Genie Energy Ltd. 2012 Q2 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 is developing oil-shale technologies in Colorado, Israel and other potential jurisdictions. The filing covers the three and six months ended June 30, 2012. The company changed its fiscal year-end from July 31 to December 31, so 2012 is the first year reported on a calendar-quarter basis. Results are unaudited and materially seasonal.
Key Financial Metrics
| Metric | Three months ended June 30, 2012 | Three months ended June 30, 2011 | Six months ended June 30, 2012 | Six months ended June 30, 2011 |
|---|---|---|---|---|
| Revenue | $42.8 million | $38.7 million | $100.3 million | $102.1 million |
| Gross profit | $11.6 million | $9.8 million | $29.7 million | $27.0 million |
| Gross margin | 27.2% | 25.4% | 29.6% | 26.4% |
| Operating income (loss) | $(5.0) million | $(2.6) million | $(2.3) million | $3.9 million |
| Net loss | $(3.7) million | $(4.2) million | $(2.5) million | $(1.8) million |
| Net loss attributable to Genie | $(3.3) million | $(2.3) million | $(2.6) million | $0.4 million |
| Basic loss per share | $(0.15) | $(0.11) | $(0.13) | $0.02 |
Six-month operating cash flow was $1.6 million, compared with $7.2 million in the prior-year period. Investing cash flow was $(19.3) million, primarily reflecting $9.7 million of increased restricted cash, $6.9 million of marketable-security purchases and $2.0 million of contributions to AMSO, LLC. Financing cash flow was $(3.2) million, including $3.1 million of dividends paid. Cash and cash equivalents declined to $81.3 million from $102.2 million at December 31, 2011.
At June 30, 2012, the company had $98.6 million of cash, restricted cash and marketable securities, $106.9 million of working capital and $27.4 million of current liabilities. The company had no borrowings or letters of credit outstanding under its new $25.0 million JPMorgan revolving credit facility; $10.0 million of cash was restricted as collateral. No material long-term debt was reported.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue increased 10.6%, driven by a 23.7% increase in electricity revenue, while natural gas revenue declined 26.4%. Six-month revenue declined 1.8% because of lower natural gas revenue following unusually warm weather.
- Total gross margin improved to 27.2% from 25.4% in the quarter and to 29.6% from 26.4% for the six months, primarily because commodity costs declined more than customer rates in natural gas and, for the six-month period, electricity.
- IDT Energy’s operating income declined 43.9% in the quarter to $1.1 million and 28.2% for the six months to $8.4 million. Higher customer-acquisition costs, severance and stock-based compensation more than offset gross-profit growth.
- Electricity meters increased to 313,000 and natural-gas meters to 182,000 at June 30, 2012, for 495,000 total meters versus 396,000 one year earlier. Average monthly churn increased to 6.6% in the quarter from 5.2%.
- Genie Oil and Gas generated no revenue and recorded a $7.0 million operating loss for the six months, modestly lower than the $7.6 million prior-year loss. Research and development expense increased 18.0% to $4.9 million, while the equity loss from AMSO, LLC declined to $1.7 million from $2.8 million.
- Corporate operating expenses increased substantially, primarily because of compensation, legal, consulting and stock-based compensation costs associated with operating as an independent public company.
Guidance, Outlook, Risks and Unusual Items
- Management expects approximately $1.5 million of incremental quarterly costs related to operating as a separate public company, including stock-based compensation.
- Management expects available liquidity to fund anticipated requirements for at least the twelve months ending June 30, 2013. It expects capital expenditures of approximately $0.2 million for that period.
- IEI expects to begin construction of its Israeli oil-shale pilot test in 2013, subject to permitting, regulatory and litigation developments. The pilot is expected to require approximately $25 million to $30 million over the next three years.
- AMSO, LLC experienced equipment and technical issues during pilot-test commissioning. Further modifications or delays may be required. Genie’s stated maximum exposure to additional AMSO-related loss was approximately $0.9 million based on the 2012 budget, but that exposure could increase.
- On August 2, 2012, the company launched an offer to exchange up to 8.75 million Class B common shares for preferred shares with an $8.50 liquidation preference and a stated annual dividend of $0.6375 per share, plus a potential performance-based increase. Management anticipated suspending common dividends indefinitely after the second-quarter dividend.
- The company has New York tax audits with $8.2 million accrued and reasonably possible additional liability of up to $11.2 million. The filing states that the ultimate assessments could exceed accrued amounts.
- IEI faces litigation in Israel challenging its oil-shale exploration license and related permitting regulations. An adverse outcome could materially impair the venture.
- IDT Energy pledged $26.1 million of trade receivables and $0.3 million of restricted cash to secure $11.9 million owed to BP. It also had $2.0 million of performance bonds outstanding.
- Energy commodity prices remain volatile. The company uses forward contracts and options but does not apply hedge accounting, so changes in fair value affect earnings.
- The company added cybersecurity and network disruption risks to its risk factors. The filing states that disclosure controls and procedures were effective as of June 30, 2012.
Most Important Facts to Verify
- Whether the preferred-share exchange offer closed, how many shares were tendered, and whether common dividends were subsequently suspended.
- The outcome and timing of the New York tax audits and any liability beyond the $8.2 million accrued.
- Availability of restricted cash, including the $10.0 million pledged for the credit facility and collateral pledged to BP.
- Progress, funding requirements and permitting status for the IEI and AMSO pilot projects.
- Whether IDT Energy’s customer growth can offset rising acquisition costs and higher churn.
- Changes in commodity prices, hedging positions and gross margins in subsequent quarters.