Genie Energy Ltd. annual report, FY2013

Genie Energy Ltd. 2013 Form 10-K Summary

Business context and reporting period

Genie Energy reported for the fiscal year ended December 31, 2013. The company has two reportable segments: IDT Energy, a retail electricity and natural-gas provider, and Genie Oil and Gas, which conducts oil shale and conventional oil and gas exploration. IDT Energy generated all consolidated revenue; Genie Oil and Gas had no revenue and remained in the research, exploration and development stage.

The filing includes quarterly data for the fourth quarter ended December 31, 2013. Genie changed its fiscal year-end from July 31 to December 31 beginning in 2012, so the principal comparable period is the year ended December 31, 2012.

Financial performance and key metrics

Metric	2013	2012	Change
Revenue	$279.2 million	$229.5 million	+21.7%
Gross profit	$65.8 million	$69.6 million	-5.5%
Gross margin	23.6%	30.3%	-6.8 percentage points
Income from operations	$0.6 million	$3.0 million	-79.5%
Net loss	$5.3 million	$2.5 million	Loss increased
Net loss attributable to Genie	$5.9 million	$3.3 million	Loss increased
Loss per common share, basic and diluted	$0.36	$0.17	Loss increased
Cash flow from operating activities	$1.2 million	$(1.0) million	Improved

Electricity revenue increased to $216.7 million from $174.3 million, while natural-gas revenue increased to $62.5 million from $55.2 million.
Electricity gross margin declined to 22.1% from 31.8%, primarily because of higher wholesale costs, promotional activity, market conditions and a pricing-system issue in newer territories. Natural-gas gross margin improved to 28.7% from 25.8%.
IDT Energy reported $25.7 million of operating income, compared with $25.0 million in 2012. Genie Oil and Gas recorded a $16.0 million operating loss, and corporate costs were $9.1 million.
Research and development expense increased to $11.4 million from $9.4 million. Genie Oil and Gas recorded a $3.2 million equity loss from AMSO, LLC.
Total assets were $158.8 million versus $150.3 million. Working capital was $105.8 million.
Cash, cash equivalents, short-term restricted cash and certificates of deposit totaled approximately $92.7 million at year-end. Including long-term restricted cash and other holdings, the filing states total cash, restricted cash, certificates of deposit and marketable securities of $93.8 million.
There was no outstanding borrowing under the $25.0 million revolving credit facility. The company had $10.0 million of cash collateral and $5.7 million of outstanding letters of credit.
Total liabilities were $42.5 million, including $25.3 million of trade accounts payable. The filing does not identify conventional funded debt outstanding at year-end.
Cash flow from investing activities was $3.8 million, including $2.7 million of AMSO contributions and $0.8 million paid for the Diversegy and Epiq acquisitions. Financing cash flow was $(0.9) million, including $1.1 million of preferred-stock dividends.

Material changes versus the prior comparable period

Revenue growth was driven by higher electricity consumption and rates, colder first-quarter weather supporting natural-gas demand, and expansion into newer territories. However, year-end meters declined to 427,000 from 502,000, and net meters decreased by 75,000 as customer churn exceeded acquisitions.
Average monthly churn improved modestly to 6.3% from 6.6%, but gross meter acquisitions fell to 245,000 from 407,000.
Gross profit declined despite higher revenue because direct costs increased 33.5% to $213.4 million, outpacing the 21.7% revenue increase.
Selling, general and administrative expense declined to $49.7 million from $54.0 million, primarily due to lower customer-acquisition costs, payroll and severance costs. A $0.8 million bad-debt provision was recorded in 2013 for disputed utility receivables.
IDT Energy acquired Diversegy and Epiq in December 2013. Cash paid net of acquired cash was $0.8 million; additional deferred and contingent consideration had an estimated fair value of approximately $2.5 million. The acquisition generated $3.7 million of goodwill.
Preferred stock outstanding increased to approximately 1.917 million shares from 1.605 million following the March 2013 exchange offer. Common-stock dividends were suspended, while preferred-stock dividends totaled approximately $1.1 million for 2013.
Genie Oil and Gas development spending shifted toward Afek and Genie Mongolia. 2013 research and development expense included $3.7 million for IEI, $3.4 million for Genie Mongolia and $4.2 million for Afek.
Management subsequently identified material weaknesses in financial reporting controls as of December 31, 2013 and also concluded that previously reported 2012 controls were not effective. The weaknesses involved journal-entry approval and review of subsidiary financial statements and variance analyses. The financial-statement audit opinion was unqualified, but the auditor issued an adverse opinion on internal control over financial reporting.

Guidance, outlook, risks and unusual items

Management expected 2014 cash resources and operations to be sufficient for anticipated requirements for at least the year ending December 31, 2014. Planned 2014 capital expenditures were approximately $0.8 million, excluding research and development spending.
The filing warns that the 2014 “polar vortex” caused unprecedented electricity and natural-gas price spikes. IDT Energy absorbed part of the increased costs and had committed to at least $2.0 million of customer rebates. Management expected higher early-2014 churn and materially lower first-quarter 2014 gross profit, operating income and net income compared with the first quarter of 2013.
AMSO’s Colorado pilot operated for approximately two weeks in March 2013 before its down-hole electric heater failed. The company abandoned efforts to re-engineer the existing system and began evaluating alternative heating solutions, with development expected to continue through 2014.
AMSO did not fund its first-quarter 2014 capital call; Total funded $0.9 million on its behalf. AMSO’s interest declined to 48.16% from 50%, and further nonfunding could cause additional dilution. The company’s estimated maximum exposure to additional AMSO losses at year-end was approximately $3.0 million.
IEI’s Israeli license was scheduled to expire in July 2014, with a possible extension through July 2015. Pilot-plant permitting remained incomplete, and construction was expected to begin in late 2014 only if permitting and other conditions were satisfied. Expected pilot investment was approximately $30 million over three years.
Afek held a three-year Golan Heights exploration license and was progressing through public review for a proposed ten-well drilling program. Political, permitting and international-dispute risks could affect operations.
Genie Mongolia held a five-year exclusive exploration agreement, but the legal framework for commercial oil shale operations remained uncertain.
IDT Energy depends heavily on BP under a preferred supplier agreement scheduled to terminate June 30, 2015, subject to extension. The agreement contains covenants and grants BP security interests in specified cash and receivables.
Other significant risks include commodity-price volatility, customer churn, regulatory changes to purchase-of-receivables programs, utility and customer concentration, licensing and tax audits, environmental opposition, technical failure of oil shale projects, additional financing needs and the absence of current oil and gas production.
A putative Pennsylvania customer class action was filed against IDT Energy on March 13, 2014 alleging unlawful sales and marketing practices. IDT Energy denied wrongdoing and intended to defend the matter vigorously.
The filing disclosed $0.3 million accrued for estimated tax-audit liabilities, $0.5 million of unrecognized tax benefits, $3.2 million of performance bonds and $5.7 million of letters of credit.

Most important facts for investors to verify

Whether 2014 energy-price spikes, customer rebates and churn caused the expected deterioration in IDT Energy’s first-quarter results and margins.
Whether IDT Energy can stabilize its customer base and reverse the decline from 502,000 to 427,000 meters.
The renewal or replacement terms for the BP supplier agreement before its June 2015 termination date.
Progress in remediating the material weaknesses in journal-entry controls and financial-statement review, including whether the controls receive a clean subsequent audit opinion.
AMSO’s future funding decisions, potential additional dilution and the feasibility and timing of an alternative heater and pilot restart.
IEI license extensions and pilot-plant permits, Afek drilling approvals and Mongolia’s commercial regulatory framework.
The financial exposure and potential outcome of the Pennsylvania class action and ongoing tax audits.
Whether Diversegy and Epiq produce material revenue and cash-flow benefits relative to their deferred and contingent purchase obligations.