Genie Energy Ltd. 2018 Q1 Form 10-Q Summary
Business Context and Reporting Period
Genie Energy reported unaudited consolidated results for the three months ended March 31, 2018, compared with the same period in 2017. The company primarily operates retail electricity and natural-gas providers through Genie Retail Energy, with additional oil-and-gas exploration and drilling activities. Results are seasonal, particularly for natural gas, and first-quarter results are not necessarily indicative of full-year performance.
Financial Performance and Liquidity
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $89.3 million | $71.4 million | 25.0% |
| Electricity revenue | $65.3 million | $53.0 million | 23.4% |
| Natural-gas revenue | $23.4 million | $17.9 million | 30.6% |
| Gross profit | $24.5 million | $24.8 million | (1.6%) |
| Gross margin | 27.4% | 34.8% | (7.4 percentage points) |
| Income from operations | $6.6 million | $5.2 million | 27.5% |
| Net income | $5.9 million | $4.1 million | 41.6% |
| Net income attributable to Genie | $6.2 million | $4.6 million | 34.3% |
| Net income attributable to common stockholders | $5.8 million | $4.2 million | 37.3% |
| Diluted EPS | $0.24 | $0.18 | 33.3% |
| Operating cash flow | $8.6 million | $3.6 million | 140.4% |
Revenue growth was driven by higher electricity and natural-gas consumption, higher customer rates, the August 2017 Mirabito acquisition, and $1.7 million of reversals related to the estimated class-action settlement revenue reduction. Cost of revenues increased 39.2%, primarily because of higher commodity costs and consumption. Electricity and natural-gas gross margins declined as customer rate increases did not fully offset higher unit costs.
Selling, general and administrative expense declined to $17.1 million from $18.8 million, primarily due to lower customer-acquisition costs. Stock-based compensation was $1.3 million, compared with $1.2 million in the prior-year quarter. The consolidated operating margin was approximately 7.4%, compared with 7.3% in Q1 2017; the net margin attributable to common stockholders was approximately 6.5%.
Cash, cash equivalents and restricted cash totaled $38.1 million at March 31, 2018, including $36.7 million of unrestricted cash. Working capital was $40.3 million. Operating cash flow was $8.6 million; investing activities used $0.2 million and financing activities used $2.2 million, mainly for dividends. The company stated that operating cash flow and unrestricted cash were expected to satisfy anticipated requirements for at least the next twelve months.
Total debt consisted primarily of $2.5 million outstanding under a $20 million revolving credit facility, bearing interest at LIBOR plus 4.5% and maturing April 3, 2020. The company was in compliance with the facility’s covenants.
Material Changes Versus the Prior Comparable Period
- Revenue increased $17.9 million, while gross profit decreased $0.4 million because commodity costs grew faster than customer rates.
- Electricity consumption increased 12.2% and natural-gas consumption increased 22.9%; average customer rates increased 9.9% and 6.2%, respectively.
- Average meters served declined, and total meters at quarter-end fell to 373,000 from 418,000 a year earlier. Average monthly churn increased to 7.6% from 6.1%, primarily due to New York customer transfers.
- New York’s low-income assistance order required the transfer of approximately 18,700 meters, or 10,600 residential customer equivalents, to incumbent utilities during the quarter.
- Shoreditch Energy, the company’s United Kingdom joint venture, generated a $0.5 million equity-method loss for Genie. Genie’s investment was $3.1 million, with potential additional contributions of up to $3.1 million contingent on milestones.
- Afek exploration expense declined to $0.2 million from $0.9 million. Afek had no revenue and was pursuing renewal of an exploratory license after additional analysis indicated possible hydrocarbons in a previously drilled well.
- The company adopted ASC 606 on January 1, 2018; management reported no impact on consolidated revenue recognition or measurement.
Outlook, Risks, Contingencies, and Unusual Items
- The New York Public Service Commission was evaluating the retail energy market. A future order could substantially affect the company’s New York operations, which represented 33% of GRE meters and 25% of residential customer equivalents at March 31, 2018.
- Class-action settlements involving New York, Pennsylvania, and New Jersey customers were awaiting final court approval. The estimated total payment was reduced from $9.0 million to approximately $7.6 million; settlement payments were expected during the third quarter of 2018.
- The company had $37.0 million of electricity and other purchase commitments, $27.4 million of renewable-energy-credit commitments, and $12.4 million of outstanding performance bonds.
- At March 31, 2018, $31.0 million of receivables and $0.3 million of restricted cash were pledged to BP against $8.5 million of trade payables. The BP agreement required a $2.5 million monthly advance payment and could be terminated by either party on November 30, 2018, subject to notice.
- Commodity prices remain volatile. The company uses options and swaps to manage electricity and natural-gas price exposure, but does not apply hedge accounting; changes in fair value flow through cost of revenues.
- The company planned capital expenditures of approximately $1 million to $2 million for the twelve months ending March 31, 2019.
- The board and stockholders approved a proposed $5.0 million sale of Class B shares and warrants to Howard S. Jonas or affiliates, with an additional potential transaction for a third-party investor. The closing was expected as soon as practicable after the filing date.
- Management reported effective disclosure controls and no material changes in internal control over financial reporting. The filing reported no material changes to previously disclosed risk factors.
Investor Verification Checklist
- Verify the final court approval and ultimate cash cost of the class-action settlement.
- Monitor New York PSC proceedings, customer-meter transfers, churn, and any effect on revenue and customer retention.
- Assess whether commodity-cost inflation continues to compress electricity and natural-gas gross margins.
- Review the timing and conditions of potential Shoreditch funding and its operating losses.
- Confirm the closing, dilution, and related-party terms of the proposed Class B share and warrant issuance.
- Reconcile purchase commitments, renewable-energy-credit obligations, performance bonds, BP collateral requirements, and the $2.5 million revolving-credit balance with available liquidity.
- Consider seasonality when extrapolating first-quarter revenue, profit, and cash flow to the full year.