Genie Energy Ltd. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017. Financial statements are unaudited and prepared under U.S. GAAP. Genie’s principal businesses are retail energy supply through Genie Retail Energy (GRE) and oil and gas exploration through Afek Oil and Gas.
Business context and key financial metrics
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Total revenue | $69.5 million | $57.2 million | $191.1 million | $160.6 million |
| Gross profit | $21.8 million | $20.2 million | $58.8 million | $62.4 million |
| Gross margin | 31.3% | 35.4% | 30.7% | 38.8% |
| Income (loss) from operations | $1.4 million | $(37.1) million | $(7.0) million | $(29.2) million |
| Net income (loss) | $1.0 million | $(37.2) million | $(7.8) million | $(30.9) million |
| Net income (loss) attributable to Genie | $0.8 million | $(32.1) million | $(7.2) million | $(23.7) million |
| EPS attributable to common stockholders | $0.02 | $(1.43) | $(0.35) | $(1.09) |
| Operating cash flow | Not separately provided | Not separately provided | $3.4 million | $11.6 million |
- Electricity revenue increased 20.2% in Q3 and 18.2% for the nine months, while natural gas revenue increased 57.8% and 24.5%, respectively.
- Q3 gross profit increased modestly, but nine-month gross profit declined 5.8% because energy costs increased faster than customer rates.
- Q3 operating results benefited from the absence of the $41.0 million Afek exploration write-off recorded in Q3 2016. The nine-month 2017 operating loss still includes higher selling, general and administrative costs and settlement accruals.
- Cash and cash equivalents were $29.4 million at September 30, 2017, compared with $35.2 million at December 31, 2016. Working capital was $33.0 million.
- Net cash used in investing activities was $13.3 million, including $5.5 million for Afek exploration, $3.2 million of capital expenditures, $3.7 million for the Mirabito acquisition and $1.3 million invested in Shoreditch Energy.
- Net cash provided by financing activities was $4.1 million, including $14.5 million of revolving-credit borrowings, $12.7 million of repayments and $6.7 million of dividends paid.
- Revolving credit debt was $2.5 million at September 30, 2017, under a $20 million facility maturing April 3, 2020. The effective interest rate was 5.82%, and the company reported compliance with its covenants.
- Total assets were $120.2 million and total liabilities were $50.9 million at September 30, 2017. Genie stockholders’ equity was $86.7 million; total equity was $69.3 million after noncontrolling interests.
Material changes versus the prior comparable period
- GRE acquired Mirabito Natural Gas on August 10, 2017 for approximately $3.9 million, including assumed working-capital consideration. The acquisition added approximately 900 natural-gas meters and was not material to 2017 results through September 30.
- The prior-year comparison includes GRE’s acquisition of Retail Energy Holdings, or Town Square Energy, in November 2016. Management attributed $14.1 million of Q3 and $35.3 million of nine-month 2017 electricity revenue to that acquisition.
- GRE’s total meters increased to approximately 446,000 at September 30, 2017 from 383,000 a year earlier. Monthly churn increased to 6.9% in Q3 from 6.0% and to 6.4% for the nine months from 5.9%.
- Electricity gross margin fell to 31.6% in Q3 and 31.1% for the nine months, compared with 36.4% and 40.0%, respectively, primarily because commodity costs rose faster than customer rates.
- Consolidated selling, general and administrative expense increased to $19.5 million in Q3 from $14.9 million and to $63.0 million for the nine months from $46.9 million. Drivers included customer acquisition, amortization, payroll, professional fees and legal settlements.
- The company entered into the Shoreditch Energy joint venture in the United Kingdom. Genie contributed $1.3 million and recorded $0.2 million of equity-method losses through September 30, 2017. Additional contributions of up to £4.2 million are contingent on performance milestones.
- Afek shifted exploration to the Northern region of its Golan Heights license. Capitalized exploration costs were $5.7 million at September 30, 2017, compared with none at year-end 2016. The sixth well was expected to be completed in Q4 2017 after a temporary suspension following a site accident.
Guidance, outlook, risks and unusual items
- Management expects operating cash flows and $29.4 million of unrestricted cash at September 30, 2017 to fund currently anticipated requirements for at least the twelve months ending September 30, 2018.
- Management expects Afek exploration and other capital expenditures of approximately $4 million to $6 million during the twelve months ending September 30, 2018. No consolidated revenue or earnings guidance was provided.
- Retail energy results are highly seasonal and weather-sensitive. Electricity demand typically increases in the third quarter, while natural gas demand typically peaks in the first quarter; interim results may not represent full-year performance.
- New York regulatory actions could materially affect GRE. The company estimated that the restriction on serving low-income assistance-program customers could affect approximately 4% to 6% of GRE’s electricity and natural gas volume and could reduce future customer acquisition opportunities.
- The company recorded a total estimated class-action settlement liability of $9.0 million, comprising a $3.6 million revenue reduction and $5.4 million of selling, general and administrative expense. Payments are expected primarily in the first half of 2018, and total payments could reach $10.1 million. Final court approval remained pending.
- The company accrued an additional $1.5 million for a New Jersey regulatory matter, including $1.3 million of customer refunds and $0.2 million of related fees. A tentative agreement in principle had been reached, but final resolution was not stated.
- Purchase commitments totaled $23.9 million, including $22.2 million for future electricity purchases. Renewable energy credit purchase commitments totaled $27.1 million, and performance bonds totaled $11.6 million.
- Afek’s exploration assets are subject to impairment risk. Management stated that future impairments could be material if estimates regarding recoverability or project viability prove incorrect.
- The company disclosed material weaknesses in internal control over financial reporting relating to weather-based estimates of unbilled revenue and management review of domestic and foreign tax calculations and disclosures. Prior-quarter financial statements for Q1 and Q2 2017 were determined to contain timing errors that shifted $2.0 million of revenue and $1.2 million of operating income from Q1 to Q2, with no six-month cumulative effect.
- The company expects to adopt the new revenue recognition standard on January 1, 2018 using the modified retrospective method. Management could not yet reasonably estimate the impact, particularly on customer acquisition costs and rebate programs.
Most important facts for investors to verify
- Whether the class-action settlement receives final court approval and whether total cash payments remain near the $9.0 million estimate or approach $10.1 million.
- The final outcome and financial impact of New York PSC restrictions and the New Jersey regulatory matter.
- Whether GRE can sustain customer growth and restore gross margins as electricity and natural gas commodity costs fluctuate.
- Progress, results and funding requirements for Afek’s Northern-region exploration program, including potential impairment exposure.
- Remediation and auditor assessment of the disclosed material weaknesses in internal controls.
- The impact of the January 1, 2018 revenue-recognition adoption on reported revenue, customer acquisition costs, rebates and retained earnings.
- Liquidity after dividends, settlement payments, contractual purchases, renewable energy commitments and potential Shoreditch contributions.