Genie Energy Ltd.

Good morning and welcome to Genie Energy's third quarter 2022 earnings call. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by a zero. After today's presentation by Genie Energy's management, there will be an opportunity to ask questions. Please note this event is being recorded. I will now turn the call over to Brian Siegel of Hayden IR.

Thank you, Operator. With me today are Michael Stein, Genie Energy CEO, and Avi Golden, Genie Energy CFO, who will discuss operational financial results for the three-month period ended September 30, 2022. Any forward-looking statements made during this conference call, 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, The specific risks and uncertainties discussed in the reports that we file periodically with the SEC. Gini assumes no obligation to either update any forward-looking statements that we 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, a non-GAAP measure. Management believes that its measure of adjusted EBITDA provides useful information to both management and investors that supplement our core operating results. Our earnings release, which is posted on the IR page, includes a reconciliation of consolidated adjusted EBITDA to its nearest comparable gap measures, consolidated net income and income from operations for all periods presented. In addition, adjusted EBITDA for applicable segments are reconciled in the earnings release to their respective segments' income from operations for all periods presented. Finally, please note that Genie Retail Energy International's results were accounted for under discontinued operations during the third quarter, and our historical results reported today and discussed on this call reflect this move. I will now turn the call over to Michael Stein, Genie Energy's Chief Executive Officer.

Thank you, Brian. Welcome to Genie Energy's third quarter 2022 earnings call. We achieved record third quarter margins in profits this quarter as energy prices remained high with increased volatility. We were well positioned from a risk management perspective, and in combination with our reduced customer acquisition efforts at GRE, we were able to generate significant year-over-year increases in gross profit, adjusted EBITDA, net income, and cash flow from operations. Looking at our segments, Genie Retail Energy, or GRE, generated a record Q3 gross profit of $43 million and adjusted EBITDA of nearly $28 million. Over the course of the third quarter, we executed our plan to suspend operations and are no longer servicing customers in the Scandinavian market. As a result, GREI's results are now reflected in discontinued operations in our financial statements. Gini Renewables, or GRU as we have taken to calling it, had an exciting quarter. First, we signed several new contracts to build solar arrays for commercial customers, which significantly grew our backlog of existing business. Separately, we also made significant progress in our vertically integrated strategy, where we will build or acquire solar farms ourselves or through sunlight energy investments. In the third quarter, GRU secured the site rights on which to potentially build 64 megawatts of solar generation in New York and Pennsylvania. We expect the first project to receive full approvals necessary for construction in the fourth quarter. Once construction begins, we expect the solar field to be generating power as soon as the second quarter of 2023. This project, a community solar farm which will be wholly owned and operated by GRU, will leverage our vertically integrated business model and strong balance sheet. We will keep you apprised of our progress on this project, as well as the significant milestones achieved with our other projects as they advance through the permitting process. Also this quarter, we redeemed $1 million in par value of preferred stock, while paying our regular 7.5 cent quarterly common dividends. and the base dividend on the outstanding preferred stock for a total of approximately $3.25 million in capital returns to stockholders during the quarter. After the quarter, we announced that we would redeem an additional $8.3 million in stated value of our preferred stock on November 15th, leveraging our strong balance sheet to increase future cash flows available to common stockholders. After the November 15th redemption, there will be a further $8.4 million worth of preferred stock outstanding. We intend to continue redeeming at least $1 million of preferred stock on a quarterly basis in the coming quarters. Now I'll provide a quick overview of our business and strategy. GRE operates retail energy providers, or REPs, that service a portfolio of retail customers in 18 of 28 deregulated states and Washington, D.C. We actively manage our reps and customer bases both geographically and within geographies. In response to evolving market conditions, we will invest in customer acquisition and growth during some periods while reducing our growth investment or obligations to customers during other periods to drive higher margins, as we have done this year. Underlying our strategy is our risk mitigation team, which, among other things, hedges our forward obligations to preserve margins during times of price volatility. In terms of customer acquisition, our programs seek to increase market share in existing territories, expand into new areas, and offer additional product and services to our customer base. In light of current energy market conditions, we expect to generally continue our strategy of margin preservation over the near term. However, despite the current volatility, we are seeing opportunities within certain areas to potentially be more aggressive in customer acquisitions. Our genie renewable segment seeks to generate outsized returns from multiple high growth potential opportunities related to solar energy generation. Our businesses currently provide services to third party solar farm owners and operators ranging from a full suite of solar procurement and installation services to customer acquisition building and management services. As we move forward with our own project, the strength of our vertical integration strategy will become more evident as we also provide these services to GENIE or Sunlight Energy owned and operated farms. On that note, GENIE took several steps forward during and since the third quarter in furtherance of this strategy. We acquired the site rights to 64 megawatts of potential solar generation and we expect to break ground on one of these projects during the next two quarters. As we work to advance the remainder of these projects through the permitting process, we continue to hunt for additional opportunities to own and or operate with Jeanne's balance sheet or with Sunlight Energy's investments to evaluate additional opportunities. We currently have over 50 megawatts of projects either under exclusive due diligence or in active negotiations with well over one gigawatt of projects in our evaluation pipeline. These projects are in various stages and range from early site rights to more mature cash flow producing assets. Looking to the fourth quarter, at GRE, we currently expect adjusted EBITDA to remain strong and to exceed historical seasonal averages. In addition, we expect that Gini Renewables will contribute strong revenue in the remainder of the year, and we look forward to updating you on the progress of our solar business as more information becomes available. In summary, we had record bottom line results for the first three quarters, and we expect to continue to generate another strong year-over-year increase in consolidated adjusted EBITDA in the fourth quarter. We have also taken several steps forward in our efforts to generate long-term growth in our emerging renewables businesses. And finally, we continue to fulfill our commitment to return capital to stockholders. Now, I'll turn over the call to Avi for his discussion of our Q3 financial results.

Thank you, Michael, and thanks to everyone on the call for joining us this morning. My remarks today cover our financial results for the three months ended September 30, 2022. Throughout my remarks, I will compare the third quarter of 2022 to the third quarter of 2021. Focusing on the year-over-year rather than sequential comparisons removes seasonal factors characteristic of our retail energy business. The third quarter is typically characterized by the highest levels of per-meter electricity consumption associated with the peak cooling season and the lowest levels of per meter gas consumption, which is highly dependent on heating usage. Our financial results this quarter reflect the exit from our Scandinavian RET businesses during the quarter. Results for these businesses are reported at discontinued operations for this and all prior periods. Discontinued results for the year-ago quarter also include results from our operations in the UK, which were discontinued in the third quarter of 2021. Gini posted an exceptionally strong third quarter, building on the positive momentum from the first half of the year. Our results continue to be positively impacted by our decision in late 2021 to optimize the value of our forward hedge book by reducing customer load in response to volatility in wholesale electricity prices in the United States. As a result, our consolidated results include record levels of third quarter gross profit, adjusted EBITDA, and net income. As Michael noted, we also continue to return capital to our shareholders through dividends and redemptions of our preferred stocks. Turning now to our third quarter P&L. Consolidated revenue decreased 7.3% to $81.3 million. At GRE, sales fell 7.4% to $79.9 million, primarily reflecting reduction in electricity sales from our lower electric meter count, substantially offset by a combination of higher electricity rates and increased gas sales. As I noted last quarter, gas prices have risen substantially over the past year. In addition, we're selling more gas after entering new gas-only markets during the year. In these markets, we've targeted relatively high average consumption gas meters, thus increasing average gas consumption per meter and putting us in stronger position for the higher gas consumption quarters coming up. Revenue at Genium Renewables increased 2.2% to $1.4 million. Consolidated gross profit increased 24.7% to $43.1 million, and gross margin improved to 53.1%. GRE's gross profit increased 26.6% to $43.2 million, and gross margin increased to 54.1%. The increases largely reflect the optimization of our risk management portfolio prior to the onset of the high energy price environment. Gross loss of Genie Renewables was $86,000 compared to gross profit of 455,000 a year ago. The results were driven by our ongoing investment to develop the solar generation projects that Michael highlighted in his remarks. Consolidated SG&A expense, including corporate overhead, increased 14.3% to 19.6 million, partly reflecting increased project development activities as we grow Genie Renewables. Consolidated income from operations increased 34.8% to 23.5 million, driven by the strong margins at GRE. At GRE, income from operations increased 39.1% to $27.4 million, while at Gini Renewables, the loss from operations increased to $1.5 million from a loss of $204,000 a year earlier, reflecting our initial investments in our promising solar generation projects. Consolidated adjusted EBITDA increased 35.2% to $24.5 million this quarter. Through the first three quarters of the year, we have generated $64.7 million in adjusted EBITDA compared to $20.4 million in the same period of 2021. Net income attributable to Genie Energy increased to $18.8 million compared to a loss of $2.3 million in the third quarter of 2021, and earnings per diluted share in the third quarter jumped to $0.70 from a loss per share of $0.10 in the year-ago quarter. Turning now to our balance sheet. On September 30, cash, restricted cash, and marketable equity securities totaled $87.7 million. This figure does not include an additional $5.5 million held within discontinued operations. Networking capital was $128.5 million. Looking ahead, GENE is positioned for a strong fourth quarter GRE while we continue to invest in building our solar project portfolio at GENE Renewables. Looking ahead to 2023, our balance sheet provides ample flexibility to ramp up customer acquisition efforts at GRE when market conditions warn. At Junior Renewables, we remain very excited about the range and depth of opportunities to develop utility and commercial-scale solar projects in related businesses, and we are working to ensure that they will generate attractive long-term returns for our shareholders. Now, operator, back to you for Q&A.

We will now begin the question-and-answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble our roster. Your first question for today is from Aaron Shafter at Great Mountain Cap. Aaron, your line is live.

All right. Thanks, operator. Guys, congratulations on another very solid quarter. Really like the improvement in the bottom line and what you're doing on gross margins. So you noted in both the release and today that you've bought back a lot of preferred shares. You've basically recently halved the amount of preferred shares. And your plan is, I guess, to redeem, correct me if I'm wrong, another $1 million each quarter. If you do that within less than two years, you'll have no preferred shares left. So am I correct that that's the projected game plan?

Hi, Erin, thanks for the warm wishes. Yes, as of now. You know, the board has only authorized an ongoing. You know, 1Million a quarter that obviously is subject to change at any time. But that is the current plan and yes, if that were to be.

Done, then, you know, would be the preferred to be gone in 2 years. Okay, and I see you didn't notice any buybacks of any of the common shares. If you take this latest quarter and you put it together, your trailing P.E. is really, really low, and the shares look to be a bargain. I'm looking if, and because the amounts, despite the buybacks and the preferred, you've really increased your cash on hand. I'm wondering if we can expect to see any common share buybacks. you can share anything on that.

Uh, again, it's something that we always look at. Uh, we do have authority, uh, up to a decent amount, uh, from, from the board to do so. And as we've always said, we try to be pretty opportunistic with our buybacks, um, you know, by, by as low as possible. So sometimes, you know, maybe we miss some windows here and there. Um, but that's pretty much what I can say about that.

Okay. And, um, The solar field that you've talked about that you're about to start building on that, I'm curious, one, how that will be financed, if you have any projected costs, and when you see it eventually adding to the bottom line.

Yeah, so most likely it will be financed with a combination of equity our equity and a debt. The debt would only have recourse to the project. It wouldn't be parent-level debt. It wouldn't encumber any of our other profitability. It would purely be on the project itself. In terms of when it could start throwing off profitability, Um, I think we're going to get the approvals this quarter. And if we get approval this quarter, it could potentially be fully built, um, you know, college first or second quarter. Uh, and that's when it starts generating revenues as soon as it gets turned on. Um, so that's the general timeline in terms of the size of the project. I think we'll, you know, we'll, we'll probably share that at a later date.

Um, okay. And you mentioned that you've totally exited the Scandinavian market, I guess, up until this point. It had just been Finland because you'd gotten out of Sweden. And what were your thoughts on deciding to exit that market?

Really, we see the two as one operation. Remember, we were operating both entities out of one headquarters. We just felt like where we are today and what's needed to wind down the businesses, it made sense to consider a discontinued operation. That doesn't mean that in six months or nine months, if there's an opportunity for us to start marketing again, that we wouldn't. But since we don't have that in the immediate short-term plans, it was, you know, the accountants and our auditors' position that we should consider it discontinued.

Okay. And finally, getting back to your cash on hand, any chance of seeing a dividend increase?

Again, those are topics of conversation along with buybacks on the common and the preferred that we have periodically. At the last board meeting, we did not increase the dividend. I can't say for sure what's going to happen in future quarters.

Okay. All right. Thanks very much, and congratulations again on another strong quarter.

Thank you.

Your next question for today is coming from Brett Rush at Centennial Management.

Hey, guys. Quick question on the solar business. Are you guys able to say kind of what you expect in terms of profit margins and then just kind of targeted, you know, stabilized cash-on-cash returns for these solar projects?

Yeah, I mean, each solar project is different and has a different return profile, different margins. So I think it's going to be hard to say. And also, to the extent that we use debt to help finance these projects, what the interest rates will be at the time when we're ready to actually take out that loan is going to be very relevant. to determining the exact financials. But typically when we do these calculations and we look at projects that are interesting to us, we try to target projects that have IRRs in the high teens or low 20s. So we'll see if that comes to fruition. You know, each project is a little bit different, but that's what we're targeting.

Gotcha. And so the IRRs that, you know, when you're targeting these high-teens IRRs, is the majority of that IRR coming from current cash, or is there some sort of terminal value that's driving a high percentage of that IRR?

Do you want to take that one?

Yeah, sure. So it's a little bit of a mix. Part of the reason that these projects are so exciting and can really yield those kinds of returns to the equity is because there's a lot of upfront value that comes in through the monetization of the tax incentives and various other programs, depending on the location in which you are, that come in in the form of actual, some are taxed and some are just through cash back through other programs. So it's the ability to find the right capital stack to minimize the amount of equities that's required, get that cash back on the front end, refinance, and then there's some form of a tail in all the projects as well. So I know I'm talking a little bit abstract, but that's the way we're aggressively approaching it and why we're able to target those attractive returns. Got it. Okay. Thanks, guys.

Sure.

Again, if you have a question, please press star, then 1. This concludes our question and answer session and conference call. Thank you for attending today's presentation. You may now disconnect.