Genie Energy Ltd.
Q1 2013 Earnings Call Transcript

Published: 7 May 2013

[Operator:]

Good morning and welcome to Genie Energy’s Q1 2013 Earnings Call. (Operator instructions.) In this presentation Genie Energy’s management team will discuss financial and operational results for the three months ended March 31, 2013. Any forward-looking statements made during this conference call, either in the prepared remarks or in the Q&A session either general or specific in nature are subject to risks and uncertainties that may cause actual results to differ materially from those which the company anticipates. These risks and uncertainties include but are not limited to specific risks and uncertainties discussed in the reports that Genie Energy files periodically with the SEC. Genie Energy assumes no obligation either to update any forward-looking statements that they have made or may make or to update the factors that may cause actual results to differ materially from those that they forecast. Please note that the Genie Energy earnings release is available on the Investor Relations page of the Genie Corporation website, www.genie.com. Their earnings release has also been filed on a Form 8(k) with the SEC. Please note this event is being recorded. I would now like to turn the conference over to Claude Pupkin, Genie Energy’s Chief Executive Office and the Genie Energy management team. Please go ahead, Mr. Pupkin.

[Claude Pupkin:]

Thank you, Operator. I would like to welcome investors to the Genie Energy Earnings Conference Call for Q1 2013. Q1 was another positive one, notable both for the strong financial performance of IDT Energy and for the operational milestones achieved by Genie Oil & Gas. During our call this morning I will provide an overview of the company with a focus on Genie Oil &Gas’ operational results. Genie’s Vice Chairman Geoff Rochwarger, will detail IDT Energy’s operational results and our Chief Financial Officer Avi Goldin will review the financial results. When Avi has finished Terry Strona, IDT Energy’s CFO, will join us to take your questions. Those of you who have been on previous calls know that Geoff and I generally start off our discussions by noting some atypical weather event that has impacted operations at IDT Energy. But today, thankfully, we don’t have to go there. The last three months marked a return to typical seasonal weather. Our results this quarter were achieved in something pretty close to a normalized operating environment. Overall the company continues to perform very well. Consolidated EBITDA declined only very slightly compared to the year-ago despite the fact that the scope of GOGAS’ operations increased significantly in that time. That’s a tribute to skillful management at IDT Energy which delivered another strong quarter, boosting IDT Energy’s trailing 12-month EBITDA to $26.5 million. At GOGAS, we made several significant operational announcements this quarter. The one with the greatest potential for impact in the medium term is the decision of the government of Israel to award Genie an exclusive petroleum exploration license covering 396 square kilometers in the southern portion of the Golan Heights. Afek Oil and Gas, the Genie subsidiary that operates the project has already begun initial geophysical tests to characterize the resource and is currently making preparations for additional geophysical, seismic, and drilling operations. Our application for the license in the Golan was based upon our technical team’s conclusions drawn from limited available geological information that there may be significant quantities of conventional oil in relatively tight formations in the licensed area. If we’re right about that the timeline to commercial operations should be significantly shorter than our oil shale projects, and the technological hurdles significantly lower. This project is an important complement to the longer-term investments we’re making in oil shale development and we’re very excited about it. In April, our subsidiary in Mongolia and the Petroleum Authority of Mongolia entered into an exclusive five-year agreement to explore and evaluate the commercial potential for oil shale development on 34,470 square kilometers in Central Mongolia. Under the terms of the agreement, Genie Mongolia will identify and characterize the oil shale resources in the survey area. In addition, we can conduct a pilot test using in situ technology on an appropriate site. Our initial geological work in Mongolia indicates that the country’s resource is well-suited to support a productive oil shale industry. We’re looking forward to continuing our geological appraisal work there. Our Israeli oil shale project, IEI, has been waiting over a year while the government revised the directives required for preparation and submission of an environmental impact statement. IEI must include an environmental impact statement in its pilot test permit application. The permit when issued will allow IEI to begin construction of its pilot test. In mid-April the government finally issued these revised directives. IEI is now finalizing its revised permit application and we expect to submit it during Q2. This is a positive development. Nevertheless, the permitting process will likely be protracted. It could easily be a year from now or more before we finally receive the go-ahead to begin construction and operation of a pilot test. Back here in the US in March our AMSO LLC joint venture with Total initiated its oil shale pilot test in Colorado. After approximately two weeks of operation, before the pilot could attain steady state operations, the down hole electric heater failed. Pilot operations were too brief to draw conclusions about the viability of our approach. However, we did obtain valuable information from the test that will help us optimize operating conditions for future pilot operations. Nevertheless, this result clearly indicates the need to consider alternative approaches to in situ heating. So even if AMSO LLC and our heater vendor are considering additional modifications to the electric heater to improve its reliability we’ve begun evaluating and developing altogether different heating processes with a focus on a hot fluid circulating or HFC heating system. An HFC system would generate heat aboveground and transfer it to the retort zone via piped fluids. Development and testing of a working HFC unit could delay the pilot test restart by approximately one year. On the plus side, the HFC approach is more readily applicable to AMSO’s eventual commercial operating plan. Over the next couple of months AMSO will make a final decision whether to proceed with another electric heater test or to move directly to HFC heater development and testing, or both. Before I leave our discussion of AMSO and turn the call over to Geoff, it’s important to note that each of our oil shale projects involves the adaptation of new technologies to the unique features of the particular resource under development. Challenges and setbacks along the way are to be expected, particularly in an innovative R&D project like AMSO’s. If this were easy someone else would have accomplished long ago that which we are trying to accomplish today. Now, to discuss IDT Energy’s operational results here’s Genie’s Vice Chairman and the CEO of IDT Energy, Geoff Rochwarger.

[Geoff Rochwarger:]

Thank you, Claude. The most significant operational development at IDT Energy this quarter was the return of more normal winter weather, and with it more typical levels of demand for natural gas and electricity during the winter heating season. Normalized demand combined with the impact of our customer acquisition programs over the past twelve months were instrumental in driving the improved performance of IDT Energy in Q1 compared to the year-ago period. For several years we have provided you with two related metrics for evaluating our customer base – meter counts and residential customer equivalence or RCEs. RCEs are an important metric to evaluate our customer base because they attempt to capture the difference between low- and high-consumption meters. To illustrate, RCE is distinguished between the meter of its single customer residing in a New York City studio apartment as compared to the meter of a large family living in a freestanding suburban home. The RCEs capture this difference because they measure the trailing twelve-month consumption history compared to the fixed level of standard or average residential meter consumption. It is essential to understand and track both actual meter counts and RCEs to understand our operational and financial results. Over the past two years, our meter acquisition activities have been focused on meter acquisition in Pennsylvania and more recently in Maryland. Not only have we added significant numbers of new electric meters but perhaps more importantly the composition of our meter portfolio has steadily shifted – gradually reflecting a consumption pattern that is a little less like the apartment dweller in New York City and a little more like households in suburban Pennsylvania and Maryland. Our results this quarter highlight this shift. IDT Energy served 485,000 meters at March 31, 2013, an increase of 10,000 meters compared to the year-ago quarter but a 17,000-meter decrease sequentially as customer churn outstripped gross meter acquisitions for the second consecutive quarter. The decline in net meters reflects the decline in the rate of our gross meter acquisitions. We added 66,000 gross meters in Q1 this year, compared to 79,000 in Q4 2012 and 108,000 in the year-ago quarter. Throughout our operating history we have learned that the environment for customer acquisition fluctuates on a spectrum. In general when conditions are favorable and we can acquire meters that meet or exceed our target rates of return on payback we kick our customer acquisition machine into high gear. At other times, including in Q1, we scale back our acquisition efforts to reflect the fact that conditions make it more difficult to achieve our specified rates of return. Some of the key variables are contribution margin per unit, the competitive landscape, and seasonable weather conditions that impact the efficacy of our door-to-door acquisition program. Specifically, gross meter acquisitions in Q1slowed compared to the year-ago quarter, primarily because we have not been able to enter new utility territories as quickly as we did in 2011 and in the first half of 2012. We did not enter any new deregulated territories in Q1. When we look at RCEs over the same time period, we see a very different story. IDT Energy’s meter portfolio represented 329,000 RCEs at March 31, a significant increase of 71,000 RCEs or nearly 28% over the year-ago quarter; and an increase of 17,000 or better than 5% compared to the prior quarter. There were two significant factors driving the increase in RCEs. First, because RCEs are based on the trailing twelve-month consumption history, our RCEs – and particularly our natural gas RCEs – have been impacted by the abnormally warm winter a year ago. However, in Q1 the year-old consumption history generated by that warm winter was steadily displaced by the higher levels of consumption generated by this year’s more typical winter. As a result, the RCE levels associated with those meters have been steadily increasing. Second, our customer acquisition programs in recent quarters have been focused on geographies including suburban and rural Pennsylvania and Maryland with higher per-meter consumption rates. And so, while we absorbed fairly consistent [amid] high rates of churn in our legacy territories, the meters we are adding to replace them have on average higher levels of consumption and associate RCEs than the meters they are replacing. This component of the increase in RCEs represents real value to our business. Nevertheless, long-term growth requires that we grow our meter base and while I expect that we will begin to generate net meter growth again soon we are constrained by the timing of the approvals we need to enter new utility territories. Fortunately, the horizon for expansion into new territories looks more promising than it has in a while. We have applications pending to enter several gas and dual-meter territories in Pennsylvania and Maryland. In addition, we are evaluating opportunities in Illinois, the District of Columbia, Massachusetts, and Connecticut. In the meantime the decreased rate of gross meter acquisitions had at least two positive impacts on this quarter’s results. First, the decreases in gross meter acquisitions translated into a reduction in churn. Average monthly churn dropped from 6.8% in the prior quarter and 6.4% in the year-ago quarter to 6.3% this quarter. That is because, as I have noted on past calls, newer customers typically have significantly higher rates of churn than do longer tenured customers. Reducing customer churn has been a priority at IDT Energy for some time. We are constantly testing new pricing models and products as well as promotional strategies and value-added services to reduce churn. Were it not for this effort, we believe that our churn rate would be much higher than it is today. Moreover, there is a significant value to be realized as we continue to make progress in this area. The second benefit of lower customer gross acquisition rates is that they translate into a reduction in customer acquisition spending; and since we do not capitalize our meter acquisition costs, decreases in gross meter acquisitions reduced our SG&A expense on a current basis. In all, we spent $1.4million less on customer acquisitions in Q1 this year compared to the year-ago quarter, contributing directly to a boost in EBITDA and income from operations. Before turning the call over to Avi, I want to briefly review how consumption was impacted by the weather, meter counts, and shifts in our RCE base this quarter. Gas consumption increased 10.7% year-over-year, primarily as a result of this year’s more typical winter weather. As measured by heating degree days in our primary territories, Q1 was 25% colder than the year-ago quarter. The colder weather more than compensated for the year-over-year decrease in gas meters served. As an aside, it is worth noting that although Q1 was typically cold this past December, like December, 2011, was atypically warm. Obviously that does not bear on this quarter’s results but a more normal and colder December in 2013 could favorably impact gas consumption for the full year 2013. Electric consumption as measured in kilowatt hours sold, increased 65.4% year-over-year, far more than the 38% increase in electric meter RCEs over the same time period. This suggests that electric heating may have played a role in increasing demand year over year. That wraps up my report on IDT Energy’s operational results for Q1. Now, to review our financial results in detail here is Genie Energy’s Chief Financial Officer Avi Goldin.

[Avi Goldin:]

Thank you, Geoff, and thanks to everyone on the call for joining us this morning. My remarks will cover our financial results for Q1 2013, the three months ended March 31. All comparisons in my remarks are true to results for the year-ago period, the three months ended March 31, 2012. Genie Energy’s revenue, direct costs and gross profit continue to be generated entirely by IDT Energy. Geoff has provided a summary of IDT Energy’s operational results during the quarter which included the prime heating season. I’ll begin my addressing IDT Energy’s financial performance which was strong and continues to trend from recent quarters. IDT Energy’s revenues for Q1 increased a robust 48% year-over-year to $85.3 million from $57.5 million in Q1 2012. Electricity revenues increased 72.2% to $54.6 million from $31.7 million in the year-ago quarter, reflecting both the 65.4% increase in kilowatt hours sold that Geoff discussed earlier and a 4.1% increase in revenue per kilowatt hour sold. Gas revenues increased 19.1% to $30.7 million in Q1 2013 from $25.8 million in the year-ago quarter and accounted for 36% of total revenues. Q1 typically sees the highest gas consumption and yet gas still only accounted for just over a third of our revenues, even in the relatively normal winter compared to 45% a year ago when we had a relatively warm winter. This change illustrates the significant impact that our focus on higher-consumption electricity meter acquisitions during 2012 have had on our product mix. Therms sold increased 10.7% year-over-year for reasons Geoff discussed while revenue per therm sold increased 7.6%. Gross profit was $19 million in Q1 compared to $18 million in the year-ago quarter. Gross margin was 22.3% compared to 31.4% in the year-ago quarter. The gross profit from electricity was $10.3 million, a decrease from $11.6 million in Q1 2012. The increase in kilowatt hours sold during the quarter was offset by a steep decrease in electricity gross profit margin which declined from an unusually high 36.5% in Q1 2012 to 19.0% in Q1 this year. The decrease in gross margin on electricity sales was primarily the result of a series of sharp spikes in the electric spot market in New York that increased costs during January and February. We obtain nearly all of the supply for our customers in that state from the spot market, so we chose to absorb a portion of those increased costs to keep our pricing competitive and to dampen churn. A secondary factor in the decline of our electricity gross margin has been the gradual shift in concentration of our customer base from New York to Pennsylvania and, to a lesser extent, to Maryland. Because of competitive pressures in our business strategy in these two states we maintain electricity margins in these two states at a somewhat lower level than in New York. Consequently, our success at obtaining customers in those states has tended to depress our electricity gross margin somewhat. It is important to reiterate that while these customers yield a lower gross margin percentage their consumption patterns are higher, leading to a healthy contribution to our results. The gross profit from gas volumes increased to $8.7 million in Q1 from $6.5 million in the year-ago quarter. As I mentioned, gas volumes increased and the gas margin increased as well, going from 25.0% in the year-ago quarter to 28.2% in Q1 this year. IDT Energy’s SG&A for the quarter was $10.6 million, a slight decrease over the year-ago quarter as a decline in sales and marketing expenses partially offset by higher billing and purchase of receivable fees as a result of the growth in the customer base. EBITDA at IDT Energy was strong at $8.9 million. We continue to be comfortable with our annual EBITDA guidance of $25 million in a normal weather environment. Now, looking at Genie on a consolidated basis

[Operator:]

We will now begin the question-and-answer session. (Operator instructions.) Our first question will come from Marco Rodriguez of Stonegate Securities. Please go ahead.

[Marco Rodriguez:]

Good morning, thank you for taking my questions. First I was wondering if you could perhaps provide a little more color on the heating technology that you might be evaluating here, if you can kind of compare it and contrast it to the in situ process.

[Claude Pupkin:]

Hi Marc, this is Claude Pupkin. Let me just make sure I understand your question. You’re asking the heating technology that we’re evaluating for AMSO?

[Marco Rodriguez:]

Correct.

[Claude Pupkin:]

How does it compare to what we’ve been doing so far – is that the question?

[Marco Rodriguez:]

That’s correct.

[Claude Pupkin:]

Okay, the overall concept is to heat a fluid at the surface which can be heated with electricity or natural gas – the long-term plan would be using gas; and pipe it down through a closed set of tubes into the existing wells. So effectively you’re removing the electric heater and inserting… Keep in mind, the electric heater went inside a closed pipe and instead of inserting an electric heater that’s doing the heating down hole, now you’re heating a fluid at the service and piping it down hole into effectively the same heater configuration, the same down hold configuration; and piping it back up to surface where it gets reheated. So it’s like a closed loop of reheating.

[Marco Rodriguez:]

Is it technically less challenging or what kind of drawbacks and what not have you noticed with the method before or have you tried it out at least?

[Claude Pupkin:]

So a couple things

[Geoff Rochwarger:]

Sure, hi, this is Geoff. So up until now although we received the license and we had been taken twice to the Supreme Court in Israel on challenges by green environmentalist groups in the country we have prevailed in those cases. And the one major item that had been holding us back, which is what we just received now, are the [EIFs] or the environmental directives which are fundamental to the application that has to be submitted for the permits. We believe that although we have received them and we are now responding to that – and we hope and believe that by the end of this month at latest that we will be submitting the application in, the rules in Israel are governed in a way that gives opportunities to outside groups and experts brought in outside of Israel to opine on the various components of the license and some of the concerns that were raised previously. So we view this as a critical milestone that we are now passing, which is the submission of the application. However, we do believe that these groups will continue to try to challenge us now that we will be in the Jerusalem Committee for final permit approval.

[Marco Rodriguez:]

Got it, okay, that’s helpful. And is there a, I don’t know – any kind of thinking there… I understand that the technology you’re using there is somewhat different than AMSO but is there any discussion as to perhaps using this new technology that you’re evaluating for AMSO perhaps in Israel?

[Geoff Rochwarger:]

Yeah, that’s an excellent question, Marco. You may have heard us speak in, I don’t know if in one-on-ones or in larger meetings, that longer-term for IEI we’ve considered and are actively evaluating molten fluids. Conceptually it’s a very similar idea to what AMSO is evaluating, which is to heat a fluid at the surface and pipe it down hole through a closed set of tubes. IEI’s specific approach is molten [salts] that have a very high heat capacity and a low boiling point, but again, conceptually and in terms of the applicability to long-term commercial operations they’re both on the same track. And should we succeed with one or the other there’s always the possibility that we may deploy a similar technology in the other project, but right now what we’re talking about is two similar approaches – one using… I’m not at liberty to disclose what fluids AMSO is considering using; and in the case of IEI it’s molten salts. But just to be clear, the IEI pilot is not going to be using molten salts – this is a longer-term development project.

[Marco Rodriguez:]

Right, okay. And then switching here over to IDT Energy, fairly decent growth rates here on the RCEs here once again on a year-over-year basis, especially on the electricity side. How should we be thinking about the growth rate of RCEs on the electricity side and the natural gas side as the year progresses?

[Geoff Rochwarger:]

Well, first I’ll talk a little bit about how we see the growth opportunity for growth in general, for both electricity and gas; and then we can talk a little bit more about specifically the RCEs. For us it has been a little frustrating over the last two quarters or so in that we have been very progressive and thought to be very proactive in terms of submitting licenses for additional territories, additional utilities that are so important for our underlying growth of the business. And as we’ve said and as we’ve shown over the past few years we are extremely opportunistic, and assuming all of the criteria lines up in way that presents for us what we believe is an acceptable return and payback on that customer we take the decision to invest as much as possible in taking advantage of that opportunity. And one of those underlying criteria are that we also do have new utilities to help us grow and expand our footprint. We do hope, and again, at this point there are several key gas utilities in Pennsylvania that we have been waiting for approvals to go forward that although we have not received the final licenses back yet, based on additional efforts that we’re trying to apply we are hopeful that that really now is hopefully just around the corner. So our assumption is that the gas RCEs in Pennsylvania will probably be larger than the gas RCEs that are our legacy gas customers in New York City; just like the electric RCEs in Pennsylvania are significantly larger than the electric RCEs in New York City. And I use New York City as a point to measure against just because New York City, New York State has really been where the vast majority of our legacy customers are. So in addition to being able to finally upsell and collect gas meters from our customers, there are several additional utility areas that we are also waiting for licensing approval. So our belief is, I guess in summary, is that as these utilities start opening up and we receive our licenses we believe that the gas RCEs will certainly increase. In terms of the electric RCEs we’ve seen a lot of growth, a lot of strong growth and I think that that is a direct result of the very aggressive growth curve that we’ve realized in the last year, year and a half, with the addition of so many Pennsylvania electric meters.

[Marco Rodriguez:]

Great, okay, that’s helpful. And then last quick question here

[Terry Stronz:]

Hi, this is Terry Stronz. Churn is a really difficult metric to measure and to predict because there’s so many things that impact it like the weather, the price of the commodity, things like that. We think that where we’re at right now in the low 6% range is probably going to be what we see in the foreseeable future given kind of normal patterns. The other thing that could impact that is our acquisitions and moving into these new territories, and typically that may cause a little bit of an increase. But I think for the most part the low 6%s are where we’re headed.

[Marco Rodriguez:]

Got it, thanks a lot guys.

[Operator:]

(Operator instructions.) I’m having no further questions. This concludes our question-and-answer session and conference call. Thank you for attending today’s presentation. You may now disconnect.