents were $35.2 million, restricted cash totaled $11.9 million, and working capital was $56.7 million.
- Total assets declined to $121.8 million from $155.8 million, primarily because the exploration-cost write-off reduced capitalized oil and gas assets to zero.
- Debt was limited: $0.7 million was outstanding under the acquired REH revolving line at year-end, with no long-term obligations. The REH facility had a maximum principal amount of $7.5 million and matured October 31, 2017.
- The company paid $5.9 million of common dividends and $1.5 million of preferred dividends during 2016. A $0.075-per-share common dividend for the fourth quarter was declared in March 2017.
Material Changes Versus the Prior Comparable Period
- Revenue was broadly flat, but the mix shifted materially toward electricity: electricity revenue rose $9.2 million while natural gas revenue fell $9.8 million.
- GRE operating income improved by $15.4 million, reflecting a $10.2 million increase in gross profit and a $5.2 million reduction in selling, general and administrative expenses.
- Average monthly customer churn increased slightly to 6.4% from 6.3%. Year-end meters served increased to 412,000 from 392,000, substantially reflecting the Town Square Energy acquisition.
- Operating cash flow improved by $18.6 million to $15.6 million, primarily due to improved GRE operating performance and working-capital movements.
- Investing cash outflows decreased to $9.5 million from $31.6 million. The company spent $12.9 million on Afek exploration, paid $8.7 million net for REH, and received $3.0 million from Total toward AMSO decommissioning costs.
- Afek wrote off all $41.0 million of capitalized exploration costs associated with five Southern-region wells after concluding that commercial viability could not be demonstrated within the next 12 to 18 months under then-current conditions.
- Total withdrew funding from AMSO in 2016, and the project was substantially decommissioned. Genie recognized a $1.3 million gain when it consolidated AMSO.
Outlook, Risks, Contingencies and Unusual Items
- Management expected unrestricted cash of $35.2 million and ongoing operations to fund anticipated requirements, including Afek expenditures, through at least 2017. Planned 2017 Afek exploration and other capital expenditures were estimated at $8 million to $10 million.
- Afek planned to drill its sixth exploratory well in the Northern region in March 2017 and complete it during the second quarter. The filing states that identified resources are not proved, probable or possible reserves and may not be commercially recoverable.
- New York regulatory proceedings remained a significant risk. New York represented approximately 44% of GRE’s meters and 33% of its residential customer equivalents at year-end. Further Public Service Commission action could materially affect GRE’s New York operations.
- GRE remains exposed to wholesale electricity and natural gas volatility, weather-driven demand, customer churn, fixed-rate pricing risk, regulatory changes, licensing requirements and reliance on utilities and suppliers. The company uses options, swaps and physical contracts to manage some commodity exposure.
- Purchase commitments totaled $39.6 million, and renewable-energy-credit purchase commitments totaled $42.5 million. Letters of credit totaled approximately $8.2 million and performance bonds totaled $7.7 million.
- Three putative class actions relating to historical variable-rate practices remained subject to proposed settlements that required resolution of material issues and court approval. A Pennsylvania regulatory settlement required $2.4 million of additional customer refunds, paid in July 2016.
- Management and the auditor identified a material weakness in internal control over financial reporting related to management review controls for domestic and foreign income-tax computations and disclosures. Management planned additional third-party review and tax-control procedures.
- The filing includes revised prior-period classifications and corrections, including Pennsylvania gross-receipts tax presentation, financing-fee classification and certain income-tax disclosures.
Most Important Facts for Investors to Verify
- Whether GRE can sustain its improved 36.3% gross margin as commodity prices, customer rates and churn change.
- The final outcome and operational effect of New York PSC proceedings, including restrictions involving low-income-assistance customers.
- Afek’s drilling results, funding requirements and the likelihood of any commercially viable discovery; no reserves or production had been established.
- Cash availability after restricted cash, collateral requirements, dividends, purchase commitments and exploration spending.
- Repayment or refinancing of the REH revolving facility and the status of the JPMorgan credit facility and its $10.0 million cash collateral.
- Resolution of the material weakness in tax-related internal controls and the extent to which REH is integrated into the company’s control assessment.
- Potential costs or settlement terms associated with the remaining class-action litigation, tax audits and other regulatory contingencies.