Genie Energy Ltd. — First-Quarter 2019 Form 10-Q Summary
Business Context and Reporting Period
Genie Energy reported unaudited results for the three months ended March 31, 2019, compared with the three months ended March 31, 2018. The company operates retail energy providers in North America and internationally, energy advisory and solar businesses, and oil and gas interests. Reportable segments are GRE, GRE International, GES and GOGAS.
In January 2019, Genie acquired an 80% controlling interest in Finnish retail energy provider Lumo Energia Oyj. The company also continued integrating Prism, a 60%-owned solar solutions business acquired in October 2018. GRE International became a separate reportable segment during the quarter.
Key Financial Metrics
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $86.6 million | $89.3 million | Down 3.0% |
| Gross profit | $25.6 million | $24.5 million | Up 4.6% |
| Gross margin | 29.5% | 27.4% | Up approximately 210 bps |
| Income from operations | $9.8 million | $7.1 million | Up 37.9% |
| Operating margin | 11.4% | 8.0% | Improved |
| Net income | $6.2 million | $5.9 million | Up 5.1% |
| Net income attributable to Genie | $6.1 million | $6.2 million | Down 1.4% |
| Net income attributable to common stockholders | $5.7 million | $5.8 million | Down 1.5% |
| Diluted EPS | $0.21 | $0.24 | Down $0.03 |
| Operating cash flow | $7.0 million | $8.6 million | Down $1.6 million |
Consolidated cost of revenues declined to $61.0 million from $64.8 million. Selling, general and administrative expense declined to $15.7 million from $17.1 million, partly because stock-based compensation fell to $0.4 million from $1.3 million. The effective tax rate increased to 32.0% from 12.0%, primarily because deferred tax valuation allowances had been released in the fourth quarter of 2018.
At March 31, 2019, cash and cash equivalents were $37.5 million, while total cash, cash equivalents and restricted cash were $44.5 million. Working capital was $51.7 million. Total debt and borrowings included $2.5 million outstanding under a $20 million revolving facility and $0.9 million of Prism notes payable. The company had no borrowings under its $5 million JPMorgan letter-of-credit facility, which was collateralized by approximately $5.2 million of restricted cash.
Material Changes Versus the Prior Comparable Period
- GRE revenue declined 13.7% to $76.5 million, but operating income increased 92.9% to $13.5 million as gross margin improved to 32.3% from 27.2% and operating expenses decreased.
- GRE electricity revenue declined 11.5% and natural gas revenue declined 20.2%, mainly because of fewer meters served. Average electricity meters declined 11.7% and average natural gas meters declined 29.6% year over year.
- GRE’s average monthly churn improved to 5.3% from 7.6%. End-of-quarter meters increased to 344,000 from 315,000 at December 31, 2018, partly due to new aggregation agreements.
- GRE International generated $4.8 million of revenue, principally from Lumo, and recorded a $1.7 million operating loss. Its reported results were not comparable with Q1 2018 because the segment was substantially expanded by the Lumo acquisition.
- GES revenue increased to $5.3 million from $0.5 million, primarily due to Prism. GES recorded a $0.2 million operating loss.
- GOGAS operating loss declined to $0.2 million from $1.4 million, reflecting reduced expenses following the divestiture of a majority interest in the Atid drilling business. GOGAS also recorded $0.3 million of equity income from Atid 613.
- Derivative losses recorded in cost of revenues increased to $2.9 million from $0.1 million. The company does not apply hedge accounting to its energy derivatives.
Guidance, Outlook, Risks and Unusual Items
- Management stated that operating cash flow and unrestricted cash of $37.5 million were expected to be sufficient to meet anticipated cash requirements through at least May 10, 2020. The filing does not provide formal revenue or earnings guidance.
- Results are seasonal and weather-sensitive. Natural gas demand is typically highest in the first quarter, while electricity demand is generally higher in the third quarter; interim results may not represent full-year performance.
- Future purchase commitments totaled $108.9 million at March 31, 2019, including $91.2 million for electricity. The company also had $17.7 million of renewable energy credit commitments and $13.0 million of performance bonds outstanding.
- New York regulatory proceedings remain material. New York represented 28.5% of GRE meters, 20.8% of GRE residential customer equivalents and $21.5 million of gross revenue in the quarter. On May 9, 2019, the New York Court of Appeals ruled that the PSC could impose price caps through its authority over utility infrastructure access.
- The Illinois Attorney General’s action against IDT Energy remains unresolved. The company recorded a $3.0 million liability in 2018, and the Illinois Attorney General sought to enforce a rescinded proposed settlement.
- Town Square Energy’s regulatory matters in Ohio and Connecticut remain relevant. Ohio was settled for a $0.2 million forfeiture; the Connecticut investigation had not resulted in a claim or estimable probable loss as of March 31, 2019.
- A putative federal Telephone Consumer Protection Act class action remains in discovery. Management stated that a loss was neither probable nor estimable as of March 31, 2019.
- Afek’s oil and gas exploration activities had been suspended, but the company obtained a renewed exploratory license for part of its former license area and was pursuing additional testing.
- Disclosure controls were not effective at quarter-end because of a previously reported material weakness in internal control over financial reporting. Management expected remediation to be completed in the third quarter of 2019.
- The company adopted lease accounting Topic 842 on January 1, 2019, recognizing $2.4 million of right-of-use assets and $2.3 million of operating lease liabilities. It also adopted ASU 2018-07, recording a $0.3 million reduction to accumulated deficit.
Most Important Facts for Investors to Verify
- Whether GRE’s improved margins and lower churn persist despite the significant year-over-year decline in meters and revenue.
- The profitability, cash requirements and integration progress of Lumo and Prism.
- The outcome and commercial impact of New York price-cap and other state regulatory actions.
- The potential ultimate cost of the Illinois Attorney General matter and other customer-practices proceedings.
- The company’s ability to fund $108.9 million of purchase commitments while maintaining dividends and acquisition activity.
- Progress and completion of remediation for the material weakness in internal controls.
- The effect of commodity-price volatility and the company’s derivative positions on future gross margins.