Genie Energy's (GNE) CEO Michael Stein on Q4 2017 Results - Earnings Call Transcript

Genie Energy Ltd. (NYSE:GNE) Q4 2017 Earnings Conference Call March 8, 2017 8:30 AM ET

Executives

Michael Stein - Chief Executive Officer

Geoffrey Rochwarger - Vice Chairman and Chief Executive Officer of Genie Oil E&P

Avi Goldin - Chief Financial Officer

Analysts

Aaron Shafter - Great Mountain Capital Management

Operator

Good morning and welcome to Genie Energy's Fourth Quarter and Full-Year 2017 Earnings Call. All participants will be in a listen-only mode. [Operator Instructions] After today's presentation by Genie Energy's management, there will be an opportunity to ask questions. [Operator Instructions] In its presentation, Genie Energy's management team will discuss financial and operational results for the 3 and 12-month period ended December 31, 2017.

Any forward-looking statements made during this conference call, either in the prepared remarks or in the Q&A session, whether general or specific in nature are subject to risks and uncertainties that may cause actual results to differ materially from those which the Company anticipates.

These risks and uncertainties include, but are not limited to, specific risks and uncertainties discussed in the reports that Genie Energy files periodically with the SEC. Genie Energy assumes no obligation, either to update any forward-looking statements that they have made or may make or to update the factors that may cause actual results to differ materially from those that they forecast.

During their remarks, management may make reference to adjusted EBITDA, which is a non-GAAP measure. Generally, a non-GAAP financial measure is a numerical measure of a Company's performance, financial position or cash flows that either excludes or includes amounts that are not normally excluded or included in the most directly comparable measure calculated and presented in accordance with GAAP.

Management believes that Genie Energy's adjusted EBITDA provides useful information to both management and investors by excluding certain expenses that may not be indicative of Genie Energy's or the relevant segment's core operating results. Adjusted EBITDA should be considered in addition to, not as a substitute for, or superior to, gross profit, income or loss from operations, cash flow from operating activities, net income or loss, basic and diluted earnings or loss per share or other measures of liquidity and financial performance prepared in accordance with GAAP.

The Genie Energy earnings release including a reconciliation of adjusted EBITDA to net income is available on the Investor Relations page of the Genie Corporation website, www.genie.com. The earnings release has also been filed on a Form 8-K with the SEC. Please note that this event is being recorded.

I'd now turn the conference over to Michael Stein, Genie's Energy's Chief Executive Officer. Please go ahead, Mr. Stein.

Michael Stein

Thank you, operator. Welcome to Genie Energy's fourth quarter and full-year 2017 earnings call. Geoff Rochwarger, who runs our businesses in Israel, and Avi Goldin, our Chief Financial Officer have joined me for today's call. This morning we review our operational and financial results for the 3 and 12-month periods ended December 31, 2017. I'll lead off with an update on our strategic and operational progress, Geoff will discuss our operations in Israel, and then Avi will discuss the quarter's financial results. At the conclusion of Avi's remarks we will take your questions.

Now let's get started. The fourth quarter was an important one as we suspended our oil and gas exploration program and shifted our strategic focus to concentrate primarily on the retail energy provider business. Going forward our financial results will become more directly comparable to other public companies in the retail energy provider space as we curtail our oil and gas exploration.

We will put the anticipated cash savings to work for our shareholders both to support our dividend and to pursue our multi-pronged retail growth strategy, expanding organically within our existing markets, pursuing potential acquisitions that meet our investment criteria and evaluating additional geographic expansion opportunities including new international markets.

Genie Retail Energy had a strong quarter highlighted by high levels of commodity consumption, robust electricity margins, and relatively moderate levels of spending on customer acquisition all of which boosted our bottom line performance. In fact, Genie Retail's fourth quarter adjusted EBITDA contribution was the highest in our history. At year-end our meter counts stood at 412,000, and our RCE counts stood at 301,000 sequentially both meters and RCEs decreased by roughly 7.5% during the fourth quarter.

Gross customer acquisition decreased to 62,000 in the fourth quarter from 111,000 in the third quarter partially as a result of our decision to cut back marketing and certain higher risk lower margin territories. Year-over-year while the meter count was essentially unchanged, RCEs increased a solid 6% as we shifted to higher consumption meters in part due to the acquisition in the third quarter of Mirabito natural gas, a commercial gas supplier with much higher levels of average per meter consumption than our residential base.

Customer churn in the fourth quarter was 6.9% the same is in the third quarter and a slight increase from 6.7% in the year-ago quarter. The year-over-year increase was driven by our high rates of customer acquisition in the second and third quarters as newly acquired meters tend to have relatively higher churn rates. For the past two years we have sought to expand Genie Retail to new markets both to accelerate growth of our customer base and to reduce operational and regulatory risk associated with heavy geographical concentration.

2017 was an especially successful year in regard to diversification and risk mitigation as we grew our geographic footprint and expanded our customer base to additional territories. We expect more success in this regard in 2018 and in fact we entered a new state earlier in this quarter. Diversegy our energy advisory and services business continues to make huge strides.

Net revenues from its core brokerage business grew by over 30% in 2017. Adding to the momentum, we have integrated other Genie commercial services, including solar and LED installation into Diversegy's portfolio offerings. With these changes, we expect that our energy advisory and service business will become a larger part of Genie Retail Energy story in 2018.

Turning now to overseas expansion. Our joint venture in the UK operating its Orbit Energy began acquiring customers during the fourth quarter under mandatory three-month controlled market entry framework. The framework allows new entrants to acquire a very limited number of customers in a test environment. We will complete the trial period later this month and we plan to immediately roll out our customer acquisition engine.

To wrap up, in the fourth quarter we began an important strategic shift that will make us more directly comparable to other retail energy providers. Genie Retail delivered a remarkably strong financial performance driven by higher consumption, strong gross margins, and moderate customer acquisition expense. We continue to diversify our customer base to mitigate operational and regulatory risks and to pursue our growth strategies. In all the fourth quarter marked a strong finish to a good year for Genie Energy and we are well positioned for a great 2018.

Now here is Geoff Rochwarger to discuss our operations in Israel.

Geoffrey Rochwarger

Thank you, Michael. In my remarks today, I will provide you with an overview of Afek's oil exploration program. Afek began drilling the sixth well of our oil and gas exploratory program in Northern Israel in April last year. Ness 10 is the first well in the Northern portion of our licensed area. It was intended to determine whether the source rock that contained insufficiently matured hydrocarbons in the Southern portion of our license, were also present in the North. And whether the expected increase in the depth of the source rock in the Northern portion of the licensed area correlated with fully matured hydrocarbons.

Afek finished drilling Ness 10 last falls and as we announced, our preliminary analysis of the results does not support the thesis that commercial quantities of light oil are present in the wells target zone. Accordingly, we suspended the exploratory drilling program and as Avi will discuss in his remarks, we made the decision to write up the capitalized drilling asset associated with the well. At this time, we have no plans for additional exploration activity.

Afek is engaged external petroleum consultants to review the findings of our geological team and to determine whether there is sufficient geological basis for an additional well to be drilled within the licensed territory. If based on its analysis, Afek concludes that additional drilling is justified. Our intention is to finance it primarily with third-party capital.

Additionally, any new drilling would also be contingent upon a renewed exploration license, the current license expires in April and additional local permitting. In the meantime, Afek is reclaiming the Ness 10 site. That concludes my update on our operations in Israel. With Afek's drilling program suspended, we will provide future updates on Afek's only when we have material news.

Now I will turn the call over to Avi Goldin for a review of Genie's financial results.

Avi Goldin

Thank you, Geoff, and thanks to everyone on the call for joining us this morning. My remarks cover our financial results for the fourth quarter and full-year 2017, the three and 12-month periods ended December 31. Except or indicated otherwise all fourth quarter results are compared to the fourth quarter 2016 and full-year 2017 results compares the full-year 2016. Consistent with my approach in prior quarters, I will focus on year-over-year rather than sequential comparisons to remove from consideration the seasonal fluctuations that are characteristic of our retail energy business.

As Michael mentioned, this quarter was highlighted by strong financial results from Genie Retail Energy, which were partially offset by exploration expenses incurred by Afek subsidiary and a $6.5 million write-off of Afek's capitalized exploration costs related to the drilling results in Ness 10. On a consolidated basis, the Company generated $8.9 million in adjusted EBITDA and is able to increase working capital.

In the fourth quarter and throughout 2017, Genie Retail Energy generated all of Genie Energy's revenue, direct cost of revenues and gross profit. Genie Retail's fourth quarter revenue increased to $73.1 million from $51.5 million, while full-year revenue increased to $264.2 million compared to $212.1 million in the year ago period. The full-year revenue totals include offsets totaling $5.2 million resulting from legal and regulatory accruals. The balance of the accruals which totaled $10.5 million recorded as increases to Genie Retail's SG&A expense.

Electricity sales in the fourth quarter increased to $58.5 million from $41 million led by the combination of an increasing kilowatt hours sold and an increasing the average revenue per kilowatt hours sold. Full-year electric sales increased to $222.2 million from $179.5 million, kilowatt hours sold increased by 21.5%, or revenue per kilowatt hour sold increased to modest 1.9%.

Sales of natural gas totaled $14.1 million for the quarter, compared to $10.1 million reflecting a 21.3% increase in revenue per therm sold and a 14.5% increase in therms sold. Full-year natural gas sales increased to $40.1 million from $31 million, primarily as a result of rising natural gas prices, which drove a 29.2% increase in revenue per therm sold.

Genie Retail recorded gross margin percentage of 36.6% in the fourth quarter compared to 28.3%. Margins increases we're seeing for both electricity and natural gas as we experience an improving margin environment.

Gross margin increases coupled with higher volumes help boost gross profit in the fourth quarter, which climbed to $26.8 million from $14.6 million. Gross profit on electric sales increased to $21.6 million from $11.1 million and gross profit on gas sales increased to $4.8 million from $3.2 million.

For the full-year 2017, gross property increased to $85.5 million from $76.9 million primarily had strength of electricity sales, which generated gross profit of $72.5 million compared to $66.5 million a year-ago quarter. Gross profit on gas sales increased to $11.9 million from $9.5 million.

Consolidated SG&A expense including bad debt expense in the fourth quarter increased to $17.1 million from $14.7 million primarily a result of the year-over-year increase in gross meter acquisitions that Michael covered in his remarks. Corporate SG&A was $2.5 million that increase $2.3 million a year-ago quarter.

Full-year consolidated SG&A expense increased $80.1 million including $5.6 million for legal and regulatory accruals compared to $61.6 million a year-ago quarter. In addition to the impact of the accruals, the increase is driven by customer acquisition costs.

We acquired 120,000 meters in 2017 than in 2016. An increase in amortization expense reflecting the amortization intangible assets acquired in Town Square and Mirabito Natural Gas and an increase in general expenses.

Exploration expense incurred by Afek operations in Northern Israel, $2.3 million compared to $1.6 million a year-ago quarter. Full-year 2017 exploration expenses $4.9 million compared to $6.1 million. Based on the signing that Ness 10, that Geoff reviewed for you in his remarks, in the fourth quarter, we also wrote-off to $6.5 million balance in capitalized exploration costs.

Consolidated income from operations including the write-off capitalized costs $429,000 in the fourth quarter, compared to a loss from operations at $1.3 million a year-ago quarter. Adjusted EBITDA, which excludes the write-down was $8.9 million compared to $222,000.

Full-year 2017 loss from operations to $6.5 million compared to a loss from operations to $30.5 million in 2016, and we wrote-off $41 million in capitalized exploration costs.

Full-year adjusted EBITDA decreased to $7.3 million from $14.7 million, reflecting the impact of the $10.5 million in legal and regulatory accruals, increased SG&A expense and increased exploration costs at Afek.

Genie Retail Energy contributed adjusted EBITDA $12.8 million in the fourth quarter and $18.8 million for the full-year, had it not been for the legal and regulatory accruals, we would have surpassed for advice that Genie Retail Energy would generate between $20 million to $25 million adjusted EBITDA.

For 2018 we expect to again invest significantly in organic growth in the U.S., Great Britain and potentially in other overseas locations. At this time, we remain comfortable with our current guidance range for Genie Retail of $20 million to $25 million in adjusted EBITDA for 2018.

Our consolidated results include corporate overhead which totaled $2.5 million in the fourth quarter, including $1.1 million in stock-based compensation compared to $2.3 million including stock-based compensation at $1.2 million in the fourth quarter of 2016.

Full-year corporate G&A expense was $9.8 million, compared to $9.2 million in 2016. Stock-based compensation comprised $4.4 million of both years corporate SG&A expense.

Net loss attributable to Genie common stockholders after non-controlling interest and preferred stock dividends for the fourth quarter was a $156,000 or $0.01 per basic and diluted share, compared to a net loss of $1.2 million or $0.05 per basic and diluted share in the year-ago quarter.

Full-year net loss is to $8.5 million or $0.36 per share, compared to $26 million or $1.14 per share in 2016. Our balance sheet remains strong, reported $31.9 million of cash, cash equivalents, and restricted cash at December 31, $35.4 million in net working capital and long-term debt of just $2.5 million. Based on our financial and operating results this quarter, Genie's Board of Directors again declared a quarterly dividend on our common stock of $0.075 per share.

That concludes my remarks on the fourth quarter and full-year financial results. Now Michael, Geoff and I will be glad to take your questions on our operational or financial results.

I'll now turn the call back to the operator for the Q&A.

Question-and-Answer Session

Operator

We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Aaron Shafter of Great Mountain Capital. Please go ahead.

Aaron Shafter

Hi, congratulations on a solid quarter here. I have one question related to Genie Oil and Gas and the other related - that sort of related to what about your general accountings? I guess to go on the second question first. Do you have - have you calculated certain results for what earnings per share would have been if you had not had these one-time charges?

Avi Goldin

This is Avi. So specifically on the - your question is specifically related to the write-off of the capitalized drilling expenses?

Aaron Shafter

Yes.

Avi Goldin

Right. So we haven't particularly broken that out, but the write-off in the quarter was $6.5 million.

Aaron Shafter

Okay. And then for Geoff. Besides Afek you had lease in Mongolia about possible using of the in-situ heating that you wanted to use in the Shfela Basin. Is there going to be anything done with - are those assets that can be sold or are they going to - do you ever contemplate trying to exploit those?

Geoffrey Rochwarger

Hi. So general answer to your question is, the answer is no, most probably not. We do look from time to time to see if there's something that can be done to monetize it to some degree, but I don't realistically expect any positive results.

Aaron Shafter

Okay. And when do you expect results from the outside analysis for the last well in [indiscernible]?

Geoffrey Rochwarger

We've already received some of the initial comments, I would expect within the very short timeframe probably within the next quarter. We should have a more definitive answer and that will determine. Our default position as I said in my comments is no further operations other than the reclamation of the sites fulfilling any other regulatory requirements we have under the current license, but beyond that really unless we see something significantly positive that with the remaining analysis, I don't foresee future Afek operations.

Aaron Shafter

Okay. Thank you.

Operator

[Operator Instructions] This concludes our question-and-answer and conference call. Thank you for attending today's presentation. You may now disconnect.