Business Context and Reporting Period
Genie Energy Ltd. filed an unaudited Form 10-Q for the quarter and nine months ended September 30, 2016. The company operates primarily through Genie Retail Energy, which resells electricity and natural gas to residential and small-business customers, and Genie Oil and Gas, including the Afek exploration project in Israel and other inactive or decommissioning projects.
Key Financial Metrics
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Total revenue | $57.2 million | $53.0 million | $160.6 million | $168.5 million |
| Gross profit | $20.2 million | $21.2 million | $62.4 million | $51.1 million |
| Gross margin | 35.4% | 40.1% | 38.8% | 30.3% |
| Operating income (loss) | $(37.1) million | $3.2 million | $(29.2) million | $(4.1) million |
| Net income (loss) | $(37.2) million | $2.6 million | $(30.9) million | $(4.5) million |
| Net loss attributable to Genie | $(32.1) million | $2.8 million | $(23.7) million | $(3.7) million |
| Loss per common share | $(1.43) | $0.11 diluted earnings | $(1.09) | $(0.22) |
Q3 operating and net margins were approximately negative 64.9% and negative 65.0%, respectively, primarily because of the $41.0 million Afek exploration-cost write-off. Nine-month operating and net margins were approximately negative 18.2% and negative 19.2%.
- Electricity revenue increased 9.8% in Q3 and 4.3% year to date, while natural-gas revenue decreased 22.0% and 37.5%, respectively.
- Genie Retail Energy generated $7.9 million of operating income in Q3 and $23.8 million year to date, compared with $7.9 million and $10.2 million in the comparable periods.
- Cash provided by operating activities was $11.6 million for the nine months, versus $0.6 million in 2015. Investing activities used $0.7 million and financing activities used $7.6 million.
- Cash and cash equivalents were $42.3 million at September 30, 2016, compared with $38.8 million at December 31, 2015. Working capital was $69.3 million.
- Total assets were $118.0 million, down from $155.8 million at year-end 2015, primarily reflecting the Afek write-off. Total equity was $81.4 million.
- The company had no revolving loan balance at quarter-end. It settled the $2.0 million Maple Bank facility for $1.8 million and recorded a $0.2 million gain. A JPMorgan revolving line of credit provides capacity of up to $25.0 million, subject to $10.0 million of restricted cash collateral; no amounts were borrowed.
Material Changes Versus the Prior Comparable Period
- Q3 revenue increased $4.2 million, or 7.9%, but gross profit declined $1.0 million because electricity costs increased faster than customer rates and natural-gas gross margin fell to negative 2.7%.
- Nine-month revenue declined $7.9 million, or 4.5%, primarily because of lower natural-gas and other revenue. Lower commodity costs improved the nine-month gross margin to 38.8% from 30.3%.
- Afek wrote off $41.0 million of capitalized exploration costs related to its Southern Golan Heights wells after concluding that it lacked a clear path to demonstrate probable or possible reserves within 12 to 18 months.
- Total withdrew from AMSO, LLC effective April 30, 2016. Genie consolidated the decommissioning project, recognized a $1.3 million gain on consolidation, and reported $0.96 million of remaining retirement obligations at September 30.
- Customer meters decreased to 383,000 at September 30, 2016 from 388,000 a year earlier; electricity meters increased to 263,000 while natural-gas meters declined to 120,000. Average monthly churn was 6.4% in Q3.
- The company revised prior 2016 interim results for errors involving prepaid electricity costs and corrected the classification of Pennsylvania gross-receipts taxes. The revisions reduced first-quarter and second-quarter 2016 income.
Outlook, Risks, Contingencies, and Unusual Items
- Management expected existing operations and $42.3 million of cash at September 30, 2016 to fund anticipated requirements for at least the following twelve months. Planned Afek exploration and other capital expenditures for the twelve months ending September 30, 2017 were estimated at $5 million to $8 million.
- Afek planned, subject to permitting and rig upgrades, to drill a Northern-region exploration well in the first quarter of 2017 and was seeking outside financing for its next phase of activity.
- New York regulatory orders affecting retail energy providers remained uncertain. Future requirements could materially affect the operations of the company’s New York businesses.
- The company had $16.5 million of purchase commitments, $42.1 million of renewable-energy-credit commitments, $8.2 million of letters of credit, and $7.4 million of performance bonds at September 30, 2016.
- Pending and proposed settlements related to customer sales and marketing practices included a $2.4 million Pennsylvania customer-refund payment made in July 2016. Other putative class actions remained subject to unresolved settlement terms and court approval.
- Energy-price volatility remains material. The company uses electricity and natural-gas options and swaps, but does not apply hedge accounting; changes in fair value flow through cost of revenues.
- Disclosure controls and procedures were ineffective at September 30, 2016 because of material weaknesses related to cost-of-revenue schedules and review controls. Management believed one weakness was remediated but was still remediating the remaining weakness.
- On November 2, 2016, after the reporting date, GRE acquired Retail Energy Holdings, LLC, operating as Town Square Energy, for $10.9 million, including working capital. The acquisition added approximately 47,000 electricity customer equivalents and expanded the geographic footprint.
- The company declared a $0.1594 per-share preferred dividend and a $0.06-per-share common dividend for the third quarter of 2016.
Important Facts for Investors to Verify
- Whether Afek’s Northern exploration program can establish economically recoverable reserves and whether additional impairment charges will be required.
- The final scope and effect of New York Public Service Commission requirements on customer retention, pricing, and renewable-energy offerings.
- The company’s remediation of the remaining internal-control material weakness and the effect of the accounting revisions on future interim reporting.
- Liquidity after the $10.9 million Town Square Energy acquisition, ongoing dividends, contractual commitments, restricted cash, and potential Afek spending.
- The ultimate cost and resolution of customer litigation, regulatory matters, tax audits, AMSO decommissioning, and related contingencies.
- Whether electricity gross-margin pressure and declining natural-gas customers offset the improved year-to-date retail-energy operating performance.