Genie Energy Ltd. 2012 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2012. Genie changed its fiscal year-end from July 31 to December 31; the most relevant prior comparable period is the calendar year ended December 31, 2011, which was unaudited. Genie operates through two segments: IDT Energy, a retail electricity and natural gas provider, and Genie Oil and Gas, which develops oil-shale and other unconventional energy projects. IDT Energy generated all consolidated revenue.
Genie owns 99.3% of GEIC; GEIC owns 96.4% of IDT Energy and 92% of Genie Oil and Gas. As a subsequent event, an Israeli subsidiary received a contested petroleum exploration license covering 396.5 square kilometers in the southern Golan Heights in February 2013.
Financial performance and key metrics
| Metric | 2012 | 2011 comparable | Change |
|---|---|---|---|
| Revenue | $229.5 million | $197.9 million | 15.9% increase |
| Gross profit | $69.6 million | $56.7 million | 22.7% increase |
| Consolidated gross margin | 30.3% | 28.7% | Up 1.6 percentage points |
| Income from operations | $3.0 million | $3.1 million | 3.1% decrease |
| Net loss | $2.5 million | $3.8 million loss | Loss narrowed |
| Net loss attributable to Genie | $3.3 million | $0.7 million income | Deteriorated |
| Net loss attributable to common stockholders | $3.5 million | $0.8 million income | Declined, including $0.2 million preferred dividend |
| Basic and diluted EPS | $(0.17) | $0.04 basic; $0.04 diluted | Declined |
IDT Energy revenue was $229.5 million, consisting of $174.3 million of electricity revenue and $55.2 million of natural gas revenue. Electricity revenue increased 29.7%, while natural gas revenue decreased 13.2%. IDT Energy operating income rose to $25.0 million from $19.6 million. Electricity gross margin declined to 31.8% from 33.8%, while natural gas gross margin increased to 25.8% from 17.9%.
Customer meters increased to 502,000 at December 31, 2012 from 438,000, but average monthly churn increased to 6.6% from 5.6%. Genie Oil and Gas had no revenue and generated a $14.0 million operating loss, including $9.4 million of research and development expense and $3.2 million of equity loss from AMSO, LLC. Corporate operating expenses increased to $7.9 million from $2.1 million.
Fourth-quarter 2012 revenue was $65.4 million, income from operations was $1.9 million, net income was $1.1 million, and basic and diluted earnings per share were $0.09 and $0.08, respectively, as reported in the unaudited quarterly data.
Cash flow, liquidity, debt and capital structure
- Cash flow from operating activities was negative $1.0 million, compared with negative $2.4 million in the five-month 2011 transition period.
- Investing cash flow was negative $17.7 million, including $4.1 million of contributions to AMSO, $11.5 million of marketable-security purchases, $2.2 million of certificate-of-deposit purchases and $0.7 million of employee notes receivable.
- Financing cash flow was negative $14.4 million, primarily reflecting $4.2 million of dividends and a $10.0 million increase in restricted cash.
- Cash and cash equivalents were $69.4 million at year-end, compared with $102.2 million at December 31, 2011. Cash, restricted cash, certificates of deposit and marketable securities totaled $92.9 million. Working capital was $109.0 million.
- Genie had no borrowings or outstanding letters of credit under its $25.0 million JPMorgan revolving facility. The facility was secured by $10.0 million of restricted cash and matured April 30, 2013.
- Total liabilities were $32.2 million, including $20.6 million of trade accounts payable. IDT Energy owed BP $15.9 million, secured by $40.2 million of receivables and $0.8 million of restricted cash.
- Management stated that available liquidity and expected operating cash flow were sufficient for anticipated requirements through at least December 31, 2013.
Material changes, outlook and unusual items
- Growth resulted from expansion into Pennsylvania and Maryland electric territories and higher electricity consumption. Warm weather reduced natural gas demand and revenue.
- Customer acquisition spending increased substantially, contributing to higher selling, general and administrative expense. Stock-based compensation increased to $3.4 million from $0.6 million, with $6.8 million of unrecognized compensation cost remaining at year-end.
- A $5.5 million New York City utility-tax audit settlement was paid in November 2012 and had been accrued previously. A $2.5 million New York State income-tax audit accrual was reversed, and the company received a $0.4 million refund.
- Genie recorded a $5.3 million increase in its deferred-tax valuation allowance, while income-tax expense declined to $2.9 million from $3.4 million. The company also recognized a $0.3 million gain related to the recovery and sale of its MF Global claim.
- AMSO’s Colorado pilot project experienced heater and commissioning problems in January and December 2012. Start-up of the oil-shale pilot test began in March 2013. Commercialization depends on technical success, environmental approvals, economic viability and conversion of the research lease.
- IEI expected to begin construction of an Israeli pilot test in late 2013, subject to permits and regulatory developments. Management estimated approximately $30 million of investment over three years and expected materially higher research and development costs.
- AMSO’s estimated 2013 funding obligation was $4.2 million, with potential for additional obligations. Total could terminate future funding and withdraw from AMSO, LLC, which could require alternative financing.
- The company issued 1.6 million Series 2012-A preferred shares in October 2012 and an additional 313,376 shares in March 2013. Preferred stock carries a $0.6375 base annual dividend per share plus a potential EBITDA-based additional dividend. Common-stock dividends were suspended for the foreseeable future.
Principal risks and contingencies
- IDT Energy faces intense competition, customer churn, commodity-price volatility, weather sensitivity, changing retail-energy regulations and dependence on state licenses and utility purchase-of-receivables programs.
- Con Edison represented 34% of 2012 revenue, creating customer and counterparty concentration. Utility programs generally purchased receivables at approximately 98% of face value without recourse, but changes to those programs could increase credit exposure.
- Genie Oil and Gas has no current oil or gas production and may never achieve commercially profitable production. Its technology remains unproven at commercial scale and requires substantial additional funding.
- Oil-shale projects face permitting, environmental, political, litigation, greenhouse-gas, water and regulatory risks. IEI’s license and pilot permitting remain subject to further governmental action, while the Golan Heights license is subject to challenge and political risk.
- IDT Energy had $3.2 million of performance bonds outstanding. The New York State sales and use tax audit had $0.8 million accrued and estimated potential exposure above the accrual of $1.2 million.
- Contractual obligations totaled approximately $1.1 million, excluding uncertain tax benefits of $0.2 million. Operating leases totaled approximately $0.4 million.
- Howard S. Jonas controlled approximately 73% of combined voting power as of March 2013, limiting other shareholders’ ability to influence corporate actions.
Investor verification checklist
- Reconcile the annual and fourth-quarter attribution figures, particularly the reported net loss attributable to Genie versus the quarterly net-income data.
- Review the full audited financial statements and notes for tax valuation allowances, tax-audit exposure and the effect of preferred dividends on common-stock earnings.
- Verify liquidity after the April 30, 2013 maturity of the JPMorgan facility and determine whether the $10.0 million collateral was released or replaced.
- Assess IDT Energy’s customer churn, electricity margins, natural gas demand, utility concentration and continued access to purchase-of-receivables programs.
- Track AMSO pilot-test results, Total’s ongoing funding commitment, lease-conversion requirements and the company’s maximum future funding exposure.
- Track IEI’s license extensions, environmental regulations, permits and the estimated $30 million pilot investment requirement.
- Review the legal status and political implications of the Golan Heights exploration license and any challenge by the competing applicant.