NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1—Basis of Presentation
The accompanying unaudited consolidated
financial statements of Genie Energy Ltd. and its subsidiaries (the “Company” or “Genie”) have been prepared
in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim
financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of management,
all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating
results for the three months ended March 31, 2017 are not necessarily indicative of the results that may be expected for the year
ending December 31, 2017. The balance sheet at December 31, 2016 has been derived from the Company’s audited financial
statements at that date but does not include all of the information and footnotes required by U.S. GAAP for complete financial
statements. For further information, please refer to the consolidated financial statements and footnotes thereto included in the
Company’s Annual Report on Form 10-K for the year ended December 31, 2016, as filed with the U.S. Securities and Exchange
Commission (the “SEC”).
The Company owns 99.3% of its subsidiary,
Genie Energy International Corporation (“GEIC”), which owns 100% of Genie Retail Energy (“GRE”) and 92%
of Genie Oil and Gas, Inc. (“GOGAS”). The Company’s principal businesses consist of the following:
|
●
|
Genie Retail Energy operates retail energy providers (“REPs”), including IDT Energy, Inc. (“IDT Energy”),
Residents Energy, Inc. (“Residents Energy”) and Town Square Energy, and energy brokerage and marketing services. Its
REP businesses resell electricity and natural gas to residential and small business customers primarily in the Eastern United States;
and
|
|
●
|
Genie Oil and Gas is an oil and gas exploration company that consists of an 86.0% interest in Afek Oil and Gas, Ltd. (“Afek”),
which operates an exploration project in the Golan Heights in Northern Israel, and certain inactive projects.
|
GRE has outstanding deferred stock units
granted to officers and employees that represent an interest of 2.5% of the equity of GRE.
Seasonality and Weather
The weather and the seasons, among other
things, affect GRE’s revenues. Weather conditions have a significant impact on the demand for natural gas used for heating
and electricity used for heating and cooling. Typically, colder winters increase demand for natural gas and electricity, and hotter
summers increase demand for electricity. Milder winters and/or summers have the opposite effect. Natural gas revenues typically
increase in the first quarter due to increased heating demands and electricity revenues typically increase in the third quarter
due to increased air conditioning use. Approximately 43% and 64% of GRE’s natural gas revenues for the relevant years were
generated in the first quarter of 2016 and 2015, respectively, when demand for heating was highest. Although the demand for electricity
is not as seasonal as natural gas (due, in part, to usage of electricity for both heating and cooling), approximately 31% and 29%
of GRE’s electricity revenues for the relevant years were generated in the third quarter of 2016 and 2015, respectively.
GRE’s revenues and operating income are subject to material seasonal variations, and the interim financial results are not
necessarily indicative of the estimated financial results for the full year.
Note 2—Restatement of Unaudited Consolidated Financial
Statements and Additional Disclosure
The unaudited consolidated statement of
operations for the three months ended March 31, 2017 has been restated to properly reflect the Company’s revenues, cost of
revenues, income from operations, net income and earnings per share for that three-month period. Certain amounts recorded in the
second quarter of 2017 should properly have been recorded in the first quarter. The unaudited consolidated balance sheet at March
31, 2107, the unaudited consolidated statement of comprehensive income for the three months ended March 31, 2017, the unaudited
consolidated statement of cash flows for the three months ended March 31, 2017, and the notes to consolidated financial statements,
were restated to make the associated changes required by the adjustments to the unaudited consolidated statement of operations.
The error related to the estimation of
weather impact on the Company’s estimated unbilled revenue. This estimation process is performed in an effort to allocate
billings to a calendar period using historical consumption data of the customer base of the retail energy providers operated by
the Company and applying a weather factor to estimated unbilled amounts. The weather adjustment was erroneous, causing understated
amounts of estimated unbilled commodity consumption, resulting in under estimates of revenues and cost of revenues to be included
in the three months ended March 31, 2017. The errors impacted revenue by $2.0 million, gross profit and income (loss) from operations
by $1.2 million, and net income by $1.1 million. The nature of the estimation processes is reversing, as actual billings representing
the unbilled estimates manifest in the following period, in this case, in April 2017. The reversal of this estimate resulted in
commodity consumption and the associated revenues and cost of revenues to be overstated in the three months ended June 30, 2017.
The cumulative operating results for the six months ended June 30, 2017 were unaffected. The Company’s GRE segment was the
only segment affected by the misstatement.
The impact of the restatement on the Company’s
consolidated financial statements was as follows:
|
|
Three
Months Ended
March 31, 2017
|
|
|
|
Previously Reported
|
|
|
Error Correction
|
|
|
Restated
|
|
|
|
(in thousands, except per share data)
|
|
|
|
|
|
Consolidated Statement of Operations:
|
|
|
|
|
|
|
|
Electricity revenues
|
|
$
|
52,474
|
|
|
$
|
492
|
|
|
$
|
52,966
|
|
Natural gas revenues
|
|
$
|
16,467
|
|
|
$
|
1,473
|
|
|
$
|
17,940
|
|
Cost of revenues
|
|
$
|
45,819
|
|
|
$
|
737
|
|
|
$
|
46,556
|
|
Gross profit
|
|
$
|
23,621
|
|
|
$
|
1,228
|
|
|
$
|
24,849
|
|
Provision for income taxes
|
|
$
|
733
|
|
|
$
|
123
|
|
|
$
|
856
|
|
Net income
|
|
$
|
3,034
|
|
|
$
|
1,105
|
|
|
$
|
4,139
|
|
Net income attributable to Genie Energy, Ltd
|
|
$
|
3,477
|
|
|
$
|
1,105
|
|
|
$
|
4,582
|
|
Comprehensive income
|
|
$
|
3,476
|
|
|
$
|
1,105
|
|
|
$
|
4,581
|
|
Comprehensive income attributable to Genie Energy, Ltd
|
|
$
|
4,177
|
|
|
$
|
1,105
|
|
|
$
|
5,282
|
|
Earnings per share attributable to Genie Energy, Ltd. common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.13
|
|
|
$
|
0.05
|
|
|
$
|
0.18
|
|
Diluted
|
|
$
|
0.13
|
|
|
$
|
0.05
|
|
|
$
|
0.18
|
|
|
|
March 31, 2017
|
|
|
|
Previously Reported
|
|
|
Error Correction
|
|
|
Restated
|
|
|
|
(in thousands)
|
|
|
|
|
|
Consolidated Balance Sheet:
|
|
|
|
|
|
|
|
Trade accounts receivable, net
|
|
$
|
33,385
|
|
|
$
|
1,817
|
|
|
$
|
35,202
|
|
Prepaid expenses
|
|
$
|
4,577
|
|
|
$
|
(589
|
)
|
|
$
|
3,988
|
|
Total assets
|
|
$
|
123,165
|
|
|
$
|
1,228
|
|
|
$
|
124,393
|
|
Income taxes payable
|
|
$
|
3,176
|
|
|
$
|
123
|
|
|
$
|
3,299
|
|
Total liabilities
|
|
$
|
41,523
|
|
|
$
|
123
|
|
|
$
|
41,646
|
|
Accumulated deficit
|
|
$
|
(50,310
|
)
|
|
$
|
1,105
|
|
|
$
|
(49,205
|
)
|
Total liabilities and equity
|
|
$
|
123,165
|
|
|
$
|
1,228
|
|
|
$
|
124,393
|
|
In addition, the Company is revising Note
11 to include additional disclosure about the pending class action lawsuits in Pennsylvania, New York and New Jersey.
Note
3—Revised Unaudited Consolidated Financial Statements
In
the consolidated statement of operations for the three months ended March 31, 2016, Pennsylvania gross receipt tax was previously
recorded as a reduction to electricity revenue instead of as cost of revenues. Electricity revenues and cost of revenues were
adjusted to correct the classification by reflecting additional revenue and cost of revenues in the consolidated statement of
operations in the amount of $0.7 million.
GRE
prepays various electricity costs that are subsequently charged to cost of revenues when the related electricity revenue is recognized.
The Company concluded that certain of these amounts included in “Prepaid expenses” in its consolidated balance sheet
at March 31, 2016 should have been charged to cost of revenues in the first quarter of 2016. The Company revised its consolidated
financial statements by reducing prepaid expenses and increasing electricity cost of revenues by $0.8 million in the three months
ended March 31, 2016.
The
impact of these adjustments on the Company’s consolidated financial statements was as follows:
|
|
Three
Months Ended
March 31, 2016
|
|
|
|
Previously Reported
|
|
|
Prepaid Expense Error Correction
|
|
|
Gross Receipts Tax Correction
|
|
|
Revised
|
|
|
|
(in thousands, except per share data)
|
|
|
|
|
|
Electricity revenues
|
|
$
|
44,385
|
|
|
$
|
—
|
|
|
$
|
741
|
|
|
$
|
45,126
|
|
Cost of revenues
|
|
$
|
33,274
|
|
|
$
|
817
|
|
|
$
|
741
|
|
|
$
|
34,832
|
|
Gross profit
|
|
$
|
24,864
|
|
|
$
|
(817
|
)
|
|
$
|
—
|
|
|
$
|
24,047
|
|
Net income
|
|
$
|
5,667
|
|
|
$
|
(817
|
)
|
|
$
|
—
|
|
|
$
|
4,850
|
|
Net income attributable to Genie Energy, Ltd
|
|
$
|
6,486
|
|
|
$
|
(817
|
)
|
|
$
|
—
|
|
|
$
|
5,669
|
|
Comprehensive income
|
|
$
|
6,924
|
|
|
$
|
(817
|
)
|
|
$
|
—
|
|
|
$
|
6,107
|
|
Comprehensive income attributable to Genie Energy, Ltd
|
|
$
|
7,746
|
|
|
$
|
(817
|
)
|
|
$
|
—
|
|
|
$
|
6,929
|
|
Earnings per share attributable to Genie Energy, Ltd. common stockholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.27
|
|
|
$
|
(0.04
|
)
|
|
$
|
—
|
|
|
$
|
0.23
|
|
Diluted
|
|
$
|
0.26
|
|
|
$
|
(0.04
|
)
|
|
$
|
—
|
|
|
$
|
0.22
|
|
Note
4—Fair Value Measurements
The
following table presents the balance of assets and liabilities measured at fair value on a recurring basis:
|
|
Level 1 (1)
|
|
|
Level 2 (2)
|
|
|
Level 3 (3)
|
|
|
Total
|
|
|
|
(in thousands)
|
|
March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts
|
|
$
|
389
|
|
|
$
|
4,453
|
|
|
$
|
—
|
|
|
$
|
4,842
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts
|
|
$
|
161
|
|
|
$
|
2,385
|
|
|
$
|
—
|
|
|
$
|
2,546
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts
|
|
$
|
256
|
|
|
$
|
2,395
|
|
|
$
|
—
|
|
|
$
|
2,651
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative contracts
|
|
$
|
60
|
|
|
$
|
1,667
|
|
|
$
|
—
|
|
|
$
|
1,727
|
|
(1)
– quoted prices in active markets for identical assets or liabilities
(2)
– observable inputs other than quoted prices in active markets for identical assets and liabilities
(3)
– no observable pricing inputs in the market
The
Company’s derivative contracts consist of natural gas and electricity put and call options and swaps. The underlying asset
in the Company’s put and call options is a forward contract. The Company’s swaps are agreements whereby a floating
(or market or spot) price is exchanged for a fixed price over a specified period. The Company’s derivatives were classified
as Level 1, Level 2 or Level 3. The Level 1 derivatives were valued using quoted prices in active markets for identical contracts.
The Level 2 derivatives were valued using observable inputs based on quoted market prices in active markets for similar contracts.
The fair value of the Level 3 derivatives was based on the value of the underlying contracts, estimated in conjunction with the
counterparty and could not be corroborated by the market.
Fair
Value of Other Financial Instruments
The
estimated fair value of the Company’s other financial instruments was determined using available market information or other
appropriate valuation methodologies. However, considerable judgment is required in interpreting this data to develop estimates
of fair value. Consequently, the estimates are not necessarily indicative of the amounts that could be realized or would be paid
in a current market exchange.
Restricted
cash—short-term and long-term, prepaid expenses, other current assets, revolving line of credit, advances from customers,
due to IDT Corporation and other current liabilities.
At March 31, 2017 and December 31, 2016, the carrying amounts of these
assets and liabilities approximated fair value because of the short period to maturity. The fair value estimate for restricted
cash—short-term and long-term was classified as Level 1 and prepaid expenses, other current assets, revolving line of credit,
advances from customers, due to IDT Corporation and other current liabilities were classified as Level 2 of the fair value hierarchy.
Other
assets and other liabilities.
At March 31, 2017 and December 31, 2016, other assets included an aggregate of $0.6 million
and $1.5 million, respectively, in notes receivable. The carrying amounts of the notes receivable and other liabilities approximated
fair value. The fair values were estimated based on the Company’s assumptions, and were classified as Level 3 of the fair
value hierarchy.
Note
5—Derivative Instruments
The
primary risk managed by the Company using derivative instruments is commodity price risk, which is accounted for in accordance
with Accounting Standards Codification 815—Derivatives and Hedging. Natural gas and electricity put and call options and
swaps are entered into as hedges against unfavorable fluctuations in market prices of natural gas and electricity. The Company
does not apply hedge accounting to these options or swaps, therefore the changes in fair value are recorded in earnings. By using
derivative instruments to mitigate exposures to changes in commodity prices, the Company exposes itself to credit risk and market
risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value
of a derivative contract is positive, the counterparty owes the Company, which creates credit risk. The Company minimizes the
credit or repayment risk in derivative instruments by entering into transactions with high-quality counterparties. At March 31,
2017 and December 31, 2016, GRE’s swaps and options were traded on the New York Mercantile Exchange.
The
summarized volume of GRE’s outstanding contracts and options at March 31, 2017 was as follows (MWh – Megawatt hour
and Dth – Decatherm):
Commodity
|
|
Settlement Dates
|
|
Volume
|
Electricity
|
|
April 2017
|
|
16,000 MWh
|
Electricity
|
|
June 2017
|
|
153,120 MWh
|
Electricity
|
|
July 2017
|
|
334,000 MWh
|
Electricity
|
|
August 2017
|
|
420,900 MWh
|
Electricity
|
|
September 2017
|
|
75,200 MWh
|
Electricity
|
|
October 2017
|
|
241,120 MWh
|
Electricity
|
|
November 2017
|
|
213,360 MWh
|
Electricity
|
|
December 2017
|
|
283,200 MWh
|
Electricity
|
|
January 2018
|
|
362,560 MWh
|
Electricity
|
|
February 2018
|
|
329,600 MWh
|
Electricity
|
|
March 2018
|
|
179,520 MWh
|
Electricity
|
|
April 2018
|
|
67,200 MWh
|
Electricity
|
|
May 2018
|
|
70,400 MWh
|
Electricity
|
|
June 2018
|
|
67,200 MWh
|
Electricity
|
|
July 2018
|
|
67,200 MWh
|
Electricity
|
|
August 2018
|
|
73,600 MWh
|
Electricity
|
|
September 2018
|
|
60,800 MWh
|
Electricity
|
|
October 2018
|
|
147,200 MWh
|
Electricity
|
|
November 2018
|
|
134,400 MWh
|
Electricity
|
|
December 2018
|
|
128,000 MWh
|
Natural gas
|
|
October 2017
|
|
200,000 Dth
|
Natural gas
|
|
November 2017
|
|
1,100,000 Dth
|
Natural gas
|
|
December 2017
|
|
700,000 Dth
|
Natural gas
|
|
February 2018
|
|
888,400 Dth
|
Natural gas
|
|
March 2018
|
|
600,000 Dth
|
The
fair value of outstanding derivative instruments recorded in the accompanying consolidated balance sheets were as follows:
Asset Derivatives
|
|
Balance Sheet Location
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
(in thousands)
|
|
Derivatives not designated or not qualifying as hedging instruments:
|
|
|
|
|
|
|
|
|
Energy contracts and options
|
|
Other current assets
|
|
$
|
4,842
|
|
|
$
|
2,651
|
|
Liability Derivatives
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives not designated or not qualifying as hedging instruments:
|
|
|
|
|
|
|
|
|
|
|
Energy contracts and options
|
|
Energy hedging contracts
|
|
$
|
2,546
|
|
|
$
|
1,727
|
|
The
effects of derivative instruments on the consolidated statements of operations were as follows:
|
|
Amount of Gain (Loss) Recognized on Derivatives
|
|
|
|
Three Months Ended
March 31,
|
|
Derivatives
not designated or not qualifying as hedging instruments
|
|
Location of Gain (Loss) Recognized on Derivatives
|
|
2017
|
|
|
2016
|
|
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
Energy contracts and options
|
|
Cost of revenues
|
|
$
|
(1,248
|
)
|
|
$
|
361
|
|
Note
6—Afek Oil and Gas Exploration Activities
The
Company accounts for Afek’s oil and gas activities under the successful efforts method of accounting. Under this method,
the costs of drilling exploratory wells and exploratory-type stratigraphic test wells are capitalized, pending determination of
whether the well has found proved reserves. Other exploration costs are charged to expense as incurred. Unproved properties are
assessed for impairment, and if considered impaired, are charged to expense when such impairment is deemed to have occurred.
In
April 2013, the Government of Israel finalized the award to Afek of an exclusive three-year petroleum exploration license covering
396.5 square kilometers in the southern portion of the Golan Heights in Northern Israel. The license has been extended to April
2018. Israel’s Northern District Planning and Building Committee granted Afek a one-year permit that commenced in February
2015, which has been subsequently extended to April 18, 2018, to conduct an up to ten-well oil and gas exploration program. This
permit as extended is expected to cover the remainder of Afek’s ongoing exploration program in the area covered by its exploration
license.
In
February 2015, Afek began drilling its first exploratory well. To date, Afek has completed drilling five wells in the Southern
region of its license area. In light of the analysis received on the first five wells and market conditions at the time, in the
third quarter of 2016, Afek determined that it did not have a clear path to demonstrate probable or possible reserves in the Southern
region of its license area over the next 12 to 18 months. Since there was substantial doubt regarding the economic viability of
these wells, in the third quarter of 2016, Afek wrote off the $41.0 million of capitalized exploration costs incurred in the Southern
region.
Afek
has turned its operational focus to the Northern region of its license area. Afek views the Northern and Southern regions separately
when evaluating its unproved properties. In 2017, Afek commenced drilling its sixth exploratory well at one of the Northern sites
in its license area. Afek expects to complete the well during the third quarter of 2017. At March 31, 2017 and December 31, 2016,
the Company had capitalized exploration costs of $1.1 million and nil, respectively. In the three months ended March 31, 2017
and 2016, the Company recognized exploration expense of $0.9 million and $1.7 million, respectively.
Afek
assesses the economic and operational viability of its project on an ongoing basis. The assessment requires significant estimates
and assumptions by management. Should Afek’s estimates or assumptions regarding the recoverability of its capitalized exploration
costs prove to be incorrect, Afek may be required to record impairments of such costs in future periods and such impairments could
be material.
Note
7—Equity
Changes
in the components of equity were as follows:
|
|
Three Months Ended
March 31, 2017
|
|
|
|
Attributable to Genie
|
|
|
Noncontrolling Interests
|
|
|
Total
|
|
|
|
(in thousands)
|
|
|
|
|
|
Balance, December 31, 2016
|
|
$
|
96,534
|
|
|
$
|
(16,669
|
)
|
|
$
|
79,865
|
|
Dividends on preferred stock
|
|
|
(370
|
)
|
|
|
—
|
|
|
|
(370
|
)
|
Dividends on common stock ($0.075 per share)
|
|
|
(1,850
|
)
|
|
|
—
|
|
|
|
(1,850
|
)
|
Restricted Class B common stock purchased from employees
|
|
|
(23
|
)
|
|
|
—
|
|
|
|
(23
|
)
|
Purchase of equity of subsidiary
|
|
|
(655
|
)
|
|
|
377
|
|
|
|
(278
|
)
|
Stock-based compensation
|
|
|
822
|
|
|
|
—
|
|
|
|
822
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (restated see Note 2)
|
|
|
4,582
|
|
|
|
(443
|
)
|
|
|
4,139
|
|
Foreign currency translation adjustments
|
|
|
700
|
|
|
|
(258
|
)
|
|
|
442
|
|
Comprehensive income (restated see Note 2)
|
|
|
5,282
|
|
|
|
(701
|
)
|
|
|
4,581
|
|
Balance, March 31, 2017 (restated see Note 2)
|
|
$
|
99,740
|
|
|
$
|
(16,993
|
)
|
|
$
|
82,747
|
|
Dividend
Payments
On
February 15, 2017, the Company paid a quarterly Base Dividend of $0.1594 per share on its Series 2012-A Preferred Stock (“Preferred
Stock”) for the fourth quarter of 2016. The aggregate dividends paid on the Company’s Preferred Stock in the three
months ended March 31, 2017 and 2016 was $0.4 million. On March 29, 2017, the Company’s Board of Directors declared a quarterly
Base Dividend of $0.1594 per share on the Preferred Stock for the first quarter of 2017. The dividend will be paid on or about
May 15, 2017 to stockholders of record as of the close of business on May 4, 2017.
On
March 24, 2017, the Company paid a quarterly dividend of $0.075 per share on its Class A common stock and Class B common stock
in the aggregate amount of $1.9 million. On February 12, 2016, the Company paid a quarterly dividend of $0.06 per share on its
Class A common stock and Class B common stock in the aggregate amount of $1.5 million. On May 2, 2017, the Company’s Board
of Directors declared a quarterly dividend of $0.075 per share on its Class A common stock and Class B common stock for the first
quarter of 2017. The dividend will be paid on or about May 19, 2017 to stockholders of record as of the close of business on May
15, 2017.
Stock
Repurchase Program
On
March 11, 2013, the Board of Directors of the Company approved a stock repurchase program for the repurchase of up to an aggregate
of 7.0 million shares of the Company’s Class B common stock. There were no repurchases under this program in the three
months ended March 31, 2017 and 2016. At March 31, 2017, 6.9 million shares remained available for repurchase under the stock
repurchase program.
Purchase
of Equity of Subsidiary
In
March 2017, GOGAS purchased from an employee of Afek a 1% fully vested interest in Afek for $0.3 million in cash.
Variable
Interest Entities
Citizens
Choice Energy, LLC (“CCE”), is a REP that resells electricity and natural gas to residential and small business customers
in the State of New York. The Company does not own any interest in CCE. Since 2011, the Company provided CCE with substantially
all of the cash required to fund its operations. The Company determined that it has the power to direct the activities of CCE
that most significantly impact its economic performance and it has the obligation to absorb losses of CCE that could potentially
be significant to CCE on a stand-alone basis. The Company therefore determined that it is the primary beneficiary of CCE, and
as a result, the Company consolidates CCE within its GRE segment. The net income or loss incurred by CCE was attributed to noncontrolling
interests in the accompanying consolidated statements of operations.
The
Company has an option to purchase 100% of the issued and outstanding limited liability company interests of CCE for one dollar
plus the forgiveness of $0.5 million that the Company loaned to CCE in October 2015. The option expires on October 22, 2023.
Net
loss related to CCE and aggregate net funding repaid to (provided by) the Company in order to finance CCE’s operations were
as follows:
|
|
Three Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(197
|
)
|
|
$
|
(571
|
)
|
Aggregate funding repaid to (provided by) the Company, net
|
|
$
|
71
|
|
|
$
|
(371
|
)
|
Summarized
combined balance sheet amounts related to CCE was as follows:
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
|
|
(in thousands)
|
|
Assets
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
168
|
|
|
$
|
150
|
|
Restricted cash
|
|
|
14
|
|
|
|
17
|
|
Trade accounts receivable
|
|
|
1,047
|
|
|
|
1,008
|
|
Prepaid expenses
|
|
|
377
|
|
|
|
450
|
|
Other current assets
|
|
|
8
|
|
|
|
26
|
|
Other assets
|
|
|
440
|
|
|
|
439
|
|
Total assets
|
|
$
|
2,054
|
|
|
$
|
2,090
|
|
Liabilities and noncontrolling interests
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
$
|
939
|
|
|
$
|
707
|
|
Due to IDT Energy
|
|
|
1,227
|
|
|
|
1,298
|
|
Noncontrolling interests
|
|
|
(112
|
)
|
|
|
85
|
|
Total liabilities and noncontrolling interests
|
|
$
|
2,054
|
|
|
$
|
2,090
|
|
The
assets of CCE may only be used to settle obligations of CCE, and may not be used for other consolidated entities. The liabilities
of CCE are non-recourse to the general credit of the Company’s other consolidated entities.
Note
8—Earnings Per Share
Basic
earnings per share is computed by dividing net income or loss attributable to all classes of common stockholders of the Company
by the weighted average number of shares of all classes of common stock outstanding during the applicable period. Diluted earnings
per share is computed in the same manner as basic earnings per share, except that the number of shares is increased to include
restricted stock still subject to risk of forfeiture and to assume exercise of potentially dilutive stock options using the treasury
stock method, unless the effect of such increase is anti-dilutive.
The
weighted-average number of shares used in the calculation of basic and diluted earnings per share attributable to the Company’s
common stockholders consists of the following:
|
|
Three Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
|
|
|
|
Basic weighted-average number of shares
|
|
|
23,450
|
|
|
|
22,791
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
6
|
|
|
|
41
|
|
Non-vested restricted Class B common stock
|
|
|
305
|
|
|
|
852
|
|
Diluted weighted-average number of shares
|
|
|
23,761
|
|
|
|
23,684
|
|
The
following shares were excluded from the diluted earnings per share computation:
|
|
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
|
|
|
|
Stock options
|
|
|
408
|
|
|
|
—
|
|
Non-vested restricted Class B common stock
|
|
|
—
|
|
|
|
—
|
|
Shares excluded from the calculation of diluted earnings per share
|
|
|
408
|
|
|
|
—
|
|
In
the three months ended March 31, 2017, stock options with an exercise price that was greater than the average market price of
the Company’s stock during the period were excluded from the diluted loss per share computation.
An
entity affiliated with Lord (Jacob) Rothschild has a one-time option, subject to certain conditions and exercisable between November
2017 and February 2018, to exchange its GOGAS shares for shares of the Company with equal fair value as determined by the parties.
The number of shares issuable in such an exchange is not currently determinable. If this option is exercised, the shares issued
by the Company may dilute the earnings per share in future periods.
An
employee of the Company, pursuant to the terms of his employment agreement, has the option to exchange his equity interests in
IEI, Afek, Genie Mongolia and any equity interest that he may acquire in other entities that the Company may create, for shares
of the Company. In addition, employees and directors of the Company that were previously granted restricted stock of Afek and
Genie Mongolia have the right to exchange the restricted stock, upon vesting of such shares, into shares of the Company’s
Class B common stock. GRE has the right, at its option, to satisfy its obligations to issue common stock of GRE upon the vesting
of the deferred stock units it granted in July 2015 to officers and employees of the Company in shares of the Company’s
Class B common stock or cash. These exchanges and issuances, if elected, would be based on the relative fair value of the shares
exchanged or to be issued. The number of shares of the Company’s stock issuable in an exchange is not currently determinable.
If shares of the Company’s stock are issued upon such exchange, the Company’s earnings per share may be diluted in
future periods.
Note
9—Related Party Transactions
The
Company was formerly a subsidiary of IDT Corporation (“IDT”). On October 28, 2011, the Company was spun-off by IDT
(the “Spin-Off”). The Company entered into various agreements with IDT prior to the Spin-Off including an agreement
for certain services to be performed by the Company and IDT. Following the Spin-Off, the charges for services provided by IDT
are included in “Selling, general and administrative” expense in the consolidated statements of operations. Also,
the Company provides specified administrative services to certain of IDT’s foreign subsidiaries. The charges for these services
reduce the Company’s “Selling, general and administrative” expense.
|
|
Three Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
|
|
|
|
Amount IDT charged the Company
|
|
$
|
377
|
|
|
$
|
434
|
|
Amount the Company charged IDT
|
|
$
|
109
|
|
|
$
|
120
|
|
Note
10—Business Segment Information
The
Company owns 99.3% of its subsidiary, GEIC, which owns 100% of GRE and 92% of GOGAS. The Company has three reportable business
segments: GRE, Afek and GOGAS. GRE operates REPs, including IDT Energy, Residents Energy and Town Square Energy, and energy brokerage
and marketing services. Its REP businesses resell electricity and natural gas to residential and small business customers primarily
in the Eastern United States. GRE has outstanding deferred stock units granted to officers and employees that represent an interest
of 2.5% of the equity of GRE. The Afek segment is comprised of the Company’s 86.0% interest in Afek, which operates an oil
and gas exploration project in the Golan Heights in Northern Israel. The GOGAS segment is comprised of inactive oil shale projects
including AMSO, LLC, Genie Mongolia, and IEI. Corporate costs include unallocated compensation, consulting fees, legal fees, business
development expense and other corporate-related general and administrative expenses. Corporate does not generate any revenues,
nor does it incur any cost of revenues.
The
Company’s reportable segments are distinguished by types of service, customers and methods used to provide their services.
The operating results of these business segments are regularly reviewed by the Company’s chief operating decision maker.
The
accounting policies of the segments are the same as the accounting policies of the Company as a whole. The Company evaluates the
performance of its business segments based primarily on income (loss) from operations. There are no significant asymmetrical allocations
to segments.
Operating
results for the business segments of the Company were as follows:
(in thousands)
|
|
GRE
|
|
|
Afek
|
|
|
GOGAS
|
|
|
Corporate
|
|
|
Total
|
|
Three Months Ended March 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues (restated see Note 2)
|
|
$
|
71,405
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
71,405
|
|
Income (loss) from operations (restated see Note 2)
|
|
|
8,974
|
|
|
|
(1,286
|
)
|
|
|
(97
|
)
|
|
|
(2,395
|
)
|
|
|
5,196
|
|
Exploration
|
|
|
—
|
|
|
|
851
|
|
|
|
—
|
|
|
|
—
|
|
|
|
851
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues (revised see Note 3)
|
|
$
|
58,879
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
58,879
|
|
Income (loss) from operations
|
|
|
10,698
|
|
|
|
(1,827
|
)
|
|
|
(469
|
)
|
|
|
(2,403
|
)
|
|
|
5,999
|
|
Exploration
|
|
|
—
|
|
|
|
1,691
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,691
|
|
Equity in the net loss of AMSO, LLC
|
|
|
—
|
|
|
|
—
|
|
|
|
222
|
|
|
|
—
|
|
|
|
222
|
|
Total
assets for the business segments of the Company were as follows:
(in thousands)
|
|
GRE
|
|
|
Afek
|
|
|
GOGAS
|
|
|
Corporate
|
|
|
Total
|
|
Total assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017 (restated see Note 2)
|
|
$
|
89,382
|
|
|
$
|
8,179
|
|
|
$
|
10,487
|
|
|
$
|
16,345
|
|
|
$
|
124,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
87,539
|
|
|
|
6,685
|
|
|
$
|
12,224
|
|
|
|
15,365
|
|
|
|
121,813
|
|
Note
11—Commitments and Contingencies
Legal
Proceedings
On
March 13, 2014, named plaintiff, Anthony Ferrare, commenced a putative class-action lawsuit against IDT Energy, Inc. in the Court
of Common Pleas of Philadelphia County, Pennsylvania. The complaint was served on IDT Energy on July 16, 2014. The named plaintiff
filed the suit on behalf of himself and other former and current electric customers of IDT Energy in Pennsylvania with variable
rate plans, whom he contends were injured as a result of IDT Energy’s allegedly unlawful sales and marketing practices. On
August 7, 2014, IDT Energy removed the case to the United States District Court for the Eastern District of Pennsylvania. On October
20, 2014, IDT Energy moved to stay or, alternatively, dismiss the complaint, as amended, by the named plaintiff. On November 10,
2014, the named plaintiff opposed IDT Energy’s motion to dismiss and IDT Energy filed a reply memorandum of law in further
support of its motion to dismiss. On June 10, 2015, the Court granted IDT Energy’s motion to stay and denied its motion
to dismiss without prejudice. The parties participated in mediation, and entered into a Memorandum of Understanding (“MOU”)
with respect to a proposed settlement of the above-referenced putative class action (as well as the other putative class actions
referred to in this section). There are a number of material issues not addressed by the MOU that must be resolved before a settlement
can be finalized. The parties notified the Court of that development and are working towards finalizing the settlement, which
will need to be approved by the Court. The Company believes that the claims in this lawsuit are without merit.
On
July 2, 2014, named plaintiff, Louis McLaughlin, filed a putative class-action lawsuit against IDT Energy, Inc. in the United
States District Court for the Eastern District of New York, contending that he and other class members were injured as a result
of IDT Energy’s allegedly unlawful sales and marketing practices. The named plaintiff filed the suit on behalf of himself
and two subclasses: all IDT Energy customers who were charged a variable rate for their energy from July 2, 2008, and all
IDT Energy customers who participated in IDT Energy’s rebate program from July 2, 2008. On January 22, 2016, the named plaintiff
filed an amended complaint on behalf of himself and all IDT Energy customers in New York State against IDT Energy, Inc., Genie
Retail Energy, Genie Energy International Corporation, and Genie Energy Ltd. (collectively, “IDT Energy”). On February
22, 2016, IDT Energy moved to dismiss the amended complaint, and the named plaintiff opposed that motion. The parties participated
in mediation, and entered into a MOU with respect to a proposed settlement of the above-referenced putative class action (as well
as the other putative class actions referred to in this section). There are a number of material issues not addressed by the MOU
that must be resolved before a settlement can be finalized. The parties notified the Court of that development and are working
towards finalizing the settlement, which will need to be approved by the Court. The Company believes that the claims in this lawsuit
are without merit.
On
July 15, 2014, named plaintiff, Kimberly Aks, commenced a putative class-action lawsuit against IDT Energy, Inc. in New Jersey
Superior Court, Essex County, contending that she and other class members were injured as a result of IDT Energy’s alleged
unlawful sales and marketing practices. The named plaintiff filed the suit on behalf of herself and all other New Jersey
residents who were IDT Energy customers at any time between July 11, 2008 and the present. The parties were engaged in discovery
prior to the mediation described below. On April 20, 2016, the named plaintiff filed an amended complaint on behalf of herself
and all IDT Energy customers in New Jersey against IDT Energy, Inc., Genie Retail Energy, Genie Energy International Corporation
and Genie Energy Ltd. On June 27, 2016, defendants Genie Retail Energy, Genie Energy International Corporation and Genie Energy
Ltd. filed a motion to dismiss the amended complaint. On August 26, 2016, the named plaintiff opposed that motion and IDT Energy
filed a reply memorandum of law in further support of its motion to dismiss. The Court granted the motion to dismiss, but the
parties agreed to set aside that decision to give the plaintiff an opportunity to submit opposition papers that had not been considered
by the Court in rendering its decision. The parties participated in mediation, and entered into a MOU with respect to a proposed
settlement of the above-referenced putative class action (as well as the other putative class actions referred to in this section).
There are a number of material issues not addressed by the MOU that must be resolved before a settlement can be finalized. The
parties notified the Court of that development and are working towards finalizing the settlement, which will need to be approved
by the Court. The Company believes that the claims in this lawsuit are without merit.
Regarding the class action lawsuits discussed
above, there are a number of material issues not addressed by the MOU related to the class action lawsuits that must be resolved
before a settlement can be finalized, and thus the Company is not able to assess if it will accept the final terms of the MOU.
The Company believes that the claims in these class action lawsuits are without merit. However, based on the tentative terms of
the MOU, the Company believes it is reasonably possible that it could incur losses of between $0 to $4 million.
On
June 20, 2014, the Pennsylvania Attorney General’s Office (“AG”) and the Acting Consumer Advocate (“OCA”)
filed a Joint Complaint against IDT Energy, Inc. with the Pennsylvania Public Utility Commission (“PUC”). In
the Joint Complaint, the AG and the OCA alleged, among other things, various violations of Pennsylvania’s Unfair Trade Practices
and Consumer Protection Law, the Telemarketing Registration Act and the PUC’s regulations. IDT Energy reached an agreement
in principle on a settlement with the AG and the OCA to terminate the litigation with no admission of liability or finding of
wrongdoing by IDT Energy. On August 4, 2015, IDT Energy, the AG, and the OCA filed a Joint Petition to the Pennsylvania PUC seeking
approval of the settlement terms. Under the settlement, IDT Energy will issue additional refunds to its Pennsylvania customers
who had variable rates for electricity supply in January, February and March of 2014. IDT Energy will also implement certain modifications
to its sales, marketing and customer service processes, along with additional compliance and reporting requirements. The settlement
was approved by the Pennsylvania PUC on July 8, 2016. In July 2016, IDT Energy paid the agreed-upon $2.4 million for additional
customer refunds to a refund administrator, and that administrator is currently in the process of issuing the additional refunds
to customers.
From
time to time, the Company receives inquiries or requests for information or materials from public utility commissions or other
governmental regulatory or law enforcement agencies related to investigations under statutory or regulatory schemes, and the Company
responds to those inquiries or requests. The Company cannot predict whether any of those matters will lead to claims or enforcement
actions.
In
addition to the above, the Company may from time to time be subject to legal proceedings that arise in the ordinary course of
business. Although there can be no assurance in this regard, the Company does not expect any of those legal proceedings to have
a material adverse effect on the Company’s results of operations, cash flows or financial condition.
New
York Public Service Commission Orders
On
February 23, 2016, the New York Public Service Commission (“PSC”) issued an order that sought to impose significant
new restrictions on REPs operating in New York, including those owned by GRE. The restrictions described in the PSC’s order,
which were to become effective March 4, 2016, would require that all REPs’ electricity and natural gas offerings to residential
and small business customers include an annual guarantee of savings compared to the price charged by the relevant incumbent utility
or, for electricity offerings, provide at least 30% of the supply from renewable sources. Customers not enrolled in a compliant
program would be relinquished back to the local utility at the end of their contract period or, for variable price customers operating
on month to month agreements, at the end of the current monthly billing cycle.
On
March 4, 2016, a group of parties from the REP industry sought and won a temporary restraining order to stay implementation of
the most restrictive portions of the PSC’s order pending a court hearing on those parties’ motion for a preliminary
injunction. On July 25, 2016, the New York State Supreme Court, County of Albany, entered a decision and order granting the Petitioners’
petition, vacated provisions 1 through 3 of the Order, and remitted the matter to the PSC for further proceedings consistent with
the Court’s order.
On
December 2, 2016, the PSC noticed an evidentiary hearing scheduled to take place in 2017 to assess the retail energy market in
New York. That process is underway and is expected to last several months. The Company is evaluating the potential impact of any
new order from the PSC that would follow from the evidentiary process, while preparing to operate in compliance with any new requirements
that may be imposed. Depending on the final language of any new order, as well as the Company’s ability to modify its relationships
with its New York customers, an order could have a substantial impact upon the operations of GRE-owned REPs in New York.
On
July 14, 2016, and on September 19, 2016, the PSC issued orders restricting REPs, including those owned by GRE, from serving customers
enrolled in New York’s utility low-income assistance programs. Representatives of the REP industry challenged the ruling
in New York State Supreme Court, Albany County, and, on September 27, 2016, the court issued an order temporarily restraining
the PSC from implementing the July and September orders. On December 16, 2016, the PSC issued a prohibition on REP service to
customers enrolled in New York’s utility low-income assistance programs. As part of a stipulated schedule upon request of
the REP industry, the PSC agreed to extend the deadlines for compliance with that order until May 26, 2017. That order is under
review in New York State Supreme Court, Albany County.
Purchase
Commitments
The
Company had purchase commitments of $35.1 million at March 31, 2017, of which $31.0 million was for future purchases of electricity.
The purchase commitments outstanding at March 31, 2017 are expected to be paid as follows: $27.8 million in the twelve months
ending March 31, 2018, $5.9 million in the twelve months ending March 31, 2019, and $1.4 million in the twelve months ending March
31, 2020.
Renewable
Energy Credits
GRE
must obtain a certain percentage or amount of its power supply from renewable energy sources in order to meet the requirements
of renewable portfolio standards in the states in which it operates. This requirement may be met by obtaining renewable energy
credits that provide evidence that electricity has been generated by a qualifying renewable facility or resource. At March 31,
2017, GRE had commitments to purchase renewable energy credits of $40.0 million.
Tax
Audits
The
Company is subject to audits in various jurisdictions for various taxes. In April 2017, the Company was notified that the Afek
Oil & Gas Ltd. tax return for 2014 was going to be audited by the U.S. Internal Revenue Service. The audit is expected to
commence in May 2017. Amounts asserted by taxing authorities or the amount ultimately assessed against the Company could be greater
than accrued amounts. Accordingly, additional provisions may be recorded in the future as revised estimates are made or underlying
matters are settled or resolved. Imposition of assessments as a result of tax audits could have an adverse effect on the Company’s
results of operations, cash flows and financial condition.
Letters
of Credit
At
March 31, 2017, the Company had letters of credit outstanding totaling $6.2 million primarily for the benefit of regional transmission
organizations that coordinate the movement of wholesale electricity and for certain utility companies. The letters of credit outstanding
at March 31, 2017 expire as follows: $4.7 million in the twelve months ending March 31, 2018 and $1.5 million in the twelve months
ending March 31, 2019.
Performance
Bonds
GRE
has performance bonds issued through a third party for the benefit of various states in order to comply with the states’
financial requirements for REPs. At March 31, 2017, GRE had aggregate performance bonds of $10.0 million outstanding.
BP
Energy Company Preferred Supplier Agreement
As
of November 19, 2015, IDT Energy and certain of its affiliates entered into an Amended and Restated Preferred Supplier Agreement
with BP Energy Company (“BP”). The agreement’s termination date is November 30, 2019, except either party may
terminate the agreement on November 30, 2018 by giving the other party notice by May 31, 2018. Under the agreement, IDT Energy
purchases electricity and natural gas at market rate plus a fee. IDT Energy’s obligations to BP are secured by a first security
interest in deposits or receivables from utilities in connection with their purchase of IDT Energy’s customer’s receivables,
and in any cash deposits or letters of credit posted in connection with any collateral accounts with BP. In addition, IDT Energy
must pay an advance payment of $2.5 million to BP each month that BP will apply to the next invoiced amount due to BP. IDT Energy’s
ability to purchase electricity and natural gas under this agreement is subject to satisfaction of certain conditions including
the maintenance of certain covenants. At March 31, 2017, the Company was in compliance with such covenants. At March 31, 2017,
restricted cash—short-term of $0.3 million and trade accounts receivable of $27.8 million were pledged to BP as collateral
for the payment of IDT Energy’s trade accounts payable to BP of $8.6 million at March 31, 2017.
Note
12—Revolving Lines of Credit
On
April 4, 2017, GRE, IDT Energy, and other GRE subsidiaries entered into a Credit Agreement with Vantage Commodities Financial
Services II, LLC (“Vantage”) for a $20 million revolving loan facility. The borrowers consist of the Company’s
subsidiaries that operate REP businesses, and those subsidiaries’ obligations are guaranteed by GRE. On April 4, 2017, the
borrowers borrowed $4.3 million under this facility, which included $1.8 million that was previously outstanding under a credit
facility between Retail Energy Holdings, LLC (“REH”), a subsidiary of the Company that operates as Town Square Energy,
and Vantage. The REH Credit Agreement with Vantage was terminated in connection with the entry into this credit agreement. The
borrowers have provided as collateral a security interest in their receivables, bank accounts, customer agreements, certain other
material agreements and related commercial and intangible rights. Outstanding principal amount incurs interest at LIBOR plus 4.5%
per annum. Interest is payable monthly and all outstanding principal and any accrued and unpaid interest is due on the maturity
date of April 3, 2020. The borrowers are required to comply with various affirmative and negative covenants, including maintaining
a target tangible net worth during the term of the credit agreement. To date, the Company is in compliance with such covenants.
REH
had a Credit Agreement with Vantage for a revolving line of credit for up to a maximum principal amount of $7.5 million. The principal
outstanding incurred interest at one-month LIBOR plus 5.25% per annum, payable monthly. The outstanding principal and any accrued
and unpaid interest was due on the maturity date of October 31, 2017. At March 31, 2017 and December 31, 2016, $1.2 million and
$0.7 million, respectively, was outstanding under the line of credit.
As
of April 23, 2012, the Company and IDT Energy entered into a Loan Agreement with JPMorgan Chase Bank for a revolving line of credit
for up to a maximum principal amount of $25.0 million. The proceeds from the line of credit may be used to provide working capital
and for the issuance of letters of credit. The Company agreed to deposit cash in a money market account at JPMorgan Chase Bank
as collateral for the line of credit equal to the greater of (a) $10.0 million or (b) the sum of the amount of letters of credit
outstanding plus the outstanding principal under the revolving note. The Company is not permitted to withdraw funds or exercise
any authority over the required balance in the collateral account. The principal outstanding will bear interest at the lesser
of (a) the LIBOR rate multiplied by the statutory reserve rate established by the Board of Governors of the Federal Reserve System
plus 1.0% per annum, or (b) the maximum rate per annum permitted by whichever of applicable federal or Texas laws permit the higher
interest rate. Interest is payable at least every three months and all outstanding principal and any accrued and unpaid interest
is due on the maturity date of May 31, 2017. The Company pays a quarterly unused commitment fee of 0.08% per annum on the difference
between $25.0 million and the average daily outstanding principal balance of the note. In addition, as of April 23, 2012, GEIC
issued a Corporate Guaranty to JPMorgan Chase Bank whereby GEIC unconditionally guarantees the full payment of all indebtedness
of the Company and IDT Energy under the Loan Agreement. At March 31, 2017 and December 31, 2016, there were no amounts borrowed
under the line of credit, and cash collateral of $10.0 million was included in “Restricted cash—short-term”
in the consolidated balance sheet. In addition, at March 31, 2017 and December 31, 2016, letters of credit of $6.1 million and
$8.1 million, respectively, were outstanding.
Note
13—Recently Issued Accounting Standards Not Yet Adopted
In
May 2014, the Financial Accounting Standards Board (“FASB”) and the International Accounting Standards Board jointly
issued a comprehensive new revenue recognition standard that will supersede most of the current revenue recognition guidance under
U.S. GAAP and International Financial Reporting Standards (“IFRS”). The goals of the revenue recognition project were
to clarify and converge the revenue recognition principles under U.S. GAAP and IFRS and to develop guidance that would streamline
and enhance revenue recognition requirements. The Company expects to adopt this standard on January 1, 2018. Entities have the
option of using either a full retrospective or modified retrospective approach for the adoption of the standard. The Company is
evaluating the impact that the standard will have on its consolidated financial statements, and has not yet selected a transition
method. The Company cannot reasonably estimate the impact that the adoption of the standard will have on its consolidated financial
statements.
In
January 2016, the FASB issued an Accounting Standards Update (“ASU”) to provide more information about recognition,
measurement, presentation and disclosure of financial instruments. The amendments in the ASU include, among other changes, the
following: (1) equity investments (except those accounted for under the equity method or that result in consolidation) will be
measured at fair value with changes in fair value recognized in net income, (2) a qualitative assessment each reporting period
to identify impairment of equity investments without readily determinable fair values, (3) financial assets and financial liabilities
will be presented separately by measurement category and form of financial asset on the balance sheet or the notes to the financial
statements, and (4) an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale
securities in combination with the entity’s other deferred tax assets. Entities will no longer be able to recognize unrealized
holding gains and losses on equity securities classified as available-for-sale in other comprehensive income. In addition, a practicability
exception will be available for equity investments that do not have readily determinable fair values and do not qualify for the
net asset value practical expedient. These investments may be measured at cost, less any impairment, plus or minus changes resulting
from observable price changes in orderly transactions for an identical or similar investment of the same issuer. Entities will
have to reassess at each reporting period whether an investment qualifies for this practicability exception. The Company will
adopt the amendments in this ASU on January 1, 2018. The Company is evaluating the impact that the ASU will have on its consolidated
financial statements.
In
February 2016, the FASB issued an ASU related to the accounting for leases. The new standard establishes a right-of-use (“ROU”)
model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer
than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense
recognition in the income statement. The Company will adopt the new standard on January 1, 2019. A modified retrospective transition
approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest
comparative period presented in the financial statements, with certain practical expedients available. The Company is evaluating
the impact that the new standard will have on its consolidated financial statements.
In
June 2016, the FASB issued an ASU that changes the impairment model for most financial assets and certain other instruments. For
receivables, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model
that generally will result in the earlier recognition of allowance for losses. For available-for-sale debt securities with unrealized
losses, entities will measure credit losses in a manner similar to current practice, except the losses will be recognized as allowances
instead of reductions in the amortized cost of the securities. In addition, an entity will have to disclose significantly more
information about allowances, credit quality indicators and past due securities. The new provisions will be applied as a cumulative-effect
adjustment to retained earnings. The Company will adopt the new standard on January 1, 2020. The Company is evaluating the impact
that the new standard will have on its consolidated financial statements.
In
November 2016, the FASB issued an ASU that includes specific guidance on the classification and presentation of changes in restricted
cash and cash equivalents in the statement of cash flows. The amendments in this ASU require that a statement of cash flows explain
the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted
cash equivalents. Amounts generally described as restricted cash or restricted cash equivalents will be included with cash and
cash equivalents when reconciling the beginning of the period and end of the period total amounts shown on the statement of cash
flows. The ASU will be applied using a retrospective transition method to each period presented. The Company will adopt the amendments
in this ASU on January 1, 2018. The adoption will impact the Company’s beginning of the period and end of the period cash
and cash equivalents balance in its statement of cash flows, as well as its net cash provided by operating activities.
In
January 2017, the FASB issued an ASU to clarify the definition of a business with the objective of adding guidance to assist entities
with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the
current guidance, there are three elements of a business—inputs, processes, and outputs. While an integrated set of assets
and activities (collectively referred to as a “set”) that is a business usually has outputs, outputs are not required
to be present. In addition, all the inputs and processes that a seller uses in operating a set are not required if market participants
can acquire the set and continue to produce outputs, for example, by integrating the acquired set with their own inputs and processes.
The amendments in this ASU provide a screen to determine when a set is not a business. The screen requires that when substantially
all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group
of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further
evaluated. If the screen is not met, the amendments in this ASU (1) require that to be considered a business, a set must include,
at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2)
remove the evaluation of whether a market participant could replace missing elements. The amendments provide a framework to assist
entities in evaluating whether both an input and a substantive process are present. The framework includes two sets of criteria
to consider that depend on whether a set has outputs. Although outputs are not required for a set to be a business, outputs generally
are a key element of a business; therefore, the FASB has developed more stringent criteria for sets without outputs. Lastly, the
ASU narrows the definition of the term output. The Company will adopt the amendments in this ASU on January 1, 2018. The Company
is evaluating the impact that the new standard will have on its consolidated financial statements.
In
January 2017, the FASB issued an ASU that simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill
impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine
the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following
the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination.
Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing
the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by
which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total
amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible
goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. An entity still
has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is
necessary. Early adoption of this standard is permitted for interim or annual goodwill impairment tests performed on testing dates
after January 1, 2017. The Company intends to adopt this standard for its goodwill impairment test to be performed in 2017.
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Item 2.
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Management’s
Discussion and Analysis of Financial Condition and Results of Operations
|
The
following information should be read in conjunction with the accompanying consolidated financial statements and the associated
notes thereto of this Quarterly Report, and the audited consolidated financial statements and the notes thereto and our Management’s
Discussion and Analysis of Financial Condition and Results of Operations contained in our Annual Report on Form 10-K for the year
ended December 31, 2016, as filed with the U.S. Securities and Exchange Commission (or SEC).
As
used below, unless the context otherwise requires, the terms “the Company,” “Genie,” “we,”
“us,” and “our” refer to Genie Energy Ltd., a Delaware corporation, and its subsidiaries, collectively.
Forward-Looking
Statements
This
Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act
of 1933 and Section 21E of the Securities Exchange Act of 1934, including statements that contain the words “believes,”
“anticipates,” “expects,” “plans,” “intends,” and similar words and phrases. These
forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the
results projected in any forward-looking statement. In addition to the factors specifically noted in the forward-looking statements,
other important factors, risks and uncertainties that could result in those differences include, but are not limited to, those
discussed under Item 1A to Part I “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31,
2016. The forward-looking statements are made as of the date of this report and we assume no obligation to update the forward-looking
statements, or to update the reasons why actual results could differ from those projected in the forward-looking statements. Investors
should consult all of the information set forth in this report and the other information set forth from time to time in our reports
filed with the SEC pursuant to the Securities Act of 1933 and the Securities Exchange Act of 1934, including our Annual Report
on Form 10-K for the year ended December 31, 2016.
Overview
We
own 99.3% of our subsidiary, Genie Energy International Corporation, or GEIC, which owns 100% of Genie Retail Energy, or GRE,
and 92% of Genie Oil and Gas, Inc., or GOGAS. Our principal businesses consist of the following:
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●
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GRE,
which owns and operates retail energy providers, or REPs, including IDT Energy, Inc.,
or IDT Energy, Residents Energy, Inc., or Residents Energy, and Town Square Energy, or
TSE, and energy brokerage and marketing services. Its REP businesses resell electricity
and natural gas to residential and small business customers primarily in the Eastern
United States; and
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|
●
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GOGAS,
which is an oil and gas exploration company that consists of an 86.0% interest in Afek
Oil and Gas, Ltd., or Afek, which operates an exploration project in the Golan Heights
in Northern Israel, and certain inactive projects.
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GRE
has outstanding deferred stock units granted to officers and employees that represent an interest of 2.5% of the equity of GRE.
As
part of our ongoing business development efforts, we continuously seek out new opportunities, which may include complementary
operations or businesses that reflect horizontal or vertical expansion from our current operations. Some of these potential opportunities
are considered briefly and others are examined in further depth. In particular, we seek out acquisitions to expand the geographic
scope and size of our REP businesses.
Genie
Retail Energy
Seasonality
and Weather
The
weather and the seasons, among other things, affect GRE’s revenues. Weather conditions have a significant impact on the
demand for natural gas used for heating and electricity used for heating and cooling. Typically, colder winters increase demand
for natural gas and electricity, and hotter summers increase demand for electricity. Milder winters and/or summers have the opposite
effects. Natural gas revenues typically increase in the first quarter due to increased heating demands and electricity revenues
typically increase in the third quarter due to increased air conditioning use. Approximately 43% and 64% of GRE’s natural
gas revenues for the relevant years were generated in the first quarter of 2016 and 2015, respectively, when demand for heating
was highest. Although the demand for electricity is not as seasonal as natural gas (due, in part, to usage of electricity for
both heating and cooling), approximately 31% and 29% of GRE’s electricity revenues for the relevant years were generated
in the third quarter of 2016 and 2015, respectively. Our revenues and operating income are subject to material seasonal variations,
and the interim financial results are not necessarily indicative of the estimated financial results for the full year.
Concentration
of Customers and Associated Credit Risk
The
GRE-owned REPs reduce their customer credit risk by participating in purchase of receivable, or POR, programs for a majority of
their receivables. In addition to providing billing and collection services, utility companies purchase those REPs’ receivables
and assume all credit risk without recourse to those REPs. The GRE-owned REPs’ primary credit risk is therefore nonpayment
by the utility companies. Certain of the utility companies represent significant portions of our consolidated revenues and consolidated
gross trade accounts receivable balance and such concentrations increase our risk associated with nonpayment by those utility
companies.
The
following table summarizes the percentage of consolidated revenues from customers by utility company that equal or exceed 10%
of our consolidated revenues in the period (no other single utility company accounted for more than 10% of consolidated revenues
in these periods):
|
|
Three Months Ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Con Edison
|
|
|
14
|
%
|
|
|
18
|
%
|
ComEd
|
|
|
11
|
%
|
|
|
11
|
%
|
National Grid USA
|
|
|
na
|
|
|
|
11
|
%
|
na-less
than 10% of consolidated revenue in the period
The
following table summarizes the percentage of consolidated gross trade accounts receivable by utility company that equal or exceed
10% of consolidated gross trade accounts receivable at March 31, 2017 and December 31, 2016 (no other single utility company accounted
for 10% or greater of our consolidated gross trade accounts receivable at March 31, 2017 or December 31, 2016):
|
|
March 31, 2017
|
|
|
December 31, 2016
|
|
Con Edison
|
|
|
15
|
%
|
|
|
15
|
%
|
ComEd
|
|
|
na
|
|
|
|
10
|
%
|
na-less
than 10% of consolidated gross trade accounts receivable
New
York Public Service Commission Orders
On
February 23, 2016, the New York Public Service Commission, or PSC, issued an order that sought to impose significant new restrictions
on REPs operating in New York, including those owned by GRE. The
restrictions described in the
PSC’s order, which were to become effective March 4, 2016, would require that all REPs’ electricity and natural gas
offerings to residential and small business customers include an annual guarantee of savings compared to the price charged by
the relevant incumbent utility or, for electricity offerings, provide at least 30% of the supply from renewable sources. Customers
not enrolled in a compliant program would be relinquished back to the local utility at the end of their contract period or, for
variable price customers operating on month to month agreements, at the end of the current monthly billing cycle.
On
March 4, 2016, a group of parties from the REP industry sought and won a temporary restraining order to stay implementation of
the most restrictive portions of the PSC’s order pending a court hearing on those parties’ motion for a preliminary
injunction. On July 25, 2016, the New York State Supreme Court, County of Albany, entered a decision and order granting the Petitioners’
petition, vacated provisions 1 through 3 of the Order, and remitted the matter to the PSC for further proceedings consistent with
the Court’s order.
On
December 2, 2016, the PSC noticed an evidentiary hearing scheduled to take place in 2017 to assess the retail energy market in
New York. That process is underway and is expected to last several months. We are evaluating the potential impact of any new order
from the PSC that would follow from the evidentiary process, while preparing to operate in compliance with any new requirements
that may be imposed. Depending on the final language of any new order, as well as our ability to modify our relationships with
our New York customers, an order could have a substantial impact upon the operations of GRE-owned REPs in New York.
On
July 14, 2016, and on September 19, 2016, the PSC issued orders restricting REPs, including those owned by GRE, from serving customers
enrolled in New York’s utility low-income assistance programs. Representatives of the REP industry challenged the ruling
in New York State Supreme Court, Albany County, and, on September 27, 2016, the court issued an order temporarily restraining
the PSC from implementing the July and September orders. On December 16, 2016, the PSC issued a prohibition on REP service to
customers enrolled in New York’s utility low-income assistance programs. As part of a stipulated schedule upon request of
the REP industry, the PSC agreed to extend the deadlines for compliance with that order until May 26, 2017. That order is under
review in New York State Supreme Court, Albany County.
Class
Action Lawsuits
Regarding
the class action lawsuits discussed in “
Legal Proceedings
” in Note 11 to the Consolidated Financial Statements
included in Item 1 to Part I of this Quarterly Report on Form 10-Q/A, the parties participated in mediation, and entered
into a Memorandum of Understanding, or MOU, with respect to a proposed settlement of the class action lawsuits. There are a number
of material issues not addressed by the MOU that must be resolved before a settlement can be finalized. The parties notified the
Court of that development and are working towards finalizing the settlement, which will need to be approved by the Court. We are
not able to assess if we will accept the final terms of the MOU. We believe that the claims in these class action lawsuits are
without merit. However, based on the tentative terms of the MOU, we believe it is reasonably possible that we could incur losses
of between $0 to $4 million.
Afek
Oil and Gas, Ltd.
In
April 2013, the Government of Israel finalized the award to Afek of an exclusive three-year petroleum exploration license covering
396.5 square kilometers in the southern portion of the Golan Heights in Northern Israel. The license has been extended to April
2018. Israel’s Northern District Planning and Building Committee granted Afek a one-year permit that commenced in February
2015, which has been subsequently extended to April 18, 2018, to conduct an up to ten-well oil and gas exploration program. This
permit as extended is expected to cover the remainder of Afek’s ongoing exploration program in the area covered by its exploration
license.
In
February 2015, Afek began drilling its first exploratory well. To date, Afek has completed drilling five wells in the Southern
region of its license area. In light of the analysis received on the first five wells and market conditions at that time, in the
third quarter of 2016, Afek determined that it did not have a clear path to demonstrate probable or possible reserves in the Southern
region of its license area over the next 12 to 18 months. Since there was substantial doubt regarding the economic viability of
these wells, in the third quarter of 2016, Afek wrote off the $41.0 million of capitalized exploration costs incurred in the Southern
region.
Afek
has turned its operational focus to the Northern region of its license area. The data analyzed to date suggests that the Southern
block resources may extend Northward at depths potentially sufficient to have induced a greater level of maturation of the resource.
To validate this hypothesis, Afek commenced drilling its sixth exploratory well at one of the Northern sites in its license area.
Afek expects to complete this well during the third quarter of 2017.
Afek
may seek financing for the next phase of activity from a variety of sources, some of which could result in a process by which
Afek would become an independent entity.
Afek
assesses the economic and operational viability of its project on an ongoing basis. The assessment requires significant estimates
and assumptions by management. Should our estimates or assumptions regarding the recoverability of its capitalized exploration
costs prove to be incorrect, we may be required to record impairments of such costs in future periods and such impairments could
be material.
Critical
Accounting Policies
Our
consolidated financial statements and accompanying notes are prepared in accordance with accounting principles generally accepted
in the United States of America, or U.S. GAAP. Our significant accounting policies are described in Note 1 to the consolidated
financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2016. The preparation of financial
statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues
and expenses as well as the disclosure of contingent assets and liabilities. Critical accounting policies are those that require
application of management’s most subjective or complex judgments, often as a result of matters that are inherently uncertain
and may change in subsequent periods. Our critical accounting policies include those related to the allowance for doubtful accounts,
goodwill, oil and gas accounting and income taxes. Management bases its estimates and judgments on historical experience and other
factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different
assumptions or conditions. For additional discussion of our critical accounting policies, see our Management’s Discussion and
Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year ended December 31, 2016.
Recently
Issued Accounting Standards Not Yet Adopted
In
May 2014, the Financial Accounting Standards Board, or FASB, and the International Accounting Standards Board jointly issued a
comprehensive new revenue recognition standard that will supersede most of the current revenue recognition guidance under U.S.
GAAP and International Financial Reporting Standards, or IFRS. The goals of the revenue recognition project were to clarify and
converge the revenue recognition principles under U.S. GAAP and IFRS and to develop guidance that would streamline and enhance
revenue recognition requirements. We expect to adopt this standard on January 1, 2018. Entities have the option of using either
a full retrospective or modified retrospective approach for the adoption of the standard. We are evaluating the impact that the
standard will have on our consolidated financial statements, and have not yet selected a transition method. We cannot reasonably
estimate the impact that the adoption of the standard will have on our consolidated financial statements.
In
January 2016, the FASB issued an Accounting Standards Update, or ASU, to provide more information about recognition, measurement,
presentation and disclosure of financial instruments. The amendments in the ASU include, among other changes, the following: (1)
equity investments (except those accounted for under the equity method or that result in consolidation) will be measured at fair
value with changes in fair value recognized in net income, (2) a qualitative assessment each reporting period to identify impairment
of equity investments without readily determinable fair values, (3) financial assets and financial liabilities will be presented
separately by measurement category and form of financial asset on the balance sheet or the notes to the financial statements,
and (4) an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities
in combination with the entity’s other deferred tax assets. Entities will no longer be able to recognize unrealized holding
gains and losses on equity securities classified as available-for-sale in other comprehensive income. In addition, a practicability
exception will be available for equity investments that do not have readily determinable fair values and do not qualify for the
net asset value practical expedient. These investments may be measured at cost, less any impairment, plus or minus changes resulting
from observable price changes in orderly transactions for an identical or similar investment of the same issuer. Entities will
have to reassess at each reporting period whether an investment qualifies for this practicability exception. We will adopt the
amendments in this ASU on January 1, 2018. We are evaluating the impact that the ASU will have on our consolidated financial statements.
In
February 2016, the FASB issued an ASU related to the accounting for leases. The new standard establishes a right-of-use, or ROU,
model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer
than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense
recognition in the income statement. We will adopt the new standard on January 1, 2019. A modified retrospective transition approach
is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative
period presented in the financial statements, with certain practical expedients available. We are evaluating the impact that the
new standard will have on our consolidated financial statements.
In
June 2016, the FASB issued an ASU that changes the impairment model for most financial assets and certain other instruments. For
receivables, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model
that generally will result in the earlier recognition of allowance for losses. For available-for-sale debt securities with unrealized
losses, entities will measure credit losses in a manner similar to current practice, except the losses will be recognized as allowances
instead of reductions in the amortized cost of the securities. In addition, an entity will have to disclose significantly more
information about allowances, credit quality indicators and past due securities. The new provisions will be applied as a cumulative-effect
adjustment to retained earnings. We will adopt the new standard on January 1, 2020. We are evaluating the impact that the new
standard will have on our consolidated financial statements.
In
November 2016, the FASB issued an ASU that includes specific guidance on the classification and presentation of changes in restricted
cash and cash equivalents in the statement of cash flows. The amendments in this ASU require that a statement of cash flows explain
the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted
cash equivalents. Amounts generally described as restricted cash or restricted cash equivalents will be included with cash and
cash equivalents when reconciling the beginning of the period and end of the period total amounts shown on the statement of cash
flows. The ASU will be applied using a retrospective transition method to each period presented. We will adopt the amendments
in this ASU on January 1, 2018. The adoption will impact our beginning of the period and end of the period cash and cash equivalents
balance in our statement of cash flows, as well as our net cash provided by operating activities.
In
January 2017, the FASB issued an ASU to clarify the definition of a business with the objective of adding guidance to assist entities
with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. Under the
current guidance, there are three elements of a business—inputs, processes, and outputs. While an integrated set of assets
and activities (collectively referred to as a “set”) that is a business usually has outputs, outputs are not required
to be present. In addition, all the inputs and processes that a seller uses in operating a set are not required if market participants
can acquire the set and continue to produce outputs, for example, by integrating the acquired set with their own inputs and processes.
The amendments in this ASU provide a screen to determine when a set is not a business. The screen requires that when substantially
all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group
of similar identifiable assets, the set is not a business. This screen reduces the number of transactions that need to be further
evaluated. If the screen is not met, the amendments in this ASU (1) require that to be considered a business, a set must include,
at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2)
remove the evaluation of whether a market participant could replace missing elements. The amendments provide a framework to assist
entities in evaluating whether both an input and a substantive process are present. The framework includes two sets of criteria
to consider that depend on whether a set has outputs. Although outputs are not required for a set to be a business, outputs generally
are a key element of a business; therefore, the FASB has developed more stringent criteria for sets without outputs. Lastly, the
ASU narrows the definition of the term output. We will adopt the amendments in this ASU on January 1, 2018. We are evaluating
the impact that the new standard will have on our consolidated financial statements.
In
January 2017, the FASB issued an ASU that simplifies the subsequent measurement of goodwill by eliminating Step 2 from the goodwill
impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine
the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following
the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination.
Instead, under the amendments in this ASU, an entity should perform its annual, or interim, goodwill impairment test by comparing
the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by
which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total
amount of goodwill allocated to that reporting unit. Additionally, an entity should consider income tax effects from any tax deductible
goodwill on the carrying amount of the reporting unit when measuring the goodwill impairment loss, if applicable. An entity still
has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is
necessary. Early adoption of this standard is permitted for interim or annual goodwill impairment tests performed on testing dates
after January 1, 2017. We intend to adopt this standard for the goodwill impairment test to be performed in 2017.
Results
of Operations
We
evaluate the performance of our operating business segments based primarily on income (loss) from operations. Accordingly, the
income and expense line items below income (loss) from operations are only included in our discussion of the consolidated results
of operations.
Three
Months Ended March 31, 2017 Compared to Three Months Ended March 31, 2016
Genie
Retail Energy Segment
Restatement
of Unaudited Consolidated Financial Statements
The
unaudited consolidated statement of operations for the three months ended March 31, 2017 has been restated to properly reflect
our revenues, cost of revenues, income from operations, net income and earnings per share for that three-month period. Certain
amounts recorded in the second quarter of 2017 should properly have been recorded in the first quarter. The error related to the
estimation of weather impact on our estimated unbilled revenue. This estimation process is performed in an effort to allocate
billings to a calendar period using historical consumption data of the customer base of the retail energy providers operated by
us and applying a weather factor to estimated unbilled amounts. The weather adjustment was erroneous, causing understated amounts
of estimated unbilled commodity consumption, resulting in under estimates of revenues and cost of revenues to be included in the
three months ended March 31, 2017. The errors impacted revenue by $2.0 million, gross profit and income (loss) from operations
by $1.2 million, and net income by $1.1 million. The nature of the estimation processes is reversing, as actual billings representing
the unbilled estimates manifest in the following period, in this case, in April 2017. The reversal of this estimate resulted in
commodity consumption and the associated revenues and cost of revenues to be overstated in the three months ended June 30, 2017.
The cumulative operating results for the six months ended June 30, 2017 were unaffected. Our GRE segment was the only segment
affected by the misstatement. See Note 2 to the Notes to Consolidated Financial Statements included in Item 1 to Part I of
this Quarterly Report.
Revised
Unaudited Consolidated Financial Statements
In
the three months ended March 31, 2016, electricity revenues and cost of revenues were adjusted to correct the classification of
Pennsylvania gross receipt tax that was previously recorded as a reduction to electricity revenue instead of as cost of revenues,
and cost of revenues was adjusted to correct an error at March 31, 2016 in “Prepaid expenses” in the consolidated
balance sheet. See Note 3 to the Notes to Consolidated Financial Statements included in Item 1 to Part I of this Quarterly
Report.
|
|
Three months ended
March 31,
|
|
|
Change
|
|
|
|
2017
(Restated)
|
|
|
2016
(Revised)
|
|
|
$
|
|
|
%
|
|
|
|
(in millions)
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Electricity
|
|
$
|
53.0
|
|
|
$
|
45.1
|
|
|
$
|
7.9
|
|
|
|
17.4
|
%
|
Natural gas
|
|
|
17.9
|
|
|
|
13.4
|
|
|
|
4.5
|
|
|
|
34.2
|
|
Other
|
|
|
0.5
|
|
|
|
0.3
|
|
|
|
0.2
|
|
|
|
28.8
|
|
Total revenues
|
|
|
71.4
|
|
|
|
58.8
|
|
|
|
12.6
|
|
|
|
21.3
|
|
Cost of revenues
|
|
|
46.6
|
|
|
|
34.8
|
|
|
|
11.8
|
|
|
|
33.7
|
|
Gross profit
|
|
|
24.8
|
|
|
|
24.0
|
|
|
|
0.8
|
|
|
|
3.3
|
|
Selling, general and administrative
|
|
|
15.8
|
|
|
|
13.3
|
|
|
|
2.5
|
|
|
|
18.9
|
|
Income from operations
|
|
$
|
9.0
|
|
|
$
|
10.7
|
|
|
$
|
(1.7
|
)
|
|
|
(16.1
|
)%
|
On
November 2, 2016, GRE acquired Retail Energy Holdings, LLC, or REH, a privately held owner of REPs that operates as Town Square
Energy in eight states. TSE’s licenses and customer base expanded GRE’s geographic footprint to four new states —
New Hampshire, Rhode Island, Massachusetts and Connecticut — and provided additional electricity customers in New Jersey,
Maryland, Ohio and Pennsylvania.
Revenues
.
GRE’s electricity revenues increased in the three months ended March 31, 2017 compared to the same period in 2016 because
of the acquisition of REH in November 2016, which added an average of approximately 51,200 electricity-only customers and $10.7
million in electricity revenues in the three months ended March 31, 2017. This increase in electricity revenues was partially
offset by a 6.0% decrease in the average rate charged to customers in the three months ended March 31, 2017 compared to the same
period in 2016. Electricity consumption by GRE’s REP customers, including the TSE electricity customers, increased 24.8%
in the three months ended March 31, 2017 compared to the same period in 2016. The increase in electricity consumption reflected
the increases in average meters served and average consumption per meter, which increased 19.4% and 4.5%, respectively, in the
three months ended March 31, 2017 compared to the same period in 2016.
GRE's
natural gas revenues increased in the three months ended March 31, 2017 compared to the same period in 2016 because of a 30.5%
increase in the average rate charged to customers (related to a 19.7% increase in the underlying commodity cost) in the three
months ended March 31, 2017 compared to the same period in 2016. Natural gas consumption by GRE’s REP customers increased
2.8% in the three months ended March 31, 2017 compared to the same period in 2016. The increase in natural gas consumption reflected
the increases in average consumption per meter of 9.6%, partially offset by a 6.1% decrease in meters served in the three months
ended March 31, 2017 compared to the same period in 2016.
The
customer base for the GRE-owned REPs as measured by meters served consisted of the following:
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
|
September 30, 2016
|
|
|
June 30,
2016
|
|
|
March 31,
2016
|
|
|
|
(in thousands)
|
|
Meters at end of quarter:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electricity customers
|
|
|
307
|
|
|
|
296
|
|
|
|
263
|
|
|
|
268
|
|
|
|
267
|
|
Natural gas customers
|
|
|
111
|
|
|
|
116
|
|
|
|
120
|
|
|
|
122
|
|
|
|
126
|
|
Total meters
|
|
|
418
|
|
|
|
412
|
|
|
|
383
|
|
|
|
390
|
|
|
|
393
|
|
The
total meters at March 31, 2017 and December 31, 2016 included TSE’s approximately 57,900 and 44,500 electric-only meters,
respectively. Gross meter acquisitions in the three months ended March 31, 2017 were 84,000 (including TSE’s gross meter
acquisitions) compared to 65,000 in the same period in 2016. In response to the New York PSC developments discussed above, we
focused our meter acquisition efforts outside of New York State while simultaneously taking steps to reduce the prospective and
contingent impacts of the PSC’s orders on our New York operations. Meters served increased by 6,000 or 1.5% at March 31,
2017 from December 31, 2106 compared to an increase of 1,000 or 0.2% at March 31, 2016 from December 31, 2015. Average monthly
churn increased to 6.1% in the three months ended March 31, 2017 from 5.9% in the three months ended March 31, 2016, and improved
from 6.4% in the three months ended December 31, 2016. Note that in 2017, GRE modified its method of calculating churn and the
figures for all periods presented reflect the revised methodology.
GRE-owned
REPs began operations in Ohio in the second quarter of 2016, and we have applications pending to enter into additional utility
service areas, primarily electric and dual meter territories in the states where we currently operate. We continue to evaluate
additional, deregulation-driven opportunities in order to expand our business geographically.
The
average rates of annualized energy consumption, as measured by residential customer equivalents, or RCEs, are presented in the
chart below. An RCE represents a natural gas customer with annual consumption of 100 mmbtu or an electricity customer with annual
consumption of 10 MWh. Because different customers have different rates of energy consumption, RCEs are an industry standard metric
for evaluating the consumption profile of a given retail customer base.
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
|
September 30,
2016
|
|
|
June 30,
2016
|
|
|
March 31,
2016
|
|
|
|
(in thousands)
|
|
RCEs at end of quarter:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electricity customers
|
|
|
220
|
|
|
|
218
|
|
|
|
174
|
|
|
|
172
|
|
|
|
175
|
|
Natural gas customers
|
|
|
67
|
|
|
|
65
|
|
|
|
67
|
|
|
|
67
|
|
|
|
72
|
|
Total RCEs
|
|
|
287
|
|
|
|
283
|
|
|
|
241
|
|
|
|
239
|
|
|
|
247
|
|
Total
RCEs at March 31, 2017 and December 31, 2016 included TSE’s approximately 58,000 and 50,600 electric-only RCEs, respectively.
Exclusive of the impact of the TSE acquisition on RCEs and meters, RCEs decreased at March 31, 2017 compared to March 31, 2016
primarily due to the decrease in electricity and natural gas meters served.
Other
revenue in the three months ended March 31, 2017 and 2016 included commissions, entry fees and other fees from our energy brokerage
and marketing services businesses.
Cost
of Revenues and Gross Margin Percentage
. GRE’s cost of revenues and gross margin percentage were as follows:
|
|
Three months ended
March 31,
|
|
|
Change
|
|
|
|
2017
(Restated)
|
|
|
2016 (Revised)
|
|
|
$
|
|
|
%
|
|
|
|
(in millions)
|
|
Cost of revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
Electricity
|
|
$
|
33.7
|
|
|
$
|
24.3
|
|
|
$
|
9.4
|
|
|
|
38.5
|
%
|
Natural gas
|
|
|
12.7
|
|
|
|
10.3
|
|
|
|
2.4
|
|
|
|
23.1
|
|
Other
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
—
|
|
|
|
(16.4
|
)
|
Total cost of revenues
|
|
$
|
46.6
|
|
|
$
|
34.8
|
|
|
$
|
11.8
|
|
|
|
33.7
|
%
|
|
|
Three months ended
March 31,
|
|
|
|
|
|
|
2017
(Restated)
|
|
|
2016 (Revised)
|
|
|
Change
|
|
Gross margin percentage:
|
|
|
|
|
|
|
|
|
|
Electricity
|
|
|
36.4
|
%
|
|
|
46.1
|
%
|
|
|
(9.7
|
)%
|
Natural gas
|
|
|
29.2
|
|
|
|
22.8
|
|
|
|
6.4
|
|
Other
|
|
|
68.7
|
|
|
|
51.7
|
|
|
|
17.0
|
|
Total gross margin percentage
|
|
|
34.8
|
%
|
|
|
40.8
|
%
|
|
|
(6.0
|
)%
|
Cost
of revenues for electricity increased in the three months ended March 31, 2017 compared to the same period in 2016 primarily because
of the acquisition of REH in November 2016, which added $8.7 million in cost of revenues for electricity in the three months ended
March 31, 2017. GRE’s customers’ electricity consumption in the three months ended March 31, 2017 compared to the
same period in 2016 increased 24.8%, including consumption from TSE’s electricity customers. The average unit cost of electricity
increased 11.0% in the three months ended March 31, 2017 compared to the same period in 2016. Gross margin on electricity sales
decreased in the three months ended March 31, 2017 compared to the same period in 2016 because the average rate charged to customers
decreased and the average unit cost of electricity increased.
Cost
of revenues for natural gas increased in the three months ended March 31, 2017 compared to the same period in 2016 primarily because
the average unit cost of natural gas increased 19.7%. In addition GRE’s customers’ natural gas consumption increased
2.8% in the three months ended March 31, 2017 compared to the same period in 2016. Gross margin on natural gas sales increased
in the three months ended March 31, 2017 compared to the same period in 2016 because the average rate charged to customers increased
more than the average unit cost of natural gas.
Other
cost of revenues primarily includes commission expense incurred by our energy brokerage and marketing services businesses.
Selling,
General and Administrative
. The increase in selling, general and administrative expense in the three months ended March 31,
2017 compared to the same period in 2016 was primarily due to increases in customer acquisition costs, payroll and related expense
and amortization of the intangible assets acquired in the REH acquisition. As a percentage of GRE’s total revenues, selling,
general and administrative expense decreased from 22.7% in the three months ended March 31, 2016 to 22.2% in the three months
ended March 31, 2017.
Afek
Segment
Afek
does not currently generate any revenues, nor does it incur any cost of revenues.
|
|
Three months ended
March 31,
|
|
|
Change
|
|
|
|
2017
|
|
|
2016
|
|
|
$
|
|
|
%
|
|
|
|
(in millions)
|
|
General and administrative
|
|
$
|
0.4
|
|
|
$
|
0.1
|
|
|
$
|
0.3
|
|
|
|
220.4
|
%
|
Exploration
|
|
|
0.9
|
|
|
|
1.7
|
|
|
|
(0.8
|
)
|
|
|
(49.7
|
)
|
Loss from operations
|
|
$
|
1.3
|
|
|
$
|
1.8
|
|
|
$
|
(0.5
|
)
|
|
|
(29.6
|
)%
|
General
and Administrative
. General and administrative expense increased in the three months ended March 31, 2017 compared to the
same period in 2016 primarily because of a reduction in the amount of costs classified as exploration expense and capitalized
exploration costs.
Exploration.
In February 2015, Afek began drilling its first exploratory well in Northern Israel’s Golan Heights. To date,
Afek has completed drilling five wells in the Southern region of its license area. Afek has turned its operational focus
to the Northern region of its license area. In 2017, Afek commenced drilling its sixth exploratory well at one of the Northern
sites in its license area. Afek expects to complete the well during the third quarter of 2017.
Genie
Oil and Gas Segment
Genie
Oil and Gas does not currently generate any revenues, nor does it incur any cost of revenues. As a result of Total S.A.’s
withdrawal from AMSO, LLC, beginning on April 30, 2016, AMSO, LLC’s assets, liabilities, results of operations and cash
flows are included in our consolidated financial statements.
|
|
Three months ended
March 31,
|
|
|
Change
|
|
|
|
2017
|
|
|
2016
|
|
|
$
|
|
|
%
|
|
|
|
(in millions)
|
|
General and administrative
|
|
$
|
0.1
|
|
|
$
|
0.1
|
|
|
$
|
—
|
|
|
|
(19.3
|
)%
|
Research and development
|
|
|
—
|
|
|
|
0.2
|
|
|
|
(0.2
|
)
|
|
|
(100.0
|
)
|
Equity in the net loss of AMSO, LLC
|
|
|
—
|
|
|
|
0.2
|
|
|
|
(0.2
|
)
|
|
|
(100.0
|
)
|
Loss from operations
|
|
$
|
0.1
|
|
|
$
|
0.5
|
|
|
$
|
(0.4
|
)
|
|
|
(79.3
|
)%
|
General
and Administrative
. General and administrative expense was substantially unchanged in the three months ended March 31, 2017
compared to the same period in 2016 primarily because an increase in payroll expense was offset by a reduction in the amount of
costs classified as research and development expense.
Research
and Development.
Research and development expense in the three months ended March 31, 2016 related to Genie Mongolia’s
joint geological survey agreement with the Republic of Mongolia, which was executed in April 2013, to explore certain of that
country’s oil shale deposits. In 2016, we suspended our operations in Mongolia.
Equity
in the Net Loss of AMSO, LLC
. Beginning on April 30, 2016, AMSO, LLC’s results of operations are included in our consolidated
financial statements. At December 31, 2016, the AMSO, LLC project was substantially decommissioned.
Corporate
Corporate
does not generate any revenues, nor does it incur any cost of revenues. Corporate costs include unallocated compensation, consulting
fees, legal fees, business development expense and other corporate-related general and administrative expense.
|
|
Three months ended
March 31,
|
|
|
Change
|
|
|
|
2017
|
|
|
2016
|
|
|
$
|
|
|
%
|
|
|
|
(in millions)
|
|
General and administrative expense and loss from
operations
|
|
$
|
2.4
|
|
|
$
|
2.4
|
|
|
$
|
—
|
|
|
|
(0.3
|
)%
|
Corporate
general and administrative expense was substantially unchanged in the three months ended March 31, 2017 compared to the same period
in 2016 primarily because a decrease in payroll and related expense was offset by an increase in stock-based compensation expense.
As a percentage of our consolidated revenues, Corporate general and administrative expense decreased from 4.1% in the three months
ended March 31, 2016 to 3.4% in the three months ended March 31, 2017.
Consolidated
Selling,
General and Administrative
. Pursuant to an agreement between us and IDT Corporation, or IDT, our former parent company, IDT
charges us for services it provides, and we charge IDT for services that we provide to certain of IDT’s subsidiaries. In
both the three months ended March 31, 2017 and 2016, the amounts that IDT charged us, net of the amounts that we charged IDT,
was $0.3 million, which was included in consolidated selling, general and administrative expense.
Stock-based
compensation expense included in consolidated selling, general and administrative expense was $1.2 million in both the three months
ended March 31, 2017 and 2016. At March 31, 2017, aggregate unrecognized compensation cost related to non-vested stock-based compensation
was $7.3 million. The unrecognized compensation cost is recognized over the expected service period.
The
following is a discussion of our consolidated income and expense line items below income from operations:
|
|
Three months ended
March 31,
|
|
|
Change
|
|
|
|
2017
(Restated)
|
|
|
2016
|
|
|
$
|
|
|
%
|
|
|
|
(in millions)
|
|
Income from operations
|
|
$
|
5.2
|
|
|
$
|
6.0
|
|
|
$
|
(0.8
|
)
|
|
|
(13.4
|
)%
|
Interest income
|
|
|
0.1
|
|
|
|
0.1
|
|
|
|
—
|
|
|
|
4.9
|
|
Other expense, net
|
|
|
(0.3
|
)
|
|
|
(0.1
|
)
|
|
|
(0.2
|
)
|
|
|
(112.6
|
)
|
Provision for income taxes
|
|
|
(0.9
|
)
|
|
|
(1.1
|
)
|
|
|
0.2
|
|
|
|
21.9
|
|
Net income
|
|
|
4.1
|
|
|
|
4.9
|
|
|
|
(0.8
|
)
|
|
|
(14.7
|
)
|
Net loss attributable to noncontrolling interests
|
|
|
0.5
|
|
|
|
0.8
|
|
|
|
(0.3
|
)
|
|
|
(45.9
|
)
|
Net income attributable to Genie
|
|
$
|
4.6
|
|
|
$
|
5.7
|
|
|
$
|
(1.1
|
)
|
|
|
(19.2
|
)%
|
Other
Expense, net
. Other expense, net in the three months ended March 31, 2017 and 2016 consisted primarily of foreign
currency translation losses of $0.3 million and $0.1 million, respectively. In addition, other expense, net in the three months
ended March 31, 2017 included interest expense of $39,000 from borrowings under REH’s revolving line of credit.
Provision
for Income Taxes
. The change in provision for income taxes in the three months ended March 31, 2017 compared to the same
period in 2016 was primarily due to the change in income tax expense in GRE. GRE includes IDT Energy, certain limited liability
companies and our consolidated variable interest entity. For purposes of computing Federal income taxes, we consolidate the GOGAS
and Afek entities so that the losses from those businesses offset the taxable income from GRE and reduce the consolidated tax
provision to zero. The additional net operating losses are fully offset by a valuation allowance so no additional benefit for
Federal income taxes was recorded. State and local taxes, which have no offset, decreased in the three months ended March 31,
2017 compared to the same period in 2016. IDT Energy and the limited liability companies are included in our consolidated return.
Citizen’s Choice Energy, LLC, or CCE, a consolidated variable interest entity, files a separate tax return since we do not
have any ownership interest in CCE.
Net
Loss Attributable to Noncontrolling Interests.
The change in the net loss attributable to noncontrolling interests in
the three months ended March 31, 2017 compared to the similar period in 2016 was primarily due to the change in the net loss of
CCE. We do not have any ownership interest in CCE, therefore, 100% of the net income or loss incurred by CCE was attributed to
noncontrolling interests. CCE’s net loss in the three months ended March 31, 2017 was $0.2 million compared to $0.6 million
in the three months ended March 31, 2016. The change was primarily due to an increase in gross profit and a reduction in management
fees.
Liquidity
and Capital Resources
General
We
currently expect that our operations in the next twelve months and the $36.0 million balance of unrestricted cash and cash equivalents
that we held at March 31, 2017 will be sufficient to meet our currently anticipated cash requirements, including Afek’s
anticipated expenditures, for at least the twelve months ending March 31, 2018.
Afek
may seek financing for the next phase of activity from a variety of sources, some of which could result in a process by which
Afek would become an independent entity.
At
March 31, 2017, we had working capital (current assets less current liabilities) of $58.2 million.
|
|
Three months ended
March 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
(in millions)
|
|
Cash flows provided by (used in):
|
|
|
|
|
|
|
Operating activities
|
|
$
|
3.7
|
|
|
$
|
9.1
|
|
Investing activities
|
|
|
(1.0
|
)
|
|
|
(8.2
|
)
|
Financing activities
|
|
|
(2.1
|
)
|
|
|
(2.0
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
|
0.2
|
|
|
|
0.2
|
|
Increase (decrease) in cash and cash equivalents
|
|
$
|
0.8
|
|
|
$
|
(0.9
|
)
|
Operating
Activities
Cash
provided by operating activities was $3.7 million and $9.1 million in the three months ended March 31, 2017 and 2016, respectively.
Our cash flow from operations varies significantly from quarter to quarter and from year to year, depending on our operating results
and the timing of operating cash receipts and payments, specifically trade accounts receivable and trade accounts payable, including
payments relating to our exploration activities.
Gross
trade accounts receivable decreased to $35.4 million at March 31, 2017 from $37.0 million at December 31, 2016 reflecting the
seasonal decline in GRE’s monthly revenues in the three months ended March 31, 2017 compared to the three months ended December
31, 2016.
Inventory
of natural gas decreased to $0.4 million at March 31, 2017 from $0.6 million at December 31, 2016 due to a 51% decrease in quantity,
partially offset by a 16% increase in the average unit cost at March 31, 2017 compared to December 31, 2016. Inventory at March
31, 2017 and December 31, 2016 also included $6.5 million and $5.4 million, respectively, in renewable energy credits.
CCE
is a consolidated variable interest entity. We determined that, since the acquisition of the interest in CCE, we had the power
to direct the activities of CCE that most significantly impact its economic performance, and we have the obligation to absorb
losses of CCE that could potentially be significant to CCE on a stand-alone basis. We therefore determined that we are the primary
beneficiary of CCE, and as a result, we consolidate CCE within our GRE segment. We provided CCE with all of the cash required
to fund its operations. In the three months ended March 31, 2017, CCE repaid $0.1 million to us. In the three months ended March
31, 2016, we provided CCE with net funding of $0.4 million to finance its operations.
As
of November 19, 2015, IDT Energy and certain of its affiliates entered into an Amended and Restated Preferred Supplier Agreement
with BP Energy Company, or BP. The agreement’s termination date is November 30, 2019, except either party may terminate
the agreement on November 30, 2018 by giving the other party notice by May 31, 2018. IDT Energy’s obligations to BP are
secured by a first security interest in deposits or receivables from utilities in connection with their purchase of IDT Energy’s
customer’s receivables, and in any cash deposits or letters of credit posted in connection with any collateral accounts
with BP. In addition, IDT Energy must pay an advance payment of $2.5 million to BP each month that BP will apply to the next invoiced
amount due to BP. IDT Energy’s ability to purchase electricity and natural gas under this agreement is subject to satisfaction
of certain conditions including the maintenance of certain covenants. At March 31, 2017, we were in compliance with such covenants.
At March 31, 2017, restricted cash—short-term of $0.3 million and trade accounts receivable of $27.8 million were pledged
to BP as collateral for the payment of IDT Energy’s trade accounts payable to BP of $8.6 million at March 31, 2017.
We
are subject to audits in various jurisdictions for various taxes. In April 2017, we were notified that the Afek Oil & Gas
Ltd. tax return for 2014 was going to be audited by the U.S. Internal Revenue Service. The audit is expected to commence in May
2017. Amounts asserted by taxing authorities or the amount ultimately assessed against us could be greater than accrued amounts.
Accordingly, additional provisions may be recorded in the future as revised estimates are made or underlying matters are settled
or resolved. Imposition of assessments as a result of tax audits could have an adverse effect on our results of operations, cash
flows and financial condition.
Regarding
the class action lawsuits discussed in “
Legal Proceedings
” in Note 11 to the Consolidated Financial Statements
included in Item 1 to Part I of this Quarterly Report on Form 10-Q/A, the parties participated in mediation, and entered
into a MOU with respect to a proposed settlement of the class action lawsuits. There are a number of material issues not addressed
by the MOU that must be resolved before a settlement can be finalized. The parties notified the Court of that development and
are working towards finalizing the settlement, which will need to be approved by the Court. We are not able to assess if we will
accept the final terms of the MOU. We believe that the claims in these class action lawsuits are without merit. However, based
on the tentative terms of the MOU, we believe it is reasonably possible that we could incur losses of between $0 to $4 million.
On
February 23, 2016, the New York PSC issued an order that sought to impose significant new restrictions on REPs operating
in New York, including those owned by GRE. The restrictions described in the PSC’s order, which were to become effective
March 4, 2016, would require that all REPs’ electricity and natural gas offerings to residential and small business customers
include an annual guarantee of savings compared to the price charged by the relevant incumbent utility or, for electricity offerings,
provide at least 30% of the supply from renewable sources. Customers not enrolled in a compliant program would be relinquished
back to the local utility at the end of their contract period or, for variable price customers operating on month to month agreements,
at the end of the current monthly billing cycle.
On
March 4, 2016, a group of parties from the REP industry sought and won a temporary restraining order to stay implementation of
the most restrictive portions of the PSC’s order pending a court hearing on those parties’ motion for a preliminary
injunction. On July 25, 2016, the New York State Supreme Court, County of Albany, entered a decision and order granting the Petitioners’
petition, vacated provisions 1 through 3 of the Order, and remitted the matter to the PSC for further proceedings consistent with
the Court’s order.
On
December 2, 2016, the PSC noticed an evidentiary hearing scheduled to take place in 2017 to assess the retail energy market in
New York. That process is underway and is expected to last several months. We are evaluating the potential impact of any new order
from the PSC that would follow from the evidentiary process, while preparing to operate in compliance with any new requirements
that may be imposed. Depending on the final language of any new order, as well as our ability to modify our relationships with
our New York customers, an order could have a substantial impact upon the operations of GRE-owned REPs in New York.
On
July 14, 2016, and on September 19, 2016, the PSC issued orders restricting REPs, including those owned by GRE, from serving customers
enrolled in New York’s utility low-income assistance programs. Representatives of the REP industry challenged the ruling
in New York State Supreme Court, Albany County, and, on September 27, 2016, the court issued an order temporarily restraining
the PSC from implementing the July and September orders. On December 16, 2016, the PSC issued a prohibition on REP service to
customers enrolled in New York’s utility low-income assistance programs. As part of a stipulated schedule upon request of
the REP industry, the PSC agreed to extend the deadlines for compliance with that order until May 26, 2017. That order is under
review in New York State Supreme Court, Albany County.
From
time to time, we receive inquiries or requests for information or materials from public utility commissions or other governmental
regulatory or law enforcement agencies related to investigations under statutory or regulatory schemes, and we respond to those
inquiries or requests. We cannot predict whether any of those matters will lead to claims or enforcement actions.
Investing
Activities
Our
capital expenditures were $0.2 million in the three months ended March 31, 2017 compared to $0.1 million in the three months ended
March 31, 2016.
In
the three months ended March 31, 2017 and 2016, we used cash of $1.1 million and $8.0 million, respectively, for investments in
Afek’s unproved oil and gas property in the Golan Heights in Northern Israel. We had purchase commitments of $35.1 million
at March 31, 2017, of which $31.0 million was for future purchases of electricity, and the remainder included commitments for
capital expenditures and exploration costs. We currently anticipate that our total expenditures for Afek’s exploration costs
and other capital expenditures in the twelve months ending March 31, 2018 will be between $8 million and $10 million.
We
received $0.4 million from an employee for the partial repayment of notes receivable in the three months ended March 31, 2017.
In
the three months ended March 31, 2017 and 2016, cash used for capital contributions to AMSO, LLC was nil and $0.1 million, respectively.
Financing
Activities
In
the three months ended March 31, 2017 and 2016, we paid a Base Dividend of $0.1594 per share on our Series 2012-A Preferred Stock,
or Preferred Stock. The aggregate amount paid in the three months ended March 31, 2017 and 2016 was $0.4 million. On March 29,
2017, our Board of Directors declared a quarterly Base Dividend of $0.1594 per share on our Preferred Stock. The dividend will
be paid on or about May 15, 2017 to stockholders of record as of the close of business on May 4, 2017.
In
the three months ended March 31, 2017 and 2016, we paid a quarterly dividend of $0.075 and $0.06 per share, respectively, on our
Class A common stock and Class B common stock. The aggregate amount paid in the three months ended March 31, 2017 and 2016 was
$1.9 million and $1.5 million, respectively. On May 2, 2017, our Board of Directors declared a quarterly dividend of $0.075 per
share on our Class A common stock and Class B common stock. The dividend will be paid on or about May 19, 2017 to stockholders
of record as of the close of business on May 15, 2017.
In
March 2017, GOGAS purchased from an employee of Afek a 1% fully vested interest in Afek for $0.3 million in cash.
REH
had a Credit Agreement with Vantage Commodities Financial Services II, LLC, or Vantage, for a revolving line of credit for up
to a maximum principal amount of $7.5 million. The principal outstanding incurred interest at one-month LIBOR plus 5.25% per annum,
payable monthly. The outstanding principal and any accrued and unpaid interest was due on the maturity date of October 31, 2017.
In the three months ended March 31, 2017, REH borrowed $10.5 million under the line of credit and repaid $10.0 million. At March
31, 2017, $1.2 million was outstanding under the line of credit.
On
April 4, 2017, GRE, IDT Energy, and other GRE subsidiaries entered into a Credit Agreement with Vantage for a $20 million revolving
loan facility. The borrowers consist of our subsidiaries that operate REP businesses, and those subsidiaries’ obligations
are guaranteed by GRE. On April 4, 2017, the borrowers borrowed $4.3 million under this facility, which included $1.8 million
that was previously outstanding under the credit facility between REH and Vantage. The REH Credit Agreement with Vantage was terminated
in connection with the entry into this credit agreement. The borrowers have provided as collateral a security interest in their
receivables, bank accounts, customer agreements, certain other material agreements and related commercial and intangible rights.
Outstanding principal amount incurs interest at LIBOR plus 4.5% per annum. Interest is payable monthly and all outstanding principal
and any accrued and unpaid interest is due on the maturity date of April 3, 2020. The borrowers are required to comply with various
affirmative and negative covenants, including maintaining a target tangible net worth during the term of the credit agreement.
To date, we are in compliance with such covenants.
In
the three months ended March 31, 2017, we paid $23,000 to repurchase 3,903 shares of our Class B common stock. In the three months
ended March 31, 2016, we paid $29,000 to repurchase 3,096 shares of our Class B common stock. These shares were tendered by our
employees to satisfy tax withholding obligations in connection with the lapsing of restrictions on awards of restricted stock.
Such shares were repurchased by us based on their fair market value on the trading day immediately prior to the vesting date.
In
December 2013, IDT Energy acquired 100% of the outstanding membership interests of Diversegy and IDT Energy Network. In the three
months ended March 31, 2017 and 2016, we paid nil and $0.1 million, respectively, related to these acquisitions. At March 31,
2017, the remaining estimated contingent payments were $0.2 million.
On
March 11, 2013, our Board of Directors approved a stock repurchase program for the repurchase of up to an aggregate of 7.0 million
shares of our Class B common stock. There were no repurchases under the program in the three months ended March 31, 2017
and 2016. At March 31, 2017, 6.9 million shares remained available for repurchase under the stock repurchase program.
As
of April 23, 2012, we and IDT Energy entered into a Loan Agreement with JPMorgan Chase Bank for a revolving line of credit for
up to a maximum principal amount of $25.0 million. The proceeds from the line of credit may be used to provide working capital
and for the issuance of letters of credit. We agreed to deposit cash in a money market account at JPMorgan Chase Bank as collateral
for the line of credit equal to the greater of (a) $10.0 million or (b) the sum of the amount of letters of credit outstanding
plus the outstanding principal under the revolving note. We are not permitted to withdraw funds or exercise any authority over
the required balance in the collateral account. The principal outstanding will bear interest at the lesser of (a) the LIBOR rate
multiplied by the statutory reserve rate established by the Board of Governors of the Federal Reserve System plus 1.0% per annum,
or (b) the maximum rate per annum permitted by whichever of applicable federal or Texas laws permit the higher interest rate.
Interest is payable at least every three months and all outstanding principal and any accrued and unpaid interest is due on the
maturity date of May 31, 2017. We pay a quarterly unused commitment fee of 0.08% per annum on the difference between $25.0 million
and the average daily outstanding principal balance of the note. In addition, as of April 23, 2012, GEIC issued a Corporate Guaranty
to JPMorgan Chase Bank whereby GEIC unconditionally guarantees the full payment of all indebtedness of ours and IDT Energy under
the Loan Agreement. At March 31, 2017, there were no amounts borrowed under the line of credit, and cash collateral of $10.0 million
was included in “Restricted cash—short-term” in the consolidated balance sheet. In addition, at March 31, 2017,
letters of credit of $6.1 million were outstanding.
Contractual
Obligations and Other Commercial Commitments
The
following tables quantify our future contractual obligations and other commercial commitments at March 31, 2017:
Contractual
Obligations
Payments
Due by Period
(in millions)
|
|
Total
|
|
|
Less than
1
year
|
|
|
1—3 years
|
|
|
4—5 years
|
|
|
After
5 years
|
|
Purchase obligations
|
|
$
|
35.1
|
|
|
$
|
27.8
|
|
|
$
|
7.3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Renewable energy credit purchase obligations
|
|
|
40.0
|
|
|
|
12.4
|
|
|
|
19.9
|
|
|
|
7.7
|
|
|
|
—
|
|
Revolving line of credit (1)
|
|
|
1.2
|
|
|
|
1.2
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Operating leases
|
|
|
0.4
|
|
|
|
0.2
|
|
|
|
0.2
|
|
|
|
—
|
|
|
|
—
|
|
Other liabilities (2)
|
|
|
0.3
|
|
|
|
0.3
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
TOTAL CONTRACTUAL OBLIGATIONS (3)
|
|
$
|
77.0
|
|
|
$
|
41.9
|
|
|
$
|
27.4
|
|
|
$
|
7.7
|
|
|
$
|
—
|
|
|
(1)
|
The
above table includes principal outstanding at March 31, 2017, expected interest payments
and expected unused commitment fees.
|
|
(2)
|
The
above table does not include estimated contingent payments of $0.2 million in connection
with the acquisition of Diversegy and IDT Energy Network due to the uncertainty of the
amount and/or timing of any such payments.
|
|
(3)
|
The
above table does not include our unrecognized income tax benefits for uncertain tax positions
at March 31, 2017 of $0.7 million due to the uncertainty of the amount and/or timing
of any such payments. Uncertain tax positions taken or expected to be taken on an
income tax return may result in additional payments to tax authorities. We are not currently
able to reasonably estimate the timing of any potential future payments. If a tax authority
agrees with the tax position taken or expected to be taken or the applicable statute
of limitations expires, then additional payments will not be necessary.
|
Other
Commercial Commitments
Payments
Due by Period
(in millions)
|
|
Total
|
|
|
Less than
1 year
|
|
|
1—3 years
|
|
|
4—5 years
|
|
|
After
5 years
|
|
Standby letters of credit (1)
|
|
$
|
6.2
|
|
|
$
|
4.7
|
|
|
$
|
1.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
(1)
|
The
above table does not include an aggregate of $10.0 million in performance bonds at March 31, 2017 due to the uncertainty of
the amount and/or timing of any payments.
|
Off-Balance
Sheet Arrangements
We
do not have any “off-balance sheet arrangements,” as defined in relevant SEC regulations that are reasonably likely
to have a current or future effect on our financial condition, results of operations, liquidity, capital expenditures or capital
resources, other than the following.
GRE
has performance bonds issued through a third party for the benefit of various states in order to comply with the states’
financial requirements for retail energy providers. At March 31, 2017, GRE had aggregate performance bonds of $10.0 million outstanding.
On
October 28, 2011, we were spun-off by IDT (the “Spin-Off”). In connection with our Spin-Off, we and IDT entered into
various agreements prior to the Spin-Off including a Separation and Distribution Agreement to effect the separation and provide
a framework for our relationship with IDT after the Spin-Off, and a Tax Separation Agreement, which sets forth the responsibilities
of us and IDT with respect to, among other things, liabilities for federal, state, local and foreign taxes for periods before
and including the Spin-Off, the preparation and filing of tax returns for such periods and disputes with taxing authorities regarding
taxes for such periods. Pursuant to Separation and Distribution Agreement, among other things, we indemnify IDT and IDT indemnifies
us for losses related to the failure of the other to pay, perform or otherwise discharge, any of the liabilities and obligations
set forth in the agreement. Pursuant to the Tax Separation Agreement, among other things, IDT indemnifies us from all liability
for taxes of IDT with respect to any taxable period, and we indemnify IDT from all liability for taxes of ours with respect to
any taxable period, including, without limitation, the ongoing tax audits related to our business.
|
Item 3.
|
Quantitative
and Qualitative Disclosures About Market Risks
|
Our
primary market risk exposure is the price applicable to our natural gas and electricity purchases and sales. The sales price of
our natural gas and electricity is primarily driven by the prevailing market price. Hypothetically, if our gross profit per unit
in the three months ended March 31, 2017 had remained the same as in the three months ended March 31, 2016, our gross profit from
electricity sales would have increased by $6.7 million in the three months ended March 31, 2017 and our gross profit from
natural gas sales would have decreased by $2.1 million in that same period.
The
energy markets have historically been very volatile, and we can reasonably expect that electricity and natural gas prices will
be subject to fluctuations in the future. In an effort to reduce the effects of the volatility of the price of electricity and
natural gas on our operations, we have adopted a policy of hedging electricity and natural gas prices from time to time, at relatively
lower volumes, primarily through the use of put and call options and swaps. While the use of these hedging arrangements limits
the downside risk of adverse price movements, it also limits future gains from favorable movements. We do not apply hedge accounting
to these options or swaps, therefore the mark-to-market change in fair value is recognized in cost of revenue in our consolidated
statements of operations.
The
summarized volume of GRE’s outstanding contracts and options at March 31, 2017 was as follows (MWh – Megawatt hour
and Dth – Decatherm):
Commodity
|
|
Settlement
Dates
|
|
Volume
|
Electricity
|
|
April
2017
|
|
16,000
MWh
|
Electricity
|
|
June
2017
|
|
153,120
MWh
|
Electricity
|
|
July
2017
|
|
334,000
MWh
|
Electricity
|
|
August
2017
|
|
420,900
MWh
|
Electricity
|
|
September
2017
|
|
75,200
MWh
|
Electricity
|
|
October
2017
|
|
241,120
MWh
|
Electricity
|
|
November
2017
|
|
213,360
MWh
|
Electricity
|
|
December
2017
|
|
283,200
MWh
|
Electricity
|
|
January
2018
|
|
362,560
MWh
|
Electricity
|
|
February
2018
|
|
329,600
MWh
|
Electricity
|
|
March
2018
|
|
179,520
MWh
|
Electricity
|
|
April
2018
|
|
67,200
MWh
|
Electricity
|
|
May
2018
|
|
70,400
MWh
|
Electricity
|
|
June
2018
|
|
67,200
MWh
|
Electricity
|
|
July
2018
|
|
67,200
MWh
|
Electricity
|
|
August
2018
|
|
73,600
MWh
|
Electricity
|
|
September
2018
|
|
60,800
MWh
|
Electricity
|
|
October
2018
|
|
147,200
MWh
|
Electricity
|
|
November
2018
|
|
134,400
MWh
|
Electricity
|
|
December
2018
|
|
128,000
MWh
|
Natural
gas
|
|
October
2017
|
|
200,000
Dth
|
Natural
gas
|
|
November
2017
|
|
1,100,000
Dth
|
Natural
gas
|
|
December
2017
|
|
700,000
Dth
|
Natural
gas
|
|
February
2018
|
|
888,400
Dth
|
Natural
gas
|
|
March
2018
|
|
600,000
Dth
|
|
Item 4.
|
Controls
and Procedures
|
Evaluation
of Disclosure Controls and Procedures.
Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness
of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934,
as amended), as of the end of the period covered by this Quarterly Report on Form 10-Q/A. Based on this evaluation, our Chief
Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as
of March 31, 2017 because of material weaknesses in our internal control over financial reporting relating to (1) the estimation
of weather impact on our estimated unbilled revenue, and (2) management review controls associated with the completeness and accuracy
of computations relating to domestic and foreign income tax accounts and disclosures.
Estimation
of Weather Impact on Estimated Unbilled Revenue.
On November 1, 2017, the management and Audit Committee of our Board of Directors
concluded that our previously issued financial statements for the quarters ended March 31, 2017 and June 30, 2017 should no longer
be relied upon because of errors related to the timing of revenues and cost of revenues recorded in these quarters that resulted
in material misstatements of income from operations, net income and earnings per share. Additionally, our earnings and press releases
and similar communications should no longer be relied upon to the extent that they relate to our financial statements for those
periods. In the quarter ended March 31, 2017, the errors caused an understatement of revenue by $2.0 million, of gross profit
and income (loss) from operations by $1.2 million, and net income by $1.1 million. The errors caused an overstatement by the same
amounts in the quarter ended June 30, 2017, resulting in no impact for the six-month period ended June 30, 2017.
Management
has concluded that there are material weaknesses in internal control over financial reporting, as we did not maintain effective
controls over the process related to the estimation of weather impact on our estimated unbilled revenue. This estimation process
is performed in an effort to allocate billings to a calendar period using historical consumption data of the customer base of
the retail energy providers operated by us and applying a weather factor to estimated unbilled amounts. The weather adjustment
was erroneous, causing understated amounts of estimated unbilled commodity consumption, resulting in under estimates of revenues
and cost of revenues to be included in the quarter ended March 31, 2017. The nature of the estimation processes is reversing,
as actual billings representing the unbilled estimates manifest in the following period, in this case, in April 2017. The reversal
of this estimate resulted in commodity consumption and the associated revenues and cost of revenues to be overstated in the quarter
ended June 30, 2017. The cumulative operating results for the six months ended June 30, 2017 were unaffected.
We
have begun implementing the following measures to remediate the material weakness and improve our internal control over financial
reporting:
|
●
|
Enhanced
the review process of the inputs into the schedules for the weather adjustment to estimated unbilled revenue;
|
|
|
|
|
●
|
Enhanced
the schedules used for the weather adjustments to improve the review of the inputs; and
|
|
|
|
|
●
|
Key
members of management will meet each month to review the estimated consumption amounts to assess whether results are in-line with
expectations.
|
Management
Review Controls Associated with the Completeness and Accuracy of Computations Relating to Domestic and Foreign Income Tax
Accounts and Disclosures.
This material weakness was initially identified as of December 31, 2016.
We
have begun implementing the following measures to remediate the material weakness and improve our internal control over financial
reporting:
|
●
|
Engaged
an independent third party to assist in preparation of and perform a comprehensive review of tax calculations and related
disclosures;
|
|
|
|
|
●
|
Enhance
the review of calculations and disclosure of deferred income tax balances;
|
|
|
|
|
●
|
Implement
additional internal analytical procedures to validate tax accounting tax-related balances; and
|
|
|
|
|
●
|
Enhance
internal documentation support related to the Company’s tax position.
|
Management
and our Audit Committee will monitor these remedial measures and the effectiveness of our internal controls and procedures.
Notwithstanding
these material weaknesses, we have performed additional analyses and other procedures to enable management to conclude that our
financial statements included in this Form 10-Q/A fairly present, in all material respects, our financial condition and results
of operations as of and for the three months ended March 31, 2017.
Changes
in Internal Control over Financial Reporting.
There were no changes in our internal control over financial reporting
during the quarter ended March 31, 2017 that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.