Genie Energy Ltd. — Form 10-Q Summary
Reporting period: Quarterly and six-month periods ended June 30, 2017; filed August 9, 2017. Financial statements are unaudited. Genie operates retail electricity and natural-gas providers through Genie Retail Energy and oil and gas exploration activities through Afek Oil and Gas and other subsidiaries.
Financial performance and condition
| Metric | Three months ended June 30 | Six months ended June 30 |
|---|---|---|
| Revenue | $52.2 million, versus $44.6 million | $121.7 million, versus $103.4 million |
| Gross profit | $13.4 million, versus $18.1 million | $37.0 million, versus $42.2 million |
| Gross margin | 25.6%, versus 40.7% | 30.4%, versus 40.8% |
| Operating income (loss) | $(12.3) million, versus $1.9 million | $(8.4) million, versus $7.9 million |
| Net income (loss) | $(11.8) million, versus $1.4 million | $(8.8) million, versus $6.3 million |
| Net income (loss) attributable to Genie | $(11.5) million, versus $2.8 million | $(8.0) million, versus $8.4 million |
| Loss per common share | $(0.50) basic and diluted | $(0.37) basic and diluted |
- Electricity revenue increased 17.4% in the quarter and 16.8% year to date; natural-gas revenue increased 17.5% and 21.5%, respectively.
- Cost of revenues increased 46.9% in the quarter and 38.2% year to date, outpacing revenue growth. Electricity and natural-gas gross margins declined because of higher commodity costs, lower average electricity rates, and the customer settlement accrual.
- Selling, general and administrative expense was $24.7 million in the quarter and $43.5 million year to date, including a $5.4 million expense for the class-action settlement. Stock-based compensation was $1.1 million in the quarter and $2.4 million year to date.
- Six-month cash used in operating activities was $3.3 million, compared with $13.3 million provided in the prior-year period. Investing cash use was $5.8 million, including $2.9 million of capital expenditures and $3.3 million of exploration investment. Financing activities provided $7.2 million.
- Cash and cash equivalents were $33.4 million at June 30, 2017, compared with $35.2 million at December 31, 2016. Working capital was $39.6 million.
- Total assets were $121.2 million and total liabilities were $52.3 million at June 30, 2017. Total equity was $68.9 million.
- Borrowings under the Vantage revolving facility were $2.5 million at June 30, 2017, bearing an effective rate of 5.72%; the facility has a $20 million capacity and matures April 3, 2020. The company reported compliance with applicable covenants.
Material changes versus the prior comparable period
- Revenue growth primarily reflected the November 2016 acquisition of Retail Energy Holdings, which added approximately 65,000 average electricity-only customers in the second quarter and 58,300 for the first six months.
- Electricity consumption increased 28.8% in the quarter and 26.1% year to date, while average electricity rates declined 8.9% and 7.4%, respectively. Natural-gas consumption declined 17.5% and 8.6%, while average natural-gas rates increased 42.4% and 33.0%.
- GRE’s total meters increased to 430,000 at June 30, 2017 from 390,000 a year earlier. Average monthly churn increased to 6.3% in the quarter and 6.2% year to date, from 5.8% and 5.9%, respectively.
- Afek’s exploration expense declined to $1.0 million in the quarter and $1.8 million year to date, compared with $1.4 million and $3.1 million. Afek capitalized $3.4 million of exploration costs at June 30, 2017 after capitalizing none at year-end 2016.
- Prior-year comparative financial statements were revised for Pennsylvania gross-receipts-tax classification and prepaid electricity-cost errors. The revisions reduced prior-year second-quarter net income by $0.7 million and reduced six-month net income by $1.5 million.
- The prior-year $1.3 million gain on consolidation of AMSO, LLC did not recur in 2017. AMSO’s project was substantially decommissioned by December 31, 2016.
Guidance, outlook, risks and unusual items
- Management stated that unrestricted cash and expected operating cash flows should be sufficient for anticipated requirements for at least the twelve months ending June 30, 2018. Expected Afek exploration and other capital expenditures over that period were estimated at $4 million to $6 million.
- On July 5, 2017, the company entered into a class-action settlement covering lawsuits in Pennsylvania, New York and New Jersey. The estimated total payment is approximately $9 million, with payments expected primarily in the first half of 2018, subject to court approval and customer participation. The company recorded a $3.6 million revenue reduction, $5.4 million expense, and $9.0 million accrued liability.
- New York restrictions on retail energy providers serving customers enrolled in utility low-income assistance programs became effective July 26, 2017. Appeals were pending, and management could not determine the number of affected customers. The company warned that customer transfers and a smaller addressable market could materially harm future results.
- Purchase commitments totaled $30.6 million, including $28.7 million for future electricity purchases. Renewable-energy-credit commitments totaled $35.7 million. GRE also had $12.6 million of performance bonds outstanding.
- Genie’s United Kingdom joint venture requires an additional $1.2 million by late August 2017 and up to $6.6 million between September 2017 and August 2018, contingent on performance milestones.
- Afek resumed development of its sixth exploratory well after a May 2017 drilling-site accident and expected completion in the third quarter of 2017. The project remains subject to impairment risk; the company previously wrote off $41.0 million of Southern-region exploration costs in 2016.
- Commodity-price volatility remains a principal market risk. Derivative contracts generated a $1.5 million loss in the second quarter and a $2.7 million loss year to date, recorded in cost of revenues.
- Disclosure controls were deemed ineffective because of a material weakness in management review controls over domestic and foreign income-tax computations and disclosures. Management began remediation using an independent third party and enhanced tax-accounting review procedures.
- The company expects to adopt the new revenue-recognition standard on January 1, 2018 using the modified retrospective method, but had not yet estimated the impact, particularly on customer-acquisition costs and rebate programs.
Most important facts for investors to verify
- Whether the approximately $9 million class-action settlement receives final court approval and the ultimate cash payout.
- The financial impact of New York regulatory restrictions, including customer attrition, market contraction, and any appellate relief.
- Whether GRE can restore gross margins after higher electricity and natural-gas costs, lower electricity rates, and derivative losses.
- The sufficiency of cash and borrowing capacity given negative year-to-date operating cash flow, dividends, contractual commitments, and planned UK and Afek funding.
- Results of Afek’s sixth well, the April 2018 license and permit deadlines, and potential impairment of the $3.4 million capitalized exploration balance.
- Progress in remediating the material weakness in tax-related internal controls and the outcome of the Afek 2014 IRS audit.
- The effect of the January 2018 revenue-recognition adoption on reported revenue, customer-acquisition costs, rebates, and retained earnings.