Genie Energy Ltd. — Fiscal Q1 2012 Form 10-Q Summary
Reporting period: Three months ended October 31, 2011; filed December 15, 2011. The filing covers Genie’s first quarter of fiscal 2012, although the supplied metadata refers to “2012 Q1.” Financial statements are unaudited. Genie became an independent public company following its October 28, 2011 spin-off from IDT Corporation.
Business Context
Genie 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 technologies through interests in Colorado and Israel. IDT Energy generated all reported revenue during the quarter.
Financial Highlights
| Metric | Q1 FY2012 | Q1 FY2011 | Change |
|---|---|---|---|
| Revenue | $45.8 million | $43.4 million | +5.6% |
| Gross profit | $16.8 million | $14.7 million | +14.0% |
| Gross margin | 36.7% | 34.0% | +2.7 percentage points |
| Income from operations | $4.0 million | $5.8 million | -32.0% |
| Net income | $1.0 million | $2.7 million | Lower |
| Net income attributable to Genie | $1.9 million | $2.7 million | -29.0% |
| Basic diluted EPS | $0.09 / $0.09 | $0.13 / $0.12 | Lower |
| Operating cash flow | $(0.9) million | $2.0 million | Lower by $2.9 million |
IDT Energy revenue increased to $45.8 million, consisting of $38.9 million of electricity revenue and $6.9 million of natural-gas revenue. Electricity consumption increased 16.5%, while the average electricity rate declined 8.7%. Natural-gas consumption increased 0.8% and the average rate increased 1.0%.
Gross margin improved primarily because electricity commodity costs declined faster than customer rates. Electricity gross margin increased to 39.7% from 35.3%, while natural-gas gross margin fell to 19.6% from 26.5% because of higher pipeline costs that were not fully recovered in rates.
Operating expenses increased materially. IDT Energy selling, general and administrative expense rose 47.7% to $8.8 million, largely because customer-acquisition and marketing costs increased by approximately $2.5 million. Corporate costs also increased following the spin-off. Stock-based compensation included in selling, general and administrative expense was $0.2 million versus less than $0.1 million in the prior period.
Balance Sheet, Cash Flow and Liquidity
- Cash and cash equivalents were $92.4 million at October 31, 2011, compared with $23.9 million at July 31, 2011. Restricted cash was $0.1 million.
- Working capital was $115.9 million. Total current assets were $137.3 million and current liabilities were $21.4 million.
- Total assets were $144.5 million and total equity was $123.0 million.
- The balance sheet does not present material funded debt; the filing text does not provide a clear total debt value.
- Financing cash flow was $71.4 million, including a $70.3 million cash capital contribution from IDT in connection with the spin-off and $1.1 million of net funding from IDT.
- Investing cash flow was $(2.0) million, primarily reflecting $2.0 million of capital contributions to AMSO, LLC.
- Management expected cash, restricted cash, the additional $11.9 million capital contribution received from IDT in the second fiscal quarter, and operating cash flow to fund anticipated working capital needs and oil-and-gas investments for at least the next twelve months.
Material Changes and Unusual Items
- The October 28, 2011 spin-off materially changed the company’s capitalization and funding structure. IDT contributed $82.2 million in total, of which $70.3 million was received during the quarter and $11.9 million was subsequently received.
- Operating income declined despite higher revenue and gross profit because of customer-acquisition spending, corporate costs, higher AMSO losses, and increased financing costs.
- Other expense included a $0.45 million estimated loss related to the October 31, 2011 bankruptcy of MF Global. Genie had $1.65 million deposited with MF Global; $1.2 million remained recorded as potentially collectible at quarter-end.
- Genie consolidated Citizens Choice Energy, LLC, a variable-interest entity in which it owns no equity. CCE incurred a $0.6 million loss attributable to noncontrolling interests, and Genie provided approximately $2.2 million to $2.4 million of net funding during the quarter, depending on the presentation in the filing.
- Genie Energy’s customer base increased to approximately 428,000 meters from 365,000 a year earlier, but average monthly churn increased to 6.1% from 4.7%.
Outlook, Risks and Contingencies
- Management estimated approximately $1.5 million of incremental quarterly costs associated with operating as a separate public company, including stock-based compensation; actual costs may vary.
- IEI expected pilot-plant drilling and construction to begin in calendar 2012, subject to permitting, regulatory action and litigation. Pilot operations could begin as early as calendar 2013 and were expected to require approximately $25 million to $30 million over two to three years.
- AMSO, LLC reported a $6.0 million quarterly net loss. Genie’s share of the loss was $1.2 million. AMSO’s estimated maximum additional loss exposure was approximately $0.4 million at October 31, 2011, but could increase under specified funding and withdrawal scenarios.
- A petition challenging IEI’s Israeli oil-shale exploration license remained pending, with a hearing scheduled for April 4, 2012. An adverse outcome could significantly affect the IEI venture.
- New York tax audits had accrued liabilities of $6.3 million in total. Reasonably possible additional exposure was estimated at up to $5.9 million for the New York City utility-tax audit and up to $4.2 million for New York State income and sales-and-use-tax audits.
- IDT had provided $3.0 million of letters of credit securing Genie obligations, and Genie was working to transfer them to its own name. Trade receivables of $19.8 million and cash of $0.1 million were pledged to BP against $9.3 million of trade payables.
- The business is materially seasonal and exposed to electricity and natural-gas price volatility, customer churn, weather, utility concentration and counterparty risk. Con Edison represented 64% of revenue and National Grid USA 13% during the quarter.
- On December 8, 2011, the board declared a $0.05-per-share dividend, expected to total approximately $1.1 million, and approved a stock-repurchase program of up to $20 million. No repurchases had been made as of the filing.
Key Facts for Investor Verification
- Confirm the impact of the IDT spin-off, including the remaining $11.9 million capital contribution and ongoing transition-service costs.
- Assess whether customer-acquisition spending and higher churn can produce profitable meter growth.
- Review the recoverability of the $1.2 million MF Global receivable and the ultimate loss on the broker bankruptcy.
- Monitor New York tax audits and potential additional exposure beyond the $6.3 million accrued.
- Evaluate funding requirements for IEI, AMSO, LLC and CCE, including whether oil-shale projects require additional equity financing.
- Track the Israeli license litigation, permitting status and timing of IEI and AMSO pilot projects.
- Consider the concentration of revenue and receivables among major utilities, particularly Con Edison.
- Verify future cash availability after dividends, the authorized $20 million repurchase program and planned oil-shale investments.