Genie Energy Ltd. — 2016 Q2 Form 10-Q Summary
Business context and reporting period
Genie Energy reported unaudited results for the three and six months ended June 30, 2016. Its principal businesses are retail electricity and natural gas supply through Genie Retail Energy, and oil and gas exploration through Afek and other Genie Oil and Gas projects. Results are seasonal, particularly for natural gas and electricity demand.
Key financial metrics
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Total revenue | $44.0 million, up 11.3% | $102.1 million, down 10.4% |
| Gross profit | $18.8 million vs. $13.4 million | $43.7 million vs. $29.9 million |
| Gross margin | 42.8% vs. 34.0% | 42.8% vs. 26.2% |
| Income from operations | $2.6 million vs. $(4.9) million | $9.4 million vs. $(7.3) million |
| Net income | $2.1 million vs. $(4.7) million | $7.8 million vs. $(7.2) million |
| Net income attributable to Genie | $3.5 million vs. $(4.5) million | $9.9 million vs. $(6.5) million |
| Net income attributable to common stockholders | $3.1 million; diluted EPS $0.13 | $9.2 million; diluted EPS $0.39 |
Electricity revenue was $37.7 million in the quarter and $82.1 million year to date. Natural gas revenue was $5.8 million in the quarter and $19.1 million year to date. Retail Energy generated $5.9 million of operating income in the quarter and $17.4 million year to date. Afek generated no revenue and recorded operating losses of $1.8 million and $3.6 million, respectively.
At June 30, 2016, cash and cash equivalents were $38.9 million, certificates of deposit were $8.9 million, and total cash, cash equivalents and certificates of deposit were $47.8 million. Working capital was $70.0 million. Restricted cash totaled $12.2 million, including $10.0 million pledged under the JPMorgan credit arrangement.
Total debt consisted of a $2.0 million revolving credit loan payable. The Maple Bank facility was no longer available for additional borrowings following the bank’s closure. No amounts were borrowed under the separate $25.0 million JPMorgan facility. Operating cash flow was $13.3 million for the six months ended June 30, 2016, compared with cash used of $3.5 million in the prior-year period. Investing cash use was $9.2 million, including $12.8 million for Afek exploration. Financing cash use was $3.9 million, primarily dividends.
Material changes versus the prior comparable period
- Quarterly revenue increased 11.3%, driven by higher electricity and natural gas revenue; year-to-date revenue declined 10.4%, primarily because natural gas revenue fell 38.6%.
- Gross margin improved substantially as electricity and natural gas commodity costs declined. Year-to-date electricity gross margin increased to 44.9% from 26.1%, and natural gas gross margin increased to 32.8% from 24.9%.
- Retail Energy operating income improved to $5.9 million in the quarter from a $0.5 million loss and to $17.4 million year to date from $2.3 million.
- Retail Energy ended the quarter with approximately 390,000 meters, including 268,000 electricity meters and 122,000 natural gas meters, versus 377,000 total meters a year earlier. Net meter growth slowed, and six-month churn increased to 6.3% from 6.1%.
- Total withdrew from AMSO, LLC effective April 30, 2016. Genie consolidated AMSO thereafter, recognized a $1.3 million gain on consolidation, and recorded a $2.2 million retirement obligation at June 30, 2016 after payments.
- Capitalized Afek exploration costs increased to $40.0 million from $26.9 million at December 31, 2015. The company cautioned that these costs could require material impairment if proved reserves are not established.
- Customer acquisition, payroll and related costs partly offset lower regulatory and legal expenses. Stock-based compensation declined to $2.3 million year to date from $2.8 million.
Guidance, outlook, commentary and risks
Management stated that available liquidity and expected operating cash flows should meet anticipated requirements for at least the twelve months ending June 30, 2017, including Afek expenditures. Planned Afek exploration and other capital expenditures for that period were estimated at $5 million to $8 million.
Afek completed flow testing at its second test site and was evaluating data from five exploratory wells, logs and core samples. The company had not established proved, probable or possible reserves. Further seismic work or drilling may occur, and Afek was seeking external financing for additional exploration.
New York regulatory actions remain a material uncertainty. A court vacated key provisions of the New York Public Service Commission’s February 2016 order and remanded the matter for further proceedings. A July 2016 order also restricted retail energy providers from serving certain low-income customers. Future requirements could substantially affect New York operations.
The company had $12.1 million of purchase commitments, $43.1 million of renewable energy credit commitments, $8.2 million of letters of credit and $12.9 million of performance bonds. Trade receivables of $26.0 million and restricted cash of $0.2 million were pledged to BP against $8.5 million of trade payables.
IDT Energy accrued $2.6 million for specified litigation at June 30, 2016. A Pennsylvania settlement was approved in July 2016, and $2.4 million of additional customer refunds were issued. The company also disclosed ongoing New York and New Jersey class-action litigation, tax audit exposure and potential future AMSO decommissioning costs.
Commodity-price volatility is managed through options and swaps. Derivative contracts had $3.1 million of assets and $1.1 million of liabilities at June 30, 2016. The company also identified cybersecurity and network disruption as a material risk; it reported denial-of-service attacks in the first quarter but no known material data compromise.
Important facts for investors to verify
- Whether Afek’s exploration results support recoverability of the $40.0 million capitalized exploration balance and whether additional financing will be obtained.
- The final requirements and financial impact of New York regulatory actions, including restrictions affecting low-income customers.
- The ultimate cost and timing of AMSO decommissioning and whether the $3.0 million Total contribution is sufficient.
- The effect of commodity prices, hedging results, seasonality, meter growth and churn on future Retail Energy margins.
- The cash impact of $57.8 million of contractual obligations, $43.1 million of renewable energy credit commitments, letters of credit and performance bonds.
- The resolution and potential additional cost of disclosed litigation, regulatory matters and tax audits.