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GENIE ENERGY LTD. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations
[November 10, 2014]

GENIE ENERGY LTD. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations


(Edgar Glimpses Via Acquire Media NewsEdge) 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, 2013, 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, 2013 as well as under Item 1A to Part II "Risk Factors" in this Quarterly Report on Form 10-Q. 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, 2013.


Overview We own 99.3% of our subsidiary, Genie Energy International Corporation, or GEIC, which owns 100% of Genie Retail Energy and 92% of Genie Oil and Gas, Inc., or GOGAS. Genie Retail Energy owns 100% of IDT Energy. IDT Energy has outstanding deferred stock units granted to directors and employees that represent an interest of 1.4% of the equity of IDT Energy. Our principal businesses consist of the following: · Genie Retail Energy owns our retail energy provider, or REP, and energy brokerage businesses supplying electricity and natural gas to residential and small business customers in the Northeastern United States and other operations in the retail energy provider industry; and · Genie Oil and Gas, which is pioneering technologies to produce clean and affordable transportation fuels from the world's abundant oil shales and other fuel resources, which consists of (1) American Shale Oil Corporation, or AMSO, which holds and manages a 44.3% interest in American Shale Oil, L.L.C., or AMSO, LLC, a joint venture with Total S.A., or Total, that is developing an oil shale project in Colorado, (2) an 87.9% interest in Israel Energy Initiatives, Ltd., or IEI, our oil shale project in Israel, (3) an 88.5% interest in Afek Oil and Gas, Ltd. or Afek, our conventional oil and gas exploration project in in the southern portion of the Golan Heights, and (4) an 89.9% interest in Genie Mongolia, our oil shale exploration project in Central Mongolia.

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 business, and additional energy exploration projects to diversify our GOGAS unit's operations, among geographies, technologies and resources.

Genie Retail Energy Seasonality and Weather The weather and the seasons, among other things, affect Genie Retail Energy's revenues. Weather conditions have a significant impact on the demand for natural gas and electricity used for heating and cooling. Typically, colder winters and hotter summers increase demand for natural gas and electricity, respectively.

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 49% and 47% of Genie Retail Energy's natural gas revenues were generated in the first quarter of 2013 and 2012, respectively, when demand for heating was highest. Although the demand for electricity is not as seasonal as natural gas, approximately 31% and 34% of Genie Retail Energy's electricity revenues were generated in the third quarter of 2013 and 2012, respectively. As a result, our revenues and income (loss) from operations are subject to material seasonal variations, and the interim financial results are not necessarily indicative of the estimated financials results for the fullyear.

18 Concentration of Customers and Associated Credit Risk Genie Retail Energy reduces its customer credit risk by participating in purchase of receivable, or POR, programs for a majority of its receivables. In addition to providing billing and collection services, utility companies purchase Genie Retail Energy's receivables and assume all credit risk without recourse to Genie Retail Energy. Genie Retail Energy's 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 our consolidated revenues in these periods): Nine Months Ended September 30, 2014 2013 Con Edison 24 % 26 % West Penn Power 12 % 11 % Penelec na 10 % National Grid USA na 10 % 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 September 30, 2014 and December 31, 2013: September 30, 2014 December 31, 2013 Con Edison 28 % 23 % West Penn Power 11 % 13 % Penelec na 12 % na-less than 10% of consolidated gross trade accounts receivable at September 30, 2014 Winter 2014 Price Volatility and Customer Complaints Because of dramatic increases in wholesale electricity prices, the retail electricity prices that Genie Retail Energy and many other variable rate electricity suppliers charged to their customers also increased sharply in January and February 2014. These retail electricity price increases resulted in large numbers of customers filing informal and formal complaints to state utility commissions, state attorneys general, and state legislators. IDT Energy was served with several thousand formal and informal customer complaints to state utility commission and state attorneys general related to the winter retail price increases. IDT Energy has responded to each customer complaint it has received and attempted to resolve each complaining customer's concerns. Genie Retail Energy has also paid $4.7 million in rebates to affected customers in the nine months ended September 30, 2014. Genie Retail Energy was under no obligation to provide such rebates and did so in order to mitigate the impact of the price increases on its customers notwithstanding that the underlying cause of the price increase was beyond Genie Retail Energy's control.

IDT Energy has also responded to formal and informal information requests from state utility commissions, state attorneys general, and state legislators related to the wholesale and retail electricity price increases in the winter of 2014. In addition, the Pennsylvania Attorney General's Office and the Acting Consumer Advocate filed a Joint Complaint against IDT Energy with the Pennsylvania Public Utility Commission in connection with such events. IDT Energy has also been sued in separate putative class action suits in New York, New Jersey and Pennsylvania, partially related to the price increases during the winter of 2014. These matters are more fully discussed in Note 9 to the Consolidated Financial Statements included in Item 1 to Part I of this Quarterly Report on Form 10-Q.

IDT Energy does not believe that it was at fault or acted in any way improperly with respect to the events of winter 2014. However, we cannot predict the outcome of the regulatory or putative class action litigation or the impact on us of these or other actions, or whether there will be other impacts from the conditions that existed in winter 2014. Further, although we have taken action to insulate us and our customers from future similar events, we cannot assure that those actions will be effective.

19 Investment in American Shale Oil, LLC AMSO, LLC holds a research, development and demonstration lease awarded by the U.S. Bureau of Land Management that covers an area of 160 acres in western Colorado (the RD&D Lease). The RD&D Lease runs for a ten-year period beginning on January 1, 2007, and is subject to an extension of up to five years if AMSO, LLC can demonstrate that a process leading to the production of commercial quantities of shale oil is diligently being pursued. If AMSO, LLC can demonstrate the economic and environmental viability of its technology, it will have the opportunity to submit a one-time payment pursuant to the applicable regulations and convert its RD&D Lease to a commercial lease on 5,120 acres, which overlap and are contiguous with the 160 acres covered by its RD&D Lease.

We account for our ownership interest in AMSO, LLC using the equity method since we have the ability to exercise significant influence over its operating and financial matters, although we do not control AMSO, LLC. AMSO, LLC is a variable interest entity, however, we have determined that we are not the primary beneficiary.

Except as set forth below, AMSO was responsible for funding 20% of the initial $50 million of AMSO, LLC's approved expenditures, and is responsible for funding 35% of the approved expenditures between $50 million and $100 million, and 40% of the costs of the one-time payment for conversion of AMSO, LLC's RD&D Lease to a commercial lease, in the event AMSO, LLC's application for conversion is approved, with the remaining amounts of such expenditures to be funded by Total.

All other expenditures are to be borne in proportion to equity ownership. The percentages for expenditures are subject to adjustment in connection with certain changes in the equity ownership of AMSO LLC. As of September 30, 2014, the cumulative contributions of AMSO and Total to AMSO, LLC were $76.9 million.

AMSO's allocated share of the net loss of AMSO, LLC is included in "Equity in the net loss of AMSO, LLC" in the accompanying consolidated statements of operations.

AMSO has the right to decide at each capital call whether or not to fund AMSO, LLC, and will make a determination at that time. AMSO did not fund the capital calls for each quarter of 2014. Total funded AMSO's share in an aggregate amount of $3.0 million. Because of AMSO's decisions not to fund its share of AMSO, LLC's expenditures, AMSO's ownership interest in AMSO, LLC was reduced to 44.3% and Total's ownership interest increased to 55.7%. In addition, AMSO's share of future funding of AMSO, LLC up to a cumulative $100 million was reduced to 31.0% and Total's share increased to 69.0%. AMSO is evaluating its options with respect to funding AMSO, LLC in 2015, and funding of less than its full share would result in further dilution of its interest in AMSO, LLC.

The agreements with Total provide for varying consequences for AMSO's failure to fund its share at different stages of the project, including dilution of AMSO's interest in AMSO, LLC or paying interest to Total for expenditures they fund on behalf of AMSO. Either Total or AMSO may terminate its obligations to make capital contributions and withdraw as a member of AMSO, LLC. Even if AMSO were to withdraw its interest in AMSO, LLC, it will remain liable for its share of expenditures for safety and environmental reclamation related to events occurring prior to its withdrawal.

Because of AMSO's decisions not to fund its share of AMSO, LLC's expenditures, AMSO, LLC allocates its net loss beginning January 2014 as follows: the first $9.0 million of losses are allocated to Total, then it allocates any remaining losses proportionately such that AMSO and Total's capital accounts as a percentage of AMSO, LLC's total capital equals their ownership interests.

Israel Energy Initiatives, Ltd.

IEI holds an exclusive Shale Oil Exploration and Production License awarded in July 2008 by the Government of Israel. The license covers approximately 238 square kilometers in the south of the Shfela region in Central Israel. Under the terms of the license, IEI is to conduct a geological appraisal study across the license area, characterize the resource and select a location for a pilot plant in which it will demonstrate its in-situ technology. The initial term of the license was for three years until July 2011. The license was extended until July 2015. IEI submitted its application for the construction and operation of its oil shale pilot test facility to the Jerusalem District Committee for Planning and Building, and on September 2, 2014, the Committee declined to issue IEI a permit to build and operate a pilot drilling project. IEI is currently evaluating its options to determine the best course of action to move forward to exploit the abundant oil shale resource in Israel.

20 Afek Oil and Gas, Ltd.

In 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. Afek has retained oil and gas exploration professionals and has contracted with internationally recognized vendors to provide the services required for its exploration program. In 2013, Afek completed preliminary geophysical work including electromagnetic survey and the reprocessing of 2D seismic data to characterize the subsurface prior to drilling exploration wells. Afek subsequently conducted initial analysis of the acquired data internally and with outside exploration experts. In addition, Afek submitted a permit application to conduct a ten-well exploratory drilling program. In the three months ended September 30, 2014, Afek was issued a permit by Israel's Northern District Planning and Building Committee to conduct a ten-well exploratory drilling program. On September 29, 2014, the High Court of Justice in Israel issued an order for the temporary cessation of any Golan Heights oil drilling operations, in order to grant the State more time to respond to a petition from the Israel Union for Environmental Defense and local residents. On October 9, 2014, the State Attorney filed its response arguing that the petition should be dismissed and that the decision of the Northern District Planning and Building Committee to issue the permit to Afek was in accordance with applicable law and regulation. On October 20, 2014, Israel's High Court of Justice issued an interim injunction against Afek, restricting Afek from building installations of any kind or carrying out work of any kind that changes the surface of the ground within the boundaries of the area defined in the drilling permit until the Court rules on the petitions. The hearing is expected to be held within two months. Provided that the permit is issued shortly after said date, and no further legal obstacles arise, Afek plans to begin exploratory drilling in the first half of 2015 and could take up to three years to complete.

Genie Mongolia In April 2013, Genie Mongolia and the Petroleum Authority of Mongolia entered into an exclusive oil shale development agreement to explore and evaluate the commercial potential of oil shale resources in a 34,470 square kilometer area in Central Mongolia. The five year agreement allows Genie Mongolia to explore, identify and characterize the oil shale resource in the exclusive survey area and to conduct a pilot test using in-situ technology on appropriate oil shale deposits. In September 2014, Genie Mongolia signed a prospecting agreement with the Petroleum Authority of Mongolia covering an additional 25,000 square kilometers in Central Mongolia. The agreement, the first to be signed under recently passed legislation, also provides a framework under which Genie Mongolia can request a commercial production agreement once a specific suitable resource and location are identified. The regulations called for by such legislation are under development. Under the two agreements, Genie Mongolia currently has exclusive rights to explore for oil shale in approximately 60,000 square kilometers in Mongolia. During 2013, Genie Mongolia conducted initial surface and subsurface exploration work. To date in 2014, Genie Mongolia continued surface mapping, other geophysical evaluation work and exploration drilling within the areas.

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, 2013. 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 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, 2013.

Recently Issued Accounting Standard Not Yet Adopted In May 2014, the Financial Accounting Standards Board 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 will adopt this standard on January 1, 2017. 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.

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.

21 Three and Nine Months Ended September 30, 2014 Compared to Three and Nine Months Ended September 30, 2013 Genie Retail Energy Segment Three months ended Nine months ended September 30, Change September 30, Change 2014 2013 $ % 2014 2013 $ % (in millions) Revenues: Electricity $ 43.4 $ 66.9 $ (23.5 ) (35.2 )% $ 179.3 $ 166.6 $ 12.7 7.6 % Natural gas 2.8 4.7 (1.9 ) (40.0 ) 46.0 45.5 0.5 1.1 Total revenues 46.2 71.6 (25.4 ) (35.5 ) 225.3 212.1 13.2 6.2 Direct cost of revenues 28.4 51.7 (23.3 ) (45.2 ) 186.2 163.2 23.0 14.1 Gross profit 17.8 19.9 (2.1 ) (10.6 ) 39.1 48.9 (9.8 ) (19.9 ) Selling, general and administrative expenses 12.2 10.3 1.9 18.1 33.5 29.9 3.6 12.0 Income from operations $ 5.6 $ 9.6 $ (4.0 ) (41.5 )% $ 5.6 $ 19.0 $ (13.4 ) (70.3 )% Revenues. Genie Retail Energy's revenues decreased in the three months ended September 30, 2014 compared to the same period in 2013 because of a significant decrease in consumption, primarily due to a decrease in meters served. As described below, the unusually cold weather and resultant high energy costs in the three months ended March 31, 2014 adversely affected Genie Retail Energy's customer churn and customer acquisition efforts in the nine months ended September 30, 2014 compared to the same period in 2013.

Genie Retail Energy's electricity revenues decreased in the three months ended September 30, 2014 compared to the same period in 2013 because of a significant decrease in consumption, primarily due to a decrease in meters served as well as cooler temperatures in July and August 2014 compared to the prior year, which reduced the demand for electricity for air conditioning. Electricity consumption decreased 36.7% in the three months ended September 30, 2014 compared to the same period in 2013, and meters served decreased 20.8% in the three months ended September 30, 2014 compared to the same period in 2013. Average electricity consumption per meter also decreased 20.0% in the three months ended September 30, 2014 compared to the same period in 2013, primarily because of the significant churn of relatively high average consumption meters in Pennsylvania territories. The decrease in consumption was slightly offset by an increase in the average rate charged to customers for electricity, which increased 2.3% in the three months ended September 30, 2014 compared to the same period in 2013.

Genie Retail Energy's natural gas revenues decreased in the three months ended September 30, 2014 compared to the same period in 2013 because of a decrease in consumption, primarily due to a decrease in meters served. Natural gas consumption decreased 22.8% in the three months ended September 30, 2014 compared to the same period in 2013, and meters served decreased 20.3% in the three months ended September 30, 2014 compared to the same period in 2013.

Average natural gas consumption per meter also decreased 3.1% in the three months ended September 30, 2014 compared to the same period in 2013. In addition, Genie Retail Energy's natural gas revenues decreased because the average rate charged to customers for natural gas decreased 22.3% in the three months ended September 30, 2014 compared to the same period in 2013.

Genie Retail Energy's revenues increased in the nine months ended September 30, 2014 compared to the same period in 2013. A confluence of issues in January and February 2014 associated with this past winter's polar vortex resulted in extraordinarily large spikes in the prices of wholesale electricity and natural gas in markets where Genie Retail Energy and other retail providers purchase their supply. These factors included sustained, extremely cold weather in much of Genie Retail Energy's service area, the failure of the Independent System Operators (ISO) to deliver peak power, and unusually volatile commodity trading in the financial markets. Genie Retail Energy responded by reducing its target margins in order to mitigate the severity of the commodity price increases on its customers and subsequently issued an aggregate of $4.7 million in rebates to customers in the nine months ended September 30, 2014. The colder weather adversely affected Genie Retail Energy's customer churn, gross margins and results of operations in the nine months ended September 30, 2014 comparedto the same period in 2013.

Genie Retail Energy's electricity revenues increased in the nine months ended September 30, 2014 compared to the same period in 2013 because of a 43.2% increase in the average rate charged to customers, which was tied to the higher commodity costs. This increase was partially offset by a 24.9% decrease in electricity consumption. The increase in the average rate charged to customers for electricity was mostly due to a 45.3% increase in the underlying commodity cost in the nine months ended September 30, 2014 compared to the same period in 2013. The decrease in electricity consumption was primarily the result of a decrease in meters served, which decreased 14.5% in the nine months ended September 30, 2014 compared to the same period in 2013, coupled with a 12.1% decrease in average consumption per meter in the nine months ended September 30, 2014 compared to the same period in 2013.

22 Genie Retail Energy's natural gas revenues increased in the nine months ended September 30, 2014 compared to the same period in 2013 because of an 8.0% increase in the average rate charged to customers, partially offset by a 6.4% decrease in natural gas consumption. The increase in the average rate charged to customers for natural gas was mostly due to a 43.3% increase in the underlying commodity cost in the nine months ended September 30, 2014 compared to the same period in 2013. The decrease in natural gas consumption was primarily the result of a 17.1% decrease in meters served, although average consumption per meter increased 12.8% in the nine months ended September 30, 2014 compared to the same period in 2013 due to the cold weather in January and February 2014 mentioned above.

Genie Retail Energy's customer base as measured by meters served consisted of the following: September 30, June 30, March 31, December 31, September 30, 2014 2014 2014 2013 2013 (in thousands) Meters at end of quarter: Electricity customers 235 238 256 282 300 Natural gas customers 127 126 135 145 156 Total meters 362 364 391 427 456 Gross meter acquisitions in the three and nine months ended September 30, 2014 were 56,000 and 158,000, respectively, compared to 64,000 and 200,000 in the three and nine months ended September 30, 2013, respectively, which is partially due to an intentional slowing of customer acquisition efforts in the territories most impacted by the rising commodity costs during the polar vortex. During the second and third quarters of 2014, Genie Retail Energy accelerated acquisitions of new customers in Illinois, and reengaged its marketing efforts in certain Pennsylvania utility territories where it had suspended activities in the three months ended March 31, 2014. This contributed to an improvement in gross meter acquisitions compared to the three months ended March 31, 2014. Net meters served decreased by 2,000 or 0.6% in the three months ended September 30, 2014 compared to a decrease of 19,000 meters or 3.8% in the three months ended September 30, 2013, and decreased by 65,000 meters or 15.1% in the nine months ended September 30, 2014 compared to a decrease of 46,000 meters or 9.1% in the nine months ended September 30, 2013, as gross meter acquisitions in the three and nine months ended September 30, 2014 were more than offset by higher rates of customer churn. Average monthly churn decreased from 6.3% in the three months ended September 30, 2013 to 6.2% in the three months ended September 30, 2014, and increased from 6.3% in the nine months ended September 30, 2013 to 7.2% in the nine months ended September 30, 2014, as some customers migrated back to the incumbent utility because of the large increase in the rates charged to customers due to the extreme increase in our costs to procure the commodities.

IDT Energy has license applications pending to enter into additional territories, primarily gas and dual meter territories, in Pennsylvania, Maryland and the District of Columbia. Management continues to evaluate additional, deregulation-driven opportunities in other states, including Massachusetts, New Hampshire and Rhode Island. During the nine months ended September 30, 2014, efforts in Illinois and the District of Columbia started to gain traction. In addition, IDT Energy has developed several significant initiatives to drive growth in gross meter additions. Most notably, Epiq Energy, LLC, or Epiq, which IDT Energy acquired in December 2013, provides independent representatives with the opportunity to build sales organizations and to profit from both residential and commercial energy. Epiq began acquiring meters in certain IDT Energy utility territories in the three months ended September 30, 2014. In addition, Genie Retail Energy has developed and begun to market a twelve-month guaranteed rate residential offering in some utility territories, and has created a new brand, Residents Energy, to focus on marketing and sales of guaranteed rate offerings.

Genie Retail Energy expects these initiatives to contribute more meaningfully to gross meter additions by December 2014.

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.

September 30, June 30, March 31, December 31, September 30, 2014 2014 2014 2013 2013 (in thousands) RCEs at end of quarter: Electricity customers 165 174 198 228 246 Natural gas customers 83 86 90 87 91 Total RCEs 248 260 288 315 337 The RCE decrease at September 30, 2014 compared to December 31, 2013 and September 30, 2013 primarily reflects the decline in meters served. In addition, the Pennsylvania utility territories hardest hit by the polar vortex have relatively high per meter consumption rates. They experienced higher than average levels of churn and customer acquisition programs in some of these territories were briefly suspended.

23 Direct Cost of Revenues and Gross Margin Percentage. Genie Retail Energy's direct cost of revenues and gross margin percentage were as follows: Nine months ended Three months ended September 30, Change September 30, Change 2014 2013 $ % 2014 2013 $ % (in millions) Direct cost of revenues: Electricity $ 26.2 $ 48.5 $ (22.3 ) (46.1 )% $ 143.2 $ 131.1 $ 12.1 9.2 % Natural gas 2.2 3.2 (1.0 ) (31.3 ) 43.0 32.1 10.9 34.1 Total direct cost of revenues $ 28.4 $ 51.7 $ (23.3 ) (45.2 )% $ 186.2 $ 163.2 $ 23.0 14.1 % Three months ended Nine months ended September 30, September 30, 2014 2013 Change 2014 2013 Change Gross margin percentage: Electricity 39.7 % 27.5 % 12.2 % 20.2 % 21.3 % (1.1 )% Natural gas 22.2 32.0 (9.8 ) 6.5 29.5 (23.0 ) Total gross margin percentage 38.6 % 27.8 % 10.8 % 17.4 % 23.1 % (5.7 )% Direct cost of revenues for electricity decreased in the three months ended September 30, 2014 compared to the same period in 2013 primarily because of the 36.7% decrease in electricity consumption, as well as a 14.8% decrease in the average unit cost of electricity. Gross margin on electricity sales increased in the three months ended September 30, 2014 compared to the same period in 2013 because the average rate charged to customers for electricity increased and the average unit cost of electricity decreased. Direct cost of revenues for electricity increased in the nine months ended September 30, 2014 compared to the same period in 2013 primarily because the average unit cost of electricity increased 45.3% in the nine months ended September 30, 2014 compared to the same period in 2013. The increase in the average unit cost of electricity was partially offset by a 24.9% decrease in electricity consumption in the nine months ended September 30, 2014 compared to the same period in 2013. Gross margin on electricity sales decreased in the nine months ended September 30, 2014 compared to the same period in 2013 because the average unit cost of electricity increased more than the average rate charged to customers.

Additionally, the nine months ended September 30, 2013 were impacted by the effects of an internal pricing system issue that constrained our ability to make timely adjustments to electric rates in some newer territories, which did not repeat.

Direct cost of revenues for natural gas decreased in the three months ended September 30, 2014 compared to the same period in 2013 primarily due to the 22.8% decrease in natural gas consumption, as well as an 11.0% decrease in the average unit cost of natural gas. Gross margin on natural gas sales decreased in the three months ended September 30, 2014 compared to the same period in 2013 because the average rate charged to customers for natural gas decreased more than the average unit cost of electricity, primarily as a result of competitive pressure on the rates charged to customers. Direct cost of revenues for natural gas increased in the nine months ended September 30, 2014 compared to the same period in 2013 primarily because the average unit cost of natural gas increased 43.3% in the nine months ended September 30, 2014 compared to the same period in 2013. The increase in the average unit cost of natural gas was partially offset by a 6.4% decrease in natural gas consumption in the nine months ended September 30, 2014 compared to the same period in 2013. Gross margin on natural gas sales decreased in the nine months ended September 30, 2014 compared to the same period in 2013 because the average unit cost of natural gas increased substantially more than the average rate charged to customers.

Selling, General and Administrative. The increase in selling, general and administrative expenses in the three and nine months ended September 30, 2014 compared to the same periods in 2013 was due to increases in payroll, consulting and professional fees and computer software licenses expense, primarily all of which related to the acquisition of Diversegy, LLC, or Diversegy, and Epiq Energy, LLC. In December 2013, IDT Energy acquired 100% of the outstanding membership interests of Diversegy, a retail energy advisory and brokerage company that serves commercial and industrial customers, and its network marketing channel, Epiq. In addition, the increase in selling, general and administrative expenses in the three and nine months ended September 30, 2014 compared to the same periods in 2013 included an increase in bad debt expense.

The increase in selling, general and administrative expenses in the nine months ended September 30, 2014 compared to the same period in 2013 was also due to an increase in purchase of receivable fees because of the increase in revenues, partially offset by a decrease in customer acquisition costs due to the significant decrease in the number of new customers acquired. As a percentage of Genie Retail Energy's total revenues, selling, general and administrative expenses increased from 14.4% in the three months ended September 30, 2013 to 26.4% in the three months ended September 30, 2014, and increased from 14.1% in the nine months ended September 30, 2013 to 14.9% in the nine months endedSeptember 30, 2014.

24 Genie Oil and Gas Segment Genie Oil and Gas does not currently generate any revenues, nor does it incur any direct cost of revenues.

Three months ended Nine months ended September 30, Change September 30, Change 2014 2013 $ % 2014 2013 $ % (in millions) General and administrative expenses $ 0.3 $ 0.3 $ - (33.3 )% $ 1.0 $ 1.2 $ (0.2 ) (15.4 )% Research and development 3.0 2.7 0.3 14.7 7.5 7.7 (0.2 ) (2.9 ) Equity in net loss of AMSO, LLC - 0.7 (0.7 ) (100.0 ) - 2.6 (2.6 ) (100.0 ) Loss from operations $ (3.3 ) $ (3.7 ) $ (0.4 ) (11.0 )% $ (8.5 ) $ (11.5 ) $ (3.0 ) (26.1 )% General and Administrative. General and administrative expenses decreased in the three months ended September 30, 2014 compared to the same period in 2013 primarily due to a decrease in stock-based compensation expense. General and administrative expenses decreased in the nine months ended September 30, 2014 compared to the same period in 2013 primarily due to decreases in stock-based compensation expense and consulting and professional fees. In May 2013, we granted an aggregate of 1.0% of the equity in IEI to certain of our employees.

The grants vested immediately on the date of the grant. The fair value on the date of the grant was estimated to be $0.2 million, which was recognized inMay 2013.

Research and Development. Research and development expenses consist of the following: Nine months ended Three months ended September 30, September 30, 2014 2013 2014 2013 (in millions) IEI $ 0.9 $ 0.8 $ 2.2 $ 2.9 Genie Mongolia 0.5 0.8 1.6 2.5 Afek 1.6 1.1 3.6 2.2 Other - - 0.1 0.1Total research and development expenses $ 3.0 $ 2.7 $ 7.5 $ 7.7 During the three and nine months ended September 30, 2014, the environmental documents portion of IEI's permit application for the construction and operation of its oil shale pilot test facility was under review by the Ministry of Environment. In addition, as per the required permitting process, IEI continued laboratory work, engineering work and associated preparation of environmental permit applications related to the planned pilot.

Genie Mongolia's expenses in the three and nine months ended September 30, 2014 and 2013 related to the 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 the three and nine months ended September 30, 2014, Genie Mongolia continued surface mapping, other geophysical evaluation work and exploration drilling within the areas. The exploratory well program is intended to identify a site suitable for a pilot test and subsequent commercial operations. Recent legislation in Mongolia established a framework under which Genie Mongolia can request a commercial production agreement once a specific suitable resource and location are identified. The regulations called for by such legislation are under development.

Since receiving the award of a 36-month petroleum exploration license in the Southern portion of the Golan Heights in 2013, Afek prepared and submitted permit applications, contracted with international service providers to assist in exploration activities, and has been staffing up for operations. During 2013, Afek completed preliminary geophysical work including an electromagnetic survey and the reprocessing of 2D seismic data to characterize the subsurface prior to drilling exploration wells. Afek subsequently conducted initial analysis of the acquired data. In the three months ended September 30, 2014, Afek was issued a permit by Israel's Northern District Planning and Building Committee to conduct a ten-well exploratory drilling program. On September 29, 2014, the High Court of Justice in Israel issued an order for the temporary cessation of any Golan Heights oil drilling operations, in order to grant the State more time to respond to a petition from the Israel Union for Environmental Defense and local residents. On October 9, 2014, the State Attorney filed its response arguing that the petition should be dismissed and that the decision of the Northern District Planning and Building Committee to issue the permit to Afek was in accordance with applicable law and regulation. On October 20, 2014, Israel's High Court of Justice issued an interim injunction against Afek, restricting Afek from building installations of any kind or carrying out work of any kind that changes the surface of the ground within the boundaries of the area defined in the drilling permit until the Court rules on the petitions. The hearing is expected to be held within two months. Provided that the permit is issued shortly after said date, and no further legal obstacles arise, Afek plans to begin exploratory drilling in the first half of 2015 and could take up to three years to complete.

25 Equity in the Net Loss of AMSO, LLC.AMSO has the right to decide at each capital call whether or not to fund AMSO, LLC, and will make a determination at that time. AMSO did not fund the capital calls for each quarter of 2014. Total funded AMSO's share in an aggregate amount of $3.0 million. Because of AMSO's decisions not to fund its share of AMSO, LLC's expenditures, AMSO, LLC allocates its net loss beginning January 2014 as follows: the first $9.0 million of losses are allocated to Total, then it allocates any remaining losses proportionately such that AMSO and Total's capital accounts as a percentage of AMSO, LLC's total capital equals their ownership interests. As a result, equity in the net loss of AMSO, LLC was nil in the three and nine months ended September 30, 2014. Equity in the net loss of AMSO, LLC was $0.7 million and $2.6 million in the three and nine months ended September 30, 2013, respectively, which was 35% of AMSO, LLC's net loss of $1.9 million and $7.4 million in the three and nine months ended September 20, 2013, respectively.

Corporate Corporate does not generate any revenues, nor does it incur any direct cost of revenues. Corporate costs include unallocated compensation, consulting fees, legal fees, business development expenses and other corporate-related general and administrative expenses.

Three months ended Nine months ended September 30, Change September 30, Change 2014 2013 $ % 2014 2013 $ % (in millions) General and administrative expenses and loss from operations $ 6.4 $ 1.9 $ 4.5 229.6 % $ 12.1 $ 6.5 $ 5.6 87.3 % The increase in general and administrative expenses in the three and nine months ended September 30, 2014 as compared to the same periods in 2013 was due to an increase in stock-based compensation. The increase in stock-based compensation was the result of the December 2013 grant of options to purchase 3.0 million shares of our Class B common stock at an exercise price of $10.30 per share to Howard Jonas, our Chairman of the Board and Chief Executive Officer, and the subsequent amendment of that compensation arrangement. The options were initially vesting in five equal annual installments commencing on December 31, 2014. The estimated total value of the options on the grant date was $19.3 million. The options were cancelled in July 2014 in connection with our entry into a Second Amended and Restated Employment Agreement with Mr. Jonas. Because of the modification to Mr. Jonas' equity arrangement, we recorded stock-based compensation relating to this grant of $4.3 million in the three and nine months ended September 30, 2014.

Consolidated Selling, General and Administrative. We were formerly a subsidiary of IDT Corporation, or IDT. On October 28, 2011, we were spun-off by IDT and became an independent public company through a pro rata distribution of our common stock to IDT's stockholders (the Spin-Off). IDT charges us for services it provides pursuant to the Transition Services Agreement that we entered into with IDT prior to the Spin-Off. In addition, we charge IDT for specified administrative services that we provide to certain of IDT's foreign subsidiaries. The amounts that IDT charged us, net of the amounts that we charged IDT, were $1.1 million and $0.8 million in the three months ended September 30, 2014 and 2013, respectively, and $2.2 million in both the nine months ended September 30, 2014 and 2013, which was included in consolidated selling, general and administrative expense.

Stock-based compensation expense included in consolidated selling, general and administrative expenses was $4.9 million and $8.5 million in the three and nine months ended September 30, 2014, respectively, compared to $1.1 million and $3.2 million in the same periods in 2013. The increases were due to expense from the modification of the equity arrangement with Mr. Jonas. At September 30, 2014, aggregate unrecognized compensation cost related to non-vested stock-based compensation was $15.8 million. The expense from these grants is recognized over the expected service period.

26 The following is a discussion of our consolidated income and expense line items below loss from operations: Three months ended Nine months ended September 30, Change September 30, Change 2014 2013 $ % 2014 2013 $ % (in millions) (Loss) income from operations $ (4.1 ) $ 3.9 $ (8.0 ) (204.0 )% $ (14.9 ) $ 1.0 $ (15.9 ) (1,578.0 )% Interest income 0.1 0.1 - 98.3 0.3 0.3 - (11.7 ) Financing fees (0.5 ) (0.7 ) 0.2 28.9 (2.0 ) (2.5 ) 0.5 18.9 Other income (expense), net 0.2 (0.2 ) 0.4 194.3 0.1 (0.3 ) 0.4 135.2 Provision for income taxes (0.5 ) (1.1 ) 0.6 56.6 (0.4 ) (2.7 ) 2.3 84.5 Net (loss) income (4.8 ) 2.0 (6.8 ) (336.3 ) (16.9 ) (4.2 ) (12.7 ) (302.0 ) Net loss (income) attributable to noncontrolling interests 0.4 - 0.4 943.1 0.9 (1.2 ) 2.1 177.6 Net (loss) income attributable to Genie $ (4.4 ) $ 2.0 $ (6.4 ) (320.7 )% $ (16.0 ) $ (5.4 ) $ (10.6 ) (196.1 )% Financing Fees. Financing fees are the volumetric fees charged by BP Energy Company under the Preferred Supplier Agreement between IDT Energy and BP, pursuant to which BP is IDT Energy's preferred provider of electricity and natural gas. Financing fees decreased in the three and nine months ended September 30, 2014 compared to the similar periods in 2013 primarily because of the reduced consumption by Genie Retail Energy's customers in the three and nine months ended September 30, 2014 compared to the similar periods in 2013.

Other Income (Expense), net. The change in other income (expense), net was primarily due to the change in foreign currency translation gains (losses) to gains of $0.2 million and $0.1 million in the three and nine months ended September 30, 2014, respectively, from losses of $0.2 million and $0.3 million, in the three and nine months ended September 30, 2013, respectively, as well as a loss on disposal of property in the nine months ended September 30, 2013of $37,000.

Provision for Income Taxes. The changes in income taxes in the three and nine months ended September 30, 2014 compared to the same periods in 2013 were primarily due to the changes in federal and state income tax expense in Genie Retail Energy. Genie Retail Energy had significant changes in its results of operations in the three and nine months ended September 30, 2014 compared to the same periods in 2013. Genie Retail Energy includes IDT Energy, certain limited liability companies and our consolidated variable interest entities. IDT Energy and the limited liability companies are included in our consolidated return.

Citizen's Choice Energy, LLC, or CCE, DAD Sales, LLC, or DAD, and Tari Corporation, or Tari, are our consolidated variable interest entities, which file separate tax returns since we do not have any ownership interest in these variable interest entities. The following table summarizes Genie Retail Energy's aggregate income before income taxes and provision for income taxes: Three months ended Nine months ended September 30, September 30, 2014 2013 2014 2013 (in millions)Genie Retail Energy: Aggregate income before income taxes $ 5.1 $ 8.9 $ 3.7 $ 16.5 Aggregate provision for income taxes $ (1.7 ) $ (2.9 ) $ (1.0 ) $ (6.0 ) Net Loss (Income) Attributable to Noncontrolling Interests. The change in the net loss (income) attributable to noncontrolling interests in the three and nine months ended September 30, 2014 compared to the similar periods in 2013 primarily relates to 100% of the net income (loss) incurred by CCE, which is a variable interest entity that is consolidated within our Genie Retail Energy segment. We do not have any ownership interest in CCE, therefore, all net income or loss incurred by CCE has been attributed to noncontrolling interests. CCE's net income in the three and nine months ended September 30, 2014 was $24,000 and $0.1 million compared to $0.7 million and $2.4 million in the three and nine months ended September 30, 2013, respectively. CCE's net income decreased in the three and nine months ended September 30, 2014 compared to the same periods in 2013 primarily due to a reduction in gross profit, partially offset by a reduction in income tax expense.

27 Liquidity and Capital Resources General Historically, we have satisfied our cash requirements primarily through a combination of our existing cash and cash equivalents, Genie Retail Energy's cash flow from operating activities and sales of equity interests in GOGAS and certain of its subsidiaries. We currently expect that our operations in the next twelve months and the $101.9 million balance of cash, cash equivalents, restricted cash-short-term and certificates of deposit that we held as of September 30, 2014 will be sufficient to meet our currently anticipated cash requirements for at least the twelve months ending September 30, 2015.

As of September 30, 2014, we had working capital (current assets less current liabilities) of $118.1 million.

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