Genie Energy (GNE) Q1 2014 Results - Earnings Call Transcript

| About: Genie Energy (GNE)

Genie Energy Ltd. (NYSE:GNE)

Q1 2014 Earnings Conference Call

May 7, 2014 08:30 a.m. ET


Geoffrey Rochwarger – Genie Energy's Vice Chairman and CEO of IDT Energy

Avi Goldin – CFO

Michael Stein – SVP Operations and Corporate Development at Genie Energy Ltd.

Michael Jonas – Executive Vice President of Genie Oil & Gas

Terry Stronz – IDT Energy Chief Financial Officer


Marco Rodriguez – Stonegate Securities

George Spindler


Good morning and welcome to Genie Energy’s First Quarter 2014 Earnings Conference Call. All participants will be in a listen-only mode. (Operator instructions) After today’s presentation by Genie Energy’s management there will be an opportunity to ask questions. (Operator instructions).

In this presentation Genie Energy’s management team will discuss financial and operational results for the three-months ended March 31, 2014.

Any forward-looking statements made during this conference call, either in the prepared remarks or in the Q&A session, whether general or specific in nature are subject to risks and uncertainties that may cause actual results to differ materially from those which the company anticipates. These risks and uncertainties include but are not limited to specific risks and uncertainties discussed in the reports that Genie Energy files periodically with the SEC.

Genie Energy assumes no obligation, either to update any forward-looking statements that they have made or may make or to update the factors that may have caused actual results to differ materially from those that they forecast. Please note that the Genie Energy earnings release is available on the investor relations page of the Genie Corporation website, The earnings release has also been filed on a Form 8-K with the SEC.

Please note this event is being recorded. I will now turn the conference over to Geoff Rochwarger, Genie Energy's Vice Chairman and CEO of IDT Energy. Please go ahead, Mr. Rochwarger.

Geoffrey Rochwarger

On behalf of our Chairman and CEO, Howard Jonas, and the entire Genie management team I want to welcome you to our first quarter 2014 earnings call, and thank you for your interest in the company.

The first quarter was characterized by continued progress on the Genie Oil and Gas side of the business, and as well by an extremely challenging environment on the retail energy side. For those of you who are new to our company, Genie Oil and Gas is an early-stage development of three oil shale projects on the western slope of Colorado, in Central Israel and in Mongolia. These are long-term projects with tremendous upside potential, but commercial operations are at best several years in the future.

In addition, we are in the process of characterizing a potentially significant tight oil resource in northern Israel pursuant to an exploration license granted to us last year by the Israeli Energy Ministry. The latter project, which is managed by our Israel-based Afek subsidiary has potentially a much shorter time frame to commercial development. Although at this point the nature of the resource remains in question, and all aspects of the project are contingent upon licensing of regulatory approvals, we are extremely excited about its potential.

Afek has completed its above ground geo-physical testing, including an electromagnetic survey in the reprocessing of 2-D seismic data. While the company has done a considerable amount of analysis on the data, including consultation with outside experts, we won’t be certain about the nature of the resource not be able to asses its commercial prospects until we have data from at least several exploratory wells.

During the first quarter, we continued preparations for the exploratory drilling program. We submitted an application to permit a 10-well 36-month drilling program and the public commentary has now expired. Assuming timing in issuance of the permit, we would seek to begin drilling our first exploratory well most likely in the second half of this year. On our oil shale projects, we continue along the trajectory we discussed in previous calls. We are happy to discuss their status during Q&A if someone wants to delve into the details on one or more of these projects.

I will now address the retail side of the business. When reporting last quarter, we stated that because of the sharp increases in wholesale gas and electric prices associated with the extreme winter weather in January and February, now commonly referred to as the polar vortex, we anticipated a significant increase in the churn rate and material substantial reductions in Genie Energy’s profits in the first quarter of 2014, compared to the first quarter of 2013.

Unfortunately, our guidance proved to be accurate. Avi Goldin, Genie’s CFO, will discuss the financial implications of the polar vortex, and the steps we have taken in response to the impact on our customers. But I want to make several operational points clear as you think about the longer term implications for our business.

First, I believe that the entire utility industry, including electricity generators, energy distributors and transport service companies failed the consumer in this difficult period. No one should have to open their mailbox to find that their electric rates have doubled, tripled, or quadrupled from the previous month as many business and homeowners in the Northeast did this past winter.

I believe the entire energy industry, ourselves included, can and must do much better. This winter’s wholesale price spikes were unlike anything we have seen in our nine years in this business, and probably unlike anything that even more experienced industry veterans have seen during their entire careers. We have seen extreme cold spells before, but never was the market as unprepared as it was this year. A confluence of several material issues in January and February associated with this past winter’s polar vortex, including extreme and sustained cold weather, failures to deliver full demanded power by the ISOs and erratic commodity trading in the financial markets drove price spikes in both the wholesale electricity and natural gas markets, where IDT Energy and other retail providers purchase their supply.

In some regions, wholesale prices increased briefly by factors of more than eight. IDT Energy abided by all legal and regulatory requirements and we are working closely with regulators as they investigate where the breakdowns (inaudible) human process occurred. We applaud their efforts to expose the root causes behind the cost spikes, and to call into account those companies that sought to take advantage of the end consumer.

It is our only hope that in doing so, regulators refrain from following the path of overcorrection, and instead work so that free competitive markets are able to provide adequate supply to meet peak demand at reasonable prices through real freedom of consumer choice. Once the magnitude of the problem became clear, we responded correctly and responsibly. We sharply reduced our margins to cushion the impact of the commodity price increases, and then provided rebates to hard hit customers. All in all, we have been rebating approximately $3.5 million to customers this spring, and have forfeited operating profits from the quarter’s operations.

Because we do not lock our customers into our variable-rate programs, we don’t charge any termination fees. We provided rebates even to recipients who opted to migrate back to their respective utilities. Going forward, we are taking a hard look at our business and will be doing something differently in light of the inability of the wholesale energy market to meet peak demand levels at reasonable prices.

Most importantly, we are developing new products that will provide customers at their choosing, with the option to limit their exposure to future price spikes through fixed prices and/or cap rates. These products, even when carefully hedged entail additional commodity price risk. Minimizing that risk has always been a key to longevity and success of IDT Energy. But the market is evolving and our product offerings have to evolve with it. With these new products, we will be assuming somewhat more commodity risk, but will do so in a carefully controlled, monitored and appropriate way. While this represents a slight departure from our tenured and tightly managed business model, we will be entering it with our prudent risk adverse approach throughout the industry.

These new products notwithstanding, we continue to observe that within our targeted customer segment, presidential small-business customers, the consumer appetite for pure variable-rate plans coupled with the freedom to choose without terms and fees remain strong even after the polar vortex. It will continue to be our core offering for the foreseeable future.

Informed and educated consumers understand that a pure variable rate plan will likely save their money over a longer time frame, notwithstanding the potential for any frequent wide price swings. Despite this rough quarter, our retail business continues to have a strong growth trajectory. I say this keeping in mind that our customer base declined throughout 2013 primarily due to a lack of geographic expansion, and that churn accelerated in the first quarter when our monthly average churn rate jumped to 7.2% compared to 6.3% in the prior quarter.

There are several important factors that will drive growth over the long term. First, the jump in churn during the first quarter resulted from the disparity in prices between those of variable-rate suppliers like IDT Energy compared to the rate offerings of the utilities. That impact may spillover into the second quarter because of the lag that exists from when meters are read and the resulting [dose] received by those customers. However, later this year, we expect that this disparity will work in our favor as the utilities may seek to recover their winter related energy costs ex post facto.

In fact, a number of utilities have already requested substantial rate increases, while others have sought to add less visible fees and surcharges to cover the extraordinarily high cost of supply this winter. Also for the first time in at least the last year and a half we have meaningful opportunities for geographic expansion. In the first quarter, we finally received regulatory approval to enter new natural gas utility territories in Pennsylvania, Maryland and the Districts of Columbia. Over the next quarter, we expect to conduct tests within these utilities with the goal of beginning service at the end of the year.

Additionally this quarter, we began to gain traction in the ComEd territory in Illinois, where we have been test marketing for some time and we see the potential for strong growth there. In addition, Massachusetts is moving towards a (inaudible) program, and an appropriately deregulated retail market, and we maybe in a position to initiate operations there in the next 12 months.

As I mentioned earlier, we are developing new fixed rate offerings that will help broaden our appeal in the marketplace, and are developing a new brand that will debut later this year focused on these plans. Finally, as we discussed previously, we believe that our newly acquired network marketing subsidiary, Afek, will become a driver of new meter growth in our existing territories before the end of the year.

So to sum up for IDT Energy, it was a rough quarter for our customers. Recognizing our share of the responsibility we stepped up and initiated strategies to do the right things for them and as a result it was a rough quarter for IDT Energy’s finances as well. Looking ahead, we are focused on growth initiatives to meet the evolving needs of the marketplace. We’re going to give consumers, who don’t want the risk inherent in fully variable rates with options that will limit their exposure to future price increases, while carefully managing the additional commodity risk that shifts to us.

We have strong prospects for future meter growth and expansion on our plate resulting from the opportunities that I previously discussed. All in all, we remain optimistic and excited about the year ahead.

Now I will turn the call over to Genie Energy’s Chief Financial Officer, Avi Goldin.

Avi Goldin

Thank you, Geoff and thanks to everyone on the call for joining us this morning. My remarks will cover our financial results for the first quarter of 2014, except where indicated otherwise, all comparisons in my remarks are to the results for the comparable year ago period, the three months ended March 31, 2013.

I like to start by addressing a few key items. As we mentioned on the last call and as Geoff discussed in some detail in his remarks, IDT Energy was materially impacted by extreme weather in the early part of the quarter. In addition to the lower gross profit and EBITDA resulting from the hit to our margins and the cost of the rebates we provided we saw a substantial increase in the non-cash working capital on our balance sheet.

We bought commodity at higher prices for a substantial portion of the corresponding revenue was in Accounts Receivable, which increased by $34 million at quarter end. This resulted in the use of cash of $29.7 million in the quarter. Virtually all of our receivables are guaranteed by utilities under [PLR] programs. We have already collected a significant portion of this amount since the close of the quarter.

Additionally, we have changed the way that we define adjusted EBITDA within our quarterly reports and communication to exclude the impact of stock based compensation. We feel that this will provide investors with a more accurate view of the company’s quarterly performance. As in prior quarters, IDT Energy accounted for all of Genie’s revenue, cost of goods sold and gross profit. On a consolidated basis, IDT Energy’s revenue increased to $130.3 million from $85.3 million.

An unusually severe winter associated with the polar vortex resulted in significant increases in both commodity prices and consumption per customer. Sales of electricity increased to $96 million from $54.6 million as average revenue per kilowatt hour sold increased 94.9% and consumption per meter increased 7.8%. On the gas side, sales increased to $34.3 million from $30.7 million in the year ago period.

Revenue per therm sold increased 13.7% and consumption per gas meter increased by 16.7%. Despite the substantial increases in revenue, gross profit fell to $9.9 million from $19 million as we reduced our gross profit margin significantly, and issued rebates to cushion the impact of the underlying commodity price increases. The average cost per kilowatt hour increased 118.5% compared to the year ago period and the average cost per therm increased 52.2%. As a result, our gross profit margin on electric sales decreased to 9.1% from 19%, and the gross profit margin on gas sales decreased to 3.2% from 28.2%.

Keep in mind that the increase in commodity cost per kilowatt hour and per therm are the aggregate for all three months. In general, the cost increases in January and February were much higher than in March. At some points of peak demand, the cost of electricity at certain markets spiked by a factor of over eight times.

On a consolidated basis SG&A expense increased to $14.3 million from $12.8 million. IDT Energy’s SG&A expense increased to $10.8 million from $10.2 million, primarily reflecting the increase in purchase of receivable fees associated with the higher levels of revenue this quarter, which was offset by a decline in meter acquisition expense.

SG&A expense at GOGAS was unchanged at $300,000, while R&D expense was $2.1 million compared to $2.5 million in the first quarter of 2013. The decrease in R&D expense primarily reflects reduced spending at IEI, which continues to work its way through the permitting process for its oil shale pilot test. Corporate SG&A increased $3.1 million from $2.3 million, primarily reflecting increased non-cash compensation, which totaled $1.6 million compared to $700,000.

At GOGAS, equity and the net loss of AMSO was zero compared to 1.1 million. As I mentioned last quarter, under the terms of our joint venture with Total, we have the right to not fund our share of AMSO’s projected cost, which is currently 35% of the total expense incurred. We elected not to fund the capital cost of the first and second quarters of 2014, which were $1.7 million in the aggregate. Total made the funding on our behalf, thereby diluting our equity stake in the project from 50% to approximately 47%, which also reduces our share of future funding proportionately.

Adjusted EBITDA on a consolidated basis was a loss of $4.6 million compared to adjusted EBITDA of $3.6 million in the year ago quarter. As I mentioned previously, our adjusted EBITDA figures now exclude stock based compensation for all periods presented. Adjusted EBITDA at IDT Energy was a negative $800,000 reflecting the impact of the winter polar vortex on our gross profit. The adjusted EBITDA loss at GOGAS was $2.3 million compared to $3.9 million, primarily reflecting the decision not to fund AMSO LLC’s capital cost and the reduced R&D expense.

Genie did not incur significant depreciation or amortization expenses during the quarter. On a consolidated basis, our loss from operations was $6.5 million compared to income from operations of $2.6 million in the first quarter of 2013. The loss from operations at IDT Energy was $900,000 compared to income of $8.9 million a year ago. And the loss due to corporate overhead was $3.1 million, including non-cash compensation of $1.6 million compared to a loss of $2.3 million, which included 700,000 of non-cash compensation.

Interest expense, financing fees and other income was $800,000 compared to $1 million in the year ago period. The benefit from income taxes was $200,000 in the first quarter compared to a provision for income taxes of $1.7 million a year ago. Adjusting for non-controlling interest in net loss attributable to Genie shareholders after preferred stock dividends was $7.1 million or $0.33 per fully diluted share, compared to a loss of $1.8 million, or $0.09 per diluted share in the year ago quarter.

Net cash used in operating activities in the first quarter was $29.7 million versus $800,000 a year ago. As explained before, this reflects primarily an increase in accounts receivable, which grew over $33 million. We have already collected a significant portion of this amount since the close of the quarter and expect the accounts to be at normalized levels in the coming quarters.

Working capital at March 31 was $100.2 million compared to $105.8 million at the end of 2013. In summary, despite a rough quarter due to the polar vortex, Genie Energy continues to have a strong balance sheet in an excellent position to finance the continued investment needed to grow IDT Energy and to fund GOGAS’ near-term research, permitting and exploration expenses even as we continue to pay a steady dividend on our preferred shares.

Prior to turning the call over for questions it is my pleasure to introduce Michael Stein and Michael Jonas, who will share some remarks. Michael Stein is our new Senior Vice President of Operations and has taken a leadership role within the strategy and corporate development efforts. Michael Jonas is an Executive Vice President who has been instrumental in managing our Mongolia operations as well as other projects.

Michael Stein

As this is my first time addressing this call, I would like to introduce myself. My name is Michael Stein. I am proud to be the SVP of Operations at Genie Energy, a position I took on full time in January. I hope all those who are listening are as confident about Genie’s prospects as we are.

On April 10, posted an article called should you get rid of Genie Energy now. The conclusion of the article was that it may not be a good decision to keep this stock in your portfolio anymore, at least if you don’t have a long-term horizon to wait. I would like to take a few minutes of your valuable time to explain why those this author’s advice have lost confidence in our company, made a big mistake and will lose out on a great opportunity.

So many early stage E&P companies face difficult challenges on the start-up. We often have a hard time finding the talent willing to take the risk of starting a new venture. They face capital needs and the constant needs by route of equity stakes at unattractive valuations until they achieve a discovery and can implement real valuations and be self-sufficient and profitable.

They can also find it difficult to work in foreign countries that have regulatory frameworks so different from that of the U.S. as they do not have the resources or experience to navigate those waters. Genie despite its young age has managed to avoid those typical growing things. We boast an unparalleled technical team led by doctors Harold Vinegar and (inaudible), who are supported by a world-class team that no early stage company could hope to have.

Our first-rate lab team at (inaudible) works day in and day out to understand the geology of our license areas and to come up with more efficient production methods. Genie Oil and Gas had the financial support of its sister division, IDT Energy, which had its own attractive growth prospects and new sales channels to explore. We have a healthy balance sheet with capital being deployed to pursue opportunities without a delay and excessive dilution of fundraising.

We have been joined by many investors and enjoy the guidance of an impressive advisory board. We have managed to accumulate licenses for prime acreage in the US and abroad for all of our projects by demonstrating regulatory experience, technical expertise and comprehensive geological understanding. In Northern Israel, we believe that our licensed exploratory acreage of 396.5 square kilometers is home to an energy resource, whose development could have a short horizon by energy project standards and certainly when compared to our oil shale projects.

We have spent the time since we were granted our license conducting surface surveys of the acreage. We remain extremely enthusiastic about the project. Of course, we will not know for sure what lies in the subsurface until it is drilled, but when several leading experts in their fields are enthusiastic, we can’t help but share that excitement. In our oil shale projects, we continue to invest time and resources in making our production technology more efficient by adding patents in many jurisdictions and by getting closer to final permitting in Israel and a commercial agreement in Mongolia.

After a difficult winter for all retail energy providers offer variable rate plans, IDT Energy is putting renewed focus on growth opportunities. The management remains not only optimistic and hopeful, but honestly excited about the growth ahead. The difficult operating environment will (inaudible) allow weak operators, who are not able to adapt to the needs of a varied customer base, there are many new companies with the opportunity to gain more market share. The (inaudible), we should all thank the author of that article for giving us added motivation to prove him and other detractors wrong.

I will now turn over the call to my colleague, Michael Jonas, Executive Vice President of Genie Oil & Gas.

Michael Jonas

Good morning ladies and gentlemen. My name is Michael Jonas, and I serve as Executive Vice President of Genie Oil & Gas. I spend most of my time spearheading our project in Mongolia, and I am also involved on various levels with Genie Oil & Gas’ other development projects.

As with all companies seeking to develop new technologies and access natural resources in new ways, Genie Oil & Gas faces significant challenges from a variety of directions. While we have an excellent team and have identified exciting prospects and we are confident that we will not only persevere but drive. For the past few years, we have embarked on a long-term project to produce oil and gas in a clean and affordable manner from the world’s abundant oil shale resources.

We have assembled a scientific team of recognized world experts and are one of the companies leading in this space. Genie Oil & Gas entered the industry in 2008 and we are now actively working on four projects across the globe. We have also developed key skills at finding new resources and opportunities that are overlooked by the engineers and geologists of others in the industry, and our business development team is committed to identifying and developing the different projects in our pipeline.

All of our projects are progressing, (inaudible) but always focusing on the ultimate goals. In Israel, as Geoff mentioned, we are continuing with the regulatory process for our oil shale pilots and are hoping to shortly receive all the necessary permits for exploratory drilling programs in the northern part of the country.

In Colorado, our project is focused on evaluating various approaches to shift the shale (inaudible) to restart our pilot. In Mongolia, we are continuing our exploration opportunities and are very encouraged by our findings to date. We continue to plan for the pilot facility in Mongolia, while at the same time we are looking to expand our acreage and we continue to work with the government authorities to ensure the necessary regulatory infrastructure is in place.

It seems that the market does not properly appreciate the value in the Genie Oil & Gas side of Genie’s business, and some of that is likely due to a lack of effective communication. We need to balance competing concerns. Keeping our shareholders informed about the developments in our project, (inaudible) and misconceptions as the timing of probabilities of success and protecting our trade secrets have their advantages.

We pledge to keep trying to achieve the best balance while providing accurate and meaningful information so the investment community will better understand what we’re doing and what the road ahead looks like.

When you are investing in Genie, you are investing in a company with a very bright future. While long journeys often include difficult and dark passages, the light is always brightest when you emerge. We encourage you to stay with us for the entire journey and sharing the ultimate rewards, and to offer [guidance] we are joined today by Terrence Stronz, CFO of IDT Energy, to take your questions. And again have a nice day.

Question-and-Answer Session


Thank you, we will now begin the Question-and-Answer session. (Operator Instructions). Our first question comes from Marco Rodriguez from Stonegate Securities. Please go ahead sir.

Marco Rodriguez – Stonegate Securities

Good morning. Thank you for taking my questions. I was wondering if you could talk a little bit about what’s the ITD Energy size first, in your press release you talked about temporarily suspending some acquisition efforts in the quarter. Was this driven by any sort of regulatory issues or what was kind behind that decision?

Geoffrey Rochwarger

Hi, it’s Geoff. No, this was not driven by any regulatory factors. It was driven by our thought process that at least in the hardest hit of four main utilities in Pennsylvania were the largest share of the price increases were felt by the customers. We wanted to take a step back for a little while, work on the programs that we did and bringing additional value to those customers with rebates, with some refunds and rate relief. But we do expect shortly within this next quarter to resume marketing in those four territories and that will probably be actually introductory ground for some of our new products starting with a fixed rate program within the coming weeks and months or so.

Marco Rodriguez – Stonegate Securities

Okay. So those areas that you stopped acquiring [leaders], you are still suspending any sort of efforts right there and when do you expect in the quarter to kind of start that up again?

Geoffrey Rochwarger

I expect within a month or so to resume marketing activities there. We will probably launch it a little bit more slowly than we would normally start in a new territory just because there is obviously customer sensitivity there. But we expect to start full marketing that's only during the quarter, probably the later end of the quarter.

Marco Rodriguez – Stonegate Securities

Got it. And you also mentioned about the ComEd territory Illinois kind of gained traction, can you discuss with the market size opportunity is there by RCs or [leaders]?

Terry Stronz

Hi, this is Terry Stronz, I think the total ComEd market size is little over $2 million, so it's a pretty good size territory, now some of those in that territory there are some municipality agreements, some aggregation that's already taken place but still it's a very good size opportunity for us.

Marco Rodriguez – Stonegate Securities

Got it and are you going to be when you are – I believe you said you are still testing up that market, are you going to be launching here with all the new products that might provide this fixed pricing for customers?

Geoffrey Rochwarger

Okay. I am sorry. It is our goal to ultimately release a version of a fixed rate product maybe variable rate product with the Cap rate possibly even something that we would call a 12 month promotion guaranteed rate program. It is ultimately our thought process that so long as we see customer appetite, number one, for that type of product and number two, that we can do that, we can offer that program without taking on additional material exposure and risk to the commodity side of the market, we will – that is something that we will slowly launch in market, say certainly given what has just happened with the polar vortex in the northeast specifically in terms of any and we do believe that this is the right market, these are the right for utilities to start introducing these products and it will also serve as a good test market for us to really make sure that we are comfortable releasing that in additional markets.

Marco Rodriguez – Stonegate Securities

Okay, so launching these new products if I am understanding you correctly is going to be in Maryland Pennsylvania, Illinois and New York or not New York?

Geoffrey Rochwarger

So right now the only specific plans we have are to just start off with the full utilities in Pennsylvania, our thought process is assuming that goes well. We probably expand it to the full state of Pennsylvania and then from there we do not yet have the states that are on a prioritized basis in terms of launch but again I believe that so long as we can offer this out there and there is demand for it, and we find that we can offer it without additional material exposure, yes ultimately we would look to expand this offering to all of our markets.

Marco Rodriguez – Stonegate Securities

Got it, understood. Are there any sort of regulatory hurdles that you need to crossover in order to promote these new products in these new markets or in these existing markets, excuse me?

Terry Stronz

Really the main hurdles really in administrative manner where as with any new offering we would need to put in place a contract that lays out these specific terms that contract would have to be approved by the PC or the PSC in any state. There are ways to certainly in terms of how we release the product if it's released as a fixed rate, there are some additional administrative hurdles that just take time factor, if it's a promotional rate or guaranteed rate or a Capped rate, we can really – we can fairly, quickly release that with a minor modification of our terms and conditions. So I don't see that as at this point that that’s not going to prevent us or slow us down.

Marco Rodriguez – Stonegate Securities

Understood. And what are sort of the expectations you guys are thinking about from an EBITDA standpoint for IDT Energy in fiscal 2014?

Terry Stronz

So we are not putting out an official number at this point but we have always talked about sort of that $25 million target. I think it's fair to say that given what we have experienced in the first quarter it's unlikely that we will hit that within this calendar year but that being said we still believe that absent, more extreme types of weather environments such as what we are experienced now and given the growth initiatives that Geoff and Terry have been describing that we will quickly be able to return to that level.

Marco Rodriguez – Stonegate Securities

Understood. And then kind of shifting gears here to Afek, you mentioned here that the community there is reviewing public comments now and you are expecting, assuming a timely approval to start exploratory drilling in the second half of this year, can you maybe talk a little bit about what might arise from those public comments of what you have seen thus far that could cause this timeframe to be delayed?

Geoffrey Rochwarger

Sure. I think that – so the public commentary expired last week in the middle of the week. And there is probably some 800 or so informal, individual comments that were raised with the municipality which is not a number that on a hold that that concerns us and thus far as the municipality and the council sort through those comments. There has more in direct dialog with them almost on a real time basis. There is nothing that’s brought to our attention as of yet that causes any concern I think that probably at this point I think the only expectation is that to call through those issues to make sure that they are addressed in the right manner that will probably delay slightly the final primitive approval from where we originally thought. I don't believe that it will be a – I don't believe that we are talking about a material at the time, I think that we are still on track as we have said in the prior quarter and that we expect to receive the permit, the final permit and in the second quarter of this year to start our drilling program. I think that we are still even given what we have seen now we are still on track for that.

Marco Rodriguez – Stonegate Securities

Okay and then the kind of the time line that you outlined there to start the drilling, is that based on sort of a historical standard if you will or is that kind of a best case scenario excuse me.

Geoffrey Rochwarger

I think that it's I would probably call it what we feel is a realistic scenario based on where we are right now in terms of the permitting process, number one, based on our operational readiness as we have been started work in parallel to these permit proceeding, preparing ourselves working very closely with the rig company in terms of mobilizing the rig for shipping, the ancillary drilling services, site preparation. So I think that we have tried as best as possible to balance the reality of wherever things stands right now and where we think it will be within the next few months and short of something that is – something that occurs out of our control, I think that we should be on target.

Marco Rodriguez – Stonegate Securities

Got it and then in Mongolia, can you give us a sense of as far as where you might be with the government on framing this regulatory framework to kind of proceed there? Are we still kind of in first innings here?

Avi Goldin

This is Avi. We are still in the similar position to where we were as we’ve been discussing this process, we have been working very closely with the government on helping them look to draft and implement the series of regulations that we feel will be necessary to spur the development of these resources. That being said, the license that we do have this [geological] survey gives us fair amount of operating latitude and which tools to look for and identify promising basins and the ability to then take that to the government and discuss with them to sort of finalize the form of the commercial framework before we would move forward. So what’s holding us back right now has been similar to sort of some of the things we’d experience therefore sometime. But we are seeing some progress and we are seeing some indications that the things are moving in the right direction.

Marco Rodriguez – Stonegate Securities

Got it and last question, I will jump back in queue on and so this is the second quarter in a row here now that you haven’t funded your portion. Is it fair to kind of reading into that that your interest in this project is somewhat diminished a bit?

Avi Goldin

No, I wouldn't necessarily qualify that. I think that the appropriate way to think about it is that given the series of projects that we have within our portfolio and in the capital that we have and the various ways in which we think things are going to play out in the near term and where capital money need to be allocated, fairly quickly to Afek as that project moves forward hopefully and fairly quickly in a fairly quick timeframe that we looked at the projects and look to see where we have some flexibility in our partnership (inaudible) gives us the flexibility to make sort of quarterly decisions whether or not to fund our still significant shareholders within that joint venture and have very hopes for its long term potential and something we are going to revisit on a quarterly basis.

Marco Rodriguez – Stonegate Securities

Got it. Thanks a lot guys.


(Operator Instructions). Our next question comes from George Spindler with [Retail], please go ahead sir.

George Spindler

Hi. Good morning. I am an individual investor and not a balance sheet expert at all. But I kind of heard you guys say that you would be removing stock base compensation from your accounting and you positioned that as giving the investor a better view on the financials of the company, it seems that might be a move that (inaudible) transparency a little bit and maybe dilutes the share price which has been nothing sort of a disappointment. So my question is it may be time to take a break from stock based compensation and give the shareholders an opportunity to see a boosted share price?

Avi Goldin

So Greg this is Avi. I would be glad to address that question. So what we have done is specifically within our definition of adjusted EBITDA, so if you look at our financial disclosure, we typically you will see it describes adjusted EBITDA and it shows operating income which for many quarters has always been effectively the same number being shown twice. What we have done is we have removed and if you look around you will see a lot of companies to do something similar remove stock based compensation from the definition of adjusted EBITDA, it is still in all of the other financials are still in that income. It's still all of our financial disclosure is in accordance with generally accepted accounting principles, so you will see within the financial statement we have decided to remove from that one line item because as a non-cash item, and one that tends to fluctuate widely from time to time, we felt that the ability for investors to see that line item reflect sort of more of a – it's not particularly cash because there are other things that moved around in there but a closer to cash operating pipeline item it's still shown in operating income to investors still have the ability to see it’s intact and we felt that would be more easier for people to see what's actually happening within the operations.

George Spindler

Thank you.

Avi Goldin

Operator, are there any other questions?


At this time I see no other questions.

Avi Goldin

Okay and in that case I could thank everybody for joining us this morning and we look forward to speaking with you on future earning calls.


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