Genie Energy Ltd. — Form 10-Q Summary
Business Context and Reporting Period
Unaudited results cover the three months ended March 31, 2014, compared with the three months ended March 31, 2013. Genie operates primarily through IDT Energy, a retail electricity and natural-gas provider in the Northeastern United States, and Genie Oil and Gas, which develops oil shale and exploration projects in Colorado, Israel, the Golan Heights and Mongolia.
Results were materially affected by unusually cold weather and the 2013–2014 “polar vortex,” which increased customer demand and wholesale commodity costs.
Key Financial Metrics
| Metric | Q1 2014 | Q1 2013 | Change |
|---|---|---|---|
| Total revenue | $130.3 million | $85.3 million | Up 52.8% |
| Gross profit | $9.9 million | $19.0 million | Down 48.0% |
| Gross margin | 7.6% | 22.3% | Down 14.7 percentage points |
| Operating income (loss) | $(6.5) million | $2.6 million | Down $9.1 million |
| Net loss | $(7.1) million | $(0.1) million | Loss increased |
| Net loss attributable to Genie | $(6.8) million | $(1.5) million | Loss increased $5.3 million |
| Net loss attributable to common stockholders | $(7.1) million | $(1.8) million | Loss increased |
| Basic and diluted loss per share | $(0.33) | $(0.09) | Worsened |
| Cash flow from operations | $(29.7) million | $(0.8) million | Greater use of cash |
- Electricity revenue increased 75.8% to $96.0 million; natural-gas revenue increased 11.8% to $34.3 million.
- Direct costs increased 81.6% to $120.4 million, exceeding revenue growth because electricity and natural-gas procurement costs rose sharply.
- Electricity gross margin fell to 9.1% from 18.9%; natural-gas gross margin fell to 3.2% from 28.2%.
- Selling, general and administrative expense increased to $14.3 million from $12.8 million. Stock-based compensation rose to $1.8 million from $1.0 million.
- Cash and cash equivalents were $46.4 million at March 31, 2014, compared with $73.9 million at December 31, 2013. Working capital was $100.2 million.
- Total assets were $157.5 million and total liabilities were $46.9 million at March 31, 2014.
- No amounts were outstanding under the $25.0 million revolving credit facility. Restricted cash included $10.0 million pledged as collateral for the facility.
- Investing activities provided $2.5 million, primarily from certificate-of-deposit maturities. Financing activities used $0.3 million, primarily for preferred-stock dividends.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by colder weather and higher customer rates, but the company absorbed much of the increased commodity costs because of competitive and regulatory pressures.
- IDT Energy’s gross margin declined substantially, resulting in an operating loss of $0.9 million versus operating income of $8.8 million in the prior-year quarter.
- Electricity consumption declined 9.8% and natural-gas consumption declined 1.7%, while average rates increased 94.9% and 13.7%, respectively.
- Customer meters declined to 391,000 from 485,000 at March 31, 2013. Average monthly churn increased to 7.2% from 6.3%; gross meter acquisitions declined to 47,000 from 66,000.
- Corporate expense increased primarily because of stock-option compensation related to a December 2013 grant of options to purchase 3.0 million Class B shares. Aggregate unrecognized stock-based compensation was $22.8 million.
- Genie Oil and Gas operating loss improved to $2.4 million from $3.9 million, partly because no equity loss from AMSO, LLC was recognized in the current quarter.
- AMSO did not fund its first- and second-quarter 2014 capital calls. Total funded AMSO’s share, reducing AMSO’s ownership interest in AMSO, LLC to 46.6% and increasing Total’s interest to 53.4%. Further underfunding could cause additional dilution.
Guidance, Outlook, Risks and Unusual Items
- Management stated that cash, cash equivalents, short-term restricted cash and certificates of deposit totaling $59.1 million at March 31, 2014, together with expected operating resources, should satisfy anticipated cash requirements for at least the twelve months ending March 31, 2015.
- Management expected the winter price volatility to continue affecting the second quarter through modest additional rebates, lower customer acquisition rates and above-average churn.
- IDT Energy issued approximately $3.5 million of customer rebates and received several thousand formal customer complaints relating to winter price increases. Regulatory inquiries, legislative changes, litigation and reputational damage could adversely affect the business.
- Contractual obligations totaled $17.9 million, including $3.2 million of projected AMSO funding, $2.5 million of purchase obligations and $9.9 million of renewable-energy-credit commitments. The filing also disclosed $7.6 million of standby letters of credit and $3.8 million of performance bonds.
- The BP preferred-supplier agreement expires June 30, 2015. At March 31, 2014, $73.3 million of trade receivables and $0.9 million of restricted cash were pledged to BP against $26.3 million of trade payables.
- IEI’s Israeli pilot-facility application remained under environmental review, expected to continue through at least the remainder of 2014. Afek’s proposed ten-well drilling program remained subject to permitting; drilling was expected to begin in the second half of 2014 if approved.
- On May 8, 2014, the company announced a proposed exchange of up to 5.0 million Class B shares for newly issued preferred shares. The filing does not provide the final outcome of the offer.
- Disclosure controls and procedures were not effective as of March 31, 2014 because of material weaknesses involving journal-entry review and quarterly financial-statement variance analysis. Remediation efforts had begun.
Important Facts for Investors to Verify
- Whether IDT Energy can restore margins after the winter commodity-price shock without further customer rebates, regulatory restrictions or increased churn.
- The pace of customer-meter losses, customer acquisition and churn during the second quarter and the remainder of 2014.
- The company’s ability and willingness to fund AMSO, LLC, and the resulting risk of further dilution or additional funding obligations.
- The status of customer complaints, regulatory investigations and any related litigation or liabilities.
- Progress in remediating the identified material weaknesses in internal control over financial reporting.
- The impact of the proposed common-stock-for-preferred-stock exchange on capital structure, dividends, dilution and future redemption obligations.
- Liquidity after considering negative operating cash flow, pledged receivables, restricted cash, letters of credit and contractual commitments.