Genie Energy Ltd. — Form 10-Q Summary
Business Context and Reporting Period
Genie Energy operates primarily through IDT Energy, a retail electricity and natural gas provider serving residential and small-business customers in the Northeastern United States, and Genie Oil and Gas, which is developing oil shale and conventional oil and gas projects in the United States, Israel, the Golan Heights and Mongolia. The filing covers the quarter and six months ended June 30, 2014; financial statements are unaudited.
Results are materially seasonal and weather-sensitive. The 2013–2014 polar vortex caused unusually high wholesale energy prices, customer complaints, rebates and increased customer churn.
Financial Performance and Key Metrics
| Metric | Three months ended June 30, 2014 | Three months ended June 30, 2013 | Six months ended June 30, 2014 | Six months ended June 30, 2013 |
|---|---|---|---|---|
| Total revenue | $48.8 million | $55.1 million | $179.2 million | $140.5 million |
| Gross profit | $11.5 million | $10.0 million | $21.3 million | $29.0 million |
| Gross margin | 23.5% | 18.1% | 11.9% | 20.6% |
| Loss from operations | $(4.3) million | $(5.6) million | $(10.8) million | $(2.9) million |
| Net loss | $(5.0) million | $(6.2) million | $(12.2) million | $(6.3) million |
| Net loss attributable to common stockholders | $(5.2) million | $(6.2) million | $(12.3) million | $(8.0) million |
| Loss per common share | $(0.24) | $(0.32) | $(0.58) | $(0.41) |
- Second-quarter revenue declined 11.5%, while six-month revenue increased 27.6%, primarily reflecting higher commodity-related customer rates during the winter period.
- Second-quarter gross profit increased 14.9%, but six-month gross profit declined 26.4% because wholesale electricity and natural gas costs rose substantially and were only partly recovered through customer rates.
- Second-quarter operating loss improved by $1.2 million, helped by higher electricity margins and the absence of the prior-year AMSO equity loss. The six-month operating loss worsened by $7.9 million.
- Consolidated selling, general and administrative expense was $13.4 million in the second quarter and $27.7 million for the six months, including stock-based compensation of $1.7 million and $3.6 million, respectively.
- Genie Oil and Gas generated no revenue and reported operating losses of $2.8 million in the quarter and $5.2 million for the six months.
Cash Flow, Liquidity, Debt and Capital Resources
- Cash and cash equivalents were $67.8 million at June 30, 2014, compared with $73.9 million at December 31, 2013. Total cash, short-term restricted cash and certificates of deposit were $79.9 million.
- Working capital was $96.0 million. Total assets were $134.7 million and total liabilities were $27.7 million.
- Operating cash flow was $(7.1) million for the six months, compared with $1.4 million provided in the prior-year period. Investing cash flow was $1.2 million provided, and financing cash flow was $(0.3) million used.
- The company had no borrowings under its $25.0 million revolving credit facility. The facility maturity was extended to April 30, 2015 and was supported by $10.0 million of restricted cash collateral.
- Letters of credit totaled $7.6 million, and performance bonds totaled $3.8 million. The company was in compliance with covenants under its BP preferred supplier agreement.
- Management stated that existing liquidity and expected operations should satisfy anticipated cash requirements for at least the twelve months ending June 30, 2015.
- Capital expenditures were $0.8 million in the first six months, and management expected approximately $0.4 million of capital expenditures for the twelve months ending June 30, 2015.
Material Changes Versus the Prior Comparable Period
- IDT Energy’s second-quarter electricity revenue fell 11.3% and natural gas revenue fell 12.1%. For the six months, electricity revenue increased 36.4% and natural gas revenue increased 5.9% because of higher customer rates.
- Six-month electricity consumption declined 18.7% and natural gas consumption declined 4.3%. Electricity and natural gas meters declined to 238,000 and 126,000, respectively, at June 30, 2014, from 314,000 and 161,000 a year earlier.
- Average monthly customer churn increased to 8.1% in the second quarter and 7.6% for the six months, compared with 6.3% in each prior-year comparison period. Management indicated churn was closer to historical levels late in the second quarter.
- IDT Energy paid $4.7 million in discretionary rebates to customers during the first six months to mitigate the impact of winter price increases.
- AMSO did not fund its first three 2014 capital calls. Its interest in AMSO, LLC declined to 44.9% from the prior level, while Total’s interest increased to 55.1%; further nonfunding could cause additional dilution.
- The company exchanged 404,732 Class B common shares for an equal number of Series 2012-A preferred shares. The exchange increased the aggregate quarterly preferred dividend to approximately $0.4 million from $0.3 million and extended certain redemption dates by one year.
- In July and August 2014, CEO Howard S. Jonas purchased 3.6 million Class B shares for $24.6 million. Relatedly, previously granted options to purchase 3.0 million shares were cancelled.
Guidance, Outlook, Risks and Unusual Items
- Management expects new initiatives, including Epiq Energy’s sales channel and the Residents Energy guaranteed-rate brand, to contribute meaningfully to customer additions by December 2014. No formal revenue or earnings guidance was provided.
- Afek received planning approval for a ten-well exploration program, but a drilling permit had not yet been issued. Subject to permits and legal matters, drilling was expected to begin in the second half of 2014.
- IEI’s oil shale license was extended through July 2015, and its pilot-facility permitting process remained ongoing. Genie Mongolia’s commercial development remains dependent on a future regulatory framework.
- AMSO’s maximum estimated additional loss exposure was $0.2 million based on the remaining 2014 budget, but this exposure could increase under the project agreements.
- Outstanding contractual obligations totaled $25.4 million, including $15.9 million of renewable energy credit commitments, $7.2 million of purchase obligations and $1.1 million of operating leases. Estimated contingent acquisition payments of $1.1 million were excluded.
- IDT Energy faced regulatory proceedings and putative class actions in Pennsylvania, New York and New Jersey concerning sales practices and winter 2014 price increases. The company said it believed the claims lacked merit but could not estimate the potential impact.
- The company identified material weaknesses in internal control over financial reporting involving journal-entry review and quarterly financial-statement variance analysis. Management initiated remediation measures, but controls were not effective as of June 30, 2014.
- Energy price volatility, customer churn, regulatory scrutiny, litigation, weather, customer and utility concentration, and the company’s limited hedging coverage remain significant risks. The company does not apply hedge accounting, so derivative fair-value changes flow through earnings.
Investor Verification Checklist
- Verify whether customer meters, churn and consumption stabilize following the winter 2014 price shock and whether new guaranteed-rate offerings increase growth without creating excessive commodity exposure.
- Monitor quarterly gross margins and the pass-through of electricity and natural gas procurement costs.
- Assess cash generation, the use of restricted cash, letters of credit and compliance with the BP and revolving-credit facility covenants.
- Track the Pennsylvania regulatory complaint and the New York, New Jersey and Pennsylvania class actions, including any settlements, reserves or changes in exposure.
- Confirm remediation and subsequent testing of the disclosed material weaknesses in internal control.
- Evaluate the effect of continued AMSO underfunding on ownership dilution, future funding obligations and project value.
- Review the effect of the preferred-share exchange, increased preferred dividends and the post-quarter-end CEO share purchase on capital structure and per-share economics.