Genie Energy Ltd. — 2013 Q2 Form 10-Q Summary
Business Context and Reporting Period
Unaudited results cover the three and six months ended June 30, 2013, compared with the corresponding 2012 periods. Genie operates two principal segments: IDT Energy, a retail electricity and natural gas provider in the Northeastern United States, and Genie Oil and Gas, which develops oil-shale and exploration projects in the United States, Israel and Mongolia.
IDT Energy generated all consolidated revenue. Genie Oil and Gas had no revenue and remained an investment and development operation. Results are seasonal and materially affected by weather, particularly natural-gas demand in winter and electricity demand in summer.
Financial Results and Key Metrics
| Metric | Three Months Ended June 30, 2013 | Three Months Ended June 30, 2012 | Six Months Ended June 30, 2013 | Six Months Ended June 30, 2012 |
|---|---|---|---|---|
| Revenue | $55.1 million | $42.8 million | $140.5 million | $100.3 million |
| Gross profit | $10.0 million | $11.6 million | $29.0 million | $29.7 million |
| Gross margin | 18.1% | 27.2% | 20.6% | 29.6% |
| Operating loss | $(5.6) million | $(5.0) million | $(2.9) million | $(2.3) million |
| Net loss | $(6.2) million | $(3.7) million | $(6.3) million | $(2.5) million |
| Net loss attributable to common stockholders | $(6.2) million | $(3.3) million | $(8.0) million | $(2.6) million |
| Basic and diluted loss per share | $(0.32) | $(0.15) | $(0.41) | $(0.13) |
Six-month revenue increased 40.0%, led by electricity revenue growth of 48.6% and natural-gas revenue growth of 22.7%. However, gross profit declined 2.3% because electricity commodity costs increased faster than customer rates. IDT Energy's six-month operating income increased to $9.4 million from $8.4 million, but this was more than offset by Genie Oil and Gas losses and corporate costs.
Six-month selling, general and administrative expense declined to $24.9 million from $25.4 million. Research and development expense increased to $5.1 million from $4.9 million, and equity in the net loss of AMSO, LLC increased to $1.9 million from $1.7 million. Stock-based compensation was $2.1 million for the six months, compared with $1.6 million in 2012.
At June 30, 2013, cash and cash equivalents were $71.8 million, restricted cash was $11.9 million, certificates of deposit were $5.2 million and marketable securities were $3.9 million. Working capital was $103.5 million. Total assets were $142.1 million and total liabilities were $28.5 million.
Six-month cash flow from operating activities was $1.4 million, compared with $1.9 million in 2012. Investing activities provided $1.5 million, primarily reflecting maturities and sales of marketable securities, while financing activities used $0.6 million. Cash and cash equivalents increased $2.4 million to $71.8 million.
No amounts were borrowed under the $25.0 million revolving credit facility at June 30, 2013. The facility had $2.0 million utilized for letters of credit and was supported by $10.0 million of restricted cash collateral. The company stated that available cash, investments and expected operating cash flow were sufficient for anticipated requirements through at least June 30, 2014.
Material Changes Versus the Prior Comparable Period
- Revenue increased substantially, primarily from higher electricity consumption, higher electricity rates and expansion into higher-consumption customer territories.
- Electricity gross margin declined to 14.9% for the quarter and 17.1% for the six months, from 26.8% and 31.4%, respectively.
- Natural-gas gross margin improved to 32.2% for the quarter and 29.2% for the six months, reflecting rate increases, colder winter weather and improved cost recovery.
- IDT Energy's total meters declined to 475,000 at June 30, 2013 from 495,000 a year earlier. Higher customer churn and reduced gross acquisitions offset customer growth efforts.
- Average monthly churn improved modestly to 6.3% from 6.6% for the quarter and from 6.5% for the six-month period.
- Net losses widened, driven by lower gross margins, higher financing fees, reduced tax benefits, preferred-stock dividends and increased oil-and-gas development costs.
- Common dividends were suspended for the foreseeable future. Preferred-stock dividends were expected to total approximately $1.2 million for 2013.
Guidance, Outlook, Risks and Unusual Items
- No formal revenue or earnings guidance was provided. Management expected available liquidity and operations to fund anticipated requirements for at least the next twelve months.
- Management expected approximately $0.2 million of capital expenditures for the twelve months ending June 30, 2014.
- Electricity and natural-gas prices remain volatile. IDT Energy uses forward contracts, futures and options to manage commodity risk, without hedge accounting; changes in fair value flow through earnings.
- IDT Energy's preferred supplier agreement with BP terminates June 30, 2014 and automatically renews for one year unless notice is provided. Compliance with related covenants was reported at June 30, 2013.
- IDT Energy pledged $33.7 million of receivables and $0.9 million of restricted cash to secure $16.0 million payable to BP. It also had $2.4 million of performance bonds and a $2.0 million letter of credit.
- The company settled a New York sales and use tax audit for $0.9 million in July 2013; the amount was accrued at June 30, 2013. Additional tax assessments could exceed recorded accruals.
- AMSO, LLC's oil-shale pilot test was interrupted after an electric down-hole heater failed after approximately two weeks. The alternative-heating-system development process was expected to take at least twelve months and could take longer. The company's maximum additional exposure to AMSO, LLC based on the 2013 budget was $2.4 million.
- IEI submitted an application for an oil-shale pilot facility in Israel but did not expect construction approval before mid-2014. Afek began initial geophysical work in the Golan Heights, and Genie Mongolia entered into a five-year exclusive oil-shale development agreement.
- Contractual obligations totaled approximately $23.0 million, including $19.1 million of derivative-contract commitments, $2.4 million for AMSO, LLC, $1.1 million of purchase obligations and $0.4 million of operating leases.
- Management reported no material changes to previously disclosed risk factors and concluded that disclosure controls and procedures were effective.
Important Facts for Investors to Verify
- Whether IDT Energy can restore electricity margins amid commodity-price volatility, pricing-system issues, promotional activity and competitive churn.
- The sustainability of revenue growth given the decline in total meters and reduced gross customer acquisitions.
- The timing, cost and technical outcome of the redesigned AMSO, LLC pilot project and the company's remaining funding obligations.
- The status of IEI's pilot-facility permits and the expected increase in Afek exploration spending.
- The renewal terms and collateral requirements of the BP supplier agreement and the JPMorgan revolving credit facility.
- Potential additional tax liabilities, including uncertain tax positions and ongoing tax audits.
- The impact of preferred dividends, stock-based compensation and potentially dilutive subsidiary-equity exchanges on future common-stock earnings per share.