Business Context and Reporting Period
Genie Energy Ltd. filed an unaudited Form 10-Q for the three months ended March 31, 2013, compared primarily with the three months ended March 31, 2012. The company operates through 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 other energy-resource projects.
Results are seasonally affected by weather, with natural-gas demand typically highest in the first quarter and electricity demand typically highest in the third quarter. Accordingly, first-quarter results are not necessarily indicative of full-year performance.
Key Financial Metrics
| Metric | Q1 2013 | Q1 2012 | Change |
|---|---|---|---|
| Revenue | $85.3 million | $57.5 million | +48.4% |
| Gross profit | $19.0 million | $18.0 million | +5.5% |
| Gross margin | 22.3% | 31.4% | Down 9.1 points |
| Income from operations | $2.6 million | $2.7 million | Down 2.2% |
| Net income | $(0.1) million | $1.2 million | Decline of $1.3 million |
| Net loss attributable to Genie | $(1.5) million | $0.6 million | Decline of $2.1 million |
| Net loss attributable to common stockholders | $(1.8) million | $0.6 million | Decline of $2.4 million |
| Basic and diluted EPS | $(0.09) | $0.03 | Decline of $0.12 |
| Operating cash flow | $(0.8) million | $2.1 million | Decrease of $2.9 million |
Electricity revenue increased 72.2% to $54.6 million, while natural-gas revenue increased 19.1% to $30.7 million. IDT Energy segment operating income increased 20.2% to $8.9 million. Genie Oil and Gas generated no revenue and reported a $3.9 million operating loss, compared with a $3.1 million loss in the prior-year quarter.
Electricity gross margin declined to 18.9% from 36.5%, principally because of higher electricity consumption, a 32.9% increase in average unit electricity costs, unusually high New York electricity costs, and a less favorable customer mix. Natural-gas gross margin increased to 28.2% from 25.0%.
Cash and cash equivalents were $71.6 million at March 31, 2013, compared with $69.4 million at December 31, 2012. Total cash, restricted cash, certificates of deposit, and marketable securities were approximately $91.1 million. Working capital was $109.8 million. Total assets were $150.5 million and total current liabilities were $31.8 million.
The company reported no borrowings under its $25.0 million revolving credit facility and no utilized letters of credit at March 31, 2013. The facility was subsequently extended on April 30, 2013 to April 30, 2014 and requires $10.0 million of restricted cash collateral.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven by higher electricity consumption, more electricity meters, higher rates, and colder weather. Total meters increased 2.1% year over year to 485,000, while RCEs increased 27.5% to 329,000.
- Gross profit grew only modestly despite substantial revenue growth because electricity costs rose faster than electricity pricing.
- Customer acquisition slowed: gross acquisitions fell to 66,000 from 108,000, and net meters declined by 17,000 versus a 37,000 increase in the prior-year quarter. Average monthly churn decreased slightly to 6.3% from 6.4%.
- Consolidated selling, general and administrative expense increased to $12.8 million from $12.4 million, including stock-based compensation of $1.0 million versus $0.7 million.
- Genie Oil and Gas losses increased because of higher research and development spending and a larger equity loss from AMSO, LLC. AMSO, LLC reported a $3.2 million first-quarter loss versus $2.4 million in the prior year.
- Cash flow from operations turned negative primarily because trade accounts receivable increased by $6.5 million and advances from customers declined by $1.3 million.
- Preferred-stock dividends of $0.3 million were accrued. Common-stock dividends were suspended for the foreseeable future, while a new program authorized repurchases of up to 7 million Class B shares; no program repurchases had occurred by March 31.
Guidance, Outlook, Risks and Unusual Items
- Management stated that available liquidity and expected operating cash flows were sufficient for anticipated requirements for at least the next twelve months.
- Management expected capital expenditures of approximately $0.2 million for the twelve months ending March 31, 2014, excluding research and development expenditures.
- IEI expected to submit an application during the second quarter of 2013 to construct and operate an oil-shale pilot facility in Israel. Approval was not expected before 2014; anticipated pilot investment was approximately $30 million over three years.
- AMSO, LLC’s oil-shale pilot test began in March 2013, but its down-hole electric heater failed after approximately two weeks. The company was evaluating another electric-heater test and an alternative heating system that could delay restart by approximately one year.
- AMSO’s maximum additional loss exposure was estimated at $3.4 million based on the 2013 budget, but this exposure could increase under specified funding, withdrawal, dilution, or reclamation scenarios.
- Afek received an exclusive three-year petroleum exploration license in Israel in April 2013 and began initial geophysical testing. Genie Mongolia entered into a five-year exclusive oil-shale development agreement in April 2013.
- The company’s principal market risk is volatility in electricity and natural-gas prices. It uses forward contracts, futures, and options, but does not apply hedge accounting; fair-value changes affect earnings.
- IDT Energy had $3.2 million of performance bonds outstanding. A New York sales and use tax audit had an accrued liability of $0.8 million, with reasonably possible additional exposure ranging from zero to $1.2 million.
- Contractual obligations totaled approximately $7.5 million, including $3.5 million related to AMSO, LLC, $3.2 million of energy forward contracts, $0.4 million of purchase obligations, and $0.4 million of operating leases.
- The filing reported no material changes to previously disclosed risk factors, and management concluded that disclosure controls and procedures were effective as of March 31, 2013.
Investor Verification Points
- Verify whether electricity procurement costs and gross margins normalize after the unusually high first-quarter 2013 costs.
- Monitor customer additions, churn, meter counts, and RCE growth, particularly in Pennsylvania and other targeted expansion territories.
- Assess the cash-flow impact of receivables, collateral requirements, and seasonal working-capital movements.
- Confirm the status, timing, funding requirements, and technical performance of the AMSO, LLC and IEI pilot projects.
- Review potential additional AMSO funding obligations and the New York tax-audit exposure above the $0.8 million accrual.
- Evaluate the effect of preferred-stock dividends, suspended common dividends, and the authorized Class B repurchase program on capital allocation and per-share results.