Genie Energy Ltd. — Q1 2012 Form 10-Q Summary
Business context and reporting period
Genie Energy operates two principal businesses: IDT Energy, a retail electricity and natural gas provider in the Northeastern United States, and Genie Oil and Gas, which develops oil-shale technologies through interests in American Shale Oil and Israel Energy Initiatives. The report covers the three months ended March 31, 2012, compared with the three months ended March 31, 2011. The company changed its fiscal year-end from July 31 to December 31 in January 2012; quarterly reporting now follows calendar quarters. Genie was spun off from IDT Corporation on October 28, 2011.
Key financial metrics
| Metric | Q1 2012 | Q1 2011 | Change |
|---|---|---|---|
| Revenue | $57.5 million | $63.4 million | Down 9.3% |
| Gross profit | $18.0 million | $17.2 million | Up 5.1% |
| Gross margin | 31.4% | 27.1% | Up 430 basis points |
| Income from operations | $2.7 million | $6.5 million | Down 58.4% |
| Net income | $1.2 million | $2.4 million | Down 49.5% |
| Net income attributable to Genie | $0.6 million | $2.7 million | Down 78.0% |
| Diluted EPS | $0.03 | $0.12 | Down $0.09 |
| Cash flow from operations | $1.5 million | $1.8 million | Down $0.3 million |
Electricity revenue increased 1.1% to $31.7 million, while natural gas revenue declined 19.5% to $25.8 million. IDT Energy’s operating income was $7.4 million, compared with $9.9 million in the prior-year quarter. Genie Oil and Gas generated no revenue and recorded a $3.1 million operating loss, substantially unchanged from 2011. Corporate operating costs increased to $1.6 million from $0.3 million.
Consolidated selling, general and administrative expense increased to $12.4 million from $7.7 million, primarily because of higher customer acquisition costs, compensation, consulting expenses and stock-based compensation. Stock-based compensation included in SG&A was $0.7 million, compared with $0.2 million in Q1 2011. Interest expense and financing fees increased to $0.7 million from $0.5 million. The tax provision declined to $0.8 million from $3.8 million, partly because Q1 2011 included a $4.0 million charge related to IDT’s net operating loss.
Liquidity, cash flow, debt and capital resources
- Cash and cash equivalents were $101.9 million at March 31, 2012, compared with $102.2 million at December 31, 2011. Cash, cash equivalents and restricted cash totaled approximately $101.9 million.
- Working capital was $111.6 million. Current liabilities were $26.0 million, and the company reported no long-term debt on the March 31 balance sheet.
- Operating cash flow was $1.5 million. Investing cash flow was negative $0.6 million, including $1.1 million of capital contributions to AMSO, LLC. Financing cash flow was negative $1.3 million, primarily because of $1.1 million of dividends and $0.1 million of employee-related share repurchases.
- On April 23, 2012, the company entered into a secured revolving credit facility of up to $25.0 million, available for working capital and letters of credit. The facility matures April 30, 2013 and requires collateral equal to at least $10.0 million or the amount of letters of credit and borrowings, whichever is greater.
- Management stated that existing cash and expected operating resources should be sufficient for anticipated requirements for at least the twelve months ending March 31, 2013.
- The company paid a $0.05 per-share dividend in January 2012 and intended to continue quarterly dividends of $0.05 per share, subject to board approval.
Material changes versus the prior comparable period
- Revenue declined because unusually warm weather reduced natural gas demand, while electricity revenue increased because of higher consumption and customer growth.
- Gross margin improved as underlying electricity and natural gas commodity costs declined faster than customer rates. Management cautioned that the current margin level is not expected to be sustainable over the long term.
- IDT Energy’s customer meters increased to 475,000 from 377,000 year over year. Gross meter acquisitions more than doubled to 108,000, but average monthly churn increased to 6.4% from 4.6%.
- Customer acquisition costs increased by $2.7 million, contributing to the decline in IDT Energy operating income despite higher gross profit.
- AMSO’s share of the loss of AMSO, LLC increased to $0.8 million from $0.7 million because its contractual allocation of the venture’s loss increased from 20% to 35%, although AMSO, LLC’s total loss declined to $2.4 million from $3.3 million.
- Noncontrolling interests reduced attributable earnings by $0.6 million in Q1 2012, compared with a $0.4 million benefit in Q1 2011, primarily reflecting the earnings of consolidated variable-interest entity CCE.
Guidance, outlook, risks and unusual items
- Management expects approximately $1.5 million of incremental quarterly costs from operating as a separate public company, including stock-based compensation and transition services.
- IEI expects pilot-test construction to begin in 2013, subject to permits, regulatory action and litigation. The expected cost is approximately $25 million to $30 million over the next two to three years.
- AMSO, LLC’s pilot test could begin as early as June 2012, although additional delays were possible. The company’s maximum exposure to additional AMSO, LLC losses was approximately $1.8 million based on the 2012 budget, with potential for additional obligations under specified circumstances.
- New York tax audits resulted in accrued liabilities of $4.4 million for the New York City utility tax audit, $2.6 million for the New York State income tax audit and $0.8 million for the New York State sales and use tax audit. Reasonably possible additional exposure was estimated at up to $5.9 million, $4.2 million and $1.1 million, respectively.
- A petition challenging IEI’s Israeli oil-shale exploration license remained pending; if successful, it could materially harm the venture. A hearing was scheduled for October 29, 2012.
- At March 31, 2012, $27.2 million of trade receivables and $0.5 million of cash were pledged to BP as collateral for $8.5 million of trade payables. IDT Energy was in compliance with the related covenants.
- The company had 139,200 MWh of electricity call options with settlement dates from May through August 2012. Derivatives are not hedge-accounted and changes in fair value affect earnings.
- In April 2012, IDT Energy agreed, subject to conditions, to acquire CCE customer-related assets in exchange for discharging $4.8 million of CCE obligations. The transaction remained contingent on closing conditions, including resolution of certain claims.
- Management identified cyberattacks, network disruptions and information-security failures as an additional material risk during the quarter.
Important facts for investors to verify
- Whether gross-margin improvement persists as commodity prices and customer pricing change.
- The effect of higher customer acquisition costs, churn and post-spin-off corporate expenses on future operating income.
- The outcome and ultimate cost of the New York tax audits.
- Funding requirements and permitting, regulatory and litigation risks for the IEI and AMSO oil-shale projects.
- Terms, collateral requirements and utilization of the $25.0 million revolving credit facility.
- The timing and conditions of the proposed CCE asset acquisition and related discharge of obligations.
- Future compensation expense from subsidiary equity grants expected to have an estimated fair value of approximately $3.0 million to $3.7 million.
- The sustainability of the stated quarterly dividend and any future share repurchases.