Genie Energy Ltd. — Q1 2017 Form 10-Q Summary
Business context and reporting period
Genie Energy reported results for the three months ended March 31, 2017. Its principal business is Genie Retail Energy, which resells electricity and natural gas to residential and small-business customers primarily in the Eastern United States. The company also owns interests in Afek Oil and Gas, an exploration project in Israel, and other inactive oil-and-gas projects. Results are subject to significant weather and seasonal effects, particularly in natural gas demand.
Financial performance and liquidity
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Total revenue | $69.4 million | $58.9 million | 17.9% increase |
| Gross profit | $23.6 million | $24.0 million | 1.8% decrease |
| Gross margin | 34.0% | 40.8% | Down 6.8 percentage points |
| Income from operations | $4.0 million | $6.0 million | 33.9% decrease |
| Net income | $3.0 million | $4.9 million | 37.4% decrease |
| Net income attributable to Genie | $3.5 million | $5.7 million | 38.7% decrease |
| Net income attributable to common stockholders | $3.1 million | $5.3 million | 41.4% decrease |
| Diluted earnings per share | $0.13 | $0.22 | Decrease |
| Operating cash flow | $3.6 million | $9.1 million | Decrease |
Electricity revenue increased 16.3% to $52.5 million, while natural gas revenue increased 23.2% to $16.5 million. The November 2016 acquisition of Retail Energy Holdings added approximately 51,200 electricity-only customers and $10.7 million of quarterly electricity revenue. Electricity consumption increased 21.5%, but the average customer rate declined 4.3% while the average unit cost increased 13.5%, reducing electricity gross margin to 36.1% from 46.1%. Natural gas gross margin improved to 26.5% from 22.8% as customer rates increased more than underlying commodity costs.
At March 31, 2017, cash and cash equivalents were $36.0 million, restricted cash totaled $11.9 million, working capital was $57.1 million, and total assets were $123.2 million. Total liabilities were $41.5 million. The company had $1.2 million outstanding under a revolving line of credit and no borrowings under its $25.0 million JPMorgan facility, which was secured by $10.0 million of restricted cash. Management stated that unrestricted cash and expected operating cash flow should fund anticipated requirements for at least the twelve months ending March 31, 2018.
Cash used in investing activities was $1.0 million, including $1.1 million of capitalized Afek exploration costs. Financing activities used $2.1 million, principally for $2.2 million of dividends. Cash increased $0.8 million during the quarter.
Material changes versus the prior comparable period
- Revenue growth was driven primarily by the Retail Energy Holdings acquisition and higher natural gas pricing.
- Gross profit declined despite higher revenue because electricity procurement costs rose faster than customer rates and the electricity mix expanded.
- Selling, general and administrative expense increased, mainly from customer acquisition costs, payroll, and amortization of acquired intangibles.
- Afek exploration expense decreased to $0.9 million from $1.7 million; Afek commenced drilling its sixth exploratory well in Northern Israel and expected completion in the third quarter of 2017.
- Operating cash flow fell to $3.6 million from $9.1 million, partly reflecting working-capital timing and lower earnings.
- Q1 2016 comparative figures were revised: electricity revenue increased by $0.7 million for Pennsylvania gross-receipts-tax classification, while cost of revenues increased by $0.8 million for a prepaid-expense error. Revised Q1 2016 net income was reduced by $0.8 million to $4.9 million.
- Electricity meters increased to 307,000 at March 31, 2017 from 267,000 a year earlier, while natural gas meters declined to 111,000 from 126,000. Average monthly churn increased to 6.1% from 5.9%.
Guidance, outlook, risks and unusual items
- Management expects Afek exploration costs and other capital expenditures of approximately $8 million to $10 million during the twelve months ending March 31, 2018.
- Afek’s exploration license and drilling permit were extended to April 2018 and April 18, 2018, respectively. The company previously wrote off $41.0 million of Southern-region exploration costs in 2016 and stated that further impairment charges could be material.
- On April 4, 2017, after quarter-end, GRE subsidiaries entered into a $20 million revolving facility. Borrowings bear interest at LIBOR plus 4.5% and mature April 3, 2020. The facility was initially drawn by $4.3 million and is secured by receivables, bank accounts, customer agreements and related rights.
- New York Public Service Commission proceedings could impose additional restrictions on retail energy providers and could substantially affect GRE’s New York operations. A prohibition concerning customers enrolled in low-income assistance programs had a compliance deadline extended to May 26, 2017.
- Commodity-price volatility remains a principal market risk. Derivative contracts produced a $1.2 million loss in cost of revenues in Q1 2017, compared with a $0.4 million gain in Q1 2016. The company does not apply hedge accounting.
- At March 31, 2017, purchase commitments totaled $35.1 million, renewable-energy-credit commitments totaled $40.0 million, letters of credit totaled $6.2 million, and performance bonds totaled $10.0 million.
- The company disclosed putative class actions and regulatory matters involving IDT Energy’s sales and marketing practices. A Pennsylvania settlement required $2.4 million of customer refunds, paid in July 2016; other proposed settlements remained subject to unresolved issues and court approval.
- The company disclosed a material weakness in internal control over financial reporting related to management review of domestic and foreign income-tax computations and disclosures. Remediation efforts included third-party tax review, enhanced analytical procedures and improved documentation.
- The company declared a $0.075 quarterly common-stock dividend and a $0.1594 per-share quarterly preferred-stock dividend after quarter-end.
Most important facts for investors to verify
- Whether electricity gross-margin pressure persists as procurement costs and customer pricing change.
- The financial and operational impact of the New York regulatory proceedings and the May 26, 2017 compliance deadline.
- Afek’s sixth-well results, remaining exploration spending, license status and potential future impairments.
- Compliance with the new Vantage credit facility and the maturity or refinancing of the JPMorgan facility due May 31, 2017.
- Cash availability after considering restricted cash, collateral requirements, purchase commitments, renewable-energy-credit obligations and dividends.
- Progress in remediating the disclosed tax-related material weakness and the outcome of the Afek tax audit announced in April 2017.
- The ultimate resolution and financial exposure, if any, from pending class actions, regulatory inquiries and proposed settlements.