Genie Energy Ltd.
Q2 2013 Earnings Call Transcript

Published: 8 Aug 2013

[Operator:]

Good morning and welcome to Genie Energy’s, second quarter 2013 earnings conference call. All participants will be in listen-only mode. (Operator Instructions). In this presentation Genie Energy’s management team will discuss financial and operational results for the three months ended June 30, 2013. Any forward-looking statements made during this conference call, either in the prepared remarks or in the Q&A session, whether general or specific in nature are subject to risks and uncertainties that may cause actual results to differ materially from those (Audio Gap). These risks and uncertainties include, but are not limited to the 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 have been made or they may make or to update the factors that may cause some actual results to differ materially from those that are already forecasted. Please note that the Genie Energy earnings release is available on the Investor Relations page of the Genie Corporation website, www.genie.com. The earnings release has also been filed on a Form 8(k) with the SEC. Please note that this event is being recorded. I would now 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 call for the second quarter of 2013. As you know, the retail energy side of our business is highly seasonal and the second quarter is typically characterized by sales in electricity and natural gas, at levels well below the peak summer cooling months and winter heating months respectively. While this quarter was no exception with the usual sequential decrease in gas consumption, our gross margin EBITDA and bottom line results were disappointing, following below last year’s second quarter levels and below our internal expectations. The shortfall reflects the confluence of factors that Geoff and Avi will address in their remarks. On a more positive note, our second quarter top line results benefited from IDT Energy’s consistent year-over-year growth in Electric RCEs, again demonstrating that this is a business with attractive growth prospects. As deregulation opens up additional retail energy markets in various states in a fashion that fits our business model, we’re well positioned to enter new markets and compete for new customers and market share. At Genie Oil and Gas this was a workhorse quarter rather than a show horse quarter. We made steady progress in all fronts, but without passing many significant milestones. Let me provide you with an update on each of the projects. At AMSO, our Oil Shale project in Western Colorado, you may recall from our last quarterly call that the pilot test we started to operate in March was suspended when the down-hole electric heater failed before the project could attain steady state operations. For a variety of reasons, the electrical heating system was never intended to be used beyond the pilot test phase of the project. So we stepped back and took a hard look at electric heaters in the context of the entire range of potential heating system options available to us. Ultimately, we concluded that our time and resources could be more productively spent on a careful, deliberate approach to identify the optimal heating technology, with the potential to substantially de-risk pilot test operations, rather than on additional attempts to re-engineer failed down-hole electric heating system. This process could result in an alternative solution with applicability to subsequent stages of AMSO’s operations, in accordance with the projects work plan. Having said that, the imperative of this process is to identify the heating approach that is most likely to contribute to a successful pilot test. We and Total, our partner at AMSO are committed to this comprehensive step wise and careful key development effort. Together we will qualify design engineer build and thoroughly test in this promising solution. This will not be a short-term effort. It will almost certainly postpone and restart of the pilot by at least 12 months and probably longer. Now moving onto our other projects. In Israel, let me first touch on IEI, our oil shale project in Central Israel. You may recall that last quarter the Israeli government finally issued the regulations we needed to proceed with our pilot planned applications. At the end of the second quarter we filed the application for the pilot test construction and operations with the Jerusalem District Building and Planning Committee. The committee’s formal evaluation process will take at least nine months and perhaps significantly longer. Additionally the challenges are possible and these could have caused additional delays. Our Afek exploration project in the Golan Heights is making excellent progress; thanks in part to my colleague Geoff Rochwarger who has taken on the additional role of coordinating Afek operations on the ground. Afek has been fastening up for operations, contracting with international service providers to support our exploration activities and preparing permit applications for our 10 well exploration program. In the third quarter we expect to undertake several geo physical tests as we hope it will help us better understand the sub surface and pick suite spots for our exploration wells. At this point we expect that the exploratory drilling programs that further characterize the resource, will begin as early as the first half of 2014. Afek’s aggressive operational program will become financial impactful in the second half of this year and expenditure levels will increase over the next couple of years. We will continue to keep you apprised of both our operational progress and its financial impact. Finally in Central Mongolia, Genie Mongolia continues to work on our survey of the oil shale resource in the 34,000 square kilometer exploratory license area. We will report back when there’s developments of interest. That concludes my discussion of Genie and update on the Genie oil and gas. Now to discuss IDT Energy’s operational results, here is Genie’s Vice Chairman and the CEO of IDT Energy, Geoff Rochwarger.

[Geoffrey Rochwarger:]

Thank you Claude. As Claude mentioned, IDT Energy’s financial performance for the second quarter fell short of expectations in certain metrics and I will get into the causes of that later. Nevertheless in the second quarter, IDT Energy continues to benefit from the consistent growth in consumption by our customer base in recent quarters. Our electric residential customer equivalence or RCE, which reflect the trailing 12-month consumption history of our meter base was 263,000 at June 30 of this year, a significant increase from 204,000 a year earlier and 243,000 on March 31 of this year. Gas RCEs increased slightly to 94,000 from 88,000 a year ago and 86,000 at March 31. The increase in electric RCEs is significant. RCEs are more indicative of the true signs of our customer base, since unlike meter count alone, it captures the migration of our customer base to the relatively higher consumption electric meters we have been acquiring in Pennsylvania and Maryland, compared to our traditional and lower consumption customer base in New York, and therefore more accurately reflects the likely trends in future consumption than meter counts alone. The electric meter served essentially flat year-over-year, increasing to 314,000 at June 30, 2013 from 313,000 a year earlier and decreasing from 319,000 at the close of the previous quarter. Gas meter served reached to 161,000 on June 30 from 182,000 a year earlier and from 166,000 from the prior quarter. This is predominantly due to our focus on acquiring customers in new markets and the fact that until now the Pennsylvania, Maryland market presented, are primarily electric meter customers. When combining the churn in the customer base, this resulted in some erosion of our gas meters account. In total IDC Energy served 475,000 meters as of June 30 compared to 485,000 at March 31. The sequential decrease in total meters served reflect in-part the delays we’ve encountered in obtaining licenses to operate in new utility territory. Although the reason for delay varies from territory-to-territory and state-to-state, the bottom line is that we have not entered into any new utility territory this year, other than Commonwealth Edison in the state of Illinois. (Inaudible) we continue to test products, including our standard variable rate and our renewable green product, but we have not acquired a significant number of new meters and because of the unique regulatory and competitive landscape there, we do not expect to do so in the foreseeable future. We have additional licenses pending then for gas and dual-meter utilities in Pennsylvania, Maryland and Washington DC. Additionally we continue to follow and evaluate the regulatory initiatives in several other states, including Massachusetts and Connecticut. However it may be several quarters before we are able to obtain additional licenses and further expand our geographic footprint. In the meantime, we are very focused on increasing market share in our existing territory, while working to minimize churn. As I mentioned previously, the environment for customer acquisitions is influenced by many factors that impact our expected profitability, influencing how we determine the rate at which we acquire new leverage. Nevertheless, it certainly is possible that we will increase our meter base without geographic expansion in the near term, if there are positive changes in the acquisition environment. Gross meter ads in the second quarter were 71,000 compared to101,000 in the year ago quarter and 66,000 in the prior quarter. Our average monthly churn rate meanwhile decreased to 6.3% from 6.6% in the year ago quarter and was unchanged compared to the second quarter. The year-over-year decrease in churn largely reflects the decline in gross meter additions compared to the year ago quarter, as newer meters tend to have higher rates of churn, as well as the phase out of acquisition programs that tenants will move faster with their higher propensity of churn. Looking now at the operational factors behind the decrease in electric growth margin during the quarter, our electric growth margin decreased by nearly 44% compared to the year ago quarter for a variety of reasons, some essentially non-recurring, others related to a longer term shift in the composition of our customer base. Let me process this explanation by pointing out that this is for a visibly challenging electric commodity price environment for us. The price of electricity in the commodity market rose significantly and abruptly during the second quarter and increasing 23% for the kilowatt-hour compared to the year ago quarter and 5.8% compared to the prior quarter. This increase in electric commodity cost impacted our margins in several respects. As was generally the case, we reduced our margin and rising price environment to remain competitive with the income in utility that purchased their supply in part to longer-term contract. That impact was exacerbated this quarter by pricing programs and incentives we had in place to facilitate newer customer acquisitions. And finally, this quarter, an internal pricing systems issue in our newer territory unexpectedly prevented us from adjusting our prices on a timely basis in response to the commodity cost change. We have since taken steps to address and correct this issue and do not expect this to be a factor impacting all margins going forward. Having said that, we do think that you can expect to see some slow long-term margin erosion over time, as our customer base continues to migrate to Pennsylvania and Maryland, where our customer acquisition programs are focused. Margins in these states tend to be lower than the average of our overall customer base. I will now turn the call over to Genie Energy’s Chief Financial Officer, Avi Goldin, to expand on our financial results.

[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 the second quarter of 2013, the three months ended June 30. All comparisons in my remarks are to the results for the year ago period, the three months ended June 30, 2012. As in prior quarters, Genie Energy’s revenue, direct costs and gross profit was generated entirely by IDT Energy. So I will begin where Geoff left off and address IDT Energy’s financial performance. IDT Energy’s revenues for the second quarter increased 28.7% year-over-year to $55.1 million from $42.8 million in the second quarter of 2012. Electricity revenues increased 27.4% to $45.1 million from $35.4 million, reflecting both the 20.2% increase in kilowatt hours sold and a 6% increase in revenue per kilowatt-hour sold. Gas revenues increased 35.3% to $10.1 million from $7.4 million and accounted for 18% of total revenues. The recent growth in our customers has been predominantly in territories where we only sell electricity and not natural gas, significantly reducing he relative contribution of gas sales to IDP energy’s total revenues. Many of the territories where we have application spending are dual-meter or gas only; therefore that picture can begin to change as we further expand our geographic footprint. Therms sold decreased 2.6% year-over-year as our gas meter count declined, but revenue per therm sold increased to 38.9%, driven by continued increases and the price of natural gas in the commodity markets. Gross profit was $10 million in the second quarter compared to $11.6 million and gross margin was 18.1% compared to 27.2%. The gross profit from electricity was $6.7 million, a decrease from $9.5 million in the second quarter of fiscal 2012. The increase in total kilowatt hours sold was more than offset by a significant decrease in the gross margin on electric sales, which is about a 14.9% from 26.8% Q1 in the year ago quarter. Geoff discussed the market and operational factors behind the decrease in our gross margin on electric sales in his remarks. I will only emphasize that we have addressed the factors that delay our ability to make timely price adjustments in some of our new regulatory territories. The gross profit from gas sales increased to $3.2 million and $2.2 million is the impact of the 2.6% decrease in therms sold and was more than offset by an increase in gross margin percentage; so 32.2% compared to 29.3% in the second quarter of last year. IDT Energy’s SG&A for the quarter was $9.4 million, compared to $10.6 million in the second quarter of 2012, primarily reflecting a reduction in sales commissions and other costs associated with decreases in gross customer acquisitions, severance expense and stock based compensation expense, which is partially offset by increased energy billing and purchase of receivable fees. EBITDA and income from operations at IDT Energy was $500,000, compared to $1.1 million in the year ago quarter. While our gross profit and margin figures for the quarter do not meet expectations. RCE growth has been steady over the last year and we expect margins to move closer to their historical levels and see normalized weather in pricing environments. Accordingly we are maintaining our annual EBITDA guidance of $25 million for IDT Energy, again, assuming in normal whether environment. At Genie Oil and Gas SG&A spend was $500,000 compared to $200,000 in the year ago quarter, reflecting an increase in non-cash compensation costs. Research and development expense at Genie Oil and Gas is $2.6 million compared to $2.8 million in the year ago quarter. As Claude mentioned, we expect that increased activity at OpEx will drive cost higher in the coming quarters. As in prior periods we account for a 50% stake in AMSO utilizing the equity method. The equity and the net loss of AMSO decreased to $800,000 compared to $900,000 in the year-ago quarter, reflecting the slow down in activity following the suspension of pilot test operations. Genie Oil and Gas’s loss from operations was flat compared to the year ago quarter of $2.9 million. Now lets look at Genie on a consolidated basis. Consolidated SG&A decreased to $12.1 million in the second quarter of 2013 compared to $13 million in the year ago quarter. SG&A in the second quarter included $1.1 million in non-cash compensation charges, compared to $960, 000 in the year ago quarter. On a consolidated basis Genie’s was a $5.5 million loss compared to a $5 million loss in the second quarter of last year and Genie’s loss from operations is $5.6 million compared to $5 million in the second quarter last year. Interest income, financing fees and other expense net came to an expense of $680,000 in the aggregate compared to $640,000 in the year-ago quarter. Financing fees, which are the majority of these items, are substantially the volumetric fees for electricity and natural gas charged under our preferred supplier agreement with BP. The benefits from income taxes was $100,000 compared to $1.9 million in the year ago quarter. Adjusting for non-controlling interests and including the impact of the $300,000 in dividends to be paid to the holders of our preferred stock, the net loss attributable to Genie common stock holders was $6.2 million compared to $3.3 million in the year ago quarter. Net cash provided by operating activities in the second quarter was $2.2 million compared to net cash used in operating activities of $200,000 in the year-ago period. Our balance sheet continues to reflect our very liquid asset mix with $91.9 million in cash, cash equivalents, short term restricted cash and certificates of deposit and marketable securities. We have virtually long-term debt and a positive working capital balance of $103.5 million. Overall we remain confident in the long-term earnings power of our retail energy business, which we expect to continue to be a source of positive cash flow, as well as the long term upside on our investment in unconventional energy. That wraps up my financial discussion for the quarter and concludes our prepared remarks. Now Terry Stronz, IDT Energy CFO will join us and I will turn the call back to the operator to take your questions.

[Operator:]

Thank you. (Operator Instructions). Our first question comes from Marco Rodriguez with Stonegate Securities.

[Marco Rodriguez:]

Good morning guys. Thank you for taking questions. In your prepared remarks I was wondering if you could talk a little bit more about the IDT Energy and electricity, cost of electricity. You guys talked about the significant cost increase in electricity. I believe this is the second quarter in a row where you’ve mentioned this factor. Yes, the way I understood the business model being kind of a variable rate pricing plan, you were able to kind of minimize your commodity exposure. Is this no longer the case here?

[Geoffrey Rochwarger:]

Hi, this is Geoff. Thank you for your question. It certainly is the case. Our business model has been built and continues to grow based on a low risk low exposure type of scenario. We are buying in the stock market and we sell predominantly variable rates to our customers. That allows us, that should we choose to recoup immediately, any increase in cost that we may incur in the stock markets and pass it on to our customers. For us however, what we’ll do and there’s a process in place that prior to actually responding immediately to price increases. What we need to do is we need to take a look at several additional factors and then decide how, when and if to pass on those cost increases immediately. And those factors include our churn rate, those factors include where the competition is, where the other rates in the markets are. So in general, no – in general and specifically also, the model continues to work the way that it was built. The one hiccup that we had in this quarter and I relate to it as such, because it has since been fixed and we do not expect to see it in the future. The problem was that in some of the newer markets, specifically in PJM, there was a systems error, there was a systems process issue that did not allow all of our, some of our price changes rather, to take effect immediately; that’s been fixed. So we see the model continuing to work the way that it needs to.

[Marco Rodriguez:]

So can you kind of help us understand; I mean what’s the degradation in the margin here because of the increasing price in commodities, electricity here. You also mentioned competition, trying to keep yourself competitive with local utilities. So how much of the degradation here is from competition and how much was from this software issue.

[Claude Pupkin:]

Avi, do you want to address that?

[Avi Goldin:]

Sure, so we are not specifically breaking out between the various issues, but I think the way to approach it is similar to what Geoff descried before, which is that it’s not necessarily an across the board margin degradation issue. I think it’s a combination of factors like we discussed, which is that as we moved into newer markets and newer utilities, we are seeing that each one is unique and it relates to the specific margins we are able to see there, just specifically as the mix has shifted into Pennsylvania. So that’s one factor and we talked about that over the course of the number of quarters. And we’ve also been fairly upfront in terms of how in different types of commodity price environments, our ability to earn margin shifts around a little bit. And this was a particularly difficult commodity price environment for us, where with rising pricing and the utility able to offer prices, either blow our cost of places in certain scenarios given their hedging programs that work against them in different commodity price environments, but in this particular one make it a little bit more difficult for us, and then in addition those factors were exacerbated by the systems issue that you have preferred to, that didn’t allow us to be as precise as we usually are in terms of pricing in certain of these markets. So we are not providing a specific breakdown, but this quarter, its fairly consistent with what we expected to see in this kind of environment, absent the one-time nature of that systems issue.

[Marco Rodriguez:]

Okay. Then in terms of EBITDA guidance for the year for IDT, you’re maintaining the $25 million for the fill fiscal year, can you talk a little bit about how you are thinking about how you are going to get there, given just the first half performance.

[Geoffrey Rochwarger:]

So, this is Geoff again. I’ll start with this and Terry, please feel free to add any additional information. This is our retail energy business. It’s a very seasonable business and I think Avi had mentioned this in the beginning of his remarks, where we noticed that this quarter happens to be during the course of the year. It does happen to be the weakest quarter in terms of EBITDA and net income generation. So based on how the first half of the year started out and with an assumption I believe that the rest of the calendar year will see an average, whether average consumption type of rest of the year compared to previous years, we do believe that given that type of environment, that with the group of the expansion and growth of our CE in some of the other markets, we saw this quarter, a very large increase in our CEs or otherwise of the group of the consumption, the average consumption for meter. So even with the possibility of some of the lower margin for units that we’ve seen previously, the throughput should help us – the higher throughput with the addition CE should be able to get us there.

[Terry Stronz:]

The only think I would add to that is that despite the things we discussed for this quarter and it was a particularly challenging one, the EBITDA relative to last year at this time, but for the same quarter, a year in which we were able to come in at the guidance level, we were only by $0.5 million behind. So fortunately this took place as Geoff mentioned, in the quarter where typically we’re not doing as much EBITDA relative to the course of year. So we are still fairly confident that we’ll be able to deliver on the guidance we’ve been discussing.

[Marco Rodriguez:]

And so if I heard you correctly. So the factor that’s really going to drive the second half or is your continuing training on the RCEs. The fact that you’re moving into more singe family homes where you have a higher footprint, higher consumption, is that correct?

[Claude Pupkin:]

I think that certainly for right now, that is correct, that’s accurate. There is several different balls that we’re juggling at the same time that are for us, the key underlying assumptions for the business. And the markets are volatile based on different times during the year. Different underlying criteria impact the model differently. So yes, I would certainly say that what has helped us is the fact that we have seen some very significant growth in the RCEs over the last three quarters. Our hope is that we are still sided by holdups with getting licensing approved to new territories. That would certainly, with some movement, with some of those utilities, that would also in terms of not only RCE growth, but if we can start to market in some of these territories and start to see some good meter growth as well, that would be helpful as well. Without trying to overcomplicate this any more, obviously what type of weather we’ll see for the rest of this month, as the final month of summer, and then more importantly looking at what type of weather and what type of commodity pricing the commodity market will see for the winter will have a major impact on the model, both B2B, to positive side and to the negative side. If you look at the market today, it’s quite interesting what’s happening with the price of the stock market financial gas and what that’s doing and driving electricity as well. But yes, I think it’s a combination of the RCEs; it’s a combination of getting normal, seasonable weather, consistent weather and I mean these are all important contributors.

[Marco Rodriguez:]

Got it, okay. And then in terms of GOGAS, can you talk a little about your expectations of operational expense trends for the remainder of the year and can you also please discuss your expectations of CapEx spend for that.

[Claude Pupkin:]

Sure. So as it relates to the remainder of the year, what we are expecting to see is that for AMSO, IEI and Genie Mongolia for things to remain relatively in line with where we right now, with the single entity where those cost arrive, being within our fact depending on the rate of our ability to permit the exploration program we are looking to do. So fundamentally we are looking, we’re thinking things are going to stay relatively flat from most of GOGAS with some increase in Afek. As we look out on a more long term basis, obviously it’s going to depend on the rate of success in the projects. As we have discussed, its really specifically to the activity of IEI, we expect to be within this, still look in this permitting cycle for quite some time, still into the 2014 timeframe. Mongolia is going to depend on the rate of success we have in executing on our exploration program within the joint geological survey and Afek is the area where we expect and we are hopefully that we’ll be able to significantly increase the spending rate, assuming that the wells are permitted and that we are able to execute on that kind of a program.

[Marco Rodriguez:]

Okay, that’s helpful. And just coming back here again to IDT Energy, can you just discuses a little bit about what’s going with the licensing and lack of approval for new territories.

[Terry Stronz:]

Yes, I mean – unfortunately there is not a lot of information to give. Meaning, we have currently – if we look at the landscape of what’s in Q right now, lets look at various states and jurisdictions. So Washington DC is probably the closest new market for us. Its actually fairly well deregulated right now. The only additional item that we’ve been waiting for – we did receive the state license, we are in Q4, both the individual utility license for the gas and electric, but probably the biggest factor there is that approximately a year, a little less than that, they finally approved the purchase of receivables, the POR program. That program only takes effect on October 1 and therefore even if, and we hope to receive the final individual utility licenses prior to them, and assuming that we do, we’ll still wait to October 1 to actually start to active market there, because we don’t want that, the receivable risk. If we look at a series of license that we’ve been waiting for at least two years, we can point through the gas licenses, the predominant gas licenses within the state of Pennsylvania. If you recall about two years ago, a little bit more than two years ago, when we first received our electric licenses in Pennsylvania that was a major driver of growth, not only in terms of absolute meters, but also in terms of the RCEs, which we continue to enjoy right now. We are not exactly sure for all the reasons for the delay, but we are hearing that we did hire an outside council with regulatory focus. We are starting to hear some positive whispers and we hope there is no guaranty, but we hope that the frame time that we can expect to receive the licenses should be late fall early winter, if things continue to go along. So it’s really as stated before, each state, each utility has their own, everyone has their own specific issues.

[Marco Rodriguez:]

Got it. And according to your guidance, $25 million guidance for IDT Energy, is that assuming that DC and the net gas for Pennsylvania go as plan in terms of your expectations to enter those markets in the second half of this year.

[Claude Pupkin:]

No, the answer is not really. However even if – what I don’t want to create an expectation is that if we do get the licenses complete and we start to market it within territories, that’s really any new territory that we enter and we see this to a very large degree and comment as an example in Illinois. What we have to do is, we have to be very careful about any new market that we open up. As Washington DC geographically is a very different market, it works on a different ISO than our core territories. So even when we do become licensed and we start to market, what we do is we spend several months extensive testing in terms of our proven acquisition channels, in terms of the various products that we sell, and we try to find the right mix, understand the underlying consumption that we know so well in our markets today and see how they compare in these markets and then make a proper adjustments for the program. And only after I would say at lease a quarter or so of real testing, if we start to find some real stickiness for customers with payback models that make sense, that’s almost start to aggressively market. So right now the answer is no, it does not.

[Marco Rodriguez:]

Got it. Thank you guys very much. I’ll jump back in queue.

[Claude Pupkin:]

Okay.

[Operator:]

(Operator Instructions). All right, as there are no more questions at the present time, this closes our question-and-answer session and conference call. Thank you for attending today’s presentation. You may now disconnect.