Genie Energy Ltd. — Q2 2018 Form 10-Q Summary
Business context and reporting period
Genie Energy operates retail electricity and natural-gas providers primarily in the Eastern and Midwestern United States through Genie Retail Energy, with energy brokerage and advisory activities. The company also has United Kingdom and Japan expansion initiatives, oil-and-gas exploration interests, and an Israeli drilling-services business. This unaudited filing covers the three and six months ended June 30, 2018, compared with the corresponding 2017 periods.
Financial performance and key metrics
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Total revenue | $56.4 million | $50.2 million | $145.7 million | $121.7 million |
| Gross profit | $16.1 million | $12.1 million | $40.5 million | $37.0 million |
| Gross margin | 28.5% | 24.1% | 27.8% | 30.4% |
| Operating income (loss) | $(2.3) million | $(13.6) million | $4.3 million | $(8.4) million |
| Net income (loss) | $(2.5) million | $(13.0) million | $3.4 million | $(8.8) million |
| Net income (loss) attributable to Genie | $(1.9) million | $(12.6) million | $4.2 million | $(8.0) million |
| EPS attributable to common stockholders | $(0.09) | $(0.55) | $0.14 | $(0.37) |
- Electricity revenue increased 9.1% in Q2 and 16.8% year to date; natural-gas revenue increased 38.5% in Q2 and 32.4% year to date. The 2017 acquisition of Mirabito contributed $1.5 million of Q2 natural-gas revenue and $3.5 million year to date.
- Q2 gross margin improved because customer rates increased more than commodity costs. Year-to-date gross margin declined, primarily because electricity and natural-gas unit costs rose faster than customer rates.
- Cash flow from operations was $12.1 million for the first six months, versus $(3.5) million in the prior-year period. Investing cash use was $1.0 million and financing cash provided was $1.5 million.
- Cash, cash equivalents, and restricted cash totaled $44.4 million at June 30, 2018, including $43.2 million of unrestricted cash and cash equivalents. Working capital was $45.0 million.
- Total debt consisted primarily of $2.5 million outstanding under a $20 million revolving facility, bearing interest at LIBOR plus 4.5% and maturing April 3, 2020. The company reported compliance with its covenants.
- Total assets were $124.4 million and total equity was $73.7 million at June 30, 2018.
Material changes versus the prior comparable period
- Results improved substantially from Q2 2017, when the company recorded a $9.0 million operating loss impact from the customer class-action settlement, including $5.4 million of selling, general and administrative expense and $3.6 million of revenue reductions.
- In 2018, the company reduced the estimated settlement liability by $1.4 million, reversed $1.7 million of prior revenue reductions, and recorded $0.3 million of related expense. The estimated total settlement payment declined from $9.0 million to approximately $7.6 million, subject to court approval.
- Selling, general and administrative expense declined to $15.4 million in Q2 from $24.7 million, reflecting the absence of the prior-year settlement expense and lower customer-acquisition costs.
- The customer base contracted: total meters served declined to 363,000 at June 30, 2018 from 430,000 a year earlier, while gross meter acquisitions also decreased materially.
- The company recorded a $2.3 million write-down of Atid Drilling assets held for sale after suspending oil-and-gas exploration drilling activities. The pending disposition was not classified as a discontinued operation.
- Genie acquired the Japanese electricity license business Smile Energy for $0.7 million and launched the United Kingdom Shoreditch joint venture. Shoreditch generated a $1.0 million Q2 net loss and a $1.8 million year-to-date net loss; Genie’s investment balance was $2.2 million at June 30.
- Genie raised $6.0 million through sales of Class B common stock and warrants, including transactions with Howard S. Jonas and a third-party investor.
- The company adopted ASC 606 effective January 1, 2018 and reported no impact on revenue recognition or measurement.
Guidance, outlook, commentary, risks, and unusual items
- No specific full-year revenue or earnings guidance was provided. Management stated that operating results are materially seasonal and that interim results are not necessarily indicative of full-year performance.
- Management expects operating cash flow and $44.4 million of unrestricted cash and cash equivalents at June 30, 2018 to fund anticipated requirements through at least August 9, 2019.
- Capital expenditures for the twelve months ending June 30, 2019 were expected to be $1 million to $2 million.
- New York regulatory proceedings remain a significant risk. New York represented 31% of GRE meters and 23% of residential customer equivalents at June 30, 2018. Further regulatory action could substantially affect New York operations.
- Commodity-price volatility affects profitability. The company uses options and swaps but does not apply hedge accounting; fair-value changes are recognized in cost of revenues. At June 30, derivative assets were $1.6 million and derivative liabilities were $0.8 million.
- Purchase commitments totaled $55.7 million, including $53.7 million for future electricity purchases. Renewable-energy-credit commitments totaled $25.9 million, and performance bonds totaled $12.4 million.
- The company had a $2.0 million monthly advance-payment obligation to BP under its preferred supplier agreement. Restricted cash of $0.3 million and $22.7 million of receivables were pledged against $9.4 million owed to BP.
- IDT Energy entered into a New Jersey consent order requiring $1.4 million of payments, including $1.2 million of consumer restitution, and additional compliance measures. The company also faces pending approval of the Pennsylvania, New York, and New Jersey class-action settlement.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the class-action settlement receives final court approval and whether the approximately $7.6 million estimate is sufficient.
- The final outcome of New York PSC proceedings and related effects on customer retention, acquisition, revenue, and profitability.
- Whether declining meters served and lower acquisitions signal continuing contraction of the retail customer base.
- The timing and proceeds of the planned Atid Drilling disposition and whether further impairments or restructuring costs arise.
- Shoreditch’s funding requirements and operating losses, including Genie’s potential additional contribution of up to approximately $3.0 million.
- Commodity-price movements, hedge performance, and the effect of electricity and natural-gas purchase commitments on future margins.
- The company’s ability to maintain dividends while funding regulatory obligations, expansion initiatives, and contractual commitments.