Genie Energy Ltd. 2019 Q3 Form 10-Q Summary
Business context and reporting period
Genie Energy operates retail electricity and natural gas providers in the United States and internationally, energy brokerage and solar businesses, and inactive oil and gas exploration projects. The report covers the three and nine months ended September 30, 2019. Results are unaudited and materially seasonal, with electricity demand generally higher in the third quarter and natural gas demand generally higher in the first quarter.
Key 2019 developments included the acquisition of an 80% controlling interest in Finnish retailer Lumo Energia in January and the continued integration of the 60% controlling interest in solar company Prism, acquired in October 2018. GRE International became a separate reportable segment.
Financial performance and position
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Revenue | $85.7 million | $71.8 million | $233.3 million | $217.5 million |
| Gross profit | $26.4 million | $21.3 million | $60.9 million | $61.8 million |
| Income from operations | $6.9 million | $6.9 million | $7.5 million | $12.4 million |
| Net income | $4.7 million | $5.7 million | $2.4 million | $9.0 million |
| Net income attributable to Genie | $5.2 million | $5.9 million | $3.9 million | $10.2 million |
| EPS attributable to common stockholders | $0.18 | $0.21 | $0.10 | $0.36 |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $15.9 million | $20.2 million |
Q3 gross margin was approximately 30.7%, compared with 29.6% in the prior-year quarter. Nine-month gross margin was approximately 26.1%, compared with 28.4%. Q3 operating margin was approximately 8.1%, versus 9.6%; nine-month operating margin was approximately 3.2%, versus 5.7%.
- Electricity revenue increased 21.1% in Q3 and 8.3% for the nine months, while natural gas revenue decreased 14.4% and 21.5%, respectively.
- Q3 revenue growth reflected higher electricity consumption, a larger customer base and higher average electricity rates. Nine-month GRE revenue declined 1.4% because lower natural gas revenue more than offset electricity growth.
- Q3 selling, general and administrative expense increased $5.5 million, primarily from customer acquisition costs and commissions. The quarter also benefited from a $1.7 million reversal of previously accrued class-action legal expense.
- Derivative losses recorded in cost of revenues were $5.4 million in Q3 and $16.2 million for the nine months, compared with gains of $1.5 million and $1.9 million in the respective 2018 periods.
- The effective tax rate increased to 28.9% in Q3 and 57.0% for the nine months, versus 10.6% and 16.1%, respectively, primarily because a U.S. valuation allowance had been released in late 2018.
- GRE ended the quarter with approximately 388,000 meters, up 23.1% from December 31, 2018. Average monthly churn declined to 5.3% in Q3 and 5.0% for the nine months.
Cash flow, debt and liquidity
- Cash, cash equivalents and restricted cash totaled $45.3 million at September 30, 2019, including $38.8 million of unrestricted cash. Working capital was $46.6 million.
- Operating cash flow was $15.9 million, investing cash flow was negative $3.0 million and financing cash flow was negative $11.8 million for the nine months.
- Financing cash uses included $7.2 million of dividends, $3.4 million of Class B share repurchases and $2.3 million of Lumo debt repayment.
- Total liabilities were $62.4 million, including $2.5 million outstanding under a $20 million revolving facility and $0.9 million of current notes payable. The revolving facility matures April 3, 2020 and bears interest at LIBOR plus 4.5%.
- A $5 million JPMorgan credit line, supported by approximately $5.2 million of restricted cash, had no borrowings at September 30, 2019 and expires December 31, 2019.
- Management stated that operating cash flow and unrestricted cash were expected to fund anticipated requirements through at least November 12, 2020. Capital expenditures for 2019 were expected to be $0.5 million to $1.0 million.
Material changes, outlook and risks
- Lumo contributed approximately $2.6 million of Q3 revenue and $10.3 million of nine-month revenue. Prism contributed approximately $0.5 million and $8.5 million, respectively. The filing does not provide separately identifiable net income or loss for either acquisition.
- GRE International reported a $1.6 million operating loss in Q3 and a $4.9 million loss for the nine months, reflecting expansion costs and the newly acquired international businesses. GES reported operating losses of $0.8 million and $1.7 million, respectively, partly due to Prism.
- Management expects continued volatility from electricity and natural gas prices. Hedging instruments reduced exposure but generated significant losses in 2019; changes in derivative fair value are recorded directly in cost of revenues.
- Purchase commitments totaled $137.7 million at quarter-end, including $103.3 million for electricity, and renewable energy credit commitments totaled $34.5 million. Performance bonds totaled $12.4 million.
- The BP preferred supplier agreement runs through November 30, 2021. At quarter-end, $40.1 million of trade receivables and $0.8 million of restricted cash were pledged against $13.9 million owed to BP. The company reported compliance with applicable covenants.
- Significant regulatory exposure remains in New York, where a Public Service Commission order could materially affect REP operations and where New York represented 17.6% of GRE residential customer equivalents and $47.6 million of nine-month revenue.
- Pending matters include a TCPA class action, an Aspirity bankruptcy-related complaint seeking approximately $16 million plus interest, and regulatory investigations involving Town Square in Connecticut. Management stated that losses were not probable or estimable for the disclosed pending matters as of September 30, 2019.
- Afek’s oil and gas exploration activities remain suspended, although final testing of an existing well was expected within the following two quarters.
- Disclosure controls were not effective at September 30, 2019 because of a previously disclosed material weakness in internal control over financial reporting. Management expected remediation in the fourth quarter of 2019.
Most important facts to verify
- Whether the material internal-control weakness was remediated and independently tested after September 30, 2019.
- The renewal or refinancing of the $2.5 million revolving facility maturing in April 2020 and the JPMorgan credit line expiring in December 2019.
- Actual customer retention, acquisition costs, commodity margins and derivative results, given the sharp nine-month decline in operating income.
- Regulatory developments in New York and Connecticut and the potential effect on customer pricing, enrollment and service operations.
- Resolution and potential exposure from the Aspirity litigation and the TCPA class action.
- The profitability and cash requirements of Lumo, Prism, Shoreditch, Genie Japan and other expansion businesses.
- The sustainability of dividends and share repurchases relative to operating cash flow and the company’s substantial purchase commitments.