Genie Energy Ltd. — Form 10-Q Summary
Business context and reporting period
Unaudited results cover the three and nine months ended September 30, 2012, compared with the corresponding 2011 periods. The Company changed its fiscal year-end from July 31 to December 31 in January 2012. 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 other unconventional energy projects.
Key financial metrics
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue | $63.7 million, up 22.2% | $164.1 million, up 6.3% |
| Gross profit | $21.4 million; 33.6% margin | $51.1 million; 31.2% margin |
| Income from operations | $3.5 million; 5.4% margin | $1.2 million; 0.7% margin |
| Net income attributable to Genie | $(2.6) million; $(0.13) per diluted share | $(5.3) million; $(0.25) per diluted share |
| Operating cash flow | Not separately provided for the quarter | $0.9 million |
At September 30, 2012, cash and cash equivalents were $71.5 million, restricted cash was $10.3 million, certificates of deposit were $2.2 million, and marketable securities were $11.5 million. Management stated that cash, restricted cash, certificates of deposit and marketable securities totaled $95.5 million and, together with expected operating cash flow, were sufficient for anticipated requirements for at least the following twelve months. Working capital was $107.4 million.
The Company had no borrowings or letters of credit outstanding under its $25.0 million JPMorgan revolving credit facility. A $10.0 million cash collateral deposit was required and classified as restricted cash. Total current liabilities were $31.0 million, and the filing does not report funded long-term debt.
Material changes versus the prior comparable period
- Electricity revenue increased 26.2% in the quarter and 18.1% year to date, driven primarily by higher consumption and customer growth. Natural gas revenue declined 12.4% in the quarter and 20.2% year to date, reflecting lower commodity prices and unusually warm weather.
- Total enrolled meters increased to 523,000 at September 30, 2012 from 430,000 a year earlier. Electricity meters increased to 343,000, while natural gas meters were broadly stable at 180,000.
- IDT Energy quarterly operating income increased 34.9% to $8.7 million, but nine-month operating income declined 5.9% to $17.1 million because of higher customer-acquisition costs and lower natural gas results.
- Consolidated operating income increased in the quarter but fell 80.8% year to date to $1.2 million, primarily because corporate costs rose substantially following the spin-off from IDT Corporation and customer-acquisition spending increased.
- Gross margin improved year to date to 31.2% from 29.8%, although quarterly gross margin declined to 33.6% from 36.4%, principally because electricity pricing reductions exceeded the decline in commodity costs.
- The Company recorded a $5.4 million valuation allowance against deferred federal tax assets. A $2.5 million reversal of a prior New York State income-tax accrual partially offset the tax charge.
- Cash declined $30.7 million during the first nine months, primarily due to $27.2 million of investing outflows, including restricted-cash funding, marketable-security purchases, certificates of deposit, and $2.9 million of contributions to AMSO, LLC.
Outlook, commentary, risks and unusual items
- Management expects approximately $1.5 million of incremental quarterly costs associated with operating as a separate public company, including transition-service and stock-based compensation costs.
- Genie expects the IEI oil-shale pilot test to require approximately $25 million to $30 million over the next three years, with construction expected to begin in late 2013 subject to permitting, regulatory and litigation developments.
- AMSO, LLC’s pilot test was expected to begin before the end of 2012, but heater-performance issues could cause additional modifications or delays. The Company’s estimated maximum additional loss exposure to AMSO, LLC was $0.4 million at September 30, 2012, subject to potential increases under specified circumstances.
- A hurricane affecting the Northeast after quarter-end was expected to negatively affect fourth-quarter revenue, gross profit and customer acquisitions, although the filing stated that the impact could not yet be quantified.
- The Company relies on hedging instruments for electricity and natural gas price risk. Outstanding positions at September 30, 2012 included 72,000 MWh of electricity contracts and 950,000 Dth of natural gas contracts settling in February 2013.
- IDT Energy had $33.3 million of receivables and $0.3 million of restricted cash pledged to BP against $11.6 million of trade payables. It also had $3.2 million of performance bonds outstanding.
- IDT Energy had accrued $0.8 million for a New York sales and use tax audit, with estimated additional exposure of $1.1 million. Separately, a New York City utility-tax audit was settled in October 2012 for $5.5 million, all of which had been accrued previously.
- The Company exchanged 1,604,591 shares of Class B common stock for Series 2012-A Preferred Stock on October 11, 2012. The preferred stock has an $8.50 liquidation preference and a base annual dividend of $0.6375 per share, and is senior to common stock. Common dividends were suspended for the foreseeable future.
- One Israeli environmental petition was rejected on October 29, 2012. A second petition challenging Israeli permitting regulations remained scheduled for a December 6, 2012 hearing.
- Management reported effective disclosure controls and procedures as of September 30, 2012, with no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether electricity customer growth and expanded territories can offset higher churn, customer-acquisition costs and commodity-price volatility.
- The cash impact and accounting consequences of the October 2012 preferred-stock issuance, including the preferred dividend burden and its effect on future common-stock earnings per share.
- The timing, permitting status, funding requirements and technical feasibility of the IEI and AMSO pilot projects.
- Final outcomes and additional exposure from outstanding tax audits and other regulatory or legal proceedings.
- Availability of unrestricted liquidity after excluding the $10.0 million credit-facility collateral and other restricted cash.
- The effect of the post-quarter hurricane and seasonal weather patterns on fourth-quarter energy demand and margins.