Genie Energy Ltd. — Q3 2013 Form 10-Q Summary
Business context and reporting period
Genie Energy reported unaudited results for the three and nine months ended September 30, 2013, compared with the corresponding 2012 periods. Its principal businesses are IDT Energy, a Northeastern U.S. retail electricity and natural-gas provider, and Genie Oil and Gas, which develops oil-shale and conventional oil-and-gas exploration projects in the United States, Israel, the Golan Heights and Mongolia. Results are seasonal, with electricity demand typically higher in the third quarter and natural-gas demand higher in the first quarter.
Financial performance and liquidity
| Metric | Q3 2013 | Q3 2012 | 9M 2013 | 9M 2012 |
|---|---|---|---|---|
| Revenue | $71.6 million | $63.7 million | $212.1 million | $164.1 million |
| Gross profit | $19.9 million | $21.4 million | $48.9 million | $51.1 million |
| Gross margin | 27.8% | 33.6% | 23.1% | 31.2% |
| Operating income | $3.9 million | $3.5 million | $1.0 million | $1.2 million |
| Net income (loss) | $2.0 million | $(1.1) million | $(4.2) million | $(3.6) million |
| Net income (loss) attributable to common stockholders | $1.7 million | $(2.6) million | $(6.3) million | $(5.3) million |
| Basic EPS | $0.09 | $(0.13) | $(0.33) | $(0.25) |
- IDT Energy generated all reported revenue. Genie Oil and Gas had no revenue and recorded a $3.7 million operating loss in Q3 and an $11.5 million operating loss for the nine months.
- Q3 revenue increased 12.4%, driven primarily by higher electricity rates and consumption. Nine-month revenue increased 29.3%, reflecting higher electricity consumption and rates and colder first-quarter weather.
- Gross profit declined despite higher revenue. Electricity gross margin fell to 27.5% in Q3 from 33.5% and to 21.3% for the nine months from 32.3%, primarily because of higher commodity costs, promotional activity, customer mix and a pricing-system issue in newer territories.
- Operating income increased in Q3 because lower IDT Energy selling, general and administrative expense more than offset the gross-profit decline. Nine-month operating income decreased modestly because of weaker gross profit and higher oil-and-gas losses.
- Operating cash flow was $(0.7) million for the nine months, compared with $1.2 million provided in 2012. Investing activities provided $3.9 million, largely reflecting proceeds from marketable securities, while financing activities used $1.0 million.
- Cash and cash equivalents were $71.8 million at September 30, 2013, versus $69.4 million at December 31, 2012. Including short-term restricted cash, certificates of deposit and marketable securities, management identified $88.1 million of available balances for liquidity planning. Working capital was $106.0 million.
- Total assets were $146.2 million and total liabilities were $29.9 million at September 30, 2013. No amounts were borrowed under the $25.0 million revolving credit facility; $10.0 million was restricted as collateral and $2.0 million was used for letters of credit.
Material changes versus the prior comparable period
- IDT Energy’s Q3 revenue rose $7.9 million, while gross profit fell $1.5 million. Selling, general and administrative expense declined $2.4 million, primarily due to lower customer acquisition, severance and stock-based compensation costs.
- Customer meters declined to 456,000 at September 30, 2013 from 523,000 a year earlier. Average monthly churn improved slightly to 6.3% from 6.6%, but customer acquisitions fell substantially and competition remained a factor.
- Genie Oil and Gas research and development expense increased to $7.7 million for the nine months from $7.1 million. AMSO, LLC’s net loss increased to $7.4 million from $6.4 million, partly because of the failed down-hole heater and development of an alternative heating system.
- Preferred-stock dividends reduced income attributable to common stockholders by $0.3 million in Q3 and $0.9 million for the nine months. Common-stock dividends were suspended for the foreseeable future.
- Marketable securities declined to $0.4 million from $10.5 million at year-end, primarily because of maturities and sales. Certificates of deposit increased to $5.3 million from $2.2 million.
Guidance, outlook, risks and unusual items
- Management stated that existing operations and cash resources were expected to meet anticipated requirements for at least the twelve months ending September 30, 2014. Planned capital expenditures for that period were approximately $0.7 million.
- AMSO expected 2013 contributions to AMSO, LLC not to exceed $2.7 million. The company’s estimated maximum additional-loss exposure was $1.9 million based on the 2013 budget, but exposure could increase; failure to fund could dilute or forfeit its interest.
- AMSO’s pilot project was delayed after its electric heater failed following approximately two weeks of operation. Replacement-heater development could continue into or through 2014, and no conclusion about technical viability had been reached.
- IEI submitted a revised pilot-facility application on November 3, 2013. The permitting process was expected to take at least nine months after acceptance of a completed proposal and potentially longer.
- Afek planned to begin exploration drilling as early as the first half of 2014. Genie Mongolia continued geological and exploratory work, but future commercial operations depended on an applicable regulatory framework.
- Energy commodity prices remain volatile. IDT Energy used electricity and natural-gas derivatives to reduce price risk, but did not apply hedge accounting; Q3 derivative losses recognized in direct cost of revenues were $0.4 million.
- Contractual obligations totaled $32.8 million, including $29.2 million of derivative contracts, $1.9 million of AMSO commitments, $1.3 million of purchase obligations and $0.4 million of operating leases. An additional $0.8 million Afek drilling commitment was entered into after quarter-end.
- IDT Energy had $3.0 million of performance bonds outstanding and a $2.0 million standby letter of credit. The BP preferred-supplier agreement was scheduled to expire June 30, 2014, subject to automatic renewal unless notice was given.
- A New York sales and use tax audit was settled for $0.9 million in July 2013, an amount previously accrued. Reasonably possible tax liabilities beyond accrued amounts were estimated at zero to $0.3 million.
Investor verification points
- Verify whether IDT Energy can stabilize electricity gross margins while managing commodity costs, customer churn and the smaller customer base.
- Assess the liquidity impact of restricted cash, collateral requirements, derivative settlements and BP-related obligations.
- Monitor AMSO’s alternative-heater program, future funding requirements and potential dilution or loss of the AMSO, LLC interest.
- Track IEI permitting, Afek drilling results and the regulatory development of Genie Mongolia, none of which had reached commercial production.
- Review the effect of preferred-stock dividends and potential equity exchanges or issuances on future common-stock earnings per share.
- Consider the seasonality of the retail energy business when extrapolating nine-month results to the full year.