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Summer Energy Reports Lower Unit Gross Margin, Anticipates Improvement In 2019; Reports Fiscal Results

April 12, 2019

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Copyright 2010-19 EnergyChoiceMatters.com
Reporting by Paul Ring • ring@energychoicematters.com

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In reporting fiscal 2018 results, Summer Energy Holdings, Inc. reported lower unit gross margin

"For the year ended December 31, 2018 compared to December 31, 2017, the Company’s unit gross margin declined by approximately 24%. Weather conditions directly influence the demand for electricity and affect the prices of energy commodities. Our hedging strategy is based on forecasted customer energy usage, which can vary substantially as a result of weather patterns deviating from historical norms. We are particularly sensitive to this variability with our residential customers in which energy is highly sensitive to weather conditions that impart heating and cooling demand. Our risk management policies direct that we hedge substantially all of our forecasted demand, which is typically hedged to long-term weather patterns. We also attempt to add additional contracts from time to time to protect us from volatility in markets where we have historically experienced higher exposure to extreme weather conditions. Because we attempt to match commodity purchases to anticipated demand, unanticipated changes in weather patterns can have a significant impact on our operating results and cash flows from period to period," Summer Energy stated in a 10-K

"Severe unpredictable weather events occurred during the months of January and July 2018 which contributed to the decline in unit gross margin and resulted in material losses to the Company. The extreme cold temperatures during the first and third weeks of January 2018 caused an increase in electric consumption by customers along with significantly higher-than-normal wholesale power prices to the Company causing a deviation from the Company’s anticipated forecast for the month. During July 2018, there were ten consecutive days of record-setting high temperatures in both the Houston and Dallas metro areas. The result of the extreme heat during this ten-day period produced a surge in wholesale power prices and increased electric consumption for both metro areas," Summer Energy said

"The Company also experienced non-weather events that negatively impacted earnings during 2018. The Company’s electronic data interchange system ('EDI') and billing provider went offline for an extended period of time. During the EDI outage, the Company was unable to generate invoices to customers or collect cash from billings for a two-week period. This unforeseen event prevented the Company from billing and collecting fee revenues which is a significant source of income. In addition, the Company was adversely affected by an allegedly erroneous power settlement issue with a local utility company. The Company pursued legal action against the local utility company and entered into an electricity usage resolution agreement in favor of the Company in March 1, 2019 for $1,341,400 for such alleged overcharges," Summer Energy said in the 10-K

Summer Energy stated in the 10-K that, "In 2019, the Company anticipates unit gross margin to improve, and the non-weather events experienced during 2018 are unlikely to reoccur. Currently, the Company is evaluating temperature contingent options to mitigate the impact of weather events on its earnings and manage its exposure. Such instruments will be implanted if a suitable solution is determined."

Turning to the fiscal results, Summer Energy Holdings' electricity revenues from contracts with customers for the year ended December 31, 2018 increased approximately 32% from the year ended December 31, 2017. "This increase was primarily due to an increase in electricity volumes delivered in the Northeast market from the acquisition of Rep Energy, LLC on November 1, 2017 and by an approximate increase of 81% in the growth of the pre-paid ERCOT market. Fee revenue decreased by approximately 30% primarily due to the inability of the Company to bill fees during the EDI outage," the company said

For the year ended December 31, 2018, Summer Energy Holdings generated $151,903,328 in electricity revenue from commercial customers and various long and short-term residential customers. The majority of the revenue comes from the flow of electricity to customers. However, included within these revenues are revenues from contract cancellation fees, disconnection fees and late fees in the amount of $3,320,374. Electricity revenues for the year ended December 31, 2017 had been $117,683,175, including $4,804,289 from contract cancellation fees, disconnection fees and late fees.

Summer Energy Holdings delivered volumes for the year 2018 were 1,728,401 MWh, versus 1,354,812 MWh a year ago

For the year ended December 31, 2018, Summer Energy Holdings and gross profit totaled $13,575,276, versus $17,784,396 a year ago

Summer Energy Holdings net income/(loss) for the years ended December 31, 2018 and 2017, totaled $(7,753,870) and $1,266,608, respectively. The 2018 net loss compared to the 2017 net income relates primarily to higher cost of goods sold, especially during the months of January and July 2018.

As in past quarters, Summer Energy Holdings stated, "Management plans to continue to execute on its sales and marketing program to solicit individual commercial and residential customers. Customer growth is a key driver of our operations. Our customer growth strategy includes growing organically through traditional sales channels complemented by customer portfolio and business acquisitions. Management plans to continue to evaluate and acquire portfolios of commercial and residential customers where they make sense economically or strategically. In addition, management plans to expand into new markets during the calendar year 2019."

"[W]e continue to evaluate and pursue opportunities to acquire other REPs to the extent these acquisitions would provide value to us," the company said

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