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The aggregate market value of the voting and non-voting stock held by non-affiliates of the registrant, based on the closing price on June 30, 2022 (the last business day of the registrant’s most recently completed second fiscal quarter) of the Class B common stock of $9.16 per share, as reported on the New York Stock Exchange, was approximately $
As of March 13, 2023, the registrant had outstanding
DOCUMENTS INCORPORATED BY REFERENCE
The definitive proxy statement relating to the registrant’s Annual Meeting of Stockholders, to be held May 10, 2023, is incorporated by reference into Part III of this Form 10-K to the extent described therein.
Genie Energy Ltd.
Annual Report on Form 10-K
|Item 1. Business.||1|
|Item 1A. Risk Factors.||17|
|Item 1B. Unresolved Staff Comments.||26|
|Item 2. Properties.||26|
|Item 3. Legal Proceedings.||26|
|Item 4. Mine Safety Disclosures.||26|
|Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.||27|
|Item 6. Selected Financial Data.||28|
|Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.||28|
|Item 7A. Quantitative and Qualitative Disclosures about Market Risks.||44|
|Item 8. Financial Statements and Supplementary Data.||44|
|Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.||44|
|Item 9A. Controls and Procedures.||44|
|Item 9B. Other Information.||45|
|Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspection.||45|
|Item 10. Directors, Executive Officers and Corporate Governance.||46|
|Item 11. Executive Compensation.||46|
|Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.||46|
|Item 13. Certain Relationships and Related Transactions, and Director Independence.||46|
|Item 14. Principal Accounting Fees and Services.||46|
|Item 15. Exhibits, Financial Statement Schedules.||47|
|Item 16. Form 10-K Summary||48|
As used in this Annual Report, unless the context otherwise requires, the terms “the Company,” “Genie,” “we,” “us,” and “our” refer to Genie Energy Ltd., a Delaware corporation, and its subsidiaries, collectively.
Genie Energy Ltd. is a global provider of energy services. We manage our business and reports results through two segments.
The Company owns 99.5% of its subsidiary, Genie Energy International Corporation ("GEIC"), which owns 100% of Genie Retail Energy, Inc. and 95.5% of Genie Energy Services, LLC ("GES"). GES holds our interest in the entities comprising the Genie Renewables segment. In March 2021, the Company renamed the GES segment to Genie Renewables. In the third quarter of 2022, the Company ceased to operate a former segment, GRE International ("GREI"). Certain GREI's assets and liabilities and operations were classified as discontinued operations and the segment's remaining assets and liabilities were combined with corporate.
GRE owns and operates REPs, including IDT Energy, Inc. ("IDT Energy"), Residents Energy, LLC ("Residents Energy"), Town Square Energy, LLC and Town Square Energy East, LLC ("collectively, "TSE"), Southern Federal Power ("SFP") and Mirabito Natural Gas, ("Mirabito"). GRE's REP businesses resell electricity and natural gas to residential and small business and small commercial customers. The majority of GRE's REPs' customers are located in the Eastern and Midwestern United States and Texas. Mirabito supplies natural gas to commercial customers in Florida.
Genie Renewables consists of our 100% interest in Genie Solar, an integrated solar energy company, our 92.8% interest in CityCom Solar, a marketer of community solar energy solutions, our 60.0% controlling interest in Prism, a solar solutions company that is engaged in manufacturing of solar panels, solar installation design and solar energy project management and 100% interest in Diversegy, an energy broker for customers.
DISCONTINUED OPERATIONS IN UNITED KINGDOM, FINLAND AND SWEDEN
Previously, the company had a third segment, GREI, which supplied electricity and natural gas to residential and small business customers in certain markets in Europe.
On November 29, 2021, Orbit Energy Limited ("Orbit") was declared insolvent and its customers were transferred to the “supplier of last resort.” Effective December 1, 2021, the administration of Orbit has been transferred to third-party Administrators. The accounts of Orbit were deconsolidated from those of the Company effective December 1, 2021.
As a result of volatility in the energy market in Europe, in the third quarter of 2022, the Company decided to discontinue the operations of Lumo Energia Oyj ("Lumo Finland") and Lumo Energi AB ("Lumo Sweden"). In July 2022, the Company entered into a series of transactions to sell most of the electricity swap instruments held by Lumo Sweden. The Company also entered into a series of transactions to transfer the customers of Lumo Finland and Lumo Sweden to other suppliers. The accounts of Lumo Finland were also deconsolidated from those of the Company in November 2022.
We account for the operations in the United Kingdom, Finland and Sweden as discontinued operations.
Following the discontinuance of operations of Lumo Finland and Lumo Sweden, GRE International ceased to be a separate segment and certain GREI's assets and liabilities and operations were classified as discontinued operations and the segment's remaining assets and liabilities and results of continuing operations of GRE International were combined with corporate.
CORONAVIRUS DISEASE (COVID-19)
Starting in the first quarter of 2020, the world and the United States experienced the unprecedented impacts of the coronavirus disease 2019 (COVID-19) pandemic.
For the years ended December 31, 2022 and 2021, the impacts of COVID-19 were evident in several key aspect of our business operations and the corresponding financial impact has been mixed. Our customers are predominantly residential, so we benefited from the increased demand for electricity in 2021 as many customers are working from and spending more time in their homes, though that impact began to abate in 2022 as more customers returned to work in corporate offices. On the other hand, like other retail energy providers, the Company suspended its face-to-face customer acquisition programs in March 2020 as public health measures were implemented to combat COVID-19, resulting in a decrease in gross meter acquisitions. The reduction in gross meter acquisitions decreased customer acquisition expenses in 2022 and 2021 and limited growth in domestic meters served. Churn in 2021 decreased, as our competitors also suspended their face-face marketing programs. COVID-19 public health restrictions relaxed in some of GRE's domestic markets in 2021, facilitating a partial reactivation of the previously curtailed customer acquisition channels, and in 2022 the impact of public health restrictions on our meter acquisition programs and churn were substantially diminished and as of December 31, 2022 was not a significant factor.
We have two reportable business segments: GRE and Genie Renewables. Our reportable segments are distinguished by types of service, customers and customer geography. Financial information by segment and geographic areas is presented in “Note 18 — Business Segment and Geographic Information” in the Notes to our Consolidated Financial Statements in this Annual Report.
GENERAL BUSINESS INFORMATION
Our main offices are located at 520 Broad Street, Newark, New Jersey 07102. Our telephone number is (973) 438-3500 and our web site is www.genie.com.
We make available free of charge through the investor relations page of our web site (http://genie.com/investors/sec-filings/) our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and all amendments to these reports, and all beneficial ownership reports on Forms 3, 4 and 5 filed by directors, officers and beneficial owners of more than 10% of our equity as soon as reasonably practicable after such material is electronically filed with the Securities and Exchange Commission. We have adopted a Code of Business Conduct and Ethics for all of our employees, including our principal executive officer and principal financial officer. Copies of our Code of Business Conduct and Ethics are available on our web site.
Our web site (https://genie.com), including the various pages thereof (e.g. the investor relations pages and the materials available thereon) and the information contained therein or incorporated therein are not incorporated into this Annual Report on Form 10-K or our other filings with the Securities and Exchange Commission.
KEY EVENTS IN OUR HISTORY
In November 2004, IDT Corporation, or IDT, our former corporate parent, launched a retail energy provider business in New York State under the brand name IDT Energy.
In October 2011, we were spun-off by IDT and became an independent public company with our Class B common stock listed on the New York Stock Exchange.
In November 2016, GRE purchased Retail Energy Holdings, LLC, which operated REPs under the brand name Town Square Energy.
In August 2017, GRE acquired Mirabito Natural Gas, a commercial supplier located in Florida. The acquisition expanded GRE’s serviceable markets into Florida.
In October 2018, Genie acquired a 60.0% interest in Prism, a solar solutions company that is engaged in U.S.-based manufacturing of solar panels, solar installation design and project management.
In July 2019, Genie launched its Souther Federal Power REP and entered the energy supply market in Texas.
In 2022, Genie Solar began to focus on developing utility scale solar projects that it will own and separate. Genie will sell the power generated throughout the life of the assets via community solar programs, power purchase agreements ("PPA") or virtual PPAs.
In July 2022, Genie announced the formation of Sunlight Energy, an investment vehicle to finance ownership of Genie Renewable-originated solar generation projects and projects developed by third parties.
In December 2022, Genie Solar obtained the notice to proceed for its first company-owned project, a 4-megawatt, or MW community solar firm in upstate New York.
After suspending, in March 2021, payment of a regular dividend on our Class A and Class B common stock to rebuild our cash position in light of the losses incurred from the effects of Winter Storm Uri, in February 2022, the Company reinstated the quarterly dividends on our Class A and Class B Common stock.
The aggregate dividends paid in the year ended December 31, 2022 on our Class A and Class B common stock (the "Common Stock") was $7.8 million, as follows:
On March 1, 2022, we paid a quarterly Base Dividend of $0.0750 per share on our Common Stock for the fourth quarter of 2021 to stockholders of record at the close of business on February 22, 2022.
On May 31, 2022, we paid a quarterly Base Dividend of $0.0750 per share on our Common Stock for the first a quarter of 2022 to stockholders of record at the close of business on May 20, 2022.
On August 26, 2022, we paid a quarterly Base Dividend of $0.0750 per share on our Common Stock for the second quarter of 2022 to stockholders of record at the close of business on August 15, 2022.
On November 21, 2022, we paid a quarterly Base Dividend of $0.0750 per share on our Common Stock for the third quarter of 2022 to stockholders of record as of the close of business on November 14, 2022.
On March 1, 2023, we paid a quarterly dividend of $0.075 per share on our Common Stock for the fourth quarter of 2022 to stockholders of record as of the close of business on February 21, 2023.
We pay a quarterly dividend on our preferred stock. The aggregate dividend paid in the year ended December 31, 2022 on our Preferred Stock was $1.4 million, as follows:
On February 15, 2022, we paid a quarterly Base Dividend of $0.1594 per share on our Preferred Stock for the fourth quarter of 2021 to stockholders of record at the close of business on February 7, 2022 of our Preferred Stock.
On May 16, 2022, we paid a quarterly Base Dividend of $0.1594 per share on the Preferred Stock for the first a quarter of 2022 to stockholders of record at the close of business on May 6, 2022 of our Preferred Stock.
On August 15, 2022, we paid a quarterly Base Dividend of $0.1594 per share on the Preferred Stock for the second quarter of 2022 to stockholders of record at the close of business on August 8, 2022 of our Preferred Stock.
On November 15, 2022, we paid a quarterly Base Dividend of $0.1594 per share on the Preferred Stock for the third quarter of 2022 to stockholders of record as of the close of business on November 8, 2022.
On December 31, 2021, the Company accrued Additional Dividends of $0.0848 per share on its Preferred Stock, equal to an aggregate of $0.2 million which was paid with the quarterly Based Dividend on May 16, 2022. The accrual was made in light of the performance of GRE through December 31, 2021.
On December 31, 2022, the Company accrued Additional Dividends of $0.0531 per share on its Preferred Stock, equal to an aggregate of $0.5 million. The accrual was made in light of the performance of GRE through December 31, 2022, which is expected to be paid around May 15, 2023.
On February 15, 2023, we paid a quarterly Base Dividend of $0.1594 per share on the Preferred Stock for the fourth quarter of 2022 to stockholders of record at the close of business on February 7, 2023 in the aggregate amount of $0.2 million.
On February 7, 2022, the Board of Directors of the Company authorized a program to redeem up to $1.0 million per quarter of the Company's Preferred Stock at the liquidation preference of $8.50. per share beginning in the second quarter of 2022. On May 3, 2022, the board of Directors authorized to redeem $2.0 million of Company's Preferred Stock during the second quarter of 2022. As of December 31, 2022, the Company redeemed 1,339,341 Preferred Sotck under this program for an aggregate amount of $11.4 million.
Genie Retail Energy
GRE is comprised of REPs and related businesses. GRE’s REP businesses acquire residential and business electricity and natural gas customers in deregulated markets in the United States. Genie purchases electricity and natural gas on the wholesale markets and resells these commodities to GRE's REPs' customers. The positive difference between the net sales price of electricity and natural gas sold to its customers and the cost of their electricity and natural gas supplies and related costs are the REP businesses’ gross profits.
GRE’s REP businesses operate in certain utility territories within the deregulated retail energy markets of eighteen states in the United States: Connecticut, Delaware, Florida, Georgia, Illinois, Indiana, Maine, Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Rhode Island and Texas, as well as in Washington, D.C. As part of our ongoing business development efforts, we routinely evaluate opportunities in other deregulated jurisdictions to accelerate the growth of our customer base and to reduce operational and regulatory risks associated with geographical concentration.
GRE’s REP businesses operate under several brand names including IDT Energy, Residents Energy, Town Square Energy, Southern Federal Power and Mirabito. GRE's diverse offerings, in both the electricity and natural gas markets included variable rate or fixed rate offerings or both. Throughout many of their markets, GRE's REPs offer green electricity and green natural gas. Green electricity supply is matched with renewable energy certificates, or RECs that reflect the generation of electricity from renewable sources. Green natural gas supply is matched with carbon offsets certificates generated mostly from greenhouse emission reduction projects.
Historically, GRE has expanded its REP businesses through organic growth of its REPs – adding new customers through customer acquisition programs at a rate faster than customers lost through attrition or churn – as well as through acquisitions of other REPs and books of business. New customers are generally acquired through a combination of marketing and sales channels including door-to-door solicitation, telemarketing, online and digital marketing, direct mail, and by competitive bidding for exclusive contracts awarded by certain municipalities, where authorized by state laws. These municipal aggregation contracts award participating residents’ electricity supply to a single supplier at a fixed price that is typically established through a competitive bidding process.
GRE evaluates its customer base both in terms of the numbers of commodity meters served and the number of Residential Customer Equivalents ("RCEs") represented by these meters. An RCE is a unit of measure denoting the typical annual commodity consumption of a single-family residential customer. One RCE represents 1,000 therms of natural gas or 10,000 kWh of electricity.
Customer churn is a significant factor in the REP business. GRE's REPs' monthly churn rates average between four and seven percent per month. Customer churn tends to decrease when commodity prices fall, when weather-driven consumption decreases, when the price to REP customers decreases relative to competitors including the incumbent utility provider, or when the REPs incentivize customer tenure. Customer churn tends to increase when commodity prices rise, when weather driven consumption increases or spikes, or when the price to REP customers increases relative to the prices charged by competitors including incumbent utility providers. Newly acquired customers typically have higher rates of churn than longer-tenured customers.
GRE’s revenue represented approximately 96.3% and 96.5% of our total consolidated revenue in 2022 and 2021, respectively. In 2022, GRE generated revenue of $304.0 million comprised of $241.8 million from sales of electricity and $62.1 million from sales of natural gas, as compared with revenue of $311.8 million in 2021, comprised of $273.0 million from the sales of electricity, $38.8 million from the sales of natural gas and a minimal amount of other revenue. GRE's electricity sales as a percentage of total sales have increased in recent years as our sales channels have acquired more electric customers than gas customers. The change in the electric and natural gas proportions is due to the Company's expansion and growth in electricity only states such as Massachusetts and Texas.
GRE’s REP revenue is seasonal. Approximately 39.7% and 44.5% of our natural gas revenues in 2022 and 2021, respectively, were generated during the first quarter, when the demand for heating in our service areas tends to be highest. Although the demand for electricity is not as seasonal as natural gas, approximately 30.5% and 30.3% of total revenues from electricity sales in 2022 and 2021, respectively, were generated in the third quarter when the demand for cooling in our service areas tends to be highest.
Unusual weather patterns can significantly impact GRE’s financial results. For example, a polar vortex resulted in unusually sustained cold weather in the first quarter of 2014.
Potential global climate change may produce, among other possible conditions, unusual variations in temperature and weather patterns, resulting in unusual weather conditions, more intense, frequent and extreme weather events and other natural disasters. Some climatologists believe that these extreme weather events will become more common and more extreme which will have a greater impact on our operations.
As of December 31, 2022, GRE serviced 275,000 meters (196,000 electric and 79,000 natural gas), compared to 285,000 meters (210,000 electric and 75,000 natural gas) as of December 31, 2021.
REP Industry Overview
REPs operate in deregulated retail energy markets in the US. REPs purchase electricity and natural gas on the wholesale markets and resell these commodities to their customers including homeowners, renters and small to mid-sized commercial and governmental operations and institutions. Generally, incumbent local utilities continue to handle electricity and natural gas distribution, billing, and collections. The utilities remit the proceeds collected for the commodity supply portion of their bills less certain fees to the REPs.
REPs generally have no significant fixed assets and low levels of capital expenditure. Their cost of revenue is incurred to purchase electricity and natural gas in their respective wholesale markets and other factors. Selling, general and administrative expenses are primarily related to customer acquisition, customer retention, billing and purchase of receivables, or POR, fees paid to the utilities, and program management.
As of December 31, 2022, there were thirty U.S. states in which there is some level of energy deregulation. We currently market in all the states where residential deregulation covers both electricity and natural gas, and in some states, where residential deregulation covers only one commodity. We are in the process of applying for licenses or setting up operations in certain such states and are constantly evaluating market opportunities in others.
Some competitors in certain REP markets have engaged in unfair business practices in order to recruit new customers. These practices can create an unfavorable impression about our industry with consumers, regulators or political bodies. Further, such practices can lead to regulatory action that negatively impact us and the industry.
The services of GRE’s REPs - IDT Energy, Residents Energy, TSE, SFP and Mirabito - are made available to customers under several offerings with distinct terms and conditions. The offerings include variable rate programs whose prices change month-to-month, fixed contracts whose unit price remains the same for the agreed upon term and renewable contracts. A significant portion of our customer base is enrolled in variable rate products, which enable us to recover our wholesale costs for electricity and natural gas by adjusting the rates we charge to our customers. The frequency and degree of these rate adjustments are determined by GRE. Variable rate products are available to all customers in all states served by GRE’s REPs except for Connecticut.
As of December 31, 2022, customers on variable rate products constituted approximately 66.2% of our revenue. The balance comprised customers on fixed rate agreements.
GRE’s REPs offer renewable or green energy supply options in all their markets. Renewable electricity supply is 100% matched with renewable energy certificates, or RECs, that reflect the generation of electricity from sources such as hydro-electric wind, solar and biomass.
The electricity and natural gas we sell through all of our offerings are metered and delivered to customers by the local utilities. The utilities also provide billing and collection services for the majority of our customers. For a small number of customers, we perform our own billing and collection.
In many states, GRE’s REPs’ receivables are purchased by the utilities in their territories for a percentage of their face value. Over the course of 2022, the associated cost was approximately 1.1% of GRE's revenue in exchange, the utility accepts a first priority lien against the customer receivable without recourse to the REP. Programs operating within this framework are preferred to as purchase of receivables, or POR, programs, and they mitigate our credit risk. At December 31, 2022, 80.5% of GRE’s net accounts receivable were under a POR program.
Certain utilities in Connecticut, Ohio, New York, Pennsylvania, Illinois, Washington, D.C., Massachusetts and Maryland offer POR programs, without recourse. These programs permit customers with past-due balances to remain in the POR and consolidated bill programs. However, utilities in New Jersey generally do not permit customers with past-due balances beyond 120 days to enroll or remain in their POR programs. After a certain amount of time (determined based on the specific commodity), the REP becomes responsible for the billing and collection of the commodity portion of the future invoices for its delinquent customers. Certain utilities in Delaware, Illinois, New Hampshire, Ohio and Rhode Island do not offer POR, but they do offer consolidated billing. In Florida and Texas, there are no POR programs and the customers are billed directly.
GRE targets markets in which we can procure energy in an efficient and transparent manner. We seek to purchase wholesale energy where there is a real-time market that reflects a fair commodity price for all participants. This allows GRE to reflect a true market cost base and adjust its rates to its variable rate customers taking into account prevailing market rates.
We regularly monitor deregulated or deregulating markets in states where we do not yet operate to determine whether and under what conditions we could operate profitability. We may initiate the licensing process in a selected region to facilitate entry into that region contingent upon favorable deregulatory developments.
Procurement and Management of Gas and Electric Supply
Certain of GRE's REPs are party to an Amended and Restated Preferred Supplier Agreement with BP Energy Company, or BP, through November 30, 2023. Under the agreement, the REPs purchase electricity and natural gas at market rate plus a fee. The obligations to BP are secured by a first security interest in deposits or receivables from utilities in connection with their purchase of the REP’s customer’s receivables, and in any cash deposits or letters of credit posted in connection with any collateral accounts with BP. The ability to purchase electricity and natural gas under this agreement is subject to satisfaction of certain conditions including the maintenance of certain covenants. At December 31, 2022, the Company was in compliance with such covenants.
GRE is required to meet certain minimum green energy supply criteria in many of the markets in which it operates. We meet those thresholds by acquiring renewable energy certificates, or REC’s. In addition, GRE offers green or other renewable energy products to its customers in all of the territories in which we operate. GRE acquires green renewable energy conversion rights or attributes and REC’s to satisfy the load requirements for these customers.
GRE does not own electrical power generation, transmission, or distribution facilities, or natural gas production, pipeline or distribution facilities. For their natural gas supply, GRE’s REPs currently contract with Dominion Transmission, Inc., National Fuel Supply, Williams Gas Pipeline and Texas Eastern Transmission and others for natural gas pipeline, storage and transportation services. For electricity supply, they, utilize the New York Independent System Operator, Inc., or NYISO, and PJM Interconnection, LLC, or PJM, for electric transmission and distribution. NYISO operates the high-voltage electric transmission network in New York State, and administers and monitors New York’s wholesale electricity markets. PJM is a regional transmission organization that coordinates the movement of wholesale electricity in all or parts of thirteen states (including New Jersey, Pennsylvania, Maryland and Illinois) and the District of Columbia. In Texas, SFP acquires power through the Electric Reliability Council of Texas (ERCOT).
For risk management purposes, GRE’s REPs utilize forward physical delivery contracts for a portion of their purchases of electricity and natural gas, which are defined as commodity derivative contracts. In addition, GRE’s REPs enter into put and call options as hedges against unfavorable fluctuations in market prices of electricity and natural gas.
The ISOs perform real-time load balancing for each of the electrical power grids in which GRE REPs operate. Similarly, load balancing is performed by the utilities or local distribution company, or LDC, for each of the natural gas markets in which GRE operates. Load balancing ensures that the amount of electricity and natural gas that GRE’s REPs purchase is equal to the amount necessary to service its customers’ demands at any specific point in time. GRE’s REPs are charged or credited for balancing the electricity and natural gas purchased and sold for their account by their suppliers and the LDCs. GRE’s REPs manage the differences between the actual electricity and natural gas demands of their customers and their bulk or block purchases by buying and selling in the spot market, and through monthly cash settlements and/or adjustments to future deliveries in accordance with the load balancing performed by utilities, LDCs, and/or ISOs.
As an operator of REPs, GRE often competes with the local utility companies in each of the markets in which it provides services and with many other licensed REPs. In some markets, competitor REPs are affiliated with local utilities. GRE also competes with several large vertically integrated energy companies as well as smaller independent operators. Competition with the utilities and REPs impacts GRE’s gross margins, customer acquisition rates and customer churn rates.
REPs and utilities offering fixed rate products or guaranteed pricing often are unable to change their sell rates offered to customers in response to underlying commodity price volatility. In a downward moving commodity cost environment, variable rate REPs typically become more competitive as they benefit from the lag that utilities experience in reducing their sell rate to reflect the lower commodity costs, and they may benefit from decreases in margin pressure, improvements in the customer acquisition environment, and lower rates of churn. In a rising commodity cost environment, REPs that offer variable rate products, and reflect real-time commodity costs, will typically become less competitive with fixed rate providers, experience increased margin pressure, a more challenging customer acquisition environment and higher rates of customer churn.
Increasing our market share depends in part on our ability to persuade more customers to switch from other providers to one of our REPs at a higher rate than our customers churn to other providers. Moreover, local utilities and some REPs may have certain advantages such as name recognition, financial strength and long-standing relationships with customers. Persuading potential customers to switch to GRE requires significant marketing and sales operations.
REPs such as ours must be licensed in each state and utility service territory in which they operate. Each is subject to the rules and regulations governing the operations of REPs in each jurisdiction.
Although the rates charged by GRE’s REPs are not regulated in the same way as the rates of utility companies, the manner in which the REPs market to potential customers, and the relationships between the REPs and their customers, are heavily regulated. GRE’s REPs must also comply with various quarterly and/or annual reporting requirements in order to maintain their eligibility to provide service. In certain jurisdictions the REPs are required to publish product offers with the applicable regulatory commissions, or in the public domain, generally on a website established for such purpose. In addition to the regulations that govern the relationships between GRE’s REPs and their customers, GRE’s REPs also maintain specific Terms & Conditions or Terms of Service for each product in each jurisdiction that the parties agree to be bound by.
From time to time, the Company is party to legal proceedings that arise in the ordinary course of business including those with utility commissions or other government regulatory or law enforcement agencies.
As of December 31, 2022, GRE’s REPs operate in Washington D.C., New York, Pennsylvania, New Jersey, Maryland, Illinois, Indiana, Ohio, Michigan, New Hampshire, Rhode Island, Connecticut, Florida, Massachusetts, Delaware, Maine, Texas and Georgia. The federal government and related public service/utility commissions, among others, establish the rules and regulations for our REP operations.
Like all operators of REPs, GRE is affected by the actions of governmental agencies, mostly on the state level, by the respective state Public Service/Utility Commissions, and other organizations (such as NYISO, ERCOT and PJM) and indirectly by the Federal Energy Regulatory Commission, or FERC. Regulations applicable to electricity and natural gas have undergone substantial changes over the past several years as a result of restructuring initiatives at both the state and federal levels. We may be subject to new laws, orders or regulations or the revision or interpretation of existing laws, orders or regulations.
State of Connecticut Public Utilities Regulatory Authority
Town Square Energy
On September 19, 2018, the State of Connecticut Public Utilities Regulatory Authority (“PURA”) commenced an investigation into Town Square following customer complaints of allegedly misleading and deceptive sales practices on the part of Town Square. The Connecticut Office of Consumer Counsel had joined in investigation, Although Town Square denies any basis for those complaints and any wrongdoing on its part, it cooperated with the investigation and responded to subpoenas for discovery. On June 17, 2020, the PURA notified Town Square that it was advancing its investigation by assigning Prosecutorial staff for the purpose of investigating Town Square’s compliance with licensed electric supplier billing, marketing, and licensing requirements, and, if appropriate, facilitating settlement discussions among the parties that contains, but it not limited to, an appropriate civil penalty extensive retraining of the supplier's third-party agents, and retention of all sales calls with continued auditing.
In July 2021, the parties settled the dispute. Pursuant to the terms of the settlement agreement, Town Square paid $0.4 million. Town Square has also, and has agreed to voluntarily refrain, from in-person marketing activities in Connecticut for the period of 15 months. As of December 31, 2022, Town Square’s Connecticut customer base represented 4.8% of GRE’s total meters served and 5.6% of the total RCEs of GRE’s customer base. For the year ended December 31, 2022 and 2021, Town Square’s gross revenues from sales in Connecticut was $16.6 million and $29.0 million, respectively.
In August 2020, Residents Energy began marketing retail energy services in Connecticut. For the year ended December 31, 2022, Residents Energy's gross revenues from sales in Connecticut were $0.2 million. During the fourth quarter of 2020, the enforcement division of PURA contacted Residents Energy concerning customer complaints received in connection with alleged door-to-door marketing activities in violation of various rules and regulations. On March 12, 2021, the enforcement division filed a motion against Resident Energy with the adjudicating body of PURA, seeking the assessment of $1.5 million in penalties, along with a suspension of license, auditing of marketing practices upon reinstatement and an invitation for settlement discussions.
In June 2021, the parties settled the dispute. Pursuant to the terms of the settlement agreement, Residents Energy paid $0.3 million and volunteered to withdraw from the market in Connecticut for a period of 36 months.
As of March 3, 2023, GRE employed 125 full time employees, 55 of whom are located in the Jamestown, New York office, 41 of whom are located in our New Jersey office, 22 of whom are located in our Arizona office and 7 are located in Texas with SFP.
In March 2021, the Biden Administration announced a framework for the "Build Back Better" agenda. The proposed framework included policies to address climate change across the federal government through the tax code, an energy efficiency and clean energy standard, research and development, among other areas of focus.
In April 2021, President Biden announced that the United States' Nationally Defined Contribution to the international Paris Climate Agreement will be an economy-wide reduction in greenhouse gas emissions ("GHG") emissions of 50-52% by 2030, relative to 2005 levels. In advance of the November 2021 Conference of the Parties 26 meeting in Glasgow, Scotland, the Biden Administration released details on its strategy to achieve those targets as part of the "Build Back Better" agenda.
On August 16, 2022, President Biden signed the Inflation Reduction Act ("IRA"), which aims to reduce U.S. carbon emissions and promote economic development through investments in clean and renewable energy projects. The consumer-facing clean energy tax credits created or expanded by the IRA are intended to drive rapid adoption of energy efficiency, electric transportation, and solar energy which would require the utility industry to expand and modernize infrastructure, systems and services to integrate and optimize these resources.
In addition to climate-related initiatives at the federal level, some states have adopted provisions designed to regulate GHG emissions and renewable and other portfolio standards, which impact the power sector. See discussion below for additional information on renewable and other portfolio standards.
Certain northeast and mid-Atlantic states (Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Vermont, Virginia) currently participate in the Regional Greenhouse Gas Initiative ("RGGI"). The program requires most fossil fuel-fired power plant owners and operators in the region to hold allowances, purchased at auction, for each ton of carbon dioxide emissions. Non-emitting resources do not have to purchase or hold these allowances. Pennsylvania joined RGGI in April 2022.
Broader state programs impact other sectors as well, such as the District of Columbia's Clean Energy DC Omnibus Act and cross-sector GHG reduction plans, which resulted in recent requirements for Pepco to develop 5-year and 30-year decarbonization programs and strategies. Maryland expects to meet and exceed the mandate set in the Greenhouse Gas Emissions Reduction Act to reduce statewide GHG emissions 40% (from 2006 levels) by 2030, and the state’s Climate Solutions Now Act of 2022 further updates requirements with a proposal to reduce emissions 60% (from 2006 levels) by 2031. New Jersey accelerated its goals through Executive Order 274, which establishes an interim goal of 50% reductions below 2006 levels by 2030 and affirms its goal of achieving 80% reductions by 2050 and includes programs to drive greater amounts of electrified transportation. Illinois’ climate bill, Clean Energy Jobs Act, establishes decarbonization requirements for the state to transition to 100% clean energy by 2050 and supports programs to improve energy efficiency, manage energy demand, attract clean energy investment and accelerate job creation.
The Company cannot predict the nature of future regulations or how such regulations might impact future financial statements.
The adoption and implementation of any foreign laws or regulations imposing obligations on, or limiting GHG emissions from, our equipment and operations could adversely affect pricing or demand for our offerings. We may not be able to pass on increases in costs to customers. In addition, changes in regulatory policies that result in a reduction in the demand for hydrocarbon products and carbon-emitting fuel sources that are deemed to contribute to climate change, or restrict the use of such products or fuel sources, may reduce demand for our offerings or impact the energy supply markets.
Genie Renewables is comprised of businesses that market and provide renewable energy solutions. Genie Renewables currently consists of (i) our 95.5% in Genie Solar, (ii) our 92.8% in CityCom Solar, (iii) our controlling interest in Prism, and (iv) Diversegy.
Solar Industry Overview
Genie Solar, CityCom Solar and Prism are all engaged in different business areas within the solar industry.
Solar energy is one of the fastest growing forms of renewable energy with numerous economic and environmental benefits that make it an attractive complement to and/or substitute for traditional forms of energy generation. In recent years, the price of solar power systems, and accordingly the cost of producing electricity from such systems, has dropped to levels that are competitive with or even below the wholesale price of electricity in many markets. Worldwide solar markets continue to develop, aided by the above factors as well as demand elasticity resulting from declining industry average selling prices, both at the module and system level, which make solar power more affordable.
Multiple markets within the United States, exemplify favorable characteristics for a solar market, including (i) sizeable electricity demand, particularly around growing population centers and industrial areas; (ii) strong demand for renewable energy generation; and (iii) abundant solar resources. In those areas and applications in which these factors are more pronounced, our solar energy solutions compete favorably on an economic basis with traditional forms of energy generation.
Federal government support for renewable energy
The U.S. federal government provides an uncapped investment tax credit, or “Federal ITC,” that originally allowed a taxpayer to claim a credit of 30% of qualified expenditures for a residential or commercial solar generation facility. The Tax Act did not make any changes to the existing laws surrounding tax credits for renewable energy. The Federal ITC is currently at 26% for a solar generation facility. A permanent 10% Federal ITC is available for non-residential solar generation facility construction that begins on or after January 1, 2022.
On August 16, 2023, the Inflation Reduction Act (IRA) was passed. The IRA extended the ITC through December 31, 2025, for solar, wind, geothermal, biogas, combined heat and power ("CHP") facilities, and microgrid projects that begin construction before December 31, 2025. The IRA established a Federal ITC level of 30.0 % for all projects that meet Prevailing Wage and Apprenticeship standards as well as additional 10.0% - 20.0% credits for projects that meet certain domestic materials requirements, placement within an energy community or placement within an environmental justice area. The IRA also allows for interconnection costs within qualified ITC costs and extends the Federal ITC for eligible costs associated with standalone energy storage.
Additionally, a number of federal regulations have increased the cost of fossil generation across the country over the last several decades. The Clean Air Act of 1970 originally provided the EPA with authority to regulate emissions, but it was not until the 2000s that EPA restrictions on sulfur dioxide and nitrogen oxides emissions required installation of scrubbers or other emissions control equipment. More recently, EPA’s continued air quality level regulations have driven controls on all types of units along with stringent operational limitations. EPA has also set broader standards for greenhouse gas emissions particularly from new, modified, and reconstructed fossil-fired power plants forcing efficiency improvements and increasing maintenance costs. At the state level, a number of carbon pricing schemes have been implemented, including a cap-and-trade program in California and a carbon tax in the Northeast via the RGGI.
In addition, the Biden Administration continues to propose legislation and both regulatory and executive actions to help accelerate the clean energy transition, including new tax incentives, additional restrictions on methane and other GHG emissions, and other policies intended to combat climate change. For example, in December 2021, President Biden signed an executive order calling for the federal government to achieve net zero emissions by 2050, with a 65% reduction by 2030. The order specifically directs the federal government to use its scale and procurement power to achieve 100% carbon pollution-free electricity by 2030, with at least half coming from locally supplied clean energy, as well as 100% zero-emission vehicle acquisitions by 2035 and a net-zero emissions building portfolio by 2045, all of which may contribute to increased demand for alternative energy technologies, including renewable energy and energy storage. The Administration has also set a goal of economy-wide net zero emissions in the United States by 2050.
State government support for renewable energy
Many states offer a personal and/or corporate investment or production tax credit for renewable energy facilities, which is additive to the Federal ITC. Further, more than half of the states, and many local jurisdictions, have established property tax incentives for renewable energy facilities that include exemptions, exclusions, abatements and credits. Many renewable energy facilities in the U.S. have been financed with a tax equity financing structure, whereby the tax equity investor is a member holding equity in the limited liability company that directly or indirectly owns the solar generation facility or wind power plant and receives the benefits of various tax credits. Additionally, Solar Development often benefit from state incentives that may provide valuable Renewable Energy Certificates, cash refunds and/or guaranteed revenue per unit of electricity produced by utility scale solar projects like Community Solar.
Many states also have adopted procurement requirements for renewable energy production. Thirty states, Washington, D.C., and two territories have active renewable or clean energy requirements, while an additional 3 states and 1 territory have set voluntary renewable energy goals. Renewable portfolio standard ("RPS") legislation has seen two opposing trends in recent years. On one hand, many states with RPS targets are expanding or renewing those goals. Since 2018, 15 states, 2 territories, and Washington, D.C., have passed legislation to increase or expand their renewable or clean energy targets. On the other hand, eleven states and one territory have allowed their RPS targets to expire.
There are 41 states that have a regulatory policy known as net metering. Net metering typically allows our customers to interconnect their on-site solar generation facilities to the utility grid and offset their utility electricity purchases by receiving a bill credit at the utility’s retail rate for energy generated by their solar generation facility in excess of electric load that is exported to the grid. Some states require utilities to provide net metering to their customers until the total generating capacity of net metered systems exceeds a set percentage of the utilities’ aggregate customer peak demand.
Genie Solar is an integrated solar energy company that develops constructs and operates solar energy projects for commercial and industrial ("C&I") customers as well its own portfolio.
Scope of Services and Business Overview
For its clients, Genie Solar identifies, develops, and in some cases operates solar generation sites to provide solar electricity to its customers. The project development scope typically includes sight identification – typically a rooftop or land already owned by the client, design and planning, obtaining relevant state and local permits, procuring panels and other materials, directing contractors during installation, and coordinating with the incumbent utility to interconnect with the existing power grid. Genie Solar offers a variety of solutions to finance project construction. However, most customers choose to finance projects on their own to take advantage of solar incentives offered by federal and local governments.
For its operating portfolio, Genie Solar targets projects with attractive return characteristics that are usually in the 3-15 MW range. Many of our initial development projects are community solar. Community solar refers to local solar facilities shared by multiple community subscribers who receive credit on their electricity bills for their share of the power produced.
Genie’s community solar projects are usually 3-10 MW. The project development path begins with site identification and control and includes design, permitting, construction, and interconnection with the local utility grid. In addition to this scope of work, we are also responsible for enrolling customers within the same utility territory to consume the project’s power production. Through government incentives, the developer is usually able to offer the customers a percentage discount off the cost of their utility bill. Genie typically self-finances community solar projects or supplements its own capital with investments from third parties.
Genie Solar currently has site control and plans to construct – subject to permitting – its first utility-scale (non-community solar) solar project. The Company is pursuing a buyer of the expected 30 MW of electric output through a long-term PPA. The Company expects to have all permitting and approvals necessary for construction toward the end of 2023.
Genie Solar markets projects directly to potential C&I customers, emphasizing its ability to help them achieve sustainability goals, lower their cost of energy and leverage tax and other solar generation incentives from federal, state, and local governments.
We differentiate ourselves by targeting medium-sized to large scale C&I facilities including buildouts if system generating 400 kilowatt or more by offering vertically integrated solution. Our solution uniquely includes in house panel manufacturing and panel procurement through Prism and procurement of additional energy not covered by the solar project through our Diversegy Energy brokerage business. We also offer customer software solution that enables property operators to obtain detailed insights into their electricity consumption patterns and to optimize production to further reduce expenses. Finally, Genie Solar offers third-party project financing and/or can directly provide financing.
While we have the expertise and the wherewithal to build across the US, our C&I sales efforts are focused on the Northeast and the majority of our projects – completed and in our pipeline – are located there.
In the community solar market, Genie operates in states with robust community solar and utility scale solar regulatory frameworks and incentives – currently New York and Pennsylvania.
Genie differentiates its community solar offerings from other developers by offering an end-to-end solution including CityCom’s customer acquisition engine and, in some instances, through Genie Retail’s ability to resell output to meet customer demands for renewably generated electricity.
As of December 31, 2022, Genie Solar and its affiliates had over 65 MWs of solar projects in its development pipeline. Genie expects to expand its pipeline significantly in 2023.
In 2022, Genie Solar accounted for 1.1% and 30.8% of our consolidated revenue and Genie Renewables segment's revenue, respectively.
CityCom — Community Solar
CityCom operates primarily as a project level customer acquisition solution for the rapidly expanding community solar industry, and, through a joint venture partnership, also provides customer billing and management to community solar projects.
According to the U.S. Department of Energy, forty states had at least one community solar project at year end 2021 and twenty two states had enacted community solar incentives or regulations. Three quarters of the output of these projects was generated in four states: Florid, Minnesota, New York and Massachusetts.
CityCom acquires community solar customers - residential, small business and commercial consumers - on behalf of the community solar project’s developers. CityCom employs a variety of sales channels to achieve its sales goals including door-to-door, through third party brokers, and through digital advertising. By leveraging these sales channels and the customer acquisition expertise that Genie Retail developed while acquiring its customer base, CityCom is often able to acquire customers more efficiently than other providers.
CityCom is compensated for its services through a combination of upfront commissions and residual fees. Currently, CityCom is actively acquiring community solar customers on behalf of project owners in Illinois, New Jersey, New York, Maine, Maryland, Massachusetts, and Virginia. Additionally, CityCom expects to expand its geographic footprint in 2023 by pursuing customer acquisition contracts for projects in development in California, Colorado, Delaware, New Mexico, and Ohio. Some of this expansion is dependent on further community solar legislation pending at the state level.
In 2022, CityCom accounted for 1.3% and 35.9% of our consolidated revenue and Genie Renewables segment's revenue, respectively.
Prism Solar Technologies
The Company acquired a 60.0% controlling interest in Prism in October 2018. On April 12, 2019, Prism restructured its ownership. The Company now holds 60.0% interest in Plus EnerG which owns 100% of Prism.
Prism is a solar module manufacturing company with over a decade's experience in manufacturing and application of bifacial solar modules.
Prism bifacial modules are engineered and designed in the U.S. utilizing domestic and overseas manufacturing facilities using high efficiency P-type PERC bifacial cells. This technology results in a reduction in the average cost per kilowatt hour. Elements of the technology that Prism uses are protected U.S. patents.
Unlike traditional solar modules, where photo-voltaic (“PV”) cells can only use the sunlight that strikes the front of the module, Prism’s bifacial modules generate energy on both faces, capturing a substantial amount of light scattered from surrounding surfaces. Bifacial panels solutions are particularly valuable when mounted over highly reflective backgrounds, such as a white roof, snow, sand, or other light-colored surfaces. For that reason, they are frequently utilized on commercial rooftops where they achieve significantly increased energy gain from the commercial white roofs, thereby making the rooftop an integral contributor to the solar system’s generative capacity. Bifacial residential applications include solar awnings, skylights, canopies and sun decks.
Recently Prism has expanded its product line up to include frameless bifacial, framed clear back sheet bifacial and ultra-black solar modules. These offerings enable Prism to offer solutions optimized for additional residential, commercial and industrial applications including parking canopies, electric vehicle car ports, vertically mounted fencing and exterior cladding on buildings.
Prism’s modules are sold directly to business customers – typically for applications requiring a high-quality custom solution. Prism is expanding its customer base by emphasizing the superior performance and aesthetics of its modules supported by unparalleled customer service.
In 2022, Prism accounted for 0.4% and 10.4% of our consolidated revenue and Genie Renewables segment's revenue, respectively.
Diversegy is a commercial energy broker and advisor to industrial, commercial and municipal customers across deregulated energy markets in the U.S. It also offers ancillary energy services in both deregulated and regulated state markets.
Diversegy works with clients to maximize the benefits afforded by energy deregulation through the solicitation and analysis of competing offers from its supplier-partners. This service is typically provided at no cost to our clients.
At the conclusion of the evaluation process, Diversegy clients may enroll in multi-year fixed-rate contracts with Diversegy’s partner-suppliers although in some instances, Diversegy may take a more managed approach with ongoing hedging and purchasing strategies. In either case, its partner-suppliers are fully responsible for risk management, billing, and collection. Diversegy’s partner-suppliers compensate Diversegy for referrals either as an upfront payment or as a residual over the life of the customer’s contract.
Diversegy’s ancillary energy services, including offerings provided by its network of supplier-partners, include LED retrofits, on- and off-site solar generation, and a full suite of utility bill auditing services.
Historically, Diversegy marketed its services through an in-house sales force supplemented by a network of independent third-party brokers and agents.
In 2022, Diversegy accounted for 0.8% and 22.9% of our consolidated revenue and Genie Renewables segment's revenue, respectively.
Diversegy is gradually building out its in-house sales team by adding experienced sales representative and recruiting independent sales agents and brokers with existing books of business.
To attract new clients directly, Diversegy utilizes customer marketing campaigns focused on propriety pricing software.
It recruits affinity groups, associations and organization in specific market verticals for cross-sell opportunities.
Diversegy is well-positions to increase in market share by leveraging its custom energy software, energy market expertise and strong agent customers support.
Customers and Marketing
The services of Genie Renewables are made available to customers via multiple channels and under several offerings. The majority of our customer base consists of medium to large commercial customers who are looking to be more efficient with their energy consumption. Our sales channels and marketing activities include a direct sales force, commission-only referral agents, telemarketing, digital marketing and radio advertising.
Sources of Material and Manufacturing
We have designed our manufacturing processes to produce high quality products that meet our customers’ requirements at competitive costs.
At Genie Solar Energy and Prism, customers have the choice of buying their solar systems either by paying for the system themselves or by financing it with third parties. Genie Renewables is responsible for sales, manufacturing, project management of the installation, and collection of payment from the customers.
In the solar energy space, the market is competitive and continually evolving. In the last year, we faced increased competition, resulting in price reductions in the market and reduced margins, which may continue and could lead to loss of market share.
We also face competition from resellers that have developed related offerings that compete with our product and service offerings, or have entered into strategic relationships with other existing solar power system providers. We compete for limited government funding for research and development contracts, customer tax rebates and other programs that promote the use of solar, and other renewable forms of energy with other renewable energy providers and customers.
At Diversegy, the energy brokerage market is highly competitive with a number of different competition types.
As of March 3, 2023, Genie Renewables employed 22 full time employees, all of whom are located in our New Jersey office.
As indicated by the Intergovernmental Panel on Climate Change, emissions of GHG, including carbon dioxide, are very likely changing the world’s climate. Climate change could affect customer demand for the Company's product offerings. It might also cause physical damage to the energy production ecosystem that the Company's REPs rely on to procure electricity and natural gas for their customers. Additionally, climate change could affect the availability of risk management products and services that the Company REPs rely on to manage its risk position.
In September 2016, the U.S. joined in adopting the agreement reached on December 12, 2015, at the United Nations Framework Convention on Climate Change meetings in Paris to reduce GHGs. The Paris Agreement’s non-binding obligations to limit global warming to below two degrees Celsius became effective on November 4, 2016. Genie cannot currently estimate the financial impact of climate change policies, although potential legislative or regulatory programs restricting CO2 emissions, or litigation alleging damages from GHG emissions, could require material capital and other expenditures or result in changes to its operations.
In December 2009, the U.S. Environmental Protection Agency (EPA) released its final “Endangerment and Cause or Contribute Findings for GHGs under the Clean Air Act (CAA),” concluding that concentrations of several key GHGs constitute an "endangerment" and may be regulated as "air pollutants" under the CAA and mandated measurement and reporting of GHG emissions from certain sources, including electric generating units (EGU). Subsequently, the EPA released its final Clean Power Plan (CPP) regulations in August 2015 to reduce CO2 emissions from existing fossil fuel-fired EGUs and finalized state regulations imposing CO2 emission limits for new, modified, and reconstructed fossil fuel-fired EGUs. Numerous states and private parties filed appeals and motions to stay the CPP with the D.C. Circuit in October 2015. On February 9, 2016, the U.S. Supreme Court stayed the rule during the pendency of the challenges to the Washington D.C. Circuit and U.S. Supreme Court. On March 28, 2017, an executive order, entitled “Promoting Energy Independence and Economic Growth,” instructed the EPA to review the CPP and related rules addressing GHG emissions and suspend, revise or rescind the rules if appropriate. On June 19, 2019, the EPA repealed the CPP and replaced it with the affordable clean energy (ACE) rule that established guidelines for states to develop standards of performance to address GHG emissions from existing coal-fired generation. On January 19, 2021, the Washington D.C. Circuit vacated and remanded the ACE rule declaring that the EPA was “arbitrary and capricious” in its rule making and, as such, the ACE rule is no longer in effect and all actions thus far taken by states to implement the federally mandated rule are now null and void. The D.C. Circuit decision is subject to legal challenge. Depending on the outcomes of further appeals and how any final rules are ultimately implemented, the future cost of compliance may be material.
In December 2021, President Biden signed an executive order calling for the federal government to achieve net zero emissions by 2050, with a 65% reduction by 2030. The order specifically directs the federal government to use its scale and procurement power to achieve 100% carbon pollution-free electricity by 2030, with at least half coming from locally supplied clean energy, as well as 100% zero-emission vehicle acquisitions by 2035 and a net-zero emissions building portfolio by 2045, all of which may contribute to increased demand for alternative energy technologies, including renewable energy and energy storage.
Additionally, a number of other federal and state regulations have increased the cost of fossil generation across the country over the last several decades. The Clean Air Act of 1970 originally provided the EPA with authority to regulate emissions, but it was not until the 2000s that EPA restrictions on sulfur dioxide and nitrogen oxides emissions required installation of scrubbers or other emissions control equipment. More recently, EPA’s continued air quality level regulations have driven controls on all types of units along with stringent operational limitations. EPA has also set broader standards for greenhouse gas emissions particularly from new, modified, and reconstructed fossil-fired power plants forcing efficiency improvements and increasing maintenance costs. At the state level, a number of carbon pricing schemes have been implemented, including a cap-and-trade program in California and a carbon tax in the Northeast via the RGGI.
The cost to the Company to comply with any legislation, regulations or initiatives limiting GHG or emissions or otherwise seeking to limit the impact of climate change could be substantial. Moreover, regulations imposing obligations on, or limiting GHG emissions from, our equipment and operations could adversely affect pricing or demand for our offerings. We may not be able to pass on increases in costs to customers. In addition, changes in regulatory policies that result in a reduction in the demand for hydrocarbon products and carbon-emitting fuel sources that are deemed to contribute to climate change, or restrict the use of such products or fuel sources, may reduce demand for our offerings or impact the energy supply markets.
Additionally, on March 21, 2022, the U.S. Securities and Exchange Commission issued a proposed rule regarding the enhancement and standardization of mandatory climate-related disclosures for investors. The proposed rule would require registrants to include certain climate-related disclosures in their registration statements and periodic reports, including, but not limited to, information about the registrant’s governance of climate-related risks and relevant risk management processes; climate-related risks that are reasonably likely to have a material impact on the registrant’s business, results of operations or financial condition and their actual and likely climate-related impacts on the registrant’s business strategy, model and outlook; climate-related targets, goals and transition plan (if any); certain climate-related financial statement metrics in a note to their audited financial statements; Scope 1 and Scope 2 GHG emissions; and Scope 3 GHG emissions and intensity, if material, or if the registrant has set a GHG emissions reduction target, goal or plan that includes Scope 3 GHG emissions. Although the proposed rule’s ultimate date of effectiveness and the final form and substance of these requirements is not yet known and the ultimate scope and impact on our business is uncertain, compliance with the proposed rule, if finalized, may result in increased legal, accounting and financial compliance costs, make some activities more difficult, time-consuming and costly, and place strain on our personnel, systems and resources.
Further, legislative and regulatory initiatives are underway to that purpose. The Inflation Reduction Act of 2022 (“IRA”), signed into law in August 2022, appropriates significant federal funding for renewable energy initiatives and, for the first time ever, imposes a fee on GHG emissions from certain oil and gas sources and facilities. The emissions fee and funding provisions of the law could increase operating costs within the oil and gas industry and accelerate a transition away from fossil fuels, which could in turn adversely affect our business and results of operations. The U.S. Congress has also considered legislation that would control GHG emissions through a “cap and trade” program and several states have already implemented programs to reduce GHG emissions. Additionally, following the U.S. Supreme Court finding that GHG emissions fall within the CAA definition of an “air pollutant,” the EPA has adopted regulations that, among other things, establish construction and operating permit review for GHG emissions from certain large stationary sources, require the monitoring and annual reporting of GHG emissions from certain petroleum and natural gas system sources, and together with the United States Department of Transportation, implement GHG emissions limits on vehicles manufactured for operation in the United States. The EPA has also proposed rules in November 2021 and 2022 intended to reduce methane emissions from new and existing oil and gas sources. Furthermore, many state and local leaders have intensified or stated their intent to intensify efforts to support international climate commitments and treaties, in addition to developing programs that are aimed at reducing GHG emissions by means of cap and trade programs, carbon taxes or encouraging the use of renewable energy or alternative low-carbon fuels.
Employees and Human Capital Resources
Attracting and retaining qualified personnel familiar with our businesses who head our different businesses units is critical to our success. As of March 3, 2023, we had172 employees located in United States.
Our human capital resources objectives include, as applicable, identifying, recruiting, retaining, incentivizing and integrating our existing and new employees, advisors and consultants. To accomplish that, our compensation practices are designed to attract and retain qualified and motivated personnel and align their interests with the goals of the Company and with the best interests of our stockholders. Our compensation philosophy is to provide compensation to attract the individuals necessary for our current needs and growth initiatives, and provide them with the proper incentives to motivate those individuals to achieve our long-term plans, which includes among other things, equity and cash incentive plans that attract, retain and reward personnel through the granting of stock-based and cash-based compensation awards.
We believe that talent attraction and retention are critical to our ability to achieve our strategy and that a trained, diverse and inspired workforce is integral to delivering on our objectives. Our recruiting process reaches a wide array of potential employees, and we employ a rigorous screening process to ensure that we identify and hire quality professionals.
We are committed to diversity and inclusion in the workforce include a policy of non-discriminatory treatment and respect of human rights for all current and prospective employees. Discrimination on the basis of an individual’s race, religion, creed, color, sex, sexual orientation, age, marital status, disability, national origin or veteran’s status is not permitted by us and is illegal in many jurisdictions. We respect the human rights of all employees and strives to treat them with dignity consistent with standards and practices recognized by the international community.
We rely on a combination of patents, copyrights, trademarks, domain name registrations and trade secret laws in the United States and other jurisdictions and contractual restrictions to protect our intellectual property rights and our brand names. All of our employees sign confidentiality agreements. These agreements provide that the employee may not use or disclose our confidential information except as expressly permitted in connection with the performance of his or her duties for us, or in other limited circumstances. These agreements also state that, to the extent rights in any invention conceived of by the employee while employed by us do not vest in us automatically by operation of law, the employee is required to assign his or her rights to us.
Our business, operating results or financial condition could be materially adversely affected by any of the following risks as well as the other risks highlighted elsewhere in this document, particularly the discussions about regulation, competition and intellectual property. The trading price of our Class B common stock and Series 2012-A Preferred Stock could decline due to any of these risks.
Risks Related to Genie Retail Energy
The REP business is highly competitive, and we may be forced to reduce prices or incur additional costs.
GRE’s REP businesses face substantial competition both from the traditional incumbent utilities as well as from other REPs, including REP affiliates of the incumbent utilities in specific territories. As a result, we may be forced to reduce prices, incur increased costs or lose market share and cannot always pass along increases in commodity costs to customers. We compete on the basis of provision of services, customer service and price. Present or future competitors may have greater financial, technical or other resources which could put us at a disadvantage. Additionally, our experience has shown that utilities do not change their rates offered to customers immediately in response to increased prices for the underlying commodities.
Increasing our market share depends in part on our ability to persuade more customers to switch to GRE’s services than those that churn from us to other providers or back to the local utility. Moreover, local utilities and some REPs may have certain advantages such as name recognition, financial strength and long-standing relationships with customers. Persuading potential customers to switch to GRE’s REPs requires significant marketing and sales operations. As we enter new international markets, we will face additional competitive environment. If GRE is not successful in convincing customers to switch both domestically and internationally, our REP businesses, results of operations and financial condition will all be adversely affected.
Our strategy is based on current regulatory conditions and assumptions, which could change or prove to be incorrect.
From time to time, various states may propose or modify legislation regulations which could adversely affect our marketing practices and ability to acquire and serve customers. The Company and the REP industry as a whole is working with government representatives, legislators, and advocacy interest groups to lobby for legislation and regulation that most effectively protects customer interests while preserving the competitive structure of deregulated markets. We also seek to expand and diversify into new markets with regulatory structures that are more favorable to the competitive retail supply of energy.
For example, on April 16, 2021, the New York Public Service Commission (“PSC”) issued an order limiting the types of services energy retailer marketers may offer new customers or renewals, in terms of pricing for non-renewable commodities and renewable product offerings (the “2021 Orders”). Such compliance could impact customer acquisition and renewal revenue and profitability. The Company is working to ensure that its products and services are fully compatible with the 2021 Orders. As of December 31, 2022, New York represented 22.4% of GRE’s total meters served and 18.8% of the total residential customer equivalents (“RCEs”) of GRE’s customer base. For the years ended December 31, 2022 and 2021, gross revenue from New York was $63.5 million and $52.9 million, respectively.
Any legislative or regulatory changes that negatively impacts the sale of fossil fuels or electricity derived therefrom would adversely affect the results of our operations and financial conditions.
Unusual weather conditions, which may become more commonplace, may have significant direct and indirect impacts on GRE's and GREI's business and results of operations.
Potential global climate change may produce, among other possible conditions, unusual variations in temperature and weather patterns, resulting in unusual weather conditions, more intense, frequent and extreme weather events and other natural disasters.
Because our variable pricing plan resulted in increased prices charged to customers, we experienced an increase in customer churn as utilities and fixed price REPs appeared to have more attractive pricing, although those increased churn levels have peaked. A failure to mitigate an increase in churn could result in decreases in meters served and revenues.
The retail electricity price increases discussed above resulted in large numbers of customers filing informal and formal complaints to state utility commissions, state attorneys general and state legislators. IDT Energy was served with several thousand formal and informal customer complaints to state utility commission and state attorneys general related to the winter retail price increases.
In certain markets, we contractually commit to provide customers with a fixed price, irrespective of our cost of supply in the wholesale energy markets. Even under variable contracts, we seek to manage customer price expectations by using reasonable efforts to avoid or mitigate potential pass-throughs related to unforeseeable weather events (even where such pass-throughs are contractually permissible). Although we use our best efforts to reasonably hedge our commodity positions to absorb weather-related cost spikes, we cannot always anticipate unforeseeable extreme weather events, and we may be forced to absorb these cost increases in order to serve our customers.
For example, a confluence of issues in January and February 2014 associated with the winter season’s polar vortex resulted in extraordinarily large spikes in the prices of wholesale electricity and natural gas in markets where GRE and other retail providers purchase their supply. Repeats of the circumstances or similar circumstances could similarly harm margins and profitability in the future, and we could find it necessary to take similar or other actions that would have a negative impact on our financial condition and results of operations.
Additionally, in mid-February of 2021, the State of Texas experienced unprecedented cold weather and snow. With the grid overtaxed and rolling blackouts being enforced, by order of ERCOT, real-time commodity prices during the crisis escalated astronomically. Although our supply commitment for our customers in Texas was reasonably hedged for expected winter weather conditions, the extreme usage spike exposed us to further unexpected cost increases. Despite our cost increases related to the unprecedented price volatility in real-time electricity prices, we maintained customer rates under current agreements with customers. The impact on our consolidated profitability for the year ended December 31, 2022 was approximately $10.6 million.
GRE's business is subject to physical, market and economic risks relating to potential effects of climate change, and policies at the national, regional and state levels to regulate GHG emissions and mitigate climate change could adversely impact our results of operations, financial condition and cash flows.
Fluctuations in weather and other environmental conditions, including temperature and precipitation levels, may affect consumer demand for electricity or natural gas. In addition, the potential physical effects of climate change, such as increased frequency and severity of storms, floods and other climatic events, could disrupt GRE's operations and supply chain, and cause it to incur significant costs in preparing for or responding to these effects. These or other changes in climate could lead to increased operating costs or capital expenses. GRE's customers may also experience the potential physical impacts of climate change and may incur significant costs in preparing for or responding to these efforts, including increasing the mix and resiliency of their energy solutions and supply.
Hazards customary to the power production industry include the potential for unusual weather conditions, which could affect pricing and availability for electricity and natural gas. The contribution of climate change to the frequency or intensity of weather-related events could affect our operations and financial results and condition.
The physical risks associated with climate change may have an adverse impact on our business operations, financial condition and cash flows
Climate change poses potential physical risks. Scientific studies forecast that these risks include increases in sea levels, stresses on water supply, rising average temperatures and other changes in weather conditions, such as increases in precipitation and extreme weather events, such as floods, heat waves, hurricanes and other tropical storms and cyclones. The projected physical effects of climate change have the potential to be destructive to the suppliers from which we purchased our electricity and natural gas supply. An extreme weather event within our REPs service areas can also cause disruption in service to customers due to downed wires and poles or damage to other equipment. For all of these reasons, these physical risks could have an adverse financial impact on our business operations, financial condition and cash flows. Climate change poses other financial risks as well. To the extent weather conditions are affected by climate change, customers’ energy use could increase or decrease depending on the duration and magnitude of the changes. Increased energy use due to weather changes may require us to purchase additional power and natural gas. Additionally, decreased energy use due to weather changes may affect our financial condition through decreased rates, revenues, margins or earnings. However, because the nature and timing of changes in extreme weather events (such as increased frequency, duration, and severity) are uncertain, it is not possible for us to estimate reliably the future financial risk to our operations caused by these potential physical risks.
Fixed Rate Products or Guaranteed Pricing Programs could result in losses or decreased profits if GRE fails to estimate future commodity prices and commodity consumption accurately.
REPs and utilities offering fixed rate products or guaranteed pricing often are unable to change their sell rates offered to customers in response to volatility in the prices of the underlying commodities or changes in the regulatory environment. Sudden spikes in commodity prices, particularly when coupled with rapid, unexpected increases in consumptions, expose us to the risk that we will incur significant unforeseen costs in performing fixed rate contracts. During the year ended December 31, 2022, GRE’s meters enrolled in offerings with fixed rate characteristics constituted approximately 24.1% and 7.1% of GRE’s electric and natural gas load, respectively. Fixed rate products are becoming a greater part of our offering as they are currently preferred by many customers and regulators.
However, it is difficult to predict future commodity costs. Any shortfalls resulting from the risks associated with fixed rate programs will reduce our working capital and profitability. Our inability to accurately estimate the cost of providing services under these programs could have an adverse effect on our profitability and cash flows. We employ an active and robust hedging program. Within this exercise there are inherent assumptions about consumption and pricing. There is risk that volatility with take place outside of the range of potential outcomes contemplated by the program. In these instances, the hedge will not be sufficient to control for risk and losses may occur.
Commodity price volatility could have an adverse effect on our cost of revenues and our results of operations.
Volatility in the markets for certain commodities can have an adverse impact on our costs for the purchase of the electricity and natural gas that GRE sells to its customers as what occurred in Texas and Japan during January and February of 2021. Similar or increased unprecedented volatility events can have a material adverse impact on our financial condition because of our fixed or guaranteed price products, we cannot, and in our variable price products, due to customer or competitive factors, we may not always be able or choose to, pass along increases in costs to our customers. This would have an adverse impact on our margins and results of operations. Alternatively, volatility in pricing for GRE’s electricity and natural gas related to the cost of the underlying commodities can lead to increased customer churn. In times of high commodity costs, our variable pricing model and commodity purchasing approach can lead to competitive disadvantages as we must pass along all or some portion of our increased costs to our customers.
The Russian invasion of Ukraine is recent and the implications on the global economy and energy supplies are uncertain but may prove to negatively impact our operations.
The short and long-term implications of Russia's invasion of Ukraine are difficult to predict at this time. The imposition of sanctions and counter sanctions may have an adverse effect on energy and economic markets generally and could result in an even greater impact related to global supply and pricing of electricity and natural gas.
To the extent the war in Ukraine may adversely affect our business as discussed above, it may also have the effect of heightening many of the other risks described in this Item IA such as those relating to cyber security, supply chain, inflationary and other volatility in commodity, and the condition of the markets including as related to our ability to access additional capital, any of which could negatively affect our business. Because of the highly uncertain and dynamic nature of these events, it is not currently possible to estimate the impact of the Russian - Ukraine war on our business.
Our business, results of operation and financial conditions could be adversely affected by the coronavirus COVID-19 pandemic and the restrictions put in place in connection therewith.
We have responded to the global outbreak of COVID-19 by taking steps to mitigate the potential risks to us posed by its spread and the impact of the restrictions put in place by governments to protect the population. We continue to execute our business continuity plan and have implemented a comprehensive set of actions for the health and safety of our customers, employees and business partners. We have implemented work from home policies where appropriate.
We continue to implement strong physical and cyber-security measures to ensure our systems remain functional to both serve our operational needs with a remote workforce and to provide uninterrupted service to our customers. We face challenges due to the need to operate with the remote workforce and are addressing those challenges so as to minimize the impact on our ability to operate.
For the year ended December 31, 2022, the impacts of COVID-19 on our operations and financial results were minimal.
We benefited from the increased demand for electricity by residential customers due to more people working from their homes in 2021, though that impact began to abate in 2022 as more customers returned to work in corporate offices. On the other hand, like other retail providers, we suspended our face-to-face customer acquisition programs in March 2020 as public health measures were implemented to combat COVID-19, resulting in a decrease in gross meter acquisitions and a slight reduction in the U.S. domestic meters served. The reduction in gross meter acquisitions decreased our customer acquisition expenses in 2021. Churn for in 2021 decreased as our competitors suspended their face-to-face marketing programs. COVID-19 public health restrictions relaxed in some of GRE's domestic market in 2021, facilitating a partial reactivation of the previously curtailed customer acquisition channels, and in 2022 the impact of public health restrictions on our meter acquisition programs and churn were substantially diminished and as of December 31, 2022 was not a significant factor.
If the COVID-19 pandemic continues for a prolonged period, or impact the territories we serve more significantly than it has today, our business, operations and financial condition could be impacted in more significant ways. The continued spread of COVID-19 and efforts to contain the virus could have the following impacts, in addition to exacerbating the impacts described above:
Adversely impact our strategic business plans and growth strategy;
Result in increases in purchase of receivable, or POR fees and allowance for credit bad debt expense as a result of delayed or non-payment from our customers, both of which could be magnified by federal or state government legislation that requires us to extend suspensions of disconnections for non-payment;
Reduce the availability and productivity of our employees and third-party resources;
Cause us to experience an increase in costs as a result of our emergency measures;
Cause a deterioration of the credit quality of our counterparties, including power purchase agreement counterparties, contractors or retail customers, that could result in credit losses;
Cause impairment of long-lived assets; and
Cause a deterioration in our financial metrics or the business environment that adversely impacts our credit ratings.
GRE’s growth depends in part on its ability to enter new markets.
New markets, both domestic and international, are evaluated based on many factors, which include the regulatory environment, as well as GRE’s REP businesses' ability to procure energy in an efficient and transparent manner. We seek to purchase wholesale energy where there is a real time market that reflects a fair price for the commodity for all participants. Once new markets are determined to be suitable for GRE’s REP businesses, we expend substantial efforts to obtain necessary licenses and will incur significant customer acquisition costs and there can be no assurance that we will be successful in new markets. Furthermore, there are regulatory differences between the markets that we currently operate in and new markets, including, but not limited to, exposure to credit risk, additional churn caused by tariff requirements, rate-setting requirements and incremental billing costs. A failure to identify, become licensed in, and enter new territories may have a material negative impact on our growth, financial condition and results of operations.
Demand for REP services and consumption by customers are significantly related to weather conditions.
Typically, colder winters and hotter summers create higher demand and consumption for natural gas and electricity, respectively. Milder than normal winters and/or summers may reduce the demand for our energy services, thus negatively impacting our financial results.
GRE is subject to litigation that may limit its operations.
In connection with the 2013-2014 events described in the Risk Factor above entitled “Unusual weather conditions which may become more commonplace, may have significant direct and indirect impacts on GRE's and GREI's business and results of operations,” IDT Energy was also sued in separate putative class action suits in New York, New Jersey and Pennsylvania, partially related to the price increases during the winter of 2014. From time to time, IDT Energy is also subject to inquiries, investigation or action from public utility commissions or other governmental regulatory or law enforcement agencies related to compliance of its practices with statutory or regulatory schemes. These matters are more fully discussed in Note 15 of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K, including that IDT Energy entered into a settlement in connection with the three putative class actions, and with multiple regulators and governmental bodies terminating litigation with no admission of liability or finding of wrongdoing by IDT Energy.
IDT Energy does not believe that it was at fault or acted in any way improperly with respect to the events of winter 2014 or in connection with any other practices that are subject to investigation or litigation. Although we have taken action to insulate us and our customers from future similar events, we cannot assure that those actions will be effective and we will not be subject to litigation in the future.
Such class action lawsuits or other claims against us could have a material adverse impact on our financial condition, competitive position or results of operations.
Transition risks associated with climate change, including those related to regulatory mandates could negatively impact our financial results
Where federal or state legislation mandates the use of renewable fuel sources, such as wind and solar and such legislation does not also provide for adequate cost recovery, it could result in significant changes in our business, including material increases in REC and power purchase costs. Such mandatory renewable portfolio requirements may have an adverse effect on our financial condition and results of operations.
A number of regulatory and legislative bodies have introduced requirements and/or incentives to reduce peak demand and energy consumption. Such conservation programs could result in customer consumption reduction and adversely impact our financial results in different ways.
In the past, we have been adversely impacted by reduced electric usage due in part to energy conservation efforts such as the use of efficient lighting products such as CFLs, halogens and LEDs. We are unable to determine what impact, if any, conservation will have on our financial condition or results of operations.
We face risks that are beyond our control due to our reliance on third parties both domestically and internationally and our general reliance on the electrical power and transmission infrastructure within the United States.
Our ability to provide energy delivery and commodity services depends on the operations and facilities of third parties, including, among others, BP, NYISO and PJM. Our reliance on the electrical power generation and transmission infrastructure within the United States makes us vulnerable to large-scale power blackouts. The loss of use or destruction of third party facilities that are used to generate or transmit electricity due to extreme weather conditions, breakdowns, war, acts of terrorism or other occurrences could greatly reduce our potential earnings and cash flows.
The REP business, including our relationship with our suppliers, is dependent on access to capital and liquidity.
Our business involves entering into contracts to purchase large quantities of electricity and natural gas. Because of seasonal fluctuations, we are generally required to purchase electricity or natural gas in advance and finance that purchase until we can recover such amounts from revenues. Certain of GRE’s REPs have a Preferred Supplier Agreement with BP pursuant to which we purchase electricity and natural gas at market rate plus a fee. The agreement has been modified and extended since 2009, and is scheduled to terminate on November 30, 2023, subject to renewal by agreement of the parties. In addition to other advantages of this agreement, we are only required to post security with BP. There can be no assurance that we will be able to maintain the required covenants, that BP will be able to maintain their required credit rating, or that the agreement will be renewed upon its expiration. In addition, the security requirements outside of the BP agreement may increase as we enter other markets. Difficulty in obtaining adequate credit and liquidity on commercially reasonable terms may adversely affect our business, prospects and financial conditions.
A revision to certain utility best practices and programs in which we participate and with which we comply could disrupt our operations and adversely affect our results and operations.
Certain retail access “best practices” and programs proposed and/or required by state regulators have been implemented by utilities in most of the service territories in which we operate. One such practice is participation in purchase of receivables programs under which certain utilities purchase customer receivables for approximately 98.0% of their face value in exchange for a first priority lien in the customer receivables without recourse against a REP. This program is a key to our control of bad debt risk in our REP business.
The REP business depends on maintaining the licenses in the states in which we operate and any loss of those licenses would adversely affect our business, prospects and financial conditions.
GRE’s REP businesses require licenses from public utility commissions and other regulatory organizations to operate its business. Those agencies may impose various requirements to obtain or maintain licenses. Further, certain non-governmental organizations have been focusing on the REP industry and the treatment of customers by certain REPs. Any negative publicity regarding the REP industry in general, including, but not limited to, legislatures potentially seeking to restrict the activities of REPs and GRE in particular or any increase in customer complaints regarding GRE’s REP businesses could negatively affect our relationship with the various commissions and regulatory agencies and could negatively impact our ability to obtain new licenses to expand operations or maintain the licenses currently held. In the aftermath of the polar vortex, several regulatory bodies adopted more aggressive policies toward REPs, including the action against IDT Energy in Pennsylvania described elsewhere in this Annual Report on Form 10-K. Any loss of our REP licenses would cause a negative impact on our results of operations, financial condition and cash flow.
The REP business depends on the continuing efforts of our management team and our personnel with strong industry or operational knowledge and our efforts may be severely disrupted if we lose their services.
Our success depends on key members of our management team, the loss of whom could disrupt our business operation. Our business also requires a capable, well-trained workforce to operate effectively. There can be no assurance that we will be able to retain our qualified personnel, the loss of whom may adversely affect our business, prospects and financial conditions.
We could be harmed by network disruptions, security breaches, or other significant disruptions or failures of our IT infrastructure and related systems or of those we operate for certain of our customers
To be successful, we need to continue to have available, for our and our customers' use, a high capacity, reliable and secure network. We face the risk, as does any company, of a security breach, whether through cyber-attack, malware, computer viruses, sabotage, or other significant disruption of our IT infrastructure and related systems. As such, there is a risk of a security breach or disruption of the system we operated, including possible unauthorized access to our and our customers' proprietary or classified information. We are also subject to breaches of our network resulting in unauthorized utilization of our services or products, which subject us to the costs of providing those products or services, which are likely not recoverable. The secure maintenance and transmission of our and our customers' information is a critical element of our operations. Our information technology and other systems that maintain and transmit customer information, or those of service providers or business partners, may be compromised by a malicious third party penetration of our network security, or that of a third party service provider or business partner, or impacted by advertent or inadvertent actions or inactions by our employees, or those of a third party service provider or business partner. As a result, our or our customers' information may be lost, disclosed, accessed or taken without the customers' consent or our product and service may be used without payment.
Although we make significant efforts to maintain the security and integrity of these types of information and systems, there can be no assurance that our security efforts and measures will be effective or that attempted security breaches or disruptions would not be successful or damaging, especially in light of the growing sophistication of cyber-attacks and intrusions sponsored by state or other interests. We may be unable to anticipate all potential types of attacks or intrusions or to implement adequate security barriers or other preventative measures. Certain of our business units have been the subject of attempted and successful cyber-attacks in the past. We have researched the situations and do not believe any material internal or customer information has been compromised.
Network disruptions, security breaches and other significant failures of the above-described systems could (i) disrupt the proper functioning of our networks and systems and therefore our operations or those of certain of our customers; (ii) result in the unauthorized use of our services or products without payment, (iii) result in the unauthorized access to, and destruction, loss, theft, misappropriation or release of proprietary, confidential, sensitive or otherwise valuable information of ours or our customers, including trade secrets, which others could use to compete against us or for disruptive, destructive or otherwise harmful purposes and outcomes; (iv) require significant management attention or financial resources to remedy the damages that result or to change our systems and processes; (v) subject us to claims for contract breach, damages, credits, fines, penalties, termination or other remedies; or (vi) result in a loss of business, damage our reputation among our customers and the public generally, subject us to additional regulatory scrutiny or expose us to litigation. Any or all of which could have a negative impact on our results of operations, financial condition and cash flows.
Our growth strategy depends, in part, on our acquiring complementary businesses and assets and expanding our existing operations, which we may be unable to do.
Our growth strategy is based, in part, on our ability to acquire businesses and assets that are complementary to our existing operations. We may also seek to acquire other businesses. The success of this acquisition strategy will depend, in part, on our ability to accomplish the following:
identify suitable businesses or assets to buy;
complete the purchase of those businesses on terms acceptable to us;
complete the acquisition in the time frame we expect;
improve the results of operations of the businesses that we buy and successfully integrate their operations into our own; and
avoid or overcome any concerns expressed by regulators, including antitrust concerns.
There can be no assurance that we will be successful in pursuing any or all of these steps. Our failure to implement our acquisition strategy could have an adverse effect on other aspects of our business strategy and our business in general. We may not be able to find appropriate acquisition candidates, acquire those candidates that we find or integrate acquired businesses effectively or profitably.
Uncertainty related to our exit in the U.K. market.
We face uncertainty related to our exit from the U.K. market. The Administrators of Orbit are currently engaged in a process to identify and settle creditors' claims. Unknown claims and liabilities could arise during the course of the process. Delays in the settlement of creditors' claims could increase the operations cost of the administration. It is unknown at this time how much of the funds that the Administrators are currently holding are ultimately going to be required to satisfy liabilities and the costs of administration, making it uncertain how much cash will be returned to us.
Risks Related to Genie Renewables
Competition in solar markets globally and across the solar value chain is intense, and could remain that way for an extended period of time.
We face significant competition both in the C&I market where we are attracting customers to our products as well as in the operating market where we are competing for access to land rights or attractive development projects.As the demand for solar energy grows, more companies and investors enter the market, increasing competition and potentially lowering prices and profits.
Changes in government regulations and policies can impact the financial viability of solar projects.
The success of solar energy projects is highly dependent government regulations and policies that impact the financial viability of the projects. This can include changes to tax incentives, subsidies, grid access and net metering policies. It can also include changes in building and safety codes, environmental regulations, and land use policies that impact the ability to construct and operate solar projects. The reduction, modification or elimination of any of these policies in one or more of our customer markets would materially and adversely affect the growth of such markets or result in increased price competition, either of which could cause our revenue to decline and materially adversely affect our financial results.
We may be unable to profitably provide new solar offerings or achieve sufficient market penetration with such offerings.
We may expand our portfolio of offerings to include solutions that build upon our core competencies but for which we have not had significant historical experience, including variations in our traditional product offerings or other offerings related to commercial and industrial customers and community solar. We cannot be certain that we will be able to ascertain and allocate the appropriate financial and human resources necessary to grow these business areas. We could invest capital into growing these businesses but fail to address market or customer needs or otherwise not experience a satisfactory level of financial return. Also, in expanding into these areas, we may be competing against companies that previously have not been significant competitors, such as companies that currently have substantially more experience than we do in the residential, commercial and industrial, or other targeted offerings. If we are unable to achieve growth in these areas, our overall growth and financial performance may be limited relative to our competitors and our operating results could be adversely impacted.
An increase in interest rates or tightening of the supply of capital in the global financial markets could increase the cost of borrowing and negatively impact our projects.
C&I customers may depend on debt and/or equity financing to fund the initial capital expenditure required to purchase a system. Additionally, Genie Solar intends to utilize long-term debt financing for its operating portfolio. As a result, an increase in interest rates, or a reduction in the supply of project debt financing could reduce the number of solar projects that we are able to construct and operate.
Problems with product quality or performance may cause us to incur significant and/or unexpected contractual damages and/or warranty and related expenses, damage our market reputation, and prevent us from maintaining or increasing our market share.
We perform a variety of quality and life tests under different conditions upon which we base our assessments and warranty. However, if our products perform below expectations, we could experience significant warranty and related expenses, damage to our market reputation, and erosion of our market share.
If any of the assumptions used in estimating our warranties prove incorrect, we could be required to accrue additional expenses, which could adversely impact our financial position, operating results, and cash flows. Although we have taken significant precautions to avoid a manufacturing excursion from occurring, any manufacturing excursions, including any commitments made by us to take remediation actions in respect of affected modules beyond the stated remedies in our warranties, could adversely impact our reputation, financial position, operating results, and cash flows.
Any widespread product failures may damage our market reputation, cause our net sales to decline, require us to repair or replace the defective products or provide financial remuneration, and result in us taking voluntary remedial measures beyond those required by our standard warranty terms to enhance customer satisfaction, which could have a material adverse effect on our operating results.
Several of our key raw materials and components are either single-sourced or sourced from a limited number of suppliers, and their failure to perform could cause manufacturing delays and impair our ability to deliver solar modules to customers in the required quality and quantities and at a price that is profitable to us.
Our failure to obtain raw materials and components that meet our quality, quantity, and cost requirements in a timely manner could interrupt or impair our ability to manufacture our solar modules or increase our manufacturing costs. Several of our key raw materials and components are either single-sourced or sourced from a limited number of suppliers. As a result, the failure of any of our suppliers to perform could disrupt our supply chain and adversely impact our operations. In addition, some of our suppliers are smaller companies that may be unable to supply our increasing demand for raw materials and components as we expand our business. We may be unable to identify new suppliers or qualify their products for use on our production lines in a timely manner and on commercially reasonable terms. A constraint on our production may result in our inability to meet our capacity plans and/or our obligations under our customer contracts, which would have an adverse impact on our business. Additionally, reductions in our production volume may put pressure on suppliers, resulting in increased material and component costs.
Risk Related to Our Financial Condition and Reporting
We had a material weakness in our internal control over financial reporting in previous years and cannot assure you that additional material weaknesses will not be identified in the future.
We reported in our Annual Report on Form 10-K as of December 31, 2020, a material weakness in internal control specifically related to management's review of the income tax provision. During 2021, we implemented certain remediation measures related to the material weakness, however, we concluded that our internal control over financial reporting was ineffective as of December 31, 2021 (see Item 9A Control and Procedures in this Annual Report on Form 10-K). During 2022, we implemented certain additional remediation measures related to the material weakness and concluded that our internal control over financial reporting was effective as of December 31, 2022.
We also reported in our Annual Report on Form 10-K as of December 31, 2018, a material weakness in internal control related to an application, which the Company uses to process a wide variety of functions for GRE related to customer enrollment, customer programs and price plans, rebate programs, sales commissions, invoicing, and invoice payment information. During 2019, we completed the remediation measures related to the material weakness and concluded that our internal control over financial reporting was effective as of December 31, 2019.
Completion of remediation does not provide assurance that our remediation or other controls will continue to operate properly.
While we aim to work diligently to ensure a robust internal control that is devoid of significant deficiencies and material weaknesses, given the complexity of the accounting rules, we may, in the future, identify additional significant deficiencies or material weaknesses in our disclosure controls and procedures and internal control over financial reporting. Any failure to maintain or implement required new or improved controls, or any difficulties we encounter in their implementation, could result in additional significant deficiencies or material weaknesses, cause us to fail to meet our periodic reporting obligations or result in material misstatements in our financial statements. Any such failure could also adversely affect the results of periodic management evaluations and annual auditor attestation reports regarding the effectiveness of our internal control over financial reporting required under Section 404 of the Sarbanes-Oxley Act of 2002 and the rules promulgated under Section 404. The existence of a material weakness could result in errors in our financial statements that could result in a restatement of financial statements, cause us to fail to meet our reporting obligations and cause investors to lose confidence in our reported financial information, leading to a decline in our stock price. See Item 9A Controls and Procedures for a further discussion of our assessment of our internal controls over financial reporting.
Risks Related to Our Capital Structure
Holders of our Class B common stock and Series 2012-A Preferred Stock have significantly less voting power than holders of our Class A common stock.
Holders of our Class B common stock and Series 2012-A Preferred Stock are entitled to one-tenth of a vote per share on all matters on which our stockholders are entitled to vote, while holders of our Class A common stock are entitled to three votes per share. As a result, the ability of holders of our Class B common stock and Series 2012-A Preferred Stock to influence our management is limited.
Holders of our Series 2012-A Preferred Stock are entitled to an annual dividend and such payments may have a negative impact on our cash flow.
Holders of our Series 2012-A Preferred Stock are entitled to receive an annual dividend, payable quarterly in cash. The payment of such dividend could have a negative impact on our cash flow and cash balances. If dividends on any shares of the Series 2012-A Preferred Stock are in arrears for six or more quarters, whether or not consecutive, holders of the Series 2012-A Preferred Stock shall have the right to elect two (2) additional directors to serve on our Board, and this could have a negative impact on the market price of our equity securities.
Eight trusts for the benefit of sons and daughters of Howard S. Jonas, our Chairman of the Board of Directors, hold shares that, in the aggregate, represent more than a majority of the combined voting power of our outstanding capital stock, which may limit the ability of other stockholders to affect our management.
Eight trusts for the benefit of children of Howard S. Jonas, (the "Trusts"), our Chairman of the Board, collectively have voting power over 5,123,374 shares of our common stock, (which is all the issued and outstanding shares of the Class A common stock), which are convertible into shares of our Class B common stock on a 1-for-1 basis, and 3,549,048 shares of our Class B common stock representing approximately 70.0% of the combined voting power of our outstanding capital stock, as of March 13, 2023. In addition, as of March 13, 2023, Howard S. Jonas holds 3,683,869 shares of our Class B common stock.
Howard Jonas serves as our Chairman of the Board, which is not an officer position. However, he is our founder and served as an executive officer, including our Chief Executive Officer, for a very significant time period, and the members of the Board and management often look to him for guidance on major financial, operational and strategic matters.
Howard S. Jonas does not have the right to direct or control the voting of the shares of our common stock that is held by the Trusts, and the independent trustees hold sole voting and dispositive power over the common stock held by the Trusts. However, he is the trustor of the trusts and is the father of each of the beneficiaries of the Trusts and his views may be taken into account by the trustees and others related to the Trusts.
We are not aware of any voting agreement between or among any of the Trusts and/or Howard S. Jonas, but if such a voting agreement or other similar arrangement exists or were to be consummated, if all or several or all of the Trusts were to act in concert, or if we issued additional Class A common stock, certain or all of the Trusts and/or Howard S. Jonas along with holders of the Class A common stock would be able to control matters requiring approval by our stockholders, including the election of all of the directors, amendment of organizational documents and the approval of significant corporate transactions, including any merger, consolidation or sale of all or substantially all of our assets. As a result, the ability of any of our other stockholders to influence our management may be limited. In addition, our dual class structure has an anti-takeover effect, and accordingly, the holders of the shares of Class A common stock have the ability to prevent any change in control transactions that may otherwise be in the best interest of stockholders.
Our headquarters are located at 520 Broad St., Newark, New Jersey. Our lease for our office space at 520 Broad Street expires in April 2025 and is for 8,631 square feet and includes two parking spots per thousand square feet of space leased. The annual base rent is $198,513. We have the right to terminate the lease upon four months’ notice and upon early termination Genie will pay a penalty equal to 25% of the portion of the rent due over the course of the remaining term. Upon expiration of the lease, we have the right to renew the lease for another 5 years on substantially the same terms, with a 2% increase in the rental payments.
GRE’s Jamestown, New York offices are located at 3315 North Main Street where we lease approximately 12,000 square feet of space. GRE’s Arizona office is located in Chandler, Arizona where we lease approximately 3,300 square feet. GRE’s Texas office is located in Houston, Texas where we lease approximately 4,200 square feet.
Certain legal proceedings in which we are involved are discussed in the Notes to Consolidated Financial Statements — Notes 16, Legal and Regulatory Proceedings, in this Annual Report on Form 10-K, which is incorporated by reference.
CLASS B COMMON STOCK
Our Class B common stock trades on the New York Stock Exchange under the symbol “GNE”.
On March 13, 2023, there were 308 holders of record of our Class B common stock and 8 holders of record of our Class A common stock. All shares of Class A common stock are beneficially owned by eight trusts or the benefit of children of Howard Jonas, our Chairman of the Board. These numbers do not include the number of persons whose shares are in nominee or in “street name” accounts through brokers. On March 13, 2023, the last sales price reported on the New York Stock Exchange for the Class B common stock was $8.96 per share.
The Series 2012-A Preferred Stock is listed and traded on the NYSE under the symbol “GNEPRA”. Trading began on the NYSE on October 24, 2012.
On March 13, 2023, there were 3 holders of record of our Series 2012-A Preferred Stock. These numbers do not include the number of persons whose shares are in nominee or in “street name” accounts through brokers. On March 13, 2023, the last sales price reported on the New York Stock Exchange for the Series 2012-A Preferred Stock was $10.51 per share.
Additional information regarding dividends required by this item is incorporated by reference from the Management’s Discussion and Analysis section in Item 7 to Part II and Note 12 to the Consolidated Financial Statements in Item 8 to Part II of this Annual Report.
The information required by Item 201(d) of Regulation S-K will be contained in our Proxy Statement for our Annual Stockholders Meeting, which we will file with the Securities and Exchange Commission within 120 days after December 31, 2022, and which is incorporated by reference herein.
Performance Graph of Stock
We are a smaller reporting company as defined by Rule 12b-2 of the Securities and Exchange Act of 1934 and are not required to provide the information under this item.
Issuer Purchases of Equity Securities
The following table provides information with respect to purchases by us of our shares during the fourth quarter of the year ended December 31, 2022.
Total Number of Shares Purchased as part of Publicly Announced Plans or Programs
Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs (1)
October 1 – 31, 2022
November 1 - 30, 2022
December 1 – 31, 2022
Under our existing stock repurchase program, approved by our Board of Directors on March 11, 2013, we were authorized to repurchase up to an aggregate of 7 million shares of our Class B common stock.
|(2)||Pertains to 14,906 shares of Class B common stock that were tendered by employees of ours to satisfy the tax withholding obligations in connection with the lapsing of restrictions on awards of restricted stock. Such shares were repurchased by us based on their fair market value on the trading day immediately prior to the vesting date.|
We are a smaller reporting company as defined by Rule 12b-2 of the Securities and Exchange Act of 1934 and are not required to provide the information under this item.
This Annual Report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements that contain the words “believes,” “anticipates,” “expects,” “plans,” “intends” and similar words and phrases. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the results projected in any forward-looking statement. In addition to the factors specifically noted in the forward-looking statements, other important factors, risks and uncertainties that could result in those differences include, but are not limited to, those discussed under Item 1A to Part I “Risk Factors” in this Annual Report. The forward-looking statements are made as of the date of this Annual Report, and we assume no obligation to update the forward-looking statements, or to update the reasons why actual results could differ from those projected in the forward-looking statements. Investors should consult all of the information set forth in this report and the other information set forth from time to time in our reports filed with the Securities and Exchange Commission pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934, including our reports on Forms 10-Q and 8-K.
The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes thereto included in Item 8 of this Annual Report.
We are comprised of Genie Retail Energy ("GRE") and Genie Renewables. In the third quarter of 2022, we discontinued the operations of Lumo Finland and Sweden as discussed below. Following this discontinuance of operations, Genie Retail Energy International ("GRE International") ceased to be a segment and the remaining assets and liabilities and results of any continuing operations of GRE International were combined with corporate.
GRE owns and operates retail energy providers ("REPs"), including IDT Energy, Residents Energy, Town Square Energy ("TSE"), Southern Federal and Mirabito Natural Gas. GRE's REPs' businesses resell electricity and natural gas primarily to residential and small business customers, with the majority of the customers in the Midwestern and Eastern United States and Texas.
Genie Renewables holds Genie Solar Energy, an integrated solar energy company, a 93.5% interest in CityCom Solar, a marketer of community solar energy solutions, Diversegy, an energy broker for commercial, and a 60.0% controlling interest in Prism Solar, a solar solutions company that is engaged in manufacturing of solar panels, solar installation design and solar energy project management.
Discontinued Operations in Finland and Sweden
As a result of sustained volatility in the energy markets in Europe, in the third quarter of 2022, we decided to discontinue the operations of Lumo Energia Oyj ("Lumo Finland") and Lumo Energi AB ("Lumo Sweden"). From July 13, 2022 to July 19, 2022, the Company entered into a series of transactions to sell most of the electricity swap instruments held by Lumo Sweden for a gross aggregate amount of €41.1 million (equivalent to approximately $41.4 million at the dates of the transactions) before fees and other costs. The sale price is to be settled monthly based on the monthly commodity volume specified in the instruments from September 2022 to March 2025. The net book value of the instruments sold was €34.2 million (equivalent to $35.8 million).
In July 2022, Lumo Sweden entered into a transaction to transfer, effective August 5, 2022, its customers to a third party for nominal consideration. In August 2022 Lumo Finland entered in a transaction to transfer its variable rate customers to a third party for €$1.9 million (equivalent to $2.0 million), and transferred the fixed rate customers to other utilities for no considerations.
We determined that exiting the Finland and Sweden markets represented a strategic shift that would have a major effect on our operations and accordingly, presented the results of operations and related cash flows as discontinued operations for all periods presented. The assets and liabilities of the discontinued operations have been presented separately, and are reflected within assets and liabilities from discontinued operations in the accompanying consolidated balance sheets as of December 31, 2022 and 2021. Lumo Finland and Lumo Sweden will continue to liquidate their remaining receivables and settle any remaining liabilities.
In November 2022, Lumo Finland declared bankruptcy and the administration of Lumo Finland was transferred to an administrator ("Lumo Administrator"). All assets and liabilities of Lumo Finland remain with Lumo Finland, in which Genie retains its interest, however, the management and control of Lumo Finland were transferred to the Lumo Administrator. Since the Company lost control of the management of Lumo Finland in favor of the Lumo Administrator, the accounts of Lumo Finland were deconsolidated effective November 9, 2022.
Net loss from discontinued operations of Lumo Finland and Lumo Sweden, net of taxes were $30.4 million and $7.7 million for the years ended December 31, 2022 and 2021, respectively
Following the discontinuance of operations of Lumo Finland and Lumo Sweden, GRE International ceased to be a segment and the remaining assets and liabilities and the results of continuing operations of GRE internal were combined with corporate.
Discontinued U.K. Operations
In 2021, the natural gas and energy market in the United Kingdom deteriorated which prompted us to suspend the then contemplated spin-off of our international operations and start the process of orderly withdrawal from the U.K. market. In October 2021, as part of the orderly exit process from the U.K. market, Orbit and Shell U.K. Limited ("Shell") agreed to terminate the exclusive supply contract between them. As part of the termination agreement, Orbit was required to unwind all physical forward hedges with Shell which resulted in net cash proceeds after settlement of all related liabilities with Shell. A portion of the net cash proceeds was transferred to us (see Notes 16, Legal and Regulatory Proceedings, to our financial statements included elsewhere in this Annual Report on Form 10-K).
Following the termination of the contract between Orbit and Shell, we filed a petition with the High Court of Justice Business and Property of England and Wales (the “Court”) to declare Orbit insolvent based on the Insolvency Act of 1986. On November 29, 2021, the Court declared Orbit insolvent based on the Insolvency Act of 1986, revoked Orbit's license to supply electricity and natural gas in the United Kingdom, ordered that Orbit's current customers be transferred to a “supplier of last resort” and transferred the administration of Orbit to Administrators effective December 1, 2021. All of the customers of Orbit were transferred to a third-party supplier effective December 1, 2021 as ordered by the Court. All assets and liabilities of Orbit, including cash and receivables remain with Orbit, the management and control of which was transferred to Administrators.
We determined that exiting the United Kingdom represented a strategic shift that would have a major effect on our operations and accordingly, presented the results of operations and related cash flows as discontinued operations for all periods presented. The assets and liabilities of the discontinued operations have been presented separately, and are reflected within assets and liabilities from discontinued operations in the accompanying consolidated balance sheets as of December 31, 2022 and 2021.
Coronavirus Disease (COVID 19)
Starting in the first quarter 2021, the world and the United States experienced the unprecedented impacts of the coronavirus disease 2020 (COVID-19) pandemic.
For the year ended December 31, 2022, the impacts of COVID-19 are evident in several key aspects of our business operations and the corresponding financial impact has been mixed. Our consolidated revenues for the year ended December 31, 2022 decreased by $7.7 million or 2.4 compared to 2021.
Our customer base is predominantly residential, so we benefited from the increased demand for electricity when customers are working from their homes. On the other hand, like other retail energy providers, we suspended our face-to-face customer acquisition programs in March 2020 as public health measures were implemented to combat COVID-19, resulting in a decrease in gross meter acquisitions and a decrease in U.S. domestic meters served. The reduction in gross meter acquisitions decreased our customer acquisition expense in the year ended December 31, 2022 and 2021 compared to the period before the pandemic.
We did not experience any significant changes in our workforce composition and were able to implement our business continuity plans with no significant impact to our ability to maintain our operations. We continue to maintain strong physical and cybersecurity measures in order to both serve our operational needs with a remote workforce and to ensure that we continue to provide services to our customers. We face challenges due to the need to operate with a remote workforce and are continuing to address those challenges so as to minimize the impact on our ability to operate.
Beginning in 2021, public health restrictions have begun to ease in some of our markets which allow us to resume face-to-face sales and marketing. We believe that the impact of the public health restrictions on our meter acquisition efforts has dissipated, however, any reversal of the easing of restrictions would impact that situation.
There are many uncertainties regarding the impacts of the COVID-19 pandemic, and we are closely monitoring those impacts of on all aspects of its business, including how it will impact our customers, employees, suppliers, vendors, and business partners. We are currently unable to predict the impact that COVID-19 will have on our financial position and operating results due to the complexities of the impacts and numerous uncertainties that are beyond the Company's control. We expect to continue to assess the evolving impact of COVID-19 on our business and assets and intend to make adjustments accordingly.
Genie Retail Energy
GRE operates REPs that resell electricity and/or natural gas to residential and small business customers in Connecticut, Delaware, Florida, Georgia, Illinois, Indiana, Maine, Maryland, Massachusetts, Michigan, New Hampshire, New Jersey, New York, Ohio, Pennsylvania, Texas, Rhode Island, and Washington, D.C. GRE’s revenues represented approximately 96.3% and 96.5% of our consolidated revenues in the years ended December 31, 2022 and 2021, respectively
GRE’s cost of revenues consists primarily of natural gas and electricity purchased for resale. Certain of GRE’s REPs are party to an Amended and Restated Preferred Supplier Agreement with BP Energy Company, or BP, which is in effect through November 30, 2023. Those REPs ability to purchase electricity and natural gas under this agreement is subject to satisfaction of certain conditions including the maintenance of certain covenants.
As an operator of REPs, GRE does not own electrical power generation, transmission, or distribution facilities, or natural gas production, pipeline or distribution facilities. Instead, GRE’s REPs contract with various pipeline and distribution companies for natural gas pipeline, storage and transportation services, and utilizes NYISO, PJM, ISO New England and MISO for electric transmission and distribution. GRE’s cost of revenues includes scheduling costs, ISO fees, pipeline costs and utility service charges for the purchase of these services.
For risk management purposes, GRE’s REPs utilize put and call options and swaps as hedges against unfavorable fluctuations in market prices of electricity and natural gas and to reduce exposure from price fluctuations. The put and call options and swaps are recorded at fair value as a current asset or liability and any changes in fair value are recorded in cost of revenues. The impact of these options and swaps on cost of revenues is relatively small in comparison to the purchases of gas and electricity for resale.
The electricity transmission and distribution operators perform real-time load balancing for each of the electrical power grids in which GRE’s REPs operate. Similarly, the utility or the local distribution company, or LDC, performs load balancing for each of the natural gas markets in which GRE’s REPs operate. Load balancing ensures that the amount of electricity and natural gas that GRE’s REPs purchase is equal to the amount necessary to service their customers’ demands at any specific point in time. GRE’s REPs manage the differences between the actual electricity and natural gas demands of its customers and its bulk or block purchases by buying and selling in the spot market, and through monthly cash settlements and/or adjustments to futures deliveries in accordance with the load balancing performed by utilities, LDCs, and electricity transmission and distribution operators. Suppliers and the LDC’s charge or credit GRE for balancing the electricity and natural gas purchased and sold for its account.
Local utilities generally meter and deliver electricity and natural gas to GRE’s REPs' customers. The local utilities also provide billing and collection services on GRE’s REPs behalf for most of customers and certain local utilities offer purchase of receivables, or POR, programs. GRE’s REPs receive the proceeds less the utility’s fees for purchase of receivables billing and other ancillary services, where applicable.
Volatility in the electricity and natural gas markets affects the wholesale cost of the electricity and natural gas that GRE’s REPs sell to customers. GRE’s REPs may not always choose to pass along increases in costs to their customers for various reasons including competitive pressures and for overall customer satisfaction. In addition, GRE’s REPs offer fixed rate products or guaranteed pricing and may be unable to change their sell rates offered to fixed rate and guaranteed pricing customers in response to volatility in the prices of the underlying commodities. This can adversely affect GRE’s gross margins and results of operations. Alternatively, increases in GRE’s REPs rates charged to customers may lead to increased customer churn.
GRE’s REPs’ selling expense consists primarily of sales commissions paid to independent agents and marketing costs, which are the primary costs associated with the acquisition of customers. Selling, general and administrative expense includes compensation, benefits, utility fees for billing and collection, professional fees, rent and other administrative costs.
Seasonality and Weather; Climate Change
The weather and the seasons, among other things, affect GRE’s REPs’ revenues. Weather conditions have a significant impact on the demand for natural gas used for heating and electricity used for heating and cooling. Typically, colder winters increase demand for natural gas and electricity, and hotter summers increase demand for electricity. Milder winters and/or summers have the opposite effect. Unseasonable temperatures in other periods may also impact demand levels. Potential changes in global climate may produce, among other possible conditions, unusual variations in temperature and weather patterns, resulting in unusual weather conditions, more intense, frequent and extreme weather events and other natural disasters. Some climatologists believe that these extreme weather events will become more common and more extreme which will have a greater impact on our operations. Natural gas revenues typically increase in the first quarter due to increased heating demands and electricity revenues typically increase in the third quarter due to increased air conditioning use. Approximately 39.7% and 44.5% of GRE’s natural gas revenues for the relevant years were generated in the first quarter of 2022 and 2021, respectively, when demand for heating was highest. Although the demand for electricity is not as seasonal as natural gas (due, in part, to usage of electricity for both heating and cooling), approximately 30.5% and 30.3% of GRE’s electricity revenues for 2022 and 2021, respectively, were generated in the third quarters of those years. GRE’s REPs’ revenues and operating income are subject to material seasonal variations, and the interim financial results are not necessarily indicative of the estimated financial results for the full year.
In addition to the direct physical impact that climate change may have on our business, financial condition and results of operations because of the effect on pricing, demand for our offerings and/or the energy supple markets, we may also be adversely impacted by other environmental factors, including: (i) technological advances designed to promote energy efficiency and limit environmental impact; (ii) increased competition from alternative energy sources; (iii) regulatory responses aimed at decreasing greenhouse gas emissions; and (iv) litigation or regulatory actions that address the environmental impact of our energy products and services.
Winter Storm in Texas
In February of 2021, the State of Texas experienced unprecedented cold weather and snow, which was named Winter Storm Uri. With the grid overtaxed due to demand and weather-related reduced supply and rolling blackouts being enforced, by order of the Electricity Reliability Council of Texas ("ERCOT"), real-time commodity prices during the crisis escalated significantly. Although GRE's commitment for their customers in Texas was hedged for foreseen winter weather conditions, the market conditions exposed the Company to significant unexpected cost increases. In the year ended December 31, 2021, GRE recognized approximately $13.0 million in additional costs related to the situation, which were included in the cost of revenue in the consolidated statements of operation.
In June 2021, the legislature of the State of Texas passed House Bill 4492 (“HB 4492”) which includes certain provisions for financing certain costs associated with electric markets caused by Winter Storm Uri. Pursuant to HB 4492, two categories of charges associated with Winter Storm Uri are to be securitized and the proceeds of the securitization will be provided to the load serving entities who originally incurred the charges. Under HB 4492, the Company is entitled to recover a portion of the costs incurred from the effect of Winter Storm Uri with a calculated range of $1.5 million to $2.6 million. In the second quarter of 2021, the Company recorded a reduction in cost of revenues of $1.5 million.
In September 2021, the Public Utility Commission of Texas ("PUC") approved the Debt Obligation Order to grant ERCOT's application for a debt financing mechanism to pay for certain costs associated with Winter Storm Uri. Under the Debt Obligation Order, the amount that the Company is entitled to recover increased to approximately $3.4 million. In the third quarter of 2021, the Company recorded an additional reduction in the cost of revenues of $1.9 million for an aggregate amount of $3.4 million for the year ended December 31, 2021. In June 2022, the Company received a $3.5 million refund related to the cost of Winter Storm Uri.
Purchase of Receivable
Utility companies offer purchase of receivable, or POR, programs in most of the service territories in which we operate. GRE’s REPs reduce their customer credit risk by participating in POR programs for a majority of their receivables. In addition to providing billing and collection services, utility companies purchase those REPs’ receivables and assume all credit risk without recourse to those REPs. GRE’s REPs’ primary credit risk is therefore nonpayment by the utility companies. In the year ended December 31, 2022, the associated cost was approximately 1.1% of GRE's revenue. At December 31, 2022, 80.5% of GRE’s net accounts receivables were under a POR program.
Concentration of Customers and Associated Credit Risk
GRE’s REPs reduce their customer credit risk by participating in purchase of receivable programs for a majority of their receivables. In addition to providing billing and collection services, some utility companies purchase those REPs’ receivables and assume all credit risk without recourse to those REPs for those purchased receivables. GRE’s REPs primary credit risk with respect to those purchased receivables is therefore nonpayment by the utility companies. Certain of the utility companies represent significant portions of our consolidated revenues and consolidated gross trade accounts receivable balance during certain periods, and such concentrations increase our risk associated with nonpayment by those utility companies.
The following table summarizes the percentage of consolidated trade receivable by customers that equal or exceed 10.0% of consolidated net trade receivables at December 31, 2022 and 2021 (no other single customer accounted for 10.0% or greater of our consolidated net trade receivable as of December 31, 2022 and 2021).
na—less than 10.0% of consolidated net trade receivables
The following table summarizes the percentage of consolidated revenues from customers that equal or exceed 10% or greater of the Company’s consolidated revenues in the period (no other single customer accounted for more than 10% of consolidated revenues in these periods):
Year ended December 31,
na—less than 10.0% of consolidated revenues in the period
Class Action Lawsuits
Although GRE endeavors to maintain best sales and marketing practices, such practices have been the subject of certain class action lawsuits in the past.
Most recently, on February 18, 2020, named Plaintiff Danelle Davis filed a putative class action complaint against Residents Energy and GRE in United States District of New Jersey alleging violations of the Telephone Consumer Protection Act, 47 U.S.C § 227 et seq. Although Residents Energy and GRE denies any wrongdoing in connection with the complains, the parties settled the matter for a minimal amount which was included in selling, general and administrative expenses in the first quarter of 2021.
See Notes 15, Legal and Regulatory Proceedings, in this Annual Report on Form 10-K, which is incorporated by reference.
Agency and Regulatory Proceedings
From time to time, the Company responds to inquiries or requests for information or materials from public utility commissions or other governmental regulatory or law enforcement agencies related to investigations under statutory or regulatory schemes. The Company cannot predict whether any of those matters will lead to claims or enforcement actions or whether the Company and the regulatory parties will enter into settlements before a formal claim is made. See Notes 15, Legal and Regulatory Proceedings, in this Annual Report on Form 10-K, which is incorporated by reference, for further detail on agency and regulatory proceedings.
State of Connecticut Public Utilities Regulatory Authority
Town Square Energy
On September 19, 2018, the State of Connecticut Public Utilities Regulatory Authority (“PURA”) commenced an investigation into Town Square following customer complaints of allegedly misleading and deceptive sales practices on the part of Town Square. The Connecticut Office of Consumer Counsel joined in the investigation. On June 17, 2020, the PURA notified Town Square that it was advancing it’s investigation by assigning Prosecutorial ("PRO") staff for the purpose of investigating Town Square’s compliance with licensed electric supplier billing, marketing, and licensing requirements, and, if appropriate, facilitating settlement discussions among the parties.
Although Town Square denies any basis for those complaints and any wrongdoing on its part, in June 2021, it settled the matter with PURA. Pursuant to the terms of the settlement, Town Square paid $0.4 million and has agreed to voluntarily refrain, from in-person marketing activities in Connecticut for the period of 15 months. As of December 31, 2022, Town Square’s Connecticut customer base represented 2.8% of GRE’s total meters served and 3.1% of the total RCEs of GRE’s customer base. For the year ended December 31, 2022 and 2021 Town Square’s gross revenues from sales in Connecticut were $16.6 million and $29.0 million, respectively.
An RCE represents a natural gas customer with annual consumption of 100 mmbtu or an electricity customer with annual consumption of 10 MWh. Because different customers have different rates of energy consumption, RCEs are an industry standard metric for evaluating the consumption profile of a given retail customer base.
In August 2020, Residents Energy began marketing retail energy services in Connecticut. For the year ended December 31, 2022, Residents Energy's gross revenues from sales in Connecticut was $0.2 million. During the fourth quarter of 2020, the enforcement division of PURA contacted Residents Energy concerning customer complaints received in connection with alleged door-to-door marketing activities in violation of various rules and regulations. On March 12, 2021, the enforcement division filed a motion against Resident Energy with the adjudicating body of PURA, seeking the assessment of $1.5 million in penalties, along with a suspension of license for eighteen months, auditing of marketing practices upon reinstatement and an invitation for settlement discussions.
In May 2021, the parties reached a settlement, pursuant to which, Residents Energy paid $0.3 million and volunteered to withdraw from the market in Connecticut for a period of 36 months.
CRITICAL ACCOUNTING POLICIES
Our financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses as well as the disclosure of contingent assets and liabilities. Critical accounting policies are those that require application of management’s most subjective or complex judgments, often as a result of matters that are inherently uncertain and may change in subsequent periods. Our critical accounting policies include those related to the allowance for doubtful accounts, goodwill and income taxes. Management bases its estimates and judgments on historical experience and other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. See Note 1 to the Consolidated Financial Statements in this Annual Report for a complete discussion of our significant accounting policies.
Revenues from the Sale of Electricity and Natural Gas
Revenue from the single performance obligation to deliver a unit of electricity and/or natural gas is recognized as the customer simultaneously receives and consumes the benefit. Variable quantities in requirements contracts are considered to be options for additional goods and services because the customer has a current contractual right to choose the amount of additional distinct goods to purchase.GRE and Genie Japan (during the period prior to its sale in May 2021) record unbilled revenues for the estimated amount customers will be billed for services rendered from the time meters were last read to the end of the respective accounting period. The unbilled revenue is estimated each month based on available per day usage data, the number of unbilled days in the period and historical trends.
Many utility companies in the U.S. offer purchase of receivable, or POR, programs in most of the service territories in which we operate, and GRE’s REPs participate in POR programs for a majority of their receivables. We estimate variable consideration related to our rebate programs using the expected value method and a portfolio approach. Our estimates related to rebate programs are based on the terms of the rebate program, the customer’s historical electricity and natural gas consumption, the customer’s rate plan, and a churn factor. Taxes that are imposed on our sales and collected from customers are excluded from the transaction price.
We recognize the incremental costs of obtaining a contract with a customer as an asset if it expects the benefit of those costs to be longer than one year. We determined that certain sales commissions to acquire customers meet the requirements to be capitalized. For GRE, we apply a practical expedient to expense costs as incurred for sales commissions to acquire customers as the period would have been one year or less.
Revenues from Solar Panels
Our revenues from sales of solar panels are recognized at a point in time following the transfer of control of the solar panels to the customer, which typically occurs upon shipment or delivery depending on the terms of the underlying contracts. For sales contracts that contain multiple performance obligations, such as the shipment or delivery of solar modules, we allocate the transaction price to each performance obligation identified in the contract based on relative standalone selling prices, or estimates of such prices, and recognize the related revenue as control of each individual product is transferred to the customer, in satisfaction of the corresponding performance obligations.
Allowance for Doubtful Accounts
We maintain an allowance for doubtful accounts for estimated losses that result from the inability or unwillingness of our customers to make required payments. The allowance for doubtful accounts was $4.8 million at December 31, 2022 and $6.1 million at December 31, 2021. Our allowance is determined based on known troubled accounts, historical experience and other currently available evidence. Our estimates of recoverability of customer accounts may change due to new developments, changes in assumptions or changes in our strategy, which may impact our allowance for doubtful accounts balance. We continually assess the likelihood of potential amounts or ranges of recoverability and adjust our allowance accordingly, however, actual collections and write-offs of trade accounts receivable may materially differ from our estimates.
Our goodwill balance was $10.0 million at December 31, 2022 and 2021. Goodwill is not amortized since it is deemed to have an indefinite life. It is reviewed annually (or more frequently under various conditions) for impairment using a fair value approach.
Goodwill is the excess of the acquisition cost of businesses over the fair value of the identifiable net assets acquired. Goodwill and other indefinite lived intangible assets are not amortized. These assets are reviewed annually (or more frequently under various conditions) for impairment using a fair value approach.
The fair value of the reporting unit is estimated using discounted cash flow methodologies, as well as considering third party market value indicators. Calculating the fair value of the reporting units requires significant estimates and assumptions by management. Should the estimates and assumptions regarding the fair value of the reporting units prove to be incorrect, the Company may be required to record impairments to its goodwill in future periods and such impairments could be material.
We perform our annual goodwill impairment test as of October 1. In reviewing goodwill for impairment, we have the option, for any or all of our reporting units that carry goodwill - to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that it is more likely than not (i.e. greater than 50%) that the estimated fair value of a reporting unit is less than its carrying amount. If we elect to perform a qualitative assessment and determines that an impairment is more likely than not, we then required to perform the quantitative impairment test, otherwise no further analysis is required. We also may elect not to perform the qualitative assessment and, instead, proceed directly to quantitative impairment test. The ultimate outcome of the goodwill impairment review for a reporting unit should be the same whether we choose to perform the qualitative assessment or proceeds directly to the quantitative impairment test. In 2022 and 2021, we elected to perform a qualitative analysis for our GRE reporting unit as of October 1. The Company determined, after performing a qualitative analysis, that there was no evidence that it is more likely than not that the fair value of any identified reporting unit was less that the carrying amounts, therefore, it was not necessary to perform a quantitative impairment test. We determined, after performing qualitative analysis, that there was no evidence that it is more likely than not that the fair value of any identified reporting unit was less that the carrying amounts, therefore, it was not necessary to perform a quantitative impairment test.
The determination of the fair value of our reporting units is based on an income approach that utilizes discounted cash flows for each reporting unit and other Level 3 inputs as specified in the fair value hierarchy in ASC Topic 820, Fair Value Measurements and Disclosure. Under the income approach, we determine fair value based on the present value of the most recent cash flow projections for the reporting unit as of the date of the analysis and calculate a terminal value utilizing a terminal growth rate. The significant assumptions under this approach include, among others: income projections, which are dependent on future sales, new customers, customer behavior, competitor pricing, operating expenses, the discount rate, and the terminal growth rate. The cash flows used to determine fair value are dependent on a number of significant management assumptions such as the expectations of future performance and the expected future economic environment, which are partly based upon our historical experience. The estimates are subject to change given the inherent uncertainty in predicting future results. Additionally, the discount rate and the terminal growth rate are based on judgment of the rates that would be utilized by a hypothetical market participant.
Our current and deferred income taxes and associated valuation allowance are impacted by events and transactions arising in the normal course of business as well as in connection with special and non-routine items. Assessment of the appropriate amount and classification of income taxes is dependent on several factors, including estimates of the timing and realization of deferred income tax assets, the results of Internal Revenue Service audits of our federal income tax returns, and changes in tax laws or regulations.
The valuation allowance on our deferred income tax assets was $10.2 million and $10.3 million at December 31, 2022 and 2021, respectively. We employ a tax strategy that enables us to currently deduct losses from our foreign subsidiaries against our profitable U.S. operations and we assess the realizability of deferred taxes quarterly. Because of our current projections, we concluded that we meet the criteria of more likely than not in order to utilize our deferred federal income tax assets in the foreseeable future and have released the valuation on the assets that we will utilize.
We use a two-step approach for recognizing and measuring tax benefits taken or expected to be taken in a tax return. We determine whether it is more-likely-than-not that, a tax position will be sustained upon examination, including resolution of any related appeals or litigation processes, based on the technical merits of the position. In evaluating whether a tax position has met the more-likely-than-not recognition threshold, we presume that the appropriate taxing authority that has full knowledge of all relevant information will examine the position. Tax positions that meet the more-likely-than-not recognition threshold are measured to determine the amount of tax benefit to recognize in the financial statements. The tax position is measured at the largest amount of benefit that is greater than 50 percent likely of being realized upon ultimate settlement. Differences between tax positions taken in a tax return and amounts recognized in the financial statements will generally result in one or more of the following: an increase in a liability for income taxes payable, a reduction of an income tax refund receivable, a reduction in a deferred tax asset, or an increase in a deferred tax liability. We review and adjust our liability for unrecognized tax benefits based on our best estimate and judgment given the facts, circumstances and information available at each reporting date. To the extent that the outcome of these tax positions is different from the amounts recorded, such differences may affect income tax expense and actual tax payments.
RECENTLY ISSUED ACCOUNTING STANDARDS
Information regarding new accounting pronouncements are included in Note 1 —Description of Business and Summary of Significant Accounting Policies, to the Consolidated Financial Statements included in this Annual Report on Form 10-K.
RESULTS OF OPERATIONS
We evaluate the performance of our operating business segments based primarily on income (loss) from operations. Accordingly, the income and expense line items below income (loss) from operations are only included in our discussion of the consolidated results of operations.
Year Ended December 31, 2022 compared to Year Ended December 31, 2021
Genie Retail Energy Segment
Year ended December 31,
(amounts in thousands)
Cost of revenues
Selling, general and administrative
Income from operations
Revenues.GRE’s electricity revenues decreased in 2022 compared to 2021. The decrease in electricity revenues in 2022 compared to 2021 was the result of a decrease in electricity consumption partially offset by an increase in the average price charged to customers. Electricity consumption by GRE's REPs' customers decreased 33.4% in 2022 compared to 2021. The decrease in electricity consumption reflected a decrease in the average number of meters served, which decreased by 30.8% in 2022 compared to 2021 and a 3.8% decrease in average electricity consumption per meter in 2022 compared to 2021. The reduction in meters served was driven, in part, by our decision to suspend certain customer acquisition efforts and allow certain lower margin customers, including those acquired through municipal aggregate deals to move to other suppliers. The average rate per kilowatt hour sold increased by 33.0% in 2022 compared to 2021. The increase in average rate per kilowatt hour sold is due to the increase in the average wholesale price of electricity in 2022 compared to 2021.
GRE’s natural gas revenues increased in 2022 compared to 2021. The increase in natural gas revenues in 2022 compared to 2021 was a result of increases in natural gas consumption, driven by increases in average meters served as well as average consumption per meter and average rate per therm sold. Natural gas consumption of GRE's REPs customers increased by 33.4% in 2022 compared to 2021. Average meters served increased by 6.5% in 2022 compared to 2021 and average consumption per meter increased by 25.2% in 2022 compared to 2021. The average rate per therm sold increased 20.0% in 2022 compared to 2021. The increase in average rate per therm sold is due to the increase in the average wholesale price of natural gas in 2022 compared to 2021.
The customer base for GRE's REPs as measured by meters serviced consisted of the following:
Meters at end of quarter:
Natural gas customers
Gross meter acquisitions in 2022 were 159,000 compared to 177,000 in 2021. The number of meters served on December 31, 2022 decreased by 10,000 meters or 3.5% from December 31, 2021. The decrease in the gross meter acquisitions for the year ended December 31, 2022 compared to 2021 was due to a “strategic pause” on certain customer acquisition channels to protect margins due to unfavorable market conditions that started in the fourth quarter of 2021.
In 2022, average monthly churn decreased to 4.8% compared to 5.7% in 2021. The decrease in average monthly churn in the year ended December 31, 2022 compared to 2021 was due to termination of a significant aggregation deal in 2021. GRE's REPs also returned some customers to their underlying utility in certain markets in the fourth quarter of 2021 to minimize the impact of expected higher prices on our margin.
The average rates of annualized energy consumption, as measured by residential customer equivalents, or RCEs, are presented in the chart below. An RCE represents a natural gas customer with annual consumption of 100 mmbtu or an electricity customer with annual consumption of 10 MWh. Because different customers have different rates of energy consumption, RCEs are an industry standard metric for evaluating the consumption profile of a given retail customer base.
RCEs at end of quarter:
Natural gas customers
RCEs slightly decreased 0.8% at December 31, 2022 compared to December 31, 2021 primarily due to the "strategic pause" on customer acquisition and transfer of some customers to their underlying customers as discussed above.
Cost of Revenues and Gross Margin Percentage. GRE’s cost of revenues and gross margin percentage were as follows:
Year ended December 31,
(amounts in thousands)
Cost of revenues:
Total cost of revenues
|Year ended December 31,|
Gross margin percentage:
Total gross margin percentage
Cost of revenues for electricity decreased in 2022 compared to 2021 primarily because of decreases in the electricity consumption in the average unit cost of electricity. The average unit cost of electricity decreased by 19.6% in 2022 compared to 2021. Electricity consumption by GRE's REPs' customers decreased by 33.4% in 2022 compared to 2021. A significant portion of the decrease in the average cost of electricity is due to the favorable results of hedging activities in 2022 compared to 2021 and the incremental cost incurred in 2022 from the effect of a major winter storm in Texas as discussed above. The gross margin on electricity increased in 2022 compared to 2021, because the average rate charged to customers increased while the average unit cost of electricity decreased.
Cost of revenues for natural gas increased in 2022 compared to 2021 primarily because of increases in total natural gas consumption and average unit cost of natural gas. Natural gas consumption by GRE’s REPs’ customers increased by 33.4% in 2022 compared to 2021. The average unit cost of natural gas increased 48.8% in 2022 compared to 2021. Gross margin on natural gas sales decreased in 2022 compared to 2021 because the increase in the average rate charged to customers increased less than the average unit cost of natural gas.
Selling, General and Administrative.The increase in selling, general and administrative expense in 2022 compared to 2021 was primarily due to increases in marketing and customer acquisition costs, provision for doubtful accounts and costs related to POR programs and employee-related costs partially offset by a decrease in legal settlement costs. Marketing and customer acquisition expenses increased by $3.7 million in 2022 compared to 2021 as a result of an increase in spending in our commercial business and to offset the effect of COVID-19 related public health restrictions to transitional customer acquisition methods partially offset by the decrease in residential customer meter acquisition. Employee-related expenses slightly increased by $0.6 million in 2022 compared to 2021 primarily due to an increase share based compensation expenses. Provision for doubtful accounts and costs related to POR programs decreased by $0.7 million in 2022 compared to 2021 as a result of expansion of activities in non-POR markets. As discussed above, Residents Energy and Town Square energy paid $0.8 million in legal settlements in Connecticut in 2021. No legal settlements were paid in 2022. As a percentage of GRE’s total revenues, selling, general and administrative expenses increased to 19.9% in 2022 from 18.0% in 2021.
The Genie Renewables (formerly GES) segment is composed of Genie Solar, CityCom Solar, Diversegy and Prism, in which we hold a60.0% controlling interest. Genie Solar is an integrated solar energy company. CityComm Solar is a marketer of community solar energy solutions. Diversegy provides energy brokerage and advisory services to commercial customers. Prism provides energy brokerage and advisory services to commercial customers.
Year Ended December 31,
|(amounts in thousands)|
Cost of revenue
|Selling, general and administrative expenses||5,328||2,531||2,797||110.5|
(Loss) income from operations
nm — not meaningful
Revenue. Genie Renewables' revenues increased in 2022 compared to 2021. The increase in revenues was the result of increases in the activities of Genie Solar projects and commissions from selling third-party products to customers by CityCom Solar.Revenues from Diversegy include commissions, entry fees and other fees from our energy brokerage and marketing services businesses.
Cost of Revenue. Cost of revenues increased by 106.7% in 2022 compared to 2021. The increase in cost revenues reflects the increase in revenues of Genie Solar and CityCom Solar. Cost of revenue related to Diversegy included commissions incurred by our energy brokerage and marketing services businesses.
Selling, General and Administrative. Selling, general and administrative expenses increased in 2022 compared to 2021 primarily due to increases in headcount in Genie Solar and Diversegy and consulting fees at Genie Solar.
As discussed above, the remaining accounts of GREI International were transferred to the corporate starting in the third quarter of 2022, which includes accounts of Genie Japan before we sold our stake in May 2021. The revenues and cost of revenues in 2021 were generated from Genie Japan before it was sold. Other entities and activities under corporate do not generate any revenues, nor does they incur any cost of revenues. In addition to the costs related to the Genie Japan customers, corporate costs include unallocated compensation, consulting fees, legal fees, business development expense and other corporate-related general and administrative expense.
Year Ended December 31,
(amounts in thousands)
|Cost of revenues||—||5,955||(5,955||)||(100.0||)|
|General and administrative expenses||9,209||8,833||376||4.3|
|Impairment of assets||2,066||—||2,066||100.0|
Loss from operations
In January 2021, weather volatility and the lack of adequate gas reserves drove the prices on the Japan Electric Power Exchange to $2,390 per megawatt hour for an extended period of time. Although our supply commitment for our customers in Japan was hedged reasonably for expected winter weather conditions, the extreme price spike exposed us to further unexpected cost increases. The impact on our 2021 consolidated result of operations was approximately $2.5 million.
On April 26, 2021, we entered into an Equity Purchase Agreement ("Purchase Agreement") with Hanhwa Q Cells Japan Co., Ltd. ("Hanhwa"), pursuant to which, we agreed to sell our interest in Genie Japan for ¥570.0 million (equivalent to approximately $5.3 million at April 26, 2021) subject to certain terms and conditions set forth in the Purchase Agreement. On May 11, 2021, upon the terms and subject to the conditions of Purchase Agreement, we completed the divestiture of Genie Japan for an aggregate cash consideration of ¥570.0 million (equivalent to approximately $5.2 million at May 11, 2021). Hanhwa also assumed the outstanding loans payable of Genie Japan. We paid $0.6 million of commission to certain former employees of Genie Japan and recognized a pre-tax gain of $4.2 million from the divestiture. For the period from January 1, 2021 to May 11, 2021, Genie Japan had revenues and cost of revenues of $3.9 million and $5.9 million, respectively.
The increase in Corporate general and administrative expenses in 2022 compared to 2021 was primarily due increases in employee related cost and stock-based compensation expenses. As a percentage of our consolidated revenues, corporate general and administrative expenses slightly increased from 2.7% in 2021 to 2.9% in 2022.
In December 2022, the Company suspended the development of business operations of Petrocycle, Ltd. ("Petrocycle"), a preoperating entity engaged in the development of a process to recycle used engine oil into usable gasoline, after it was determined that the current operations will not meet the expected results. Petrocycle provided full impairment of its property and equipment and notes and other receivables from its minority interest partner for an aggregate amount of $2.1 million
Selling, General and Administrative. Stock-based compensation expense included in consolidated selling, general and administrative expense was $3.0 million and $2.9 million in 2022 and 2021, respectively. At December 31, 2022, aggregate unrecognized compensation cost related to non-vested stock-based compensation was $3.4 million. The unrecognized compensation cost expected to be recognized over the average service period of 1.4 years.
As a percentage of our consolidated revenues, selling, general and administrative expense increased from 20.9% in 2021 to 23.8% in 2022.
The following is a discussion of our consolidated income and expense line items below loss from operations.
Year Ended December 31,
(amounts in thousands)
Income from operations
|Unrealized loss on marketable equity securities and investments||(417||)||(4,970||)||4,553||91.6|
|Gain on sale of subsidiary||—||4,226||(4,226||)||nm|
Other income, net
Provision for income taxes
Net income from continuing operations
|Income from discontinued operations, net of tax||30,445||11,705||18,740||(160.1||)|
Net loss attributable to noncontrolling interests
Net income attributable to Genie Energy Ltd.
nm — not meaningful
Unrealized loss on marketable equity securities and investments. The unrealized loss on marketable equity securities and investments in 2021 primarily pertains to the change in fair value of the Company's investments in common stock of Rafael Holdings, Inc. ("Rafael") which the Company acquired in December 2020.
Gain on sale of subsidiary. The gain on sale of subsidiary in 2021 pertains to the gain recognized related to the sale of Genie Japan in May 2021.
Other Income, net.Other expense, net in 2022 and 2021, consisted primarily of foreign currency transactions gains and losses.
Provision for Income Taxes. The increase in provision for income tax in 2022 compared to 2021 is primarily due to increases in the amount of taxable income in the various taxing jurisdictions. Income before income taxes increased to $77.5 million in 2022 compared to $23.7 million in 2021.
Net Loss (Income) Attributable to Noncontrolling Interests. The decrease in net loss attributable to noncontrolling interests in 2022 compared to 2021 was primarily due to a decrease in net loss of Citizens Choice ("CCE"), partially offset by the increase in share in noncontrolling interest in the net income of Lumo Sweden and Lumo Finland.
Income from discontinued operations, net of tax. Income from discontinued operations, net of tax in 2022 pertains to the results of operations of Lumo Finland and Lumo Sweden. Income from discontinued operations, net of tax in 2021 pertains to the results of operations of Lumo Finland and Lumo Sweden as well Orbit which we discontinued in fourth quarter of 2021.
LIQUIDITY AND CAPITAL RESOURCES
We currently expect that our cash flows from operations in the next twelve months and the $98.6 million balance of unrestricted cash and cash equivalents that we held at December 31, 2022 will be sufficient to meet our currently anticipated cash requirements for at least the period from January 1, 2023 to March 16, 2024.
At December 31, 2022, we had working capital (current assets less current liabilities) $127.4.
Year ended December 31,
(amounts in thousands)
Cash flows provided by (used in):