Genie Energy Ltd.
Q3 2013 Earnings Call Transcript

Published: 6 Nov 2013

[Operator:]

Good morning and welcome to Genie Energy’s 3rd quarter 2013 earnings conference call. All participants will be on a listen- only mode. (Operator’s Instructions). After today’s presentation by Genie Energy’s management, there will be an opportunity to ask questions. (Operator’s Instructions). In this presentation Genie Energy’s management team will discuss financial and operational results for the month ended September 30, 2013. Any forward-looking statements paid during this conference call either in the prepared remarks or in a Q&A session, the general or specific in nature as established the risk may cause actual result different materially both companies. Its risk and uncertainties include but not limited to the risks concerned in these discussion reports that Genie Energy files periodically with the SEC. Genie Energy assumes no obligation, either to update any forward-looking statements they have made or may have made or update factors that may cause actual results to differ materially from those that are reported. Please know that Genie Energy’s earnings release is available on the investor relations page with Genie Corporation website, www.Genie.com. Earnings release is also on file with Form 8-K with the SEC. Please note this event is being recorded. I will turn the conference over to Bob Pupkin, the Genie Chief Executive Officer and Genie 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 Third Quarter of 2013. Joining me to discuss the quarter’s results are Geoff Rochwarger and Avi Golding. Geoff is Genie Energy’s Vice Chairman and the CEO of IBT Energy. He also provides oversight for Go Gas’s two projects in Israel. Avi is Genie’s Chief Financial Officer. After Avi’s remarks, Terri Stronz, Chief Financial Officer for IBT Energy will join us, and the four of us will then be happy to take your questions. I’m pleased to report that during the third quarter, Genie’s operational and financial results were generally in line with our expectation and we’ll see that many of the trends underlying our recent results continue to drive our performance in the third quarter. Looking ahead, we’re working towards several significant and positive milestone that could be impactful over the next several quarters. Later on this morning’s call, Geoff and Avi will provide you with a comprehensive operational and financial review of IBT Energy. I would like to focus my remarks on the four projects that comprise Genie Oil and Gas’s operations. However, I will point out that IBT Energy’s results show the significant improvement over the prior quarter and return to normalized levels for the season. Although, this summer was relatively cool overall, revenues and EBITDA nevertheless met our expectations for the quarter and exceeded the levels we obtained in the year ago quarter. Turning to Genie Oil and Gas, during the third quarter, AFEC[ph], our oil and gas exploration project in the Golan Heights, again, in earnest, with its initial field activities to characterize and evaluate the resource underlying our license area. To date, AFEC[ph] has gathered electromagnetic data and analyzed seismic survey data and will continue to carry out the other components of our surface resource characterization program to paint[ph] as much information on the sub-surface prior to drilling and to help us prioritize our exploratory drilling locations. Together with our vendors, when we select from leading international service providers, we’re in the process of interpreting the preliminary data. So far, the data is consistent with our thesis. And there may be a significant oil and gas resource in the license area. But, I should note that surface evidence is rarely, if ever, conclusive. Only through the results from the drilling program will we have a thorough understanding of the resource and its produceability. We plan to initiate exploration drilling during the first half of 2014 and this will likely extend into 2015. However, permitting legal and regulatory delays could impede our progress and extend our timeline. The drilling preparations like the drilling itself will entail significant increases in AFEC’s[ph] rate of spend and should become impactful as early as the fourth quarter of this year. Also in Israel, our oil shell project IEI had made progress with the pilot test permit application filed with the Jerusalem district building and planning committee. Though Israel’s government issued new regulations applicable to oil and gas development, via article 47, the IEI team has been working with the ministry of energy and the committee to ensure that the article’s requirements are fully reflected in our application. I observed on our previous earnings call that although our submission starts the clock running on an approximately nine to twelve month application evaluation process – additional delays were possible. We are working to submit the remaining necessary information required under article 47 during the next quarter. At AMSO, our oil shell project in Western Colorado, and continued in comprehensive review of alternative heating systems for the pilot test with Total’s active participation. One component of this review includes diagnostic tests to evaluate the condition of the pilot test heating and production well system. We want to understand how the passage of time and the operations conducted today have impacted the down hole heating and production wells. And, whether and how these changes will require us to modify our technical and operational plans. As I’ve mentioned last quarter, this analysis will take some time, quite probably a year or more. But it is crucial to a successful pilot test and to the future of the project that we just described. Finally, Genie Mongolia continues to work on our survey of the oil shell resource in our 34,000 square kilometer exploration license area. We have conducted a significant amount of surface mapping – rather, metric and other analyses, and have drilled exploratory wells as part of our resource characterization plan, we’re continuing to drill during the fourth quarter. At the end of the exploration and resource characterization process, we expect to identify a suitable site to build and conduct a pilot test. However, we do not expect to undertake a pilot test unless and until the government of Mongolia has developed and implemented an appropriate regulatory framework for the commercialization of oil shell. Given the timelines and progress, very considerably from project to project, I am pleased that (Go Gas’s) portfolio approach has allowed us to deploy and focus our scientific and technical personnel as well as our financial resources to take full and timely advantage of their opportunities each project represents. Overall, we’re executing well and moving forward as rapidly as local conditions and regulations permit. That concludes my discussion of Genie and update on Genie Oil and Gas. Now, to discuss IBT Energy’s operational results, here’s Geoff Rochwarger

[Geoff Rochwarger:]

Thank you Claude. I’ll begin my discussion of the IBT Energy’s Third Quarter Operation Results by looking at the key drivers of consumption, including the two measures of our customer base – RCE and Meters served. During the third quarter, kilowatt hours sold increased very slightly year over year. Increasing just eight-tenths of 1 percent. Although, as we will discuss, our RCE’s have increased significantly compared to the year ago quarter. This summer was not as hot as last year decreasing demand over the future lying in August cooling season. Our residential customer equivalents or RCEs increased 5 percent year over year, but the clients’ 6 percent compared to the prior quarter to 337,000. The year over year increase resulted from a focus of our customer acquisition efforts on electric and dual meter territories in Pennsylvania, Maryland. The predominantly suburban meters we take off in these states have on average a higher rate of consumption than our more urban-centric New York customer base. In addition, the colder winter in the first quarter of this year compared to the mild ones or of 2012, also contributed to the year over year increase. The sequential decrease reflects both as the clients’ to Meters served which I will discuss in a minute – and a relatively cool summer. Meters served decreased 13 percent year over year and 4 percent sequentially to 456,000. And in fact, we had a two sequential declines throughout the trailing twelve months. Our decrease on meter base largely reflects the fact that our growth opportunities have historically, then linked to geographic expansion – and we have not entered in a meaningful way new territories and support order of 2012. Looking ahead, as I’ve mentioned on prior calls, we have applications pending to enter additional territories. Primarily GAP and DOLE metered territories in Pennsylvania, Maryland and the District of Colombia. There is a good chance that we will be able to answer some of these territories before the end of the year. Although, even under this scenario, they would not be impactful financially until sometime in 2014. In addition, we are closely monitoring longer-term opportunities in other States, including Massachusetts and Connecticut. Although, entering new territories has historically been our dominant driver for new meter acquisition, our ability to grow our meter base in existing territories is a function of numerous factors that determine our ROI, including some we do not control. Such as the competitive environment and prevailing utility prices as well as some – we do control. Such as the level of investment in our sales and marketing programs and, to some extent, the efficacy of our various sales channels. In that regard, we continue to look for ways that deepen our market penetration either by developing new sales channels or increasing the effectiveness of our current channels. I believe there is stillroom for improvement and we continue to expect many growth opportunities. Rows meter ads in the third quarter were 64,000 compared to 71,000 in the second quarter and 118,000 in the year ago quarter. The cost monthly trend intends to be closely correlated to gross meter ads. Our monthly churn rates decreased from 6.6 percent in the year ago to 6.3 percent this quarter although it did not change compared to the prior quarter. Turning now to market conditions during the quarter, our gross margin at third quarter, 27.8 percent decreased 580 basis points compared to the year ago quarter and increased 980 points compared to the prior quarter. While lows in the year ago quarter, our margins are in the quarter-met expectations given the rising cost of electricity on the wholesale market. Our cost per kilowatt-hour increased 23 and 10 percent compared to the year ago and prior quarters respectively. The price of natural gas, while not a significant impacts this quarter, also at somewhat higher year compared to the year ago quarter. Overall we continue to feel the impact of competitive pressures on our growth margins as our customer base gradually becomes more concentrated in newer, more competitive territories. That wraps up my remarks and I’m now turn the call over to 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 financial results for the third quarter of 2013. The three month ended September 30th. All comparisons in my remarks are due to results for the year ago period. The three month ended September 30th 2012. As in prior quarter GENIE Energy’s revenue, direct cost and gross profit was generated entirely by IET Energy. So, I will begin with jet-black off and address IET Energy’s financial performance. IET Energy’s revenues for the third quarter increased 12.4 percent year over year to $71.6 million and $63.7 million in the third quarter of 2012. Electricity revenues increased 13.4 percent to $66.9 million from $59 million resulting both a 12.6 percent increase in revenue per kilowatt-hour sold and an increase in kilowatt hours sold. As Geoff covered in this remarks. Gas revenues decreased slightly to $4.7 million accounting for just 7 percent of total revenues during this peak cool season. Fermsol[ph] decreased 7.7 percent year over year as our gas meter count declined, a revenue per therm sold increased 8.1 percent due to the increase in the market price of natural gas. Gross profit was $19.9 million in the third quarter compared to $21.4 million in the year ago quarter and gross margin was 27.8 percent compared to 33.6 percent. Gross profit generated by electricity sales was $18.4 million, a decrease from $19.7 million in third quarter of fiscal 2012. Gross margin declined to 27.5 percent from 33.5 percent over the same period. At the 12.6 percent increase in revenue per kilowatt-hour sold was more than offset by 22.6 percent increase in our cost per kilowatt-hour. The decrease in gross margin reflects the strategy to accept the lower margin pre-unit to enhance our ability to acquire new customers. Particularly to targeted enrolment and retention incentives and to enhance our competitive positioning in key territories. Gross profit from gas sales in the third quarter decreased to $1.5 million, from $1.7 million in the year ago quarter. While the gross margin decreased from 36 percent to 32 percent as the average cost per therm increased 14.8 percent compared to the 8.1 percent increase in our revenue per therm. IDT energy’s SG&A or the quarter was $10.3 million compared to $12.7 million in the third quarter of 2012, primarily reflecting reduction from sales commissions and other costs associated with decreases in customer acquisitions. EBITDA and income from operations at IDT Energy were $9.6 million compared to $8.7 million in the year ago quarter. IDT Energy’s EBITDA for the trailing twelve months with $26.9 million including $7.9 million in the fourth quarter of 2012. At Genie Oil and Gas, SG&A expense of $350,000 compared to $380,000 in the year ago quarter. Research and Development expense total $2.7 million compared to $2.3 million in the year ago quarter reflecting a cross-related, the surface resource characterization program as AFEC[ph] that was initiated in this quarter which has partially offset our reduction activity at IEI. As in prior periods in the account for our 50 percent stake in Ansell[ph] utilizing the equity method. The equity and the net loss of Ansell[ph] increased to $700,000 compared to $500,000 in the year ago quarter, reflecting the initiation of the alternative heater development program during the year. Genie Oil and Gas has lost from operations increased to $3.7 million and $3.2 million in the year ago quarter. Genie Energy’s corporate SG&A was $1.9 million compared to $2 million in the third quarter of 2012. Non-tax compensation was $610,000 compared to $570,000 in the year ago quarter. Now, turning to Genie on a consolidated basis. The consolidated SG&A decreased to $12.6 million in the third quarter of 2013 compared to $15.2 million in the year ago quarter. SG&A in the third quarter included $1.1 million in non-tax compensation charges compared to $970,000 in the year ago quarter. Genie’s EBITDA was $4 million compared to $3.5 million in the third quarter of last year. Genie’s income from operations is $3.9 million compared to $3.5 million in the year ago quarter. Total interest and other expenses is $800,000 compared to $600,000 in the year ago quarter. Financing fees which are the majority of this expense are substantially the biometric fees for electricity and natural gas charged under our preferred supplier agreement with BP. Income taxes $1.1 million compared to $4 million in the year ago quarter. Adjusting for non-controlling interest including the impact of the $300,000 in dividends to be paid to the holders of our preferred stock. The net income attributable to Genie common stockholders was $1,7 million compared to a loss of $2.6 million in the year ago quarter. Net cap use and operating activities in the third quarter was $2 million compared to $700,000 in the year ago period. Our balance sheet continues to reflect our very liquid asset mix, with $89 million in cash, cash equivalents, restricted cash, certificates of deposit and marketable security and a positive working capital balance of $106 million. Overall, the steady cash generation by our re-sell energy business and a strong balance sheet indicate that we are well positioned to invest and growing our RES[ph] business as well to continue our measured investment in continuing gases exploration and development projects. Even as these expenses ramp up in the coming quarters, with the start of AFEC[ph] exploratory drilling program in the Golan Heights. That wraps up my financial discussion for the quarter and concludes our prepared remarks. Now, Terri Stronz IBT CFO will join us and I will turn the call back to the operator to take your questions.

[Operator:]

Thank you, we will now begin the question and answer session. (Operator Instructions). At this time, we will pause momentarily to assemble our roster. And, the first question comes with, from Marco Rodriguez from Stonegate Securities.

[Marco Rodriguez:]

Good morning guys, thank you for taking my questions. I was wondering here, just to confirm something in your press release, you talk about expectations for RCEs to continue declining. Is that sequential or year over year or both?

[Claude Pupkin:]

So, that’s – that’s sequentially.

[Marco Rodriguez:]

OK. Got it. And then, I apologize if you covered ahead this and I had to jump off for a second – but, you had talked about the last quarter in delays and getting approvals for new territories and it sounds like that’s still kind of, kind of happening here. Can you kind of provide a little color on what’s going on there and how we should be thinking about this trend as the next few quarters unfold?

[Geoff Rochwarger:]

Yes, absolutely. This is Geoff hi how are you?

[Marco Rodriguez:]

Good.

[Geoff Rochwarger:]

Yes. So, certainly as we have mentioned before, many times on these calls, unfortunately the process is such that once we submit the license applications to the appropriate authorities – there’s very little in a way of additional offerings so we can use to help facilitate the process. We have, again as I mentioned before, we have hired out to our regulatory to assist us in the process. But, for the most part, remain largely at the regulatory authorities’ discretion. Although, having said that, we have seen some recent indications of movement on some of our applications. Specifically with, in regards to Pennsylvania and Pennsylvania Gas Utilities. And, it is possible that we will receive the permission to answer some of these additional gas utilities before the end of the calendar year. So, even if that happens, even under the circumstances, this won’t be impactful for several quarters just given the time to execute on our customer acquisition program. So, we are, I would say, cautiously optimistic that we may start, we may have started to turn the corner on some of these opportunity.

[Marco Rodriguez:]

I see, okay, that’s helpful. And then, in terms of the gross margins for IDT Energy, in your press release, and you mentioned you’re compared to Mark’s as well that the – Q3 of ’12 I guess was a rather high quarter from the gross margin perspective and that this current quarter is more of a normalized rate, going forward. I’m just curious here though, because in Q3 ’11 if I looked at and if my numbers are correctly, showing even higher gross profit margin for this quarter. So, just wondering what’s kind of driving this result – is it, is it more of a custom mix situation or is it commodity prices, can you provide some color there?

[Geoff Rochwarger:]

Sure, I’ll start and if I don’t answer adequately, then we’ll turn it over to Terri. The major impact in what you’re seeing with the difference in gross margins over a couple of years, really has to do with seasonality. When we look at this business, because it is a very seasonal business, we look at the average annual expectation on gross margin per unit. You know, we do record on gross margin percentage. Although, that’s really, you know, that’s probably not the healthiest way to look at the measurements of performance here – it’s really the average margin per unit. Based on, there has been an evolution of some sorts with our business going back at – compared to three years ago. To where we are today, we’re since – most of the customers and the RCE’s that we’ve added over the last two years or so – have moved from being New York-centric to primarily coming out of Pennsylvania, where there is a generally speaking – there’s a lower average margin per unit than we expect from that customer base. Although there’s greater consumption, probably a little less assurance. So, there’s many net – there’s a net positive attribute coming from these customers. So, we would say, and I think that what we discussed in the past that on an average annual basis, which takes into account normal peak seasons both for the winter as well as for the summer which are obviously are key for our business. You know, I think that the net result would be probably mid-20 percent, you know, mid-20 percent gross margin percentage range. And that, that’s as a result of targeting average annual gross profit per unit of about $0.02 on electricity and about $0.15 on gas. Does that help?

[Marco Rodriguez:]

Yes, absolutely. That’s helpful, very helpful. And then, in regard to the shift here, into these single family homes in Pennsylvania, Maryland – you know, you’re talking about targeting a lower gross profit margin for those – for those RCE’s, those meters. Is that a reflection of there being more competition or – can you kind of help me understand that a little bit more? Or is it just, you know, the greater consumption that you’re looking at?

[Geoff Rochwarger:]

Well, I think that, let me first address one of the words that you used because I think it’s very important. In terms of targeting specific areas – specific types of customer for consumption or for gross margin or for whatever that might be. Number one is the channels that we have historically relied on and continue to in terms of generating the acquisition of the meters – continues to be primarily door-to-door marketing, outbound telemarketing, and then a bucket of additional channels, like the web, like their Xmail and some other program. So, for us, since we are targeting variable rates customers – we don’t take the commodity risk at all, so we don’t offer the fixed rate, the fixed rate programs for customers. When we enter into a new State, and as we continue to acquire and grow within that State, really, and primarily due to purchase of receivable program – where we have no bad debt risk – you know, we’ve kind of used the Axiom of fishing with an open, with a wide-open net meaning. That we try to acquire as many meters as possible given these channels and that’s – it’s reflected, the results are reflective of just a different State that we’re acquiring in. So, at half-end, we ultimately look at a payback model. And so, long as the key assumptions that we look at, that are underlying drivers for our business – and that’s average consumption per year – that average expected margin per unit per year. That’s average expected churn from that customer base per year, and the acquisition cost which generates a payback model. So, long as we see in any given market, that by looking at those four underlying criteria, that that generates a payback that’s acceptable to us – then, we will continue to acquire those meters as aggressively as we possibly we can. And, now it happens to be that in Pennsylvania, what we have found, the type of meter, the type of customer that will sign up with ours with IDT Energy, tends to, as compared to our legacy customer, New York, New York City as an example. In Pennsylvania, tend to have a lower margin per unit but a much higher average consumption per year. A slightly lower level of churn and slightly higher cost of acquisition. And, again, as compared to that New York legacy customer that has a much higher margin per unit, significantly lower consumption per year, probably slightly higher churn and a lower cost of acquisition. So, that’s really how we look at each market. And, how we acquire.

[Marco Rodriguez:]

Got it. Thanks. And then, in terms of IDT’s SG&A spending Q4, how should we be thinking about that and how should we be thinking about that line, as we go into next year?

[Terri Stronz:]

Hi, this is Teri Stronz. Our SG&A has been relatively flat., it pull out the acquisition costs, decreases we’ve seen in recent quarters. I think that in Q4, we’ll see similar numbers to what you saw in Q3, maybe even a slight more of a decline because some of our acquisition efforts slowed down as the weather changes, it’s colder. But, generally speaking, SG&A exclusive of the acquisitions as pretty flat, and as we go into the first part of next year, I could see that, you know, slowly ramping back up from a probably a low in Q4 of this year.

[Marco Rodriguez:]

Got it. Thanks. And then, shifting kind of gears for the GOGAS, I apologize if I missed this, the cost associated with the ten well exploration program, what is the timing of that in terms expense increases and winning we should that run to the P&L?

[Claude Pupkin:]

Hey Marco, it’s Claude. You know, at the end of the day it will depend on both the exact timing that we’re – that we get all of our drilling permits and the rate of speed of drilling. But, our base working assumption is that we will drill approximately five wells in 2014 and the balance in 2015. And, our working estimate for the five wells in 2014, you know, the full cost of drilling rigs and all associated equipment and services in the range of $12 to $15 million.

[Marco Rodriguez:]

Got it. OK, now. And I’m assuming of probably roughly the same expense in ’15.

[Claude Pupkin:]

Yes, that’s a – that’s a fair assumption. If we simply drill five additional wells, having said that, depending on the results as we move forward how positive or not they are. We could change working plans in the middle. So, it’s sort of success based. We could decide to do a production test somewhere along the way if we see, you know, attractive results down hole. And, so, it’s a little early to start putting real numbers on that kind of stuff. But, I think at the modeling, working assumption, that’s a fair assumption.

[Marco Rodriguez:]

Got it. And, then last, a question, I’ll jump back in queue, in terms of the other projects that you have going on through GOGAS, do you expect any merit material increase, season and expenses in the coming two quarters?

[Geoff Rochwarger:]

I would say that, in general, for AMSO and IEI the answer is no, given what’s going on. Mongolia is really a function of how quickly we are able to get certain changes to the regulatory framework that will give us the confidence to move forward on our joint geological survey. Licensed area to build a pilot – we’re spending currently at a measured pace as I think I mentioned in my prepared remarks, we’ve been doing surface work and some drilling. And that drilling is continuing now. Not very large numbers. And, you know, we’re pleased with what we’re seeing but we’re still sort of keeping out the ideal place to build a pilot. But, we will only pull the trigger on building a pilot when we’re completely satisfied with the regulatory framework. So, at this point, it’s hard to say exactly when we will reach that point. And then, other than that I would say the spending in Mongolia will be at the similar to the levels we’ve been spending.

[Marco Rodriguez:]

Got it, thanks a lot guys.

[Geoff Rochwarger:]

You’re welcome.

[Operator:]

Thank you. And, once again, please press star then one if you would like to ask a question. All right, there are no more questions at the present and I’d like to turn the call over the management for any closing remarks.

[Geoff Rochwarger:]

I don’t think so, just want to thank everybody for listening in today and for your questions.

[Operator:]

Thank you, this concludes our question and answer session and conference call. Thank you for attending today’s presentation, you may now disconnect, have a nice day.