Genie Energy Ltd. 10-Q Summary: Third Quarter 2015
Business Context and Reporting Period
Genie Energy operates retail energy providers and brokerage businesses through Genie Retail Energy, and oil and gas exploration activities through Genie Oil and Gas and Afek Oil and Gas. The filing covers the three and nine months ended September 30, 2015, compared with the corresponding 2014 periods. Results are unaudited and materially seasonal, particularly because of weather-driven electricity and natural gas demand.
Financial Performance and Position
| Metric | Q3 2015 | Q3 2014 | 9M 2015 | 9M 2014 |
|---|---|---|---|---|
| Revenue | $52.2 million | $46.2 million | $166.2 million | $225.3 million |
| Gross profit | $21.8 million | $17.8 million | $53.0 million | $39.2 million |
| Gross margin | 41.8% | 38.6% | 31.9% | 17.4% |
| Operating income (loss) | $3.8 million | $(4.1) million | $(2.2) million | $(14.9) million |
| Net income (loss) | $2.6 million | $(4.8) million | $(4.5) million | $(17.0) million |
| Net income (loss) attributable to common stockholders | $2.5 million | $(4.8) million | $(4.8) million | $(17.1) million |
| EPS attributable to common stockholders | $0.11 basic; $0.10 diluted | $(0.22) | $(0.22) | $(0.81) |
- Q3 revenue increased 13.1%, driven by a 16.2% increase in electricity revenue. Nine-month revenue declined 26.3%, primarily because 2014 included unusually high winter electricity and natural gas prices and consumption.
- Gross profit increased 22.4% in Q3 and 35.3% for the first nine months. Electricity gross margin improved to 44.9% in Q3 and 33.9% for the nine months, while Q3 natural gas gross margin declined to 17.5% from 27.2%.
- Q3 operating income benefited from higher GRE profitability and lower corporate expenses, including reduced stock-based compensation. Nine-month operating loss remained negative because of exploration expenses, regulatory and legal accruals, and corporate costs.
- GRE generated all reported revenue and reported operating income of $8.5 million in Q3 and $12.1 million for the nine months. Afek reported operating losses of $1.8 million and $5.0 million, respectively; GOGAS reported losses of $0.7 million and $2.4 million.
- Cash and cash equivalents were $48.4 million at September 30, 2015, compared with $71.9 million at December 31, 2014. Cash, cash equivalents and certificates of deposit totaled $57.2 million. Working capital was $88.6 million.
- Cash provided by operating activities was $0.6 million for the first nine months, compared with cash used of $8.1 million in the prior-year period. Investing cash use was $22.3 million, including $17.8 million for Afek exploration. Financing cash use was $1.7 million.
- The company had no borrowings under its $25.0 million revolving credit facility. Restricted cash included $10.0 million securing the facility, and $7.5 million of letters of credit were outstanding.
- Total assets were $150.2 million and total liabilities were $34.1 million at September 30, 2015. Capitalized unproved Afek exploration costs were $17.6 million.
Material Changes Versus the Prior Comparable Period
- Q3 electricity consumption increased 13.6%, average meters served increased 8.1%, and electricity rates increased 2.3%. Nine-month electricity consumption decreased 13.0% and average rates decreased 15.6%.
- Total meters served increased to 388,000 at September 30, 2015 from 362,000 a year earlier. Average monthly churn declined to 6.3% for the nine months from 7.2%, but increased to 6.7% in Q3 from 6.2%.
- Corporate general and administrative expense declined substantially because stock-based compensation fell to $4.1 million for the nine months from $8.5 million. GRE selling, general and administrative expense increased because of customer acquisition costs, payroll and a $2.7 million regulatory and legal accrual.
- Afek completed two exploratory wells and was nearly finished with a third. Capitalized exploration investment increased from none at December 31, 2014 to $17.6 million at September 30, 2015.
- Common-stock dividends were suspended beginning August 2015. Preferred-stock dividends continued, including a quarterly dividend of $0.1594 per preferred share declared for the third quarter.
Guidance, Outlook, Risks and Unusual Items
- Management expected available cash, cash equivalents and certificates of deposit to fund anticipated requirements for the twelve months ending September 30, 2016, including Afek spending. Planned Afek exploration and other capital expenditures were estimated at $20 million to $25 million.
- Management was considering sales of equity interests in Afek or GOGAS to help finance exploration activities.
- Afek’s preliminary drilling results indicated hydrocarbons, but the filing states that resource volumes and extractability cannot yet be determined and that the resources are not proved, probable or possible reserves. A proposed two-year drilling-permit extension was subject to public comment and final approval.
- AMSO’s interest in AMSO, LLC had been diluted to 41.9% because of underfunding of capital calls. Further underfunding could cause additional dilution and could leave AMSO liable for certain safety and environmental reclamation costs.
- IDT Energy faced a putative class action in each of Pennsylvania, New York and New Jersey, as well as Pennsylvania regulatory proceedings related to 2014 winter price increases. The company had accrued $2.5 million for the described complaints and lawsuits; the Pennsylvania settlement required regulatory approval.
- The BP preferred-supplier agreement was scheduled to terminate November 30, 2015, with management negotiating a replacement agreement. IDT Energy was subject to related collateral and covenant requirements and was in compliance at September 30, 2015.
- Contractual obligations totaled $44.0 million, including $33.4 million of renewable-energy-credit purchase commitments and $10.1 million of other purchase commitments. Performance bonds totaled $11.9 million.
- Commodity-price volatility remains a principal market risk. Derivative contracts generated a $1.5 million loss in direct cost of revenues during the first nine months, and the company does not apply hedge accounting.
- IEI’s oil-shale operations remained on hold after its pilot-project permit was declined, and the company was scaling back operations in Mongolia.
Investor Verification Priorities
- Verify the sustainability of GRE’s improved gross margins and whether lower commodity prices, consumption trends and customer churn affect future profitability.
- Monitor cash usage, Afek’s $20 million to $25 million anticipated spending, and whether asset or equity sales become necessary.
- Confirm final approval and terms of Afek’s drilling-permit extension and distinguish exploration indications from commercially recoverable reserves.
- Track the BP supplier-agreement renewal, related collateral requirements and the $7.5 million of outstanding letters of credit.
- Follow the Pennsylvania regulatory settlement and the New York, New Jersey and Pennsylvania lawsuits, including potential costs beyond the $2.5 million accrual.
- Assess the impact of continued AMSO underfunding, further dilution and potential reclamation obligations.
- Reconcile common-share dividend suspension with continuing preferred dividends and the company’s capital-allocation priorities.