The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
The accompanying notes are an integral part
of these consolidated financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER
SHARE DATA)
Note 1 – Summary of Business
Nature of Business
Energy West was originally incorporated in
Montana in 1909 and was reorganized as a holding company in 2009. On July 9, 2010, we changed our name to Gas Natural Inc. (the
“Company,” “we,” “us,” or “our”) and reincorporated in Ohio. We are a natural gas
company with operations in four states. In October 2016, we implemented a plan of reorganization and formed a new holding company,
PHC, an Ohio Corporation, that is the parent company of our regulated utility subsidiaries, Cut Bank Gas, EWM, Frontier Natural
Gas, Bangor Gas, NEO, Brainard, Orwell, and Spelman. Gas Natural is the parent company of Energy West Propane, Inc., EWR, GNR,
Lone Wolfe and PHC. PHC is the parent company of multiple entities that are natural gas utility companies with regulated operations
in Maine, Montana, North Carolina and Ohio. EWR is a natural gas marketing and production company with non-regulated operations
in Montana. GNR is a natural gas marketing company that markets gas in Ohio. Energy West Propane, Inc. distributes propane with
non-regulated operations in Montana. Lone Wolfe serves as an insurance agent for us. We have three operating and reporting segments:
|
·
|
Natural Gas.
Representing the majority of our revenue, we annually distribute approximately 21 Bcf of natural gas through
regulated utilities operating in Maine, Montana, North Carolina and Ohio. Our natural gas utility subsidiaries include Bangor Gas
(Maine), Brainard (Ohio), Cut Bank Gas (Montana), EWM (Montana), Frontier Natural Gas (North Carolina), NEO (Ohio) and Orwell (Ohio).
As of December 31, 2016, we served approximately 69,400 customers.
|
|
·
|
Marketing and Production.
Annually, we market approximately 3.6 Bcf of natural gas to commercial and industrial customers
in Montana, Wyoming and Ohio through our EWR and GNR subsidiaries. Our EWR subsidiary also manages midstream supply and production
assets for transportation customers and utilities. EWR owns an average 53% gross working interest (average 44% net revenue interest)
in 160 natural gas producing wells and gas gathering assets located in Glacier and Toole Counties in Montana.
|
|
·
|
Corporate and Other.
Included in corporate and other
are costs associated with business development and acquisitions, dividend income, recognized gains or losses from the sale of
marketable securities, activity from Lone Wolfe which serves as an insurance agent for us and other businesses in the energy industry,
and the results of our discontinued operations from the sales of EWW, Pipeline Assets and Independence.
|
Note 2 - Significant Accounting Policies
Basis of Presentation
The
accompanying consolidated financial statements have been prepared in accordance with U.S. GAAP.
The consolidated financial
statements include the accounts and transactions of Gas Natural and its wholly-owned subsidiaries as well as the proportionate
share of assets, liabilities, revenues, and expenses of certain producing natural gas properties. All intercompany transactions
and balances have been eliminated.
Reclassifications
Certain reclassifications of prior year reported
amounts have been made for comparative purposes. Such reclassifications are not considered material and had no effect on net income.
Effects of Regulation
We follow the provisions
of
ASC 980
-
Regulated Operations
and the accompanying financial statements reflect the effects of the different
rate-making principles followed by the various jurisdictions in which we operate. The economic effects of regulation can result
in regulated companies recording costs that have been, or are expected to be, allowed in the rate-making process in a period different
from the period in which the costs would be charged to expense by an unregulated enterprise. When this occurs, costs are deferred
as assets in the balance sheet (regulatory assets) and recorded as expenses in the periods when those same amounts are reflected
in rates. Additionally, regulators can impose liabilities upon a regulated company for amounts previously collected from customers
and for amounts that are expected to be refunded to customers which are recorded as liabilities in the balance sheet (regulatory
liabilities).
Use of Estimates
The preparation of financial statements in
conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts
of revenues and expenses during the reporting period. Actual results could differ from these estimates.
We use estimates to measure certain deferred
charges and deferred credits related to items subject to approval of the various public service commissions with jurisdiction over
us. Estimates are also used in determining our allowances for doubtful accounts, unbilled gas, asset retirement obligations, when
testing for impairment, contingent consideration liability, loss contingencies, and determination of depreciable lives of utility
plant. The deferred tax asset and valuation allowance require a significant amount of judgment and are significant estimates. The
estimates are based on projected future tax deductions, future taxable income, estimated limitations under the Internal Revenue
Code, and other assumptions.
We make acquisitions that involve combining
the assets and liabilities of the acquired company with us. The assets and liabilities acquired are reported at their fair value
at the date of acquisition. We may make estimates when we measure the fair value of acquired assets and liabilities.
Our estimates could change in the near term
and could significantly impact our results of operations and financial position.
Fair Value Measurements
We measure certain of our assets and liabilities
at fair value. The fair values of marketable securities are estimated based on the closing share price or the quoted market price
for those investments. The fair values of our derivative instruments are estimated based on the difference between the fixed commodity
price designated in the agreement and the commodity futures price for the settlement period at the measurement date. The fair value
measure of our contingent consideration liability has significant unobservable inputs, including our weighted average cost of capital,
our credit spread above the risk free rate and our forecasted future cash flows. A significant increase (decrease) in these inputs
could result in a significant increase (decrease) in the fair value measure.
Leases
Leases are categorized as either operating
or capital leases at inception. Operating lease costs are recognized on a straight-line basis over the term of the lease. For capital
leases, an asset and a corresponding liability are established for the present value at the beginning of the lease term of minimum
lease payments during the lease term, excluding any executory costs. If the present value of the minimum lease payments exceeds
the fair value of the leased property at lease inception, the amount measured initially as the asset and obligation shall be the
fair value. The capital lease obligation is amortized over the life of the lease.
For build-to-suit leases, we evaluate our level
of risk during the asset’s construction or development period. If we determine that we bear substantially all of the risk
during this period, we establish an asset and liability for the total project costs with the liability reduced by any project costs
paid directly by us. Once the build-to-suit asset is complete, we assess whether the arrangement qualifies for sales recognition
under the sale-leaseback accounting guidance. If the lease meets the criteria to qualify as a sale-leaseback transaction, then
the asset and liability are removed from our consolidated balance sheet at the time of the sale and accounted for as either a capital
or an operating lease. If it does not meet the criteria to qualify as a sale-leaseback transaction, then the asset and liability
remain on our consolidated balance sheet and the transaction is treated as a financing lease. If the lease is treated as sale-leaseback,
we evaluate the fair value of the property sold compared to the sale price of the assets and defer any profit or loss on the sale.
Revenue Recognition
Revenues are recognized in the period that
services are provided or products are delivered. We record gas distribution revenues for gas delivered to residential and commercial
customers but not billed at the end of the accounting period. We periodically collect revenues subject to possible refunds pending
final orders from regulatory agencies. When this occurs, we recognize a liability for such refunds.
Stock-Based Compensation
We account for stock-based compensation arrangements
by recognizing compensation costs for all stock-based awards over the respective service period for employee services received
in exchange for an award of equity or equity-based compensation. The compensation cost is based on the fair value of the award
on the date it was granted.
Income Taxes
We file our income tax returns on a consolidated
basis. Rate-regulated operations record cumulative increases in deferred taxes as income taxes recoverable from customers. We use
the deferral method to account for investment tax credits as required by regulatory commissions. Deferred income taxes are determined
using the asset and liability method, under which deferred tax assets and liabilities are measured based upon the temporary differences
between the financial statement and income tax bases of assets and liabilities, using current tax rates.
Tax positions must meet a more-likely-than-not
recognition threshold to be recognized. We do not have any unrecognized tax benefits that would have a material impact to our consolidated
financial statements for any open tax years. No adjustments were recognized for uncertain tax positions for the three years ended
December 31, 2016.
We recognize interest and penalties related
to unrecognized tax benefits in operating expense. As of December 31, 2016 and 2015, there were no unrecognized tax benefits nor
interest or penalties accrued related to unrecognized tax benefits, nor were any interest or penalties recognized during the three
years ended December 31, 2016.
We, or one or more of our subsidiaries, files
income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The tax year 2010 for federal taxes, as a
result of an amendment, and after 2012 for federal and state returns remains open to examination by the major taxing jurisdictions
in which we operate.
Comprehensive Income
Comprehensive income includes net income and
other comprehensive income (loss), which is primarily comprised of unrealized holding gains or losses on available-for-sale securities.
These gains or losses are excluded from net income and reported separately in our accompanying Consolidated Balance Sheets and
Consolidated Statements of Changes in Stockholders’ Equity as accumulated other comprehensive income.
During the year ended December 31, 2014, we
sold all of our available-for-sale securities. We recognized a gain on the sale of approximately $184. An unrealized gain of approximately
$120, net of tax, was reclassified from accumulated other comprehensive income to a component of net income during the period as
a result of the sale. This amount represented the complete cumulative net unrealized gain on these securities.
Earnings per Share
We compute basic earnings per share using the
two class method because our restricted stock awards participate equally with common shares in the distribution of earnings. Diluted
earnings per share reflect the potential dilution from the exercise or conversion of outstanding stock options and unvested restricted
stock awards into common stock.
Cash and Cash Equivalents
We consider all highly liquid investments with
original maturities of three months or less, at the date of acquisition, to be cash equivalents. We may have balances of cash and
cash equivalents that exceed federally insurable limits.
Marketable Securities
Our securities investments that we intend to hold to maturity are
classified as held-to-maturity securities and recorded at amortized cost. Securities investments bought expressly for the purpose
of selling in the near term are classified as trading securities and are measured at fair value with unrealized gains and losses
reported in earnings. Securities investments not classified as either held-to-maturity or trading securities are classified as
available-for-sale securities. Available-for-sale securities are recorded at fair value in the accompanying Consolidated Balance
Sheets, with the change in fair value during the period excluded from earnings and recorded net of tax as a component of other
comprehensive income. Realized gains and losses, and declines in value judged to be other than temporary, are recorded in the accompanying
Consolidated Statements of Comprehensive Income.
Receivables
Accounts receivable are generated from sales
and delivery of natural gas as measured by inputs from meter reading devices. Trade accounts receivable are carried at the expected
net realizable value. There is credit risk associated with the collection of these receivables. As such, we record an allowance
for doubtful accounts based on the amount of probable losses in our existing accounts receivable. The allowance for doubtful accounts
is based on management’s assessment of the collectability of specific customer accounts, the aging of the accounts receivable
and historical write-off amounts. The underlying assumptions may change from period to period and the allowance for doubtful accounts
could potentially cause a negative material impact to the income statement and working capital.
Two of our utilities in Ohio, Orwell and NEO,
collect from their customers, through rates, an amount to provide an allowance for doubtful accounts. As accounts are identified
as uncollectible, they are written off against this allowance for doubtful accounts with no income statement impact. In effect,
all bad debt expense is funded by the customer base. The total amount collected from customers and the amounts written off
are reviewed annually by the PUCO and the rate per Mcf is adjusted as necessary.
Natural Gas Inventory
Natural gas inventory is stated at the lower
of weighted average cost or net realizable value except for EWM – Great Falls, which is stated at the rate approved by the
MPSC and includes transportation and storage costs.
Recoverable/Refundable Costs of Gas Purchases
We account for purchased gas costs in accordance
with procedures authorized by the utility commissions in the states in which we operate. Purchased gas costs that are different
from those provided for in present rates, and approved by the respective commission, are accumulated and recovered or credited
through future rate changes. The gas cost recoveries are monitored closely by the regulatory commissions in all of the states in
which we operate and are subject to periodic audits or other review processes.
Property, Plant and Equipment
Property, plant and equipment are recorded
at original cost when placed in service. Depreciation and amortization on assets are generally recorded on a straight-line basis
over the estimated useful lives. These assets are depreciated and amortized over three to forty years.
EWR owns an interest in certain natural gas
producing reserves on properties located in northern Montana. We are depleting these reserves using the units-of-production method.
The production activities are being accounted for using the successful efforts method. We are not the operator of any of the natural
gas producing wells on these properties and we do not have significant oil- and gas-producing activities as defined by ASC 932
-
Extractive Activities – Oil and Gas
. Therefore, the disclosures defined in ASC 932 have been omitted.
Capitalized Interest
We capitalize the portion of our interest expense that is attributable
under U.S. GAAP to our more significant construction projects over the duration of the respective construction periods. Capitalized
interest is amortized to depreciation and amortization expense over the estimated useful life of the corresponding asset. During
the years ended December 31, 2016, 2015 and 2014, we capitalized interest of $147, $549 and $621, respectively.
Contributions in Aid of and Advances Received for Construction
Contributions in aid of construction are contributions
received from customers for construction that are not refundable and are amortized over the life of the assets. Customer advances
for construction includes advances received from customers for construction that are to be wholly or partially refunded. As of
December 31, 2016 and 2015, $1,105 and $1,027, respectively, was included in other long-term liabilities for customer advances
to be refunded to customers.
Goodwill and Other Intangible Assets
Goodwill represents the excess of the purchase price over the fair
value of identifiable net tangible and intangible assets acquired in a business combination. We test goodwill for impairment annually,
or more often if events or changes in circumstances indicate that the carrying value of our goodwill may be more than the fair
value. We test for goodwill impairment using a two-step approach.
In the
first step of the review process, we compare the estimated fair value of the reporting unit with its carrying value. If the estimated
fair value of the reporting unit is less than its carrying value, we recognize an impairment loss for the excess, if any, of the
carrying value over the implied fair value of the reporting unit's goodwill amount.
We recognize an acquired intangible asset whenever
the intangible arises from contractual or other legal rights, or whenever it can be separated or divided from the acquired entity
and sold, transferred, licensed, rented or exchanged, either individually or in combination with a related contract, asset or liability.
Such intangibles are amortized on a straight-line basis over their estimated useful lives unless the estimated useful life is determined
to be indefinite. Our customer relationships are amortized over an average useful life of 13 years. Accumulated amortization for
our customer relationships was approximately $1,163 and $860 at December 31, 2016 and 2015, respectively. Amortization expense
for customer relationships for the years ended December 31, 2016, 2015 and 2014 was $303. We expect that our amortization expense
related to our intangible assets will be $303 for each of the next five years.
Debt Issuance Costs
Debt issuance costs are fees and other direct
incremental costs we incurred in obtaining debt financing and are recognized as a reduction of the associated liability in the
accompanying consolidated balance sheets. Costs related to line of credit arrangements are presented as an asset in the accompanying
financial statements. At December 31, 2016 and 2015, we had $510 and $253, respectively, of debt issuance costs, net of accumulated
amortization included in other assets and we had $608 and $302, respectively, of debt issuance costs, net of accumulated amortization
that reduced our debt balances on our Consolidated Balance Sheets. Additionally, upon refinancing on October 19, 2016, we recognized
$962 of deferred losses on our debt reacquisition as assets in our Consolidated Balance Sheet, which will be amortized over the
respective lives of the new debt. The unamortized balance of this asset was $940 at December 31, 2016. We recognized interest expense
related to the amortization or write off of debt issuance costs of $487, $656, and $420, respectively, for the years ended December
31, 2016, 2015 and 2014. During 2016, we paid $1,990 of debt issuance costs related to the increase in our Bank of America revolving
credit facility availability and our short term loans with NIL Funding. In connection with our sale of EWW and the Pipeline Assets,
during the fourth quarter of 2015 we committed to repay the portion of notes payable to Allstate/CUNA that was allocated to EWW
and EWD on February 12, 2016. Accordingly, we wrote off the unamortized debt issuance costs that were allocated to EWW and EWD’s
portion of the debt, totaling $103. This amount was recognized within discontinued operations, net of tax on our Consolidated Statement
of Comprehensive Income during 2015. As of January 1, 2016, we adopted ASU 2015-3,
Simplifying the Presentation of Debt Issuance
Costs
, which requires debt issuance costs to be presented in the balance sheet as a reduction of the associated debt liability.
This standard requires retrospective application, and as such, we reclassified $302 of debt issuance costs from other non-current
assets to a reduction of our notes payable in our Condensed Consolidated Balance Sheet as of December 31, 2015
.
See
Note 13 – Credit Facilities and Long-Term Debt
for more information regarding our debt agreements.
We estimate that we will recognize amortization
of debt issuance costs of $248 in 2017 through 2020, and $114 in 2021.
Investment in Unconsolidated Affiliate
We use the equity method of accounting for
equity investments in entities when we do not control the investee, but can exert significant influence over the financial and
operating policies of the investee. Under the equity method, we record our share of the investee’s underlying net income
or loss as non-operating income in our Consolidated Statements of Comprehensive Income with a corresponding increase or decrease
in the investment account. Distributions received from the investee reduce our investment balance.
Restricted Cash
At December 31, 2015, we had a restricted cash
balance of $1,898. At December 31, 2015, $948 was related to our Sun Life debt covenants and was released upon our extinguishment
of the debt on October 19, 2016. The remaining restricted cash of $950 at December 31, 2015, was related to a customer deposit
that was refundable to the customer upon termination of the related gas transportation service agreement. We were restricted from
using these funds unless and until a default under this agreement occurred, or otherwise agreed to by the parties to the agreement.
This customer filed for protection under Chapter 11 of the Federal Bankruptcy Code and we applied $450 of the restricted cash to
open accounts receivable balances in January 2016. The remaining balance paid certain remaining open accounts receivable during
2016.
Impairment of Long-Lived Assets
We evaluate our long-lived assets for impairment whenever events
or changes in circumstances indicate that the carrying amount of such assets or intangibles may not be recoverable. We measure
the recoverability of assets to be held and used by a comparison of the carrying amount of an asset to future undiscounted net
cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment loss to be recognized
is measured as the amount by which the carrying value of the assets exceeds their fair value.
Asset Retirement Obligations
We record the fair value of a liability for
an asset retirement obligation (
"
ARO
"
)
in the period in which it was incurred or acquired. The associated asset retirement costs are capitalized as part of the carrying
amount of the long-lived asset, and amortized over the related asset’s useful life. The increase in carrying value of a property
associated with the capitalization of an asset retirement cost is included in property, plant and equipment in the accompanying
Consolidated Balance Sheets. The accretion of the asset retirement liability is allocated to operating expense using a systematic
and rational method.
Derivatives and Hedging Activities
We recognize all of our derivative instruments
as either assets or liabilities in the statement of financial position at fair value. We may account for changes in the fair value
of a derivative instrument as a hedge if it meets certain qualifications and we have designated it as such. We must designate hedging
instruments based upon the exposure being hedged, and recognize gains and losses related to hedges in our consolidated balance
sheets. We recognize gains and losses related to derivative instruments that are not designated as hedging instruments in our consolidated
statements of comprehensive income during the current period.
We primarily manage commodity price risk related
to natural gas by using derivative instruments. We enter forward contracts and commodity price swaps with fixed pricing to protect
profit margins on future obligations to deliver gas at fixed prices or to protect our regulated utility customers from possible
adverse price fluctuations in the market. These forward contracts usually qualify as a “normal purchase” or “normal
sale” and are exempt from derivative accounting treatment. Our commodity price swaps do not meet any of the hedging exemption
criteria under ASC 815 and are accounted for as derivatives.
Discontinued Operations
We present discontinued operations in our consolidated
financial statements when we believe that the disposition of assets constitutes a strategic shift that will have a major effect
on our operations or financial results. The results of prior periods are reclassified to conform to the current year presentation.
Corporate overhead is not allocated to discontinued operations and any overhead that was allocated to the discontinued operations
in prior periods is reclassified to our corporate and other segment. We do not allocate interest expense to discontinued operations
unless debt is to be assumed by the buyer of our discontinued operations or debt is to be repaid as a result of the disposal of
our discontinued operations.
Recent Accounting Pronouncements
In January 2017, the FASB issued ASU 2017-04,
Intangibles – Goodwill and Other,
intended to simplify the subsequent measurement of goodwill. The standards update
eliminates the requirement for an entity to calculate the implied fair value of a goodwill impairment charge. Instead, an entity
will perform its annual, or interim, goodwill impairment testing by comparing the fair value of a reporting unity with its carrying
amount and recording an impairment charge for the amount by which the carrying amount exceeds the fair value. The standards update
is effective prospectively for annual and interim goodwill impairment testing performed in fiscal years beginning after December
15, 2019, the adoption of this standards update is not expected to impact our consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows
, regarding the presentation of restricted cash on the statement of cash flows. The standards update
requires that the reconciliation of the beginning and end of period cash amounts shown in the statement of cash flows include restricted
cash. When restricted cash is presented separately from cash and cash equivalents on the balance sheet, a reconciliation is required
between the amounts presented on the statement of cash flows and the balance sheet. Also, the new guidance requires the disclosure
of information about the nature of the restrictions. The standards update is effective retrospectively for fiscal years and interim
periods beginning after December 15, 2017, with early adoption permitted.
In August 2016, the FASB issued ASU 2016-15,
Classification of Certain Cash Receipts and Cash Payments
, which clarifies the treatment of several types of cash receipts
and payments for which there was diversity in practice. This update is effective for annual periods beginning after December 15,
2017, and interim periods within those fiscal years, with early adoption permitted, including adoption in an interim period. We
anticipate that the adoption of this guidance will not have a material impact on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09,
Improvements to Employee Share Based Payment Accounting
, to simplify several aspects of the accounting for share-based payment
transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification
on the statement of cash flows. The guidance will be effective for annual periods beginning after December 15, 2016 and interim
periods within those annual periods. We are currently evaluating the impact of this newly issued guidance on our consolidated financial
statements.
In February 2016, the FASB issued ASU 2016-02,
Leases
, which requires recognition of lease assets and lease liabilities on the balance sheet and disclosure of key information
about leasing arrangements. The standard will become effective for interim and annual periods beginning after December 15, 2018,
with early adoption permitted. The guidance is required to be adopted at the earliest period presented using a modified retrospective
approach. We are currently evaluating the impact this standard will have on our consolidated financial statements and whether we
will adopt the guidance early.
In November 2015, the FASB issued ASU 2015-17,
Balance Sheet Classification of Deferred Taxes
, which stipulates all deferred tax assets and liabilities are to be classified
and presented in the balance sheet as non-current items. The guidance will be effective for interim and annual periods beginning
after December 15, 2016, with early adoption permitted, and may be applied either prospectively to all deferred tax liabilities
and assets or retrospectively to all periods presented. We are currently evaluating the impact that this newly issued guidance
will have on our consolidated financial statements.
In May 2014, the FASB issued
ASU 2014-09
Revenue from Contracts with Customers
, which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The
core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount
that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five
step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition
process than are required under existing U.S. GAAP. This pronouncement is effective for annual reporting periods beginning after
December 15, 2017, and is to be applied using one of two retrospective application methods, with early application not permitted.
We are currently evaluating the impact of the pending adoption of ASU 2014-09 on the consolidated financial statements. We do not
expect that the adoption of this standard will have a material impact on our consolidated financial statements.
Note 3 – Discontinued Operations
The following table presents the amounts of the major line items
that are included in discontinued operations, net of income tax that are presented on our Consolidated Statements of Comprehensive
Income. There were no items remaining on our Consolidated Balance Sheet as of December 31, 2016 and 2015, related to discontinued
operations.
|
|
Years ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
EWW/Pipeline assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
-
|
|
|
$
|
4,609
|
|
|
$
|
10,927
|
|
Cost of sales
|
|
|
-
|
|
|
|
(2,534
|
)
|
|
|
(6,697
|
)
|
Distribution, general & administrative
|
|
|
(9
|
)
|
|
|
(780
|
)
|
|
|
(1,503
|
)
|
Maintenance
|
|
|
-
|
|
|
|
(81
|
)
|
|
|
(175
|
)
|
Depreciation & amortization
|
|
|
-
|
|
|
|
-
|
|
|
|
(542
|
)
|
Taxes other than income
|
|
|
-
|
|
|
|
(169
|
)
|
|
|
(321
|
)
|
Other income
|
|
|
9
|
|
|
|
6
|
|
|
|
28
|
|
Interest expense
|
|
|
(29
|
)
|
|
|
(412
|
)
|
|
|
(1
|
)
|
Pretax income from discontinued operations
|
|
|
(29
|
)
|
|
|
639
|
|
|
|
1,716
|
|
Gain on the sale of EWW/Pipeline Assets
|
|
|
-
|
|
|
|
5,368
|
|
|
|
-
|
|
Income tax (expense) benefit
|
|
|
33
|
|
|
|
(2,458
|
)
|
|
|
(643
|
)
|
Income from discontinued operations of EWW/Pipeline Assets
|
|
$
|
4
|
|
|
$
|
3,549
|
|
|
$
|
1,073
|
|
Independence
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations of Independence
|
|
|
(16
|
)
|
|
|
(30
|
)
|
|
|
(40
|
)
|
Discontinued operations, net of income tax
|
|
$
|
(12
|
)
|
|
$
|
3,519
|
|
|
$
|
1,033
|
|
EWW and the Glacier & Shoshone
Pipelines
On October 10, 2014, we executed a stock purchase
agreement for the sale of all of the stock of our wholly-owned subsidiary, EWW, to Cheyenne Light, Fuel and Power Company (“Cheyenne”).
EWW has historically been included in our natural gas operations segment. In conjunction with this sale, our former EWD subsidiary
entered into an asset purchase agreement for the sale of the transmission pipeline system known as the Shoshone Pipeline and the
gathering pipeline system known as the Glacier Pipeline and certain other assets directly used in the operation of the pipelines
(together the “Pipeline Assets”) to Black Hills Exploration and Production, Inc. (“Black Hills”), an affiliate
of Cheyenne. The Pipeline Assets have historically comprised the entirety of our pipeline segment. As a result of EWW and the Pipeline
Asset’s classification as discontinued operations, their results have been included in our corporate and other segment for
all periods presented. On July 1, 2015, the transaction was completed and we received proceeds, net of costs to sell, of $14,223
for the sale of EWW and $1,185 for the sale of the Pipeline Assets. We recorded gains on the sales of $4,869 and $499 for EWW and
the Pipeline Assets, respectively, in discontinued operations. In connection with our sale of EWW and the Pipeline Assets, during
the fourth quarter of 2015 we committed to repay the portion of notes payable to Allstate/CUNA that was allocated to EWW and EWD
on February 12, 2016, including a prepayment penalty of $310. Additionally, we wrote off the unamortized debt issue costs that
were allocated to EWW and EWD’s portion of the debt, totaling $103. During the first quarter of 2016 we adjusted our estimate
of the prepayment penalty by $29. These amounts were recognized within interest expense related to the EWW/Pipeline Assets in the
table above, and within discontinued operations, net of tax on our Consolidated Statements of Comprehensive Income. See
Note
13 – Credit Facilities and Long-Term Debt
for more information regarding our debt agreements.
Our subsidiary, EWR, continues to conduct some
business with both EWW and Black Hills relating to the Pipeline Assets. EWW will continue to purchase natural gas from EWR under
an established gas purchase agreement through the first quarter of 2017. Additionally, EWR will continue to use EWW’s transmission
system under a standing transportation agreement through the first quarter of 2017. Finally, EWR will continue to use the Pipeline
Assets’ transmission systems under a standing transportation agreement through October 2017. During 2016 and 2015, we received
$3,827 and $1,550, respectively from Black Hills for gas and transportation under these ongoing agreements, and we recorded revenue
of $4,104 and $1,832, respectively, related to these transactions in our income from continuing operations. These transactions
are a continuation of transactions that were conducted prior to the sales of EWW and the Pipeline Assets and were eliminated through
the consolidation process until their sale to third parties.
Note 4 – Disposals
We have recently completed certain divestitures
as part of our strategy to monetize non-core assets so that we may direct our energies and resources on operations that we believe
have higher growth potential. The sale of these assets does not constitute a strategic shift that will have a major effect
on our operations or financial results and as such, the disposals are not classified as discontinued operations in our consolidated
financial statements.
On October 15, 2015, we sold an office building
in Mentor, Ohio for net proceeds of $1,220, which resulted in a loss on the transaction of $409, based on the carrying value of
the property of $1,760 and the costs to sell the property. This represented substantially all of the assets of our 8500 Station
Street subsidiary. We recorded this loss in other income in the accompanying Consolidated Statements of Comprehensive Income
for the year ended December 31, 2015. Including the loss on the sale transaction, 8500 Station Street experienced a pre-tax loss
of $469, which is included in our pre-tax income from continuing operations for the year ended December 31, 2015. Our 8500 Station
Street subsidiary has historically been reported as a component of our natural gas operations segment and contributed $161 to our
pre-tax income from continuing operations for the year ended December 31, 2014.
In November 2015, we sold nearly all of the
assets and liabilities of our Clarion River and Walker Pennsylvania utilities to Utility Pipeline, LTD for proceeds of $848, which
resulted in a gain on the transaction of $415. Including the gain on the sale transaction, Clarion River and Walker Gas contributed
$350 to our pre-tax income from continuing operations for the year ended December 31, 2015. Clarion River and Walker Gas have historically
been reported as a component of our natural gas operations segment and collectively contributed $213 and $46 to our pre-tax income/(loss)
from continuing operations for the years ended December 31, 2014 and 2013, respectively.
On December 11, 2015, we sold to Kentucky Frontier Gas, LLC nearly
all the assets and liabilities of our subsidiary PGC in Kentucky, for proceeds of $1,900, which resulted in a loss on the transaction
of $341, based on the carrying value of our assets and our costs to sell the assets. These losses were recorded in other income
in the accompanying Consolidated Statement of Comprehensive Income for the year ended December 31, 2015. Including the loss on
the sale transaction, PGC experienced a pre-tax loss of $626, which is included in our pre-tax income from continuing operations
for the year ended December 31, 2015. PGC has historically been reported as a component of our natural gas operations segment and
accounted for losses of $225 included in our pre-tax income from continuing operations for the year ended December 31, 2014.
Note 5 - Goodwill
In June 2013, we and our wholly-owned Ohio
subsidiary, GNR, finalized our purchase of substantially all the assets and certain liabilities of JDOG Marketing. We accounted
for this transaction as a business combination and as a result recognized $2,102 of goodwill. We used many estimates in the determination
of the acquisition date fair value of JDOG Marketing, including the amount of future sales between GNR and two of our Ohio natural
gas utility subsidiaries, NEO and Orwell.
In November 2013, the PUCO released an Opinion
and Order related to the 2012 NEO and Orwell GCR audits. This Opinion and Order, amongst other things, fined our NEO and Orwell
subsidiaries for failure to terminate natural gas purchase agreements with JDOG Marketing. As a result of these fines, we have
ceased all future purchases by NEO and Orwell of natural gas from GNR. We are unsure if GNR will be able to replace these lost
sales volumes with sales to other sources. This change in forecast negatively affected the calculated enterprise value of GNR and
led to the 2013 goodwill impairment charge included in our marketing and production segment. We calculated this impairment charge
using both a discounted cash flow method and a guideline public company method.
The schedule below presents the changes in the carrying amount of
goodwill for the years ended December 31, 2016 and 2015:
|
|
Natural Gas
|
|
|
Marketing and
Production
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2014
|
|
$
|
14,780
|
|
|
$
|
1,376
|
|
|
$
|
16,156
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill reclassified to assets held for sale
|
|
|
(284
|
)
|
|
|
-
|
|
|
|
(284
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2015
|
|
|
14,496
|
|
|
|
1,376
|
|
|
$
|
15,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill reclassified to assets held for sale
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2016
|
|
$
|
14,496
|
|
|
$
|
1,376
|
|
|
$
|
15,872
|
|
The following table presents our gross goodwill
balance and accumulated impairment loss as of December 31, 2016 and 2015.
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Goodwill, gross
|
|
|
|
|
|
|
|
|
Natural gas
|
|
$
|
14,496
|
|
|
$
|
14,496
|
|
Marketing and production
|
|
|
2,102
|
|
|
|
2,102
|
|
|
|
|
|
|
|
|
|
|
Total goodwill, gross
|
|
|
16,598
|
|
|
|
16,598
|
|
|
|
|
|
|
|
|
|
|
Accumulated impairment loss
|
|
|
|
|
|
|
|
|
Marketing and production
|
|
|
(726
|
)
|
|
|
(726
|
)
|
|
|
|
|
|
|
|
|
|
Total accumulated impairment loss
|
|
|
(726
|
)
|
|
|
(726
|
)
|
|
|
|
|
|
|
|
|
|
Goodwill, net
|
|
$
|
15,872
|
|
|
$
|
15,872
|
|
Note 6 - Investment in Unconsolidated Affiliate
Our EWR subsidiary, which is part of our marketing
and production segment, owns a 24.5% interest in Kykuit, a developer and operator of oil, gas and mineral leasehold estates located
in Montana. We account for the investment in Kykuit using the equity method. We have invested $2,160 in Kykuit as it could provide
a supply of natural gas in close proximity to our natural gas operations in Montana. Our obligations to make additional investments
in Kykuit are limited under our agreement with the other Kykuit investors. At December 31, 2016, we are obligated to invest no
more than an additional $79 over the life of the venture. Other investors in Kykuit include Richard M. Osborne, our former
chairman and chief executive officer; JDOG, a publicly held gas exploration company, which is also the managing member of Kykuit;
Thomas J. Smith, a former director of ours and our former chief financial officer and a director of JDOG; and Gregory J. Osborne,
chief executive officer and a member of our board of directors and the former president and director of JDOG. Due to significant
doubts regarding the recoverability of Kykuit’s leaseholds on unproven oil and gas properties coupled with the bankruptcy
of the managing member, we impaired the balance of our investment in Kykuit in 2014. This expense is included in our loss from
unconsolidated affiliate in the accompanying Consolidated Statement of Comprehensive Income for the year ended December 31, 2014.
Note 7 – Fair Value Measurements
We follow a fair value hierarchy that prioritizes
the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices
in active markets for identical assets and liabilities (Level 1) and the lowest priority to measurements involving unobservable
inputs (Level 3). The three levels of the fair value hierarchy are as follows:
Level 1 inputs - observable inputs
that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 inputs - other inputs that
are directly or indirectly observable in the marketplace.
Level 3 inputs - unobservable inputs which
are supported by little or no market activity.
We categorize our fair value measurements within
the hierarchy based on the lowest level input that is significant to the fair value measurement in its entirety. The following
table presents the amount and level in the fair value hierarchy of each of our assets and liabilities that are measured at fair
value on a recurring basis as of December 31, 2016 and 2015.
|
|
December 31, 2016
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
TOTAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity swap contracts
|
|
$
|
-
|
|
|
$
|
139
|
|
|
$
|
-
|
|
|
$
|
139
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
TOTAL
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent consideration
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
672
|
|
|
$
|
672
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commodity swap contracts
|
|
$
|
-
|
|
|
$
|
54
|
|
|
$
|
-
|
|
|
$
|
54
|
|
The fair value of our financial instruments
including cash and cash equivalents, notes and accounts receivable, and notes and accounts payable are not materially different
from their carrying amounts. Under the fair value hierarchy, the fair value of cash and cash equivalents is classified as a Level
1 measurement and the fair value of notes payable are classified as Level 2 measurements.
Commodity Swaps Contracts
We value our commodity swap contracts, which
are categorized in Level 2 of the fair value hierarchy, by comparing the futures price at the measurement date of the natural gas
commodity specified in the contract to the fixed price that we will pay. See
Note 8 – Derivative Financial Instruments
for more information regarding our commodity swap contracts.
Contingent Consideration Liability
The contingent consideration liability categorized
in Level 3 of the fair value hierarchy arose as a result of a purchase agreement, pursuant to which we acquired the assets of our
GNR subsidiary in 2013. The purchase agreement for the transaction provided for contingent “earn-out” payments in the
form of validly issued, fully paid and non-assessable shares of our common stock for a period of five years after the closing of
the transaction if the acquired business achieved a minimum annual EBITDA target of $810. If the acquired business’s actual
EBITDA for a given year is less than the target EBITDA, then no earnout payment is due and payable for that period. If the acquired
business’s actual EBITDA for a given year meets or exceeds the target EBITDA, then an earnout payment in an amount equal
to actual EBITDA divided by target EBITDA multiplied by $575 will have been earned for that year.
We recorded a liability for an earn-out payment
for the year ended December 31, 2013. We did not believe an earn-out payment was due to JDOG Marketing as a result of payments
made by the Ohio utilities to JDOG Marketing during 2013 that were disallowed by the PUCO. Richard M. Osborne, our former chairman
and chief executive officer, believed that JDOG Marketing was entitled to the earn-out. Richard M. Osborne and JDOG Marketing filed
a suit against us for the earn-out payment for 2013. During the second quarter of 2016, we settled the suit and recorded a gain
of $672 related to the settlement agreement with Richard M. Osborne that terminated the earn-out provision of the agreement. See
Note 19 – Commitments and Contingencies
for more information about the litigation between us and Richard M. Osborne.
The following table reconciles the beginning and ending balances
of the contingent consideration liability categorized under Level 3 of the fair value hierarchy.
Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
|
|
|
|
|
|
|
|
|
|
Contingent Consideration Liability
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Balance January 1st
|
|
$
|
672
|
|
|
$
|
747
|
|
|
|
|
|
|
|
|
|
|
Total gains for period:
|
|
|
|
|
|
|
|
|
Included in net income
|
|
|
(672
|
)
|
|
|
(75
|
)
|
Included in other comprehensive income
|
|
|
-
|
|
|
|
-
|
|
Balance December 31st
|
|
$
|
-
|
|
|
$
|
672
|
|
The change in fair value included in net income
in the table above is reflected in our contingent consideration gain in our accompanying Consolidated Statements of Comprehensive
Income and is the result of an unrealized holding gain associated with the change in the fair value of our contingent consideration
liability.
The following table summarizes quantitative
information used in determining the fair value of our liabilities categorized in Level 3 of the fair value hierarchy.
Quantitative Information about Level 3 Fair Value Measures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
Valuation
Techniques
|
|
Unobservable Input
|
|
Range
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent Consideration
|
|
$
|
672
|
|
|
Monte Carlo analysis
|
|
Forecasted annual EBITDA
|
|
|
$500-$600
|
|
|
|
|
|
|
|
|
|
Weighted avg cost of capital
|
|
|
14.0% - 14.0%
|
|
|
|
|
|
|
|
|
|
U.S. Treasury yields
|
|
|
0.7% - 1.1%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discounted cash flow
|
|
U.S. Treasury yields
|
|
|
0.7% - 1.1%
|
|
|
|
|
|
|
|
|
|
Credit spread
|
|
|
2.0% - 2.4%
|
|
Note 8 – Derivative Financial Instruments
We enter into commodity swap contracts in order
to reduce the commodity price risk related to natural gas prices. These commodity swap contracts set a fixed price that we will
pay for specified notional quantities of natural gas. We have not designated any of these commodity swaps contracts as hedging
instruments.
The following table summarizes our commodity
swap contracts outstanding as of December 31, 2016. We will pay the fixed price listed based on the volumes denoted in the table
below in exchange for a variable payment from a counterparty based on the market price for the natural gas product listed for these
volumes. These payments are settled monthly.
Product
|
|
Type
|
|
|
Contract Period
|
|
|
Volume
|
|
|
Price per MMBtu
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AECO Canada - CGPR 7A Natural Gas
|
|
|
Swap
|
|
|
|
1/1/17 - 3/31/17
|
|
|
|
500 MMBtu/Day
|
|
|
$
|
2.109
|
|
AECO Canada - CGPR 7A Natural Gas
|
|
|
Swap
|
|
|
|
1/1/17 - 3/31/17
|
|
|
|
500 MMBtu/Day
|
|
|
$
|
1.827
|
|
AECO Canada - CGPR 7A Natural Gas
|
|
|
Swap
|
|
|
|
4/1/17 - 10/31/17
|
|
|
|
200 MMBtu/Day
|
|
|
$
|
1.775
|
|
AECO Canada - CGPR 7A Natural Gas
|
|
|
Swap
|
|
|
|
6/1/17 - 3/31/18
|
|
|
|
150 MMBtu/Day
|
|
|
$
|
2.162
|
|
AECO Canada - CGPR 7A Natural Gas
|
|
|
Swap
|
|
|
|
11/1/17 - 3/31/18
|
|
|
|
250 MMBtu/Day
|
|
|
$
|
2.078
|
|
AECO Canada - CGPR 7A Natural Gas
|
|
|
Swap
|
|
|
|
12/1/17 - 5/31/18
|
|
|
|
500 MMBtu/Day
|
|
|
$
|
2.536
|
|
We included in cost of sales in the accompanying Consolidated Statements
of Comprehensive Income, $(132), $(96) and $151, respectively, of (gains)/losses on commodity swap agreements not designated as
hedging instruments for the year ended December 31, 2016, 2015 and 2014, respectively, related to our non-regulated utilities.
As of December 31, 2016 and 2015, we included $139 and $(54), respectively, of assets (liabilities) related to commodity swap contracts
that are not designated as hedging instruments in derivative instruments in the accompanying Consolidated Balance Sheets.
Note 9 – Regulatory Assets and Liabilities
The following table summarizes the components
of our regulatory asset and liability balances at December 31, 2016 and 2015.
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Current
|
|
|
Long-term
|
|
|
Current
|
|
|
Long-term
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REGULATORY ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoverable cost of gas purchases
|
|
$
|
2,638
|
|
|
$
|
-
|
|
|
$
|
1,936
|
|
|
$
|
-
|
|
Deferred costs
|
|
|
490
|
|
|
|
735
|
|
|
|
490
|
|
|
|
1,226
|
|
Income taxes
|
|
|
-
|
|
|
|
297
|
|
|
|
-
|
|
|
|
297
|
|
Rate case costs
|
|
|
3
|
|
|
|
-
|
|
|
|
43
|
|
|
|
-
|
|
Total regulatory assets
|
|
$
|
3,131
|
|
|
$
|
1,032
|
|
|
$
|
2,469
|
|
|
$
|
1,523
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
REGULATORY LIABILITIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Over-recovered gas purchases
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
487
|
|
|
$
|
-
|
|
Income taxes
|
|
|
-
|
|
|
|
83
|
|
|
|
-
|
|
|
|
83
|
|
Asset retirement costs
|
|
|
-
|
|
|
|
1,334
|
|
|
|
-
|
|
|
|
1,168
|
|
Total regulatory liabilities
|
|
$
|
-
|
|
|
$
|
1,417
|
|
|
$
|
487
|
|
|
$
|
1,251
|
|
Recoverable Cost of Gas Purchases/Over-recovered
Gas Purchases
We account for purchased gas costs in accordance
with procedures authorized by the utility commissions in the states in which we operate. Purchased gas costs that are different
from those provided for in present rates, and approved by the respective commission, are accumulated and recovered (recoverable
cost of gas purchases) or credited through future rate changes (over-recovered gas purchases). We generally recover or credit these
amounts through rates within one year. The regulatory commissions in all of the states in which we operate closely monitor GCR
mechanisms, and gas cost recoveries are subject to periodic audits or other review processes.
Deferred Costs
On June 27, 2014, our Frontier Natural Gas
subsidiary entered into a stipulation with the Staff of the NCUC (Docket No G-40, Sub 124), in which the subsidiary agreed, among
other items, to reclassify $2,450 from its recoverable cost of gas purchases asset account to a deferred gas cost asset account.
This amount represents a portion of deferred expenses related to the subsidiary’s January and February 2014 gas purchases
on which it will not earn a return. The stipulation calls for amortization of this amount as operating expense over a five year
period beginning July 1, 2014. Under the stipulation, the Staff agreed to not request a change in Frontier Natural Gas’s
base rates, exclusive of cost of gas, for the same five year period.
Income Taxes
Both the regulatory asset and regulatory liability
related to income taxes is included in our rate base and upon which we earn a return.
Asset Retirement Costs
As a result of regulatory action by the PUCO,
Orwell and Brainard accrue an estimated liability for removing certain classes of utility plant long-lived assets at the end of
their useful lives. The liability is equal to a set percent of the asset’s historic cost according to the following table:
|
|
Percent of Asset Cost
|
|
|
|
Orwell
|
|
|
Brainard
|
|
|
|
|
|
|
|
|
Mains
|
|
|
15
|
%
|
|
|
20
|
%
|
Meter/regulator stations
|
|
|
10
|
%
|
|
|
|
|
Service lines
|
|
|
75
|
%
|
|
|
|
|
We accrue these liabilities over the useful
lives of the assets with the corresponding expense included as a portion of depreciation expense. Upon retirement of any assets
included in these asset classes, any costs incurred to retire the asset will be recorded against this regulatory liability. Any
costs in excess of the liability will be expensed as incurred and any residual liability in excess of incurred costs to retire
the asset will act to reduce Orwell and Brainard’s future rates. As of December 31, 2016, none of the assets included in
these asset classes have been retired.
Other Regulatory Assets
Our rate case costs do not earn a return and
will be amortized over a period of 2 to 3 years.
Note 10 – Earnings per Share
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
525
|
|
|
$
|
1,169
|
|
|
$
|
2,729
|
|
Income (loss) from discontinued operations
|
|
|
(12
|
)
|
|
|
3,519
|
|
|
|
1,033
|
|
Net income
|
|
$
|
513
|
|
|
$
|
4,688
|
|
|
$
|
3,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average common shares outstanding
|
|
|
10,510,644
|
|
|
|
10,496,979
|
|
|
|
10,478,312
|
|
Dilutive effect of restricted stock awards
|
|
|
623
|
|
|
|
1,476
|
|
|
|
505
|
|
Diluted weighted average common shares outstanding
|
|
|
10,511,267
|
|
|
|
10,498,455
|
|
|
|
10,478,817
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic & diluted earnings per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.05
|
|
|
$
|
0.11
|
|
|
$
|
0.26
|
|
Discontinued operations
|
|
|
-
|
|
|
|
0.34
|
|
|
|
0.10
|
|
Net income
|
|
$
|
0.05
|
|
|
$
|
0.45
|
|
|
$
|
0.36
|
|
We compute basic earnings per share by dividing
net income by the weighted average number of common shares outstanding during the period. There were no shares or share equivalents
that would have been anti-dilutive and therefore excluded in the calculation of diluted earnings per share for the years ended
December 31, 2016, 2015 and 2014. Unvested restricted stock awards are treated as participating securities because they participate
equally in dividends and earnings with other common shares.
Note 11 – Property, Plant & Equipment
Components of property, plant, and equipment
were as follows:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Gas transmission & distribution facilities
|
|
$
|
150,502
|
|
|
$
|
144,977
|
|
Land
|
|
|
6,524
|
|
|
|
6,074
|
|
Buildings & leasehold improvements
|
|
|
10,015
|
|
|
|
9,746
|
|
Transportation equipment
|
|
|
5,550
|
|
|
|
5,749
|
|
Other equipment
|
|
|
19,199
|
|
|
|
17,232
|
|
Producing natural gas properties
|
|
|
3,887
|
|
|
|
4,032
|
|
Construction work in progress
|
|
|
1,002
|
|
|
|
4,878
|
|
Property, plant & equipment
|
|
|
196,679
|
|
|
|
192,688
|
|
Accumulated depreciation, depletion & amortization
|
|
|
(56,953
|
)
|
|
|
(50,237
|
)
|
|
|
|
139,726
|
|
|
|
142,451
|
|
Assets held for sale
|
|
|
(35
|
)
|
|
|
(35
|
)
|
Property, plant & equipment, net
|
|
$
|
139,691
|
|
|
$
|
142,416
|
|
At December 31, 2016 and 2015, we reflected
in our Consolidated Balance Sheets $10,453 and $9,852 of property, plant and equipment related to our new ERP system. As of December
31, 2015, two of three phases of that project were completed and $7,521 of the related assets were classified as other equipment
under a capital lease, while the balance related to phase three remained in construction work in progress. The final phase of our
ERP system implementation was completed in the first quarter of 2016, and we recorded property, plant and equipment and a capital
lease liability of $1,672. See
Note 19 - Commitments and Contingencies
for information regarding our capital leases. The
cost basis and accumulated depreciation of assets recorded under capital leases, which are included in property, plant, and equipment
on our Consolidated Balance Sheets are as follows as of December 31, 2016 and 2015:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Gas transmission & distribution facilities
|
|
$
|
6,320
|
|
|
$
|
6,320
|
|
Other equipment
|
|
|
9,192
|
|
|
|
7,521
|
|
Capital lease assets, gross
|
|
|
15,512
|
|
|
|
13,841
|
|
Accumulated depreciation
|
|
|
(2,804
|
)
|
|
|
(1,467
|
)
|
Capital lease assets, net
|
|
$
|
12,708
|
|
|
$
|
12,374
|
|
We recorded depreciation expense on assets
under capital leases of $1,338, $564, and $401, for the years ended December 31, 2016, 2015 and 2014, respectively.
Producing Natural Gas Properties
In order to provide a stable source of natural
gas for a portion of its requirements, EWR owns two natural gas production properties and three gathering systems located in north
central Montana. We deplete the cost of the gas properties using the units-of-production method. As of December 31, 2016 and 2015,
we estimated, based on reserve estimates provided by an independent reservoir engineer, the net gas reserves at 1.9 Bcf (unaudited)
and 1.5 Bcf (unaudited), respectively, and that the gas reserves had net present values of $433 and $686 respectively, after applying
a 10% discount (unaudited). The net book value of the gas properties was $698 and $782 at December 31, 2016 and 2015, respectively.
We deplete the wells based upon production
at approximately 14%, 13% and 10% per year as of December 31, 2016, 2015 and 2014, respectively. For the years ended December 31,
2016, 2015 and 2014, EWR’s portion of the daily gas production was 261 Mcf, 318 Mcf and 395 Mcf per day, or 5.3%, 16.2% and
20.0% of EWR’s volume requirements, respectively.
EWR owns working interests in a group of approximately
50 producing natural gas properties and a 75% ownership interest in a gathering system located in northern Montana
.
For the years ended December 31, 2016, 2015 and 2014, our portion of the daily gas production was 96 Mcf, 114, Mcf and 107
Mcf per day, or 2.0%, 5.8% and 5.5% of EWR’s volume requirements, respectively. For the years ended December 31, 2016, 2015
and 2014, our portion of the estimated daily gas production from the reserves was 357 Mcf, 432 Mcf and 502 Mcf, or 7.3%, 22.0%
and 26.0% of our volume requirements in our Montana market, respectively. The wells are operated by an independent third party
operator who also has an ownership interest in the properties.
Note 12 – Asset Retirement Obligations
We have identified but not recognized ARO liabilities
related to gas transmission and distribution assets resulting from easements over property that we do not own. These easements
are generally perpetual and only require retirement action upon abandonment or cessation of use of the property for the specified
purpose. We cannot estimate an ARO liability for such easements as we intend to utilize these properties indefinitely. In the event
that we decide to abandon or cease the use of a particular easement, an ARO liability will be recorded at that time.
Our recognized asset retirement obligations
represent the estimated costs to retire certain natural gas producing wells. The following schedule presents our recognized asset
retirement obligations, included in other long-term liabilities in our Consolidated Balance Sheets as of December 31, 2016 and
2015.
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Balance, January 1st
|
|
$
|
1,218
|
|
|
$
|
1,197
|
|
Accretion expense
|
|
|
-
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31st
|
|
$
|
1,218
|
|
|
$
|
1,218
|
|
We have no assets that are legally restricted
for purposes of settling our AROs. As of December 31, 2015, our ARO costs were fully depreciated.
Note 13 – Credit Facilities and Long-Term
Debt
The following table presents our outstanding
borrowings at December 31, 2016 and 2015.
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Borrowings outstanding
|
|
|
|
|
|
|
|
|
LIBOR plus 1.75 to 2.25%, Bank of America line of credit, due October 19, 2021
|
|
$
|
13,450
|
|
|
$
|
-
|
|
4.23% TIAA Senior Notes, due October 19, 2028
|
|
|
50,000
|
|
|
|
-
|
|
6.95% NIL Funding fixed rate note to related party, due April 20, 2016
|
|
|
-
|
|
|
|
2,000
|
|
LIBOR plus 1.75 to 2.25%, Bank of America line of credit, due April 1, 2017
|
|
|
-
|
|
|
|
15,750
|
|
LIBOR plus 1.75 to 2.25%, Bank of America amortizing term loan, due April 1, 2017
|
|
|
-
|
|
|
|
8,375
|
|
6.16%, Allstate/CUNA Senior unsecured note, due June 29, 2017
|
|
|
-
|
|
|
|
13,000
|
|
5.38%, Sun Life fixed rate note, due June 1, 2017
|
|
|
-
|
|
|
|
15,334
|
|
4.15% Sun Life senior secured guaranteed note, due June 1, 2017
|
|
|
-
|
|
|
|
2,990
|
|
Vehicle and equipment financing loans
|
|
|
-
|
|
|
|
22
|
|
Total borrowings outstanding
|
|
|
63,450
|
|
|
|
57,471
|
|
Less: unamortized debt issuance costs
|
|
|
(608
|
)
|
|
|
(302
|
)
|
Borrowings outstanding less unamortized debt issuance costs
|
|
$
|
62,842
|
|
|
$
|
57,169
|
|
The weighted average interest rate on our current
borrowings was 3.07%, 2.95% and 2.45% during 2016, 2015 and 2014, respectively, and the weighted average interest rate on our current
borrowings outstanding as of December 31, 2016 and 2015, was 2.90% and 2.71%, respectively. All of our debt is due upon maturity,
with periodic interest payments due.
Bank of America
On October 19, 2016, we entered into a
credit agreement and revolving note with Bank of America. The credit agreement provides for a $42,000 unsecured revolving
credit facility which incurs variable interest on a grid structure, based on our leverage ratio. The credit facility has a
maturity date of October 19, 2021. The credit agreement provides for letters of credit, up to a maximum of $15,000. The
credit agreement requires us to maintain compliance with a number of covenants, including limitations on our minimum net
worth, incurring additional debt, dispositions and investments, and requirements to maintain a total debt to capital ratio of
not more than 0.50 to 1.00, and an interest coverage ratio of not less than 2.00 to 1.00. Although we are in compliance with
these covenants at December 31, 2016, under the terms of the credit agreement and revolving note, the occurrence and
continuation of one or more of the events of default specified in the credit agreement could require us to immediately pay
all amounts then remaining unpaid on the revolving note. This credit agreement includes an annual commitment fee ranging from
25 to 45 basis points of the unused portion of the facility and accrues interest based on our option of two indices: (1) a
base rate, which is defined as 75 to 125 basis points plus a daily rate based on the highest of the prime rate, the Federal
Funds Rate plus 50 basis points or the daily LIBOR rate plus 100 basis points, or (2) a choice of one, three or six month
LIBOR plus 175 to 225 basis points. At December 31, 2016, we had $1,050 of base rate borrowings.
Our former Energy West subsidiary had a Credit
Facility with the Bank of America that provided for a revolving credit facility with a maximum borrowing capacity of $30,000, due
April 1, 2017. This Credit Facility was paid in full on October 19, 2016, when we entered into the credit agreement and revolving
note with Bank of America, discussed above.
TIAA Senior Notes
Also on October 19, 2016, we entered into
a note purchase agreement providing for the issuance and sale to investors in a private placement of $50,000 aggregate
principal amount of our 4.23% senior notes. Pursuant to the note purchase agreement, we issued an unsecured senior note, in
the amount of $50,000 to TIAA. The senior note is a twelve year term note due October 19, 2028 and bears interest payable
semiannually. The note purchase agreement and senior note are subject to other customary covenants and default provisions,
including limitations on our minimum net worth, on incurring additional debt, dispositions and investments, and maintaining a
total debt to capital ratio of not more than 0.50 to 1.00, and an interest coverage ratio of not less than 2.00 to 1.00.
Although we are in compliance with these covenants at December 31, 2016, an occurrence of an event of default specified in
the note purchase agreement could require us to immediately pay all amounts then remaining unpaid on the senior note.
The revolving note and senior note are each guaranteed by our wholly
owned non-utility subsidiaries, Energy West Propane, Inc., EWR, GNR, Independence, Lone Wolfe, and PHC.
Bank of America Term Loan
Energy West had a $10,000 term loan with Bank
of America with a maturity date of April 1, 2017 (the "Term Loan"). The Term Loan portion of the Credit Facility
bore interest at a rate of LIBOR plus 175 to 225 basis points. The Term Loan amortized at a rate of $125 per quarter, and was paid
in full on October 19, 2016. At December 31, 2015, the Term Loan bore interest at 2.17%, and had a balance of $8,375.
NIL Funding
On October 23, 2015, we entered into a loan
agreement and promissory note for $3,000 with NIL Funding. During December 2015, we made a principal payment of $1,000 on the note.
Pursuant to the note and loan agreement, NIL Funding made a loan to us that bore an annual interest rate of 6.95%, and a maturity
date of April 20, 2016. On March 14, 2016, the NIL Funding credit facility was paid off and extinguished.
On April 15, 2016, we entered into a
loan agreement and promissory note for $4,000 with NIL Funding. Under the note and loan agreement, we made monthly interest
payments, based on an annual rate of 7.5% and the principal balance of the note would have been due upon maturity on November
15, 2016. On October 19, 2016, the NIL Funding credit facility was paid off and extinguished. NIL Funding is a related party
of ours. See
Note 17 – Related Party Transactions
in the Notes to Consolidated Financial Statements in this
Annual Report for more information regarding relating party transactions.
Senior Unsecured Notes of Energy West
On June 29, 2007, Energy West authorized the
sale of $13,000 aggregate principal amount of its 6.16% Senior Unsecured Notes with Allstate/CUNA, due June 29, 2017. In connection
with our sale of EWW and the Pipeline Assets, during the fourth quarter of 2015 we committed to repay the portion of notes payable
to Allstate/CUNA that was allocated to EWW and EWD on February 12, 2016, including a prepayment penalty of $310 Additionally, we
wrote off the unamortized debt issue costs that were allocated to EWW and EWD’s portion of the debt, totaling $103. These
amounts were recognized within discontinued operations, net of tax on our Consolidated Statements of Comprehensive Income. See
Note 3 – Discontinued Operations
in the Notes to the Consolidated Financial Statements in this Annual Report for more
information regarding our discontinued operations. The balance of the Allstate/CUNA note was paid in full on October 19, 2016,
and was subject to a make-whole premium of $781.
Sun Life
On May 2, 2011, we and our Ohio subsidiaries,
NEO, Orwell and Brainard, issued a $15,334, 5.38% Senior Secured Guaranteed Fixed Rate Note due June 1, 2017 (
"
Fixed
Rate Note
"
). Additionally, Great Plains issued a $3,000, Senior Secured Guaranteed
Floating Rate Note that was repaid on May 3, 2014. Payments for these notes prior to maturity are interest-only. The balance of
the Sun Life Notes were paid in full on October 19, 2016, and were subject to a make-whole premium of $482.
The Sun Life covenants restricted certain cash
balances and required a debt service reserve account to be maintained to cover approximately one year of interest payments. The
total balance in the debt service reserve account was $948 at December 31, 2015, and was included in restricted cash on our Consolidated
Balance Sheets. Upon the repayment of the Sun Life debt, the restrictions on the cash were released.
We believe that we were in compliance with
all of our debt covenants as of December 31, 2016.
Note 14 – Stockholders’ Equity
Stock Repurchase Plan
Our common stock trades on the NYSE MKT Equities
under the symbol EGAS. The Board of Directors approved a stock repurchase plan whereby we may buy back up to 448,500 shares of
our common stock. As of December 31, 2016, we have not repurchased any stock.
Stock Compensation
The 2012 Incentive and Equity Award Plan (“Equity Award Plan”)
provides for the grant of options, restricted stock, performance awards, other stock-based awards and cash awards to certain eligible
employees and directors. The Equity Award Plan provides for 500,000 shares authorized for issuance.
During 2016, we granted 11,994 common shares
to our directors under the Equity Award Plan, with an aggregate market value of $90, based on the closing prices of our common
shares on the dates of the awards. The weighted average grant date fair value was $7.46 per share and we recognized an aggregate
compensation expense of $88 on the grant dates because shares granted to directors vest immediately. As of December 31, 2016, there
were 436,950 shares available to issue under the Equity Award Plan.
On July 21, 2014, in conjunction with his employment
agreement, the board of directors granted 5,000 shares of restricted stock to Gregory J. Osborne, our chief executive officer member
of our board of directors. These shares had a grant date fair value of $11.64 per share or $58 in aggregate, based upon the closing
price of our common shares on the date of the award. During the years ended December 31, 2016 and 2015, we recorded $19 of compensation
expense related to the vesting of the restricted stock. At December 31, 2016, $11 remained unvested and will vest ratably through
July 21, 2017. During the vesting period, each restricted share has the same rights to dividend distributions and voting as any
other common share.
|
|
Restricted Stock
|
|
|
|
Awards
|
|
|
|
|
|
Outstanding, December 31, 2015
|
|
|
3,333
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
Vested
|
|
|
(1,667
|
)
|
Forfeited
|
|
|
-
|
|
|
|
|
|
|
Outstanding, December 31, 2016
|
|
|
1,666
|
|
2012 Non-Employee Director Stock Award Plan
The 2012 Non-Employee Director Stock Award
Plan allows each non-employee director to receive his or her fees in shares of our common stock by providing written notice to
us. The plan authorized the issuance of 250,000 shares to non-employee directors in lieu of fees. As of December 31, 2016, no shares
had been issued under the plan.
Restrictions on Dividends
Our subsidiaries are subject to several restrictions
on the amounts that they can distribute to our holding company. In addition to the debt covenants discussed in
Note 13 –
Credit Facilities and Long-Term Debt
, the MPUC, MPSC and NCUC have each placed ring fencing provisions over the subsidiary
companies in their jurisdictions. The ring fencing provisions and debt covenants act to limit the dividends and distributions of
the various subsidiaries to our holding company, which limits the funds available to be paid as dividends to our shareholders.
On November 24, 2014, the MPSC issued an order directing, in part, that Energy West and its Montana, Maine, and North Carolina
operating subsidiaries were restricted from paying dividends to Gas Natural until persuasive evidence could be presented that Energy
West was on a sound financial footing and that effect had been given to the MPSC’s ring-fencing conditions; the strongest
indication being the absence of ongoing balances owed to Energy West by Gas Natural. On April 9, 2015, Energy West filed a request
to reinstate Energy West and its Montana, Maine, and North Carolina operating subsidiaries ability to pay dividends to Gas Natural.
On July 22, 2015, the MPSC issued an order allowing for the reinstatement of the dividends. They also approved a special dividend
to be declared from the proceeds from the sale of Energy West’s subsidiaries EWW and the Pipeline Assets. Additionally, our
Merger Agreement restricts our ability to pay dividends in excess of $.075 per share on a quarterly basis.
At December 31, 2016, $90,092 of $92,957 or
96.92%, of our total net assets were restricted by our debt covenants and ring fencing restrictions.
Note 15 – Employee Benefit Plans
We have a defined contribution plan (the “401k
Plan”) that covers substantially all of our employees. The plan provides for an annual contribution of 3% of all employees’
salaries and an additional contribution of 10% of each participant’s elective deferrals, which until July 1, 2016, was invested
in shares of our common stock under the 401k Plan. Contributions after July 1, 2016, are made based on each participant’s
investment allocation. We recognized $348, $462 and $549 of contributions to the 401k Plan for the years ended December 31, 2016,
2015 and 2014, respectively.
We sponsored a defined postretirement health
benefit plan (the “Retiree Health Plan”) providing Medicare supplement benefits to eligible retirees. We discontinued
contributions in 2006 and are no longer required to fund the Retiree Health Plan. The Retiree Health Plan pays eligible retirees
(post-65 years of age) a monthly stipend toward eligible Medicare supplement payments. The amount of this payment is fixed and
will not increase with medical trends or inflation. The amounts available for retirement supplement payments are currently held
in a VEBA trust account, and benefits for this plan are paid from assets held in the VEBA Trust account. As of December 31, 2016
and 2015, the value of plan assets was $82 and $102, respectively. The assets remaining in the trust will be used to fund the plan
until these assets are exhausted, at which time the plan will be terminated.
Note 16 – Income Taxes
Significant components of the deferred tax
assets and liabilities are as follows:
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
Current
|
|
|
Long-term
|
|
|
Current
|
|
|
Long-term
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
$
|
143
|
|
|
$
|
-
|
|
|
$
|
190
|
|
|
$
|
-
|
|
Contributions in aid of construction
|
|
|
-
|
|
|
|
215
|
|
|
|
-
|
|
|
|
342
|
|
Asset retirement obligations
|
|
|
-
|
|
|
|
445
|
|
|
|
-
|
|
|
|
448
|
|
Other nondeductible accruals
|
|
|
125
|
|
|
|
600
|
|
|
|
33
|
|
|
|
-
|
|
Refundable purchase gas costs
|
|
|
-
|
|
|
|
-
|
|
|
|
182
|
|
|
|
-
|
|
Net operating loss carryforwards
|
|
|
-
|
|
|
|
12,493
|
|
|
|
-
|
|
|
|
12,455
|
|
Regulatory liability
|
|
|
-
|
|
|
|
467
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
14
|
|
|
|
814
|
|
|
|
12
|
|
|
|
627
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
282
|
|
|
|
15,034
|
|
|
|
417
|
|
|
|
13,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoverable purchase gas costs
|
|
|
918
|
|
|
|
-
|
|
|
|
720
|
|
|
|
-
|
|
Property, plant and equipment
|
|
|
-
|
|
|
|
20,047
|
|
|
|
-
|
|
|
|
18,439
|
|
Regulatory asset
|
|
|
-
|
|
|
|
589
|
|
|
|
-
|
|
|
|
-
|
|
Unrealized gain on securities available for sale
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
581
|
|
Unamortized debt issue costs
|
|
|
-
|
|
|
|
344
|
|
|
|
-
|
|
|
|
-
|
|
Amortization of intangibles
|
|
|
-
|
|
|
|
924
|
|
|
|
-
|
|
|
|
247
|
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
371
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liabilities
|
|
|
918
|
|
|
|
21,904
|
|
|
|
720
|
|
|
|
19,638
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset (liability) before valuation allowance
|
|
|
(636
|
)
|
|
|
(6,870
|
)
|
|
|
(303
|
)
|
|
|
(5,766
|
)
|
Less: valuation allowance
|
|
|
-
|
|
|
|
(4,410
|
)
|
|
|
-
|
|
|
|
(6,529
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred tax liability
|
|
$
|
(636
|
)
|
|
$
|
(11,280
|
)
|
|
$
|
(303
|
)
|
|
$
|
(12,295
|
)
|
Our current deferred tax assets and current deferred tax liabilities
are included in other current assets and other current liabilities, respectively, on our Consolidated Balance Sheets.
Income tax expense from continuing operations
consists of the following:
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Current income tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(2
|
)
|
|
$
|
468
|
|
|
$
|
49
|
|
State
|
|
|
(30
|
)
|
|
|
227
|
|
|
|
11
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current income tax expense (benefit)
|
|
|
(32
|
)
|
|
|
695
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax expense (benefit):
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(215
|
)
|
|
|
2,043
|
|
|
|
1,988
|
|
State
|
|
|
(466
|
)
|
|
|
128
|
|
|
|
138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred income tax expense (benefit)
|
|
|
(681
|
)
|
|
|
2,171
|
|
|
|
2,126
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income taxes before credits
|
|
|
(713
|
)
|
|
|
2,866
|
|
|
|
2,186
|
|
Investment tax credit, net
|
|
|
(21
|
)
|
|
|
(21
|
)
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
|
(734
|
)
|
|
|
2,845
|
|
|
|
2,165
|
|
Income tax (expense) benefit from discontinued operations
|
|
|
27
|
|
|
|
(2,428
|
)
|
|
|
(617
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) from continuing operations
|
|
$
|
(707
|
)
|
|
$
|
417
|
|
|
$
|
1,548
|
|
A reconciliation of taxes computed at the statutory
federal rate to our effective tax is as follows:
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
Tax expense at federal statutory rate
|
|
$
|
(75
|
)
|
|
$
|
2,561
|
|
|
$
|
2,015
|
|
State income tax, net of federal tax expense
|
|
|
(6
|
)
|
|
|
307
|
|
|
|
307
|
|
Deferred tax credits
|
|
|
(313
|
)
|
|
|
(21
|
)
|
|
|
(21
|
)
|
Change in valuation allowance
|
|
|
(231
|
)
|
|
|
24
|
|
|
|
(398
|
)
|
Permanent differences
|
|
|
17
|
|
|
|
38
|
|
|
|
25
|
|
State rate change
|
|
|
(134
|
)
|
|
|
7
|
|
|
|
149
|
|
Blended vs. actual rate variance
|
|
|
86
|
|
|
|
-
|
|
|
|
-
|
|
Other
|
|
|
(78
|
)
|
|
|
(71
|
)
|
|
|
88
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
|
(734
|
)
|
|
|
2,845
|
|
|
|
2,165
|
|
Income tax (expense) benefit from discontinued operations
|
|
|
27
|
|
|
|
(2,428
|
)
|
|
|
(617
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit) from continuing operations
|
|
$
|
(707
|
)
|
|
$
|
417
|
|
|
$
|
1,548
|
|
The following table presents the changes in our valuation allowance
for deferred tax assets during the last two years.
|
|
Balance at
Beginning
of Year
|
|
|
Additions/
(Reversals)
Recorded in the
Provision for
Income Taxes
|
|
|
Other
Changes
|
|
|
Balance at
End of
Year
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
$
|
6,529
|
|
|
$
|
(2,119
|
)
|
|
$
|
—
|
|
|
$
|
4,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2015
|
|
$
|
6,497
|
|
|
$
|
32
|
|
|
$
|
—
|
|
|
$
|
6,529
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2014
|
|
$
|
5,699
|
|
|
$
|
798
|
|
|
$
|
—
|
|
|
$
|
6,497
|
|
We have approximately $24,213 in federal and
$89,520 in state net operating loss carryovers as of December 31, 2016. The net operating losses begin to expire in 2018. Due to
acquisitions and changes in ownership, these net operating loss carryovers are subject to limitations set forth in Section 382
of the Internal Revenue Code. We maintain a valuation allowance of $43 on the portion of our federal net operating loss carryforward
related to our acquisition of Cut Bank Gas in 2009. We maintain a state deferred tax asset valuation allowance of $3,438 against
our state net operating loss carryover. In addition, we have approximately $11,092 of carryover tax basis as of December 31, 2016,
against which we have a valuation allowance of $928 related to the carryover tax basis of the subsidiaries. We will maintain the
valuation allowance against our deferred tax assets until such time that sufficient positive evidence exists to support a conclusion
that it is more likely than not that we will realize those deferred tax assets. We consider the scheduled reversal of deferred
tax liabilities, projected future results of operations, and tax planning strategies when making this assessment. If we determine
that we will be able to realize our deferred tax assets in the future in excess of their net recorded amount, an adjustment to
the deferred tax assets would result in an increase in income in the period that such a determination is made. Likewise, if we
determine that we will not be able to realize a portion of our deferred tax assets, an adjustment to our deferred tax assets would
result in a charge to income in the period that such a determination is made.
We follow the applicable provisions of ASC
740 to recognize, measure, and disclose uncertain tax positions in the financial statements. Tax positions must meet a more-likely-than-not
recognition threshold to be recognized in our consolidated financial statements and in subsequent periods. During the three years
ended December 31, 2016, we did not recognize any adjustments for uncertain tax benefits.
The tax year 2010 for federal taxes, as a result
of an amendment, and after 2012 for federal and state remains open to examination by the major taxing jurisdictions in which we
operate, although we do not expect to make material changes to unrecognized tax positions within the next twelve months.
Note 17 – Related Party Transactions
Relationship with NIL Funding
NIL Funding is an affiliate of The InterTech Group, Inc. (“InterTech”).
The Chairperson and Chief Executive Officer of InterTech is Anita G. Zucker. Ms. Zucker, as trustee of the Article 6 Marital Trust,
under the First Amended and Restated Jerry Zucker Revocable Trust dated April 2, 2007, beneficially owns 1,040,640 shares, or 9.89%,
of our outstanding common stock, as of May 18, 2016. Two members of Gas Natural’s Board of Directors, Robert Johnston and
Michael Bender, also currently serve as executive vice president and chief strategy officer and director, corporate secretary and
corporate counsel, respectively, of InterTech. See
Note 13 – Credit Facilities and Long-Term Debt
for more information
regarding our credit facilities.
On April 15, 2016, we entered into a loan agreement
and promissory note for $4,000 with NIL Funding. Under the note and loan agreement, we made monthly interest payments to NIL Funding,
based on an annual rate of 7.5% and the principal balance of the note would have been due upon maturity on November 15, 2016. On
October 19, 2016, we paid the balance of this note payable with the proceeds from our senior notes and revolving credit agreement.
The note and loan agreements were subject to other customary loan covenants and default provisions. In an event of default, as
defined under the loan agreement, NIL Funding could have, at its option, required us to immediately pay the outstanding principal
balance of the note as well as any and all interest and other payments due or convert any part of the amounts due and unpaid to
shares of our common stock at a conversion price of 95% of the previous day’s closing price on the NYSE MKT. See
Note
13 – Credit Facilities and Long-Term Debt
for more information regarding our credit facilities.
On October 23, 2015, we entered into a loan
agreement and promissory note with NIL Funding. Pursuant to the note and loan agreement, NIL Funding loaned Gas Natural $3,000,
bearing an annual rate of 6.95% and a maturity date of April 20, 2016. On March 14, 2016, the NIL Funding credit facility was paid
off and extinguished.
Our loan agreement with NIL Funding restricted
our ability to incur additional borrowings, make new investments, consummate a merger or acquisition and dispose of assets. In
an event of default, as defined under the loan agreement, NIL Funding could have, at its option, required us to immediately pay
the outstanding principal balance of the note as well as any and all interest and other payments due or converted any part of the
amounts due and unpaid to shares of our common stock at a conversion price of 95% of the previous day’s closing price on
the NYSE MKT. See
Note 13 – Credit Facilities and Long-Term Debt
for more information regarding our credit facilities.
On April 6, 2015, we entered into a loan agreement
and promissory note with NIL Funding. Pursuant to the note and loan agreement, NIL Funding loaned Gas Natural $5,000, bearing an
annual interest rate of 7.5%, and a maturity date of October 3, 2015. On July 27, 2015, the NIL Funding credit facility was paid
off and extinguished.
Transactions with Richard M. Osborne
Historically we engaged in various related
party transactions with entities owned or controlled by our former chairman and chief executive officer, Richard M. Osborne. After
Richard M. Osborne’s removal as chief executive officer on May 1, 2014, the board took a measured approach to reduce or terminate,
as appropriate, related party transactions with Richard M. Osborne while ensuring that we continue to serve our customers affected
by such transactions. These efforts were made in furtherance of our long-term plan to phase out related party transactions.
On October 7, 2013, we entered into a lease
agreement with OsAir, Inc. (“OsAir”), an entity owned and controlled by Richard M. Osborne. Pursuant to the agreement,
we leased to OsAir approximately 6,472 square feet of office space located at 8500 Station Street, Mentor, Ohio 44060, at a rent
of $6 per month for a period of three years starting from March 1, 2013. In September of 2014, OsAir was evicted from the office
space for failure to make payment and at December 31, 2015, we were owed $29 of past due rent. During the third quarter of 2016,
we wrote off this amount.
On December 18, 2013, Orwell entered into a
lease agreement with Cobra Pipeline Co., LLC (“Cobra”), an entity owned and controlled by Richard M. Osborne. Pursuant
to the lease agreement, Cobra leases to Orwell approximately 2,400 square feet of warehouse space located at 2412 Newton Falls
Rd., Newton Falls, OH 44444, at a rent of $2 per month for the time period commencing on December 18, 2013 and ending on February
29, 2016, at which time the lease was terminated.
We made purchases of natural gas and transportation
services from entities owned or controlled by Richard M. Osborne of $2,068, $2,636 and $3,671, respectively, during the years ended
December 31, 2016, 2015 and 2014. We incurred rent expense related to entities owned or controlled by Richard M. Osborne of $2,
$26 and $141, respectively, during the years ended December 31, 2016, 2015 and 2014. We sold natural gas to entities owned or controlled
by Richard M. Osborne of $8, $22, and $151, respectively, during the years ended December 31, 2016, 2015 and 2014. During the years
ended December 31, 2015 and 2014, we recognized rental income of $7 and $153, respectively, from entities owned or controlled by
Richard M. Osborne. We did not earn rental income from related parties in 2016. During 2014, we purchased $255 of pipeline construction
supplies from entities owned or controlled by Richard M. Osborne. We did not purchase pipeline construction supplies from related
parties during 2015 or 2016.
As of December 31, 2016 and 2015, we had accounts
receivable of $14 and $188, respectively, due from companies owned or controlled by Richard M. Osborne. As of December 31, 2016
and 2015, we had accounts payable of $8 and $192, respectively, due to companies owned or controlled by Richard M. Osborne.
We accrued a liability of $253 and $170 due
to companies controlled by Richard M. Osborne for natural gas used and transportation charges due to us as of December 31, 2016
and 2015, respectively, which had not yet been invoiced. The related expense is included in the gas purchased line item in the
accompanying statements of comprehensive income. In addition, we had related party natural gas imbalances of $46 and $256 at December
31, 2016 and 2015, respectively, which were included in our natural gas inventory balance. These amounts represent quantities of
natural gas due to us from natural gas transportation companies controlled by Richard M. Osborne.
During the second quarter of 2016, we recorded
$2,908 to establish an accrual payable to related parties for the settlement of certain pending legal matters between us and Richard
M. Osborne, of which $2,000 was paid during the third quarter of 2016. See
Note 19 - Commitments and Contingencies
for further
details regarding our legal matters.
Note 18 – Segment Reporting
Our Chief Operating Officer has been identified
as the chief operating decision maker because he has final authority over performance assessment and resource allocation decisions.
Our reportable segments are based on our method of internal reporting, which generally segregates the strategic business units
due to differences in services and regulation. We primarily separate our state regulated utility businesses from non-regulated
marketing and production businesses, and our corporate level operations. We have regulated natural gas utility businesses in the
states of Maine, Montana, North Carolina and Ohio that form our natural gas segment. We have non-regulated natural gas marketing
and production businesses in Montana, Wyoming and Ohio that together form our marketing and production segment. Our corporate operations,
our Lone Wolf insurance subsidiary, and our discontinued operations together form our corporate and other segment. Transactions
between reportable segments are accounted for on an accrual basis, and are eliminated. Intercompany eliminations between segments
consist primarily of gas sales from the marketing and production operations to the natural gas operations, intercompany accounts
receivable and payable, equity, and investments in subsidiaries. See
Note 3 – Discontinued Operations
for more information
regarding our previously reported pipeline and propane segments.
The following tables set forth summarized financial
information for our natural gas, marketing and production, and corporate and other operations segments for the years ended December
31, 2016, 2015 and 2014.
Year Ended December 31, 2016
|
|
Natural Gas
|
|
|
Marketing &
Production
|
|
|
Corporate &
Other
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING REVENUES
|
|
$
|
87,486
|
|
|
$
|
13,003
|
|
|
$
|
-
|
|
|
$
|
100,489
|
|
Intersegment eliminations
|
|
|
(22
|
)
|
|
|
(1,026
|
)
|
|
|
-
|
|
|
|
(1,048
|
)
|
Total operating revenue
|
|
|
87,464
|
|
|
|
11,977
|
|
|
|
-
|
|
|
|
99,441
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF SALES
|
|
|
45,834
|
|
|
|
11,731
|
|
|
|
-
|
|
|
|
57,565
|
|
Intersegment eliminations
|
|
|
(22
|
)
|
|
|
(1,026
|
)
|
|
|
-
|
|
|
|
(1,048
|
)
|
Total cost of sales
|
|
|
45,812
|
|
|
|
10,705
|
|
|
|
-
|
|
|
|
56,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS MARGIN
|
|
|
41,652
|
|
|
|
1,272
|
|
|
|
-
|
|
|
|
42,924
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution, general and administrative
|
|
|
22,885
|
|
|
|
(367
|
)
|
|
|
4,330
|
|
|
|
26,848
|
|
Maintenance
|
|
|
984
|
|
|
|
-
|
|
|
|
-
|
|
|
|
984
|
|
Depreciation and amortization
|
|
|
7,594
|
|
|
|
440
|
|
|
|
-
|
|
|
|
8,034
|
|
Taxes other than income
|
|
|
3,991
|
|
|
|
15
|
|
|
|
-
|
|
|
|
4,006
|
|
Total operating expenses
|
|
|
35,454
|
|
|
|
88
|
|
|
|
4,330
|
|
|
|
39,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS)
|
|
|
6,198
|
|
|
|
1,184
|
|
|
|
(4,330
|
)
|
|
|
3,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
(4
|
)
|
|
|
(26
|
)
|
|
|
(35
|
)
|
|
|
(65
|
)
|
Interest expense
|
|
|
(2,656
|
)
|
|
|
(172
|
)
|
|
|
(341
|
)
|
|
|
(3,169
|
)
|
Income (loss) before taxes
|
|
|
3,538
|
|
|
|
986
|
|
|
|
(4,706
|
)
|
|
|
(182
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit (expense)
|
|
|
(941
|
)
|
|
|
(387
|
)
|
|
|
2,035
|
|
|
|
707
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM CONTINUING OPERATIONS
|
|
|
2,597
|
|
|
|
599
|
|
|
|
(2,671
|
)
|
|
|
525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net of income tax
|
|
|
-
|
|
|
|
-
|
|
|
|
(12
|
)
|
|
|
(12
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
2,597
|
|
|
$
|
599
|
|
|
$
|
(2,683
|
)
|
|
$
|
513
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
7,432
|
|
|
$
|
-
|
|
|
$
|
93
|
|
|
$
|
7,525
|
|
Year Ended December 31, 2015
|
|
Natural Gas
|
|
|
Marketing &
Production
|
|
|
Corporate &
Other
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING REVENUES
|
|
$
|
104,003
|
|
|
$
|
12,132
|
|
|
$
|
-
|
|
|
$
|
116,135
|
|
Intersegment eliminations
|
|
|
(25
|
)
|
|
|
(3,749
|
)
|
|
|
-
|
|
|
|
(3,774
|
)
|
Total operating revenue
|
|
|
103,978
|
|
|
|
8,383
|
|
|
|
-
|
|
|
|
112,361
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF SALES
|
|
|
60,527
|
|
|
|
11,399
|
|
|
|
-
|
|
|
|
71,926
|
|
Intersegment eliminations
|
|
|
(25
|
)
|
|
|
(3,749
|
)
|
|
|
-
|
|
|
|
(3,774
|
)
|
Total cost of sales
|
|
|
60,502
|
|
|
|
7,650
|
|
|
|
-
|
|
|
|
68,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS MARGIN
|
|
|
43,476
|
|
|
|
733
|
|
|
|
-
|
|
|
|
44,209
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution, general and administrative
|
|
|
23,415
|
|
|
|
312
|
|
|
|
2,667
|
|
|
|
26,394
|
|
Maintenance
|
|
|
1,419
|
|
|
|
3
|
|
|
|
-
|
|
|
|
1,422
|
|
Depreciation and amortization
|
|
|
6,770
|
|
|
|
466
|
|
|
|
-
|
|
|
|
7,236
|
|
Accretion
|
|
|
3
|
|
|
|
18
|
|
|
|
-
|
|
|
|
21
|
|
Taxes other than income
|
|
|
4,104
|
|
|
|
15
|
|
|
|
-
|
|
|
|
4,119
|
|
Intersegment eliminations
|
|
|
(87
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(87
|
)
|
Total operating expenses
|
|
|
35,624
|
|
|
|
814
|
|
|
|
2,667
|
|
|
|
39,105
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS)
|
|
|
7,852
|
|
|
|
(81
|
)
|
|
|
(2,667
|
)
|
|
|
5,104
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
147
|
|
|
|
7
|
|
|
|
(68
|
)
|
|
|
86
|
|
Interest expense
|
|
|
(2,782
|
)
|
|
|
(135
|
)
|
|
|
(687
|
)
|
|
|
(3,604
|
)
|
Income (loss) before taxes
|
|
|
5,217
|
|
|
|
(209
|
)
|
|
|
(3,422
|
)
|
|
|
1,586
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit (expense)
|
|
|
(1,741
|
)
|
|
|
96
|
|
|
|
1,228
|
|
|
|
(417
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM CONTINUING OPERATIONS
|
|
|
3,476
|
|
|
|
(113
|
)
|
|
|
(2,194
|
)
|
|
|
1,169
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net of income tax
|
|
|
-
|
|
|
|
-
|
|
|
|
3,519
|
|
|
|
3,519
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
3,476
|
|
|
$
|
(113
|
)
|
|
$
|
1,325
|
|
|
$
|
4,688
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
9,383
|
|
|
$
|
3
|
|
|
$
|
181
|
|
|
$
|
9,567
|
|
Year Ended December 31, 2014
|
|
Natural Gas
|
|
|
Marketing &
Production
|
|
|
Corporate &
Other
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING REVENUES
|
|
$
|
123,379
|
|
|
$
|
17,605
|
|
|
$
|
-
|
|
|
$
|
140,984
|
|
Intersegment eliminations
|
|
|
(326
|
)
|
|
|
(8,088
|
)
|
|
|
-
|
|
|
|
(8,414
|
)
|
Total operating revenue
|
|
|
123,053
|
|
|
|
9,517
|
|
|
|
-
|
|
|
|
132,570
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF SALES
|
|
|
79,548
|
|
|
|
16,860
|
|
|
|
-
|
|
|
|
96,408
|
|
Intersegment eliminations
|
|
|
(326
|
)
|
|
|
(8,088
|
)
|
|
|
-
|
|
|
|
(8,414
|
)
|
Total cost of sales
|
|
|
79,222
|
|
|
|
8,772
|
|
|
|
-
|
|
|
|
87,994
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS MARGIN
|
|
|
43,831
|
|
|
|
745
|
|
|
|
-
|
|
|
|
44,576
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution, general and administrative
|
|
|
20,851
|
|
|
|
1,895
|
|
|
|
3,176
|
|
|
|
25,922
|
|
Maintenance
|
|
|
1,225
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,225
|
|
Depreciation and amortization
|
|
|
6,071
|
|
|
|
515
|
|
|
|
19
|
|
|
|
6,605
|
|
Accretion
|
|
|
7
|
|
|
|
45
|
|
|
|
-
|
|
|
|
52
|
|
Taxes other than income
|
|
|
3,898
|
|
|
|
23
|
|
|
|
6
|
|
|
|
3,927
|
|
Intersegment eliminations
|
|
|
(103
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(103
|
)
|
Total operating expenses
|
|
|
31,949
|
|
|
|
2,478
|
|
|
|
3,201
|
|
|
|
37,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME (LOSS)
|
|
|
11,882
|
|
|
|
(1,733
|
)
|
|
|
(3,201
|
)
|
|
|
6,948
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income (expense)
|
|
|
890
|
|
|
|
(351
|
)
|
|
|
16
|
|
|
|
555
|
|
Interest expense
|
|
|
(2,619
|
)
|
|
|
(121
|
)
|
|
|
(486
|
)
|
|
|
(3,226
|
)
|
Income (loss) before taxes
|
|
|
10,153
|
|
|
|
(2,205
|
)
|
|
|
(3,671
|
)
|
|
|
4,277
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax benefit (expense)
|
|
|
(3,661
|
)
|
|
|
772
|
|
|
|
1,341
|
|
|
|
(1,548
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME (LOSS) FROM CONTINUING OPERATIONS
|
|
|
6,492
|
|
|
|
(1,433
|
)
|
|
|
(2,330
|
)
|
|
|
2,729
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations, net of income tax
|
|
|
-
|
|
|
|
-
|
|
|
|
1,033
|
|
|
|
1,033
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME (LOSS)
|
|
$
|
6,492
|
|
|
$
|
(1,433
|
)
|
|
$
|
(1,297
|
)
|
|
$
|
3,762
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
$
|
21,531
|
|
|
$
|
60
|
|
|
$
|
22
|
|
|
$
|
21,613
|
|
|
|
Natural Gas
|
|
|
Marketing &
Production
|
|
|
Corporate &
Other
|
|
|
Consolidated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
194,820
|
|
|
$
|
8,465
|
|
|
$
|
161,305
|
|
|
$
|
364,590
|
|
Intersegment eliminations
|
|
|
(6,665
|
)
|
|
|
(706
|
)
|
|
|
(159,795
|
)
|
|
$
|
(167,166
|
)
|
Total assets
|
|
$
|
188,155
|
|
|
$
|
7,759
|
|
|
$
|
1,510
|
|
|
$
|
197,424
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
228,549
|
|
|
$
|
8,571
|
|
|
$
|
100,822
|
|
|
$
|
337,942
|
|
Intersegment eliminations
|
|
|
(87,978
|
)
|
|
|
(3,946
|
)
|
|
|
(48,631
|
)
|
|
|
(140,555
|
)
|
Total assets
|
|
$
|
140,571
|
|
|
$
|
4,625
|
|
|
$
|
52,191
|
|
|
$
|
197,387
|
|
Note 19 – Commitments and Contingencies
Lease Commitments
Operating Leases
We lease certain properties including land,
office buildings, and other equipment under non-cancelable operating leases. We incurred lease expense related to operating leases
for the years ended December 31, 2016, 2015 and 2014, of $176, $197 and $258, respectively.
Capital Leases
During 2012, we entered into an agreement with
United States Power Fund, L.P. whereby we lease certain pipeline and pipeline easement assets. The agreement contains an initial
term of sixteen years, with the option to renew for two additional sixteen year terms. The lease calls for lease payments of $300
per year through 2022; an annual $120 facility service fee to be paid as long as the leased assets remain in place on the property,
and a throughput charge of $0.0125 per Mcf moved through the leased pipeline, in excess of certain base amounts. There were no
throughput charge payments made during the three years ended December 31, 2016, 2015 and 2014 as we did not exceed the base amounts
specified in the lease. During the years ended December 31, 2015 and 2014, we paid $120 for services related to this lease. During
2016, we disposed of the property included in the lease that was associated with a maintenance obligation and we recognized a loss
of $531 on the sale.
ERP System Lease
During 2014, we began construction of a new
ERP system that for accounting purposes qualified as a build-to-suit lease. We determined that during the application development
stage we assumed substantially all of the project’s risk and as such we were the owner of the asset during this period, under
U.S. GAAP. Accordingly, we recorded $6,525 of construction work in progress and a $5,597 build-to-suit liability line item on our
Consolidated Balance Sheet as of December 31, 2014, related to this project. Upon completion of the first two (of three) phases
of the ERP implementation project during the fourth quarter of 2015, we determined that the lease qualifies for sales recognition
under sale-leaseback accounting guidance. During the fourth quarter of 2015, we determined that the lease governing our future
use of the assets is a capital lease and we recorded property, plant and equipment and a capital lease liability of $7,521, based
on the present value of our minimum lease payments. We removed the build-to-suit liability and the related assets from our consolidated
balance sheet and we deferred a loss on the sale of the software assets of $2,037 that will be amortized over the three year life
of the lease. During the fourth quarter of 2015, we recorded $358 for amortization of our deferred loss, depreciation of $163 and
interest expense of $237 related to our capital lease payments.
The final phase of our ERP system implementation
project was completed during the first quarter of 2016. Accordingly, we recorded property, plant and equipment and a capital lease
liability of $1,672, based on the present value of our minimum lease payments. We deferred a loss on the sale of the software assets
of $1,196 that will be amortized ratably over the thirty month life of the lease. The deferred loss represents the difference between
the fair value of that property and the amount financed in the sale-leaseback transaction. Based on the nature of the transaction,
the fair value of the property leased was determined to be the costs capitalized. We will make lease payments of $58 per month
over the thirty month term of the lease related to this phase three of the ERP implementation project. Our total lease payments
related to our ERP implementation project, including the leases that we entered during 2015, will be $294 through 2017 and will
decline in 2018 as each of the leases reach the end of their respective term. As of December 31, 2016 and 2015, we had capital
lease obligations of $4,922 and $6,379, respectively, and unamortized deferred losses on the sale-leaseback of our ERP system of
$1,783 and $1,679, respectively.
Our ERP system leases have terms that extend
from 30 to 36 months, and we intend to exercise a purchase option at the end of the lease terms at a price to be negotiated at
that time.
The following schedule presents the future
minimum lease payments under our non-cancelable long-term lease agreements as of December 31, 2016.
Future Minimum Lease Payments
|
|
|
|
|
|
|
|
|
|
Operating Leases
|
|
|
Capital Leases
|
|
|
|
|
|
|
|
|
2017
|
|
$
|
254
|
|
|
$
|
3,827
|
|
2018
|
|
|
245
|
|
|
|
1,841
|
|
2019
|
|
|
217
|
|
|
|
300
|
|
2020
|
|
|
212
|
|
|
|
300
|
|
2021
|
|
|
212
|
|
|
|
300
|
|
Thereafter
|
|
|
620
|
|
|
|
300
|
|
Total minimum lease payments
|
|
$
|
1,760
|
|
|
|
6,868
|
|
Less: Interest portion
|
|
|
|
|
|
|
470
|
|
Total liability
|
|
|
|
|
|
$
|
6,398
|
|
Our current
capital lease obligations as of December 31, 2016 and 2015, of $3,618 and $2,876, respectively, are included in current
liabilities and our long-term capital lease obligations of $2,780 and $5,177, respectively, are included in long-term
liabilities in our Consolidated Balance Sheets. During the years ended December 31, 2016, 2015 and 2014, we recognized $325,
$267 and $122, respectively, of interest expense related to our capital leases.
Long-term Contracts
The following table presents our future minimum
obligations under non-cancellable long-term contracts at December 31, 2016.
|
|
Nova Gas
|
|
|
Transcontinental
|
|
|
Maritimes &
|
|
|
Jefferson
|
|
|
Elevation
|
|
|
|
|
|
|
Transmission
|
|
|
Gas Pipe Line
|
|
|
Northeast
|
|
|
Energy
|
|
|
Energy
|
|
|
|
|
|
|
Ltd.
|
|
|
Company, LLC
|
|
|
Pipeline, LLC
|
|
|
Trading, LLC
|
|
|
Group
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
$
|
1,035
|
|
|
$
|
834
|
|
|
$
|
132
|
|
|
$
|
4,193
|
|
|
$
|
473
|
|
|
$
|
74
|
|
2018
|
|
|
992
|
|
|
|
834
|
|
|
|
132
|
|
|
|
4,193
|
|
|
|
445
|
|
|
|
74
|
|
2019
|
|
|
777
|
|
|
|
676
|
|
|
|
132
|
|
|
|
1,048
|
|
|
|
-
|
|
|
|
68
|
|
2020
|
|
|
777
|
|
|
|
322
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3
|
|
2021
|
|
|
560
|
|
|
|
321
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Thereafter
|
|
|
949
|
|
|
|
19,687
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
5,090
|
|
|
$
|
22,674
|
|
|
$
|
396
|
|
|
$
|
9,434
|
|
|
$
|
918
|
|
|
$
|
219
|
|
We have various contracts for pipeline capacity
to ensure that we are able to meet our customers’ demands for natural gas. Each of the contractual obligations above were
estimated using the pricing in effect on December 31, 2016, except our obligation with Maritimes & Northeast Pipeline, LLC,
which contract has a provision for fixed pricing. We have three contracts with Nova Gas Transmission, Ltd. that have expiration
dates between October 2018 and October 2023. We have five contracts with Transcontinental Gas Pipe Line Company, LLC that expire
between December 2018 and February 2094 and our contract with Jefferson Energy Trading, LLC expires in March 2019. Our contract
with Maritimes & Northeast Pipeline, LLC expires December 2019. Our contract with Elevation Energy Group expires December 2018.
During 2016, we paid an aggregate of $6,732 for our commitments under these contracts and additional contracts for natural gas
purchases that are not included in our estimate of our future minimum long-term contractual obligations that expire within one
year.
None of the preceding long-term contracts have
been recognized on our Consolidated Balance Sheets.
Regulatory Matters
An investigative audit was required in the
Opinion and Order issued by the PUCO on November 13, 2013 concerning our Ohio utilities and their affiliates and related entities.
The audit was initiated on June 21, 2014. On January 23, 2015, Rehmann Corporate Investigative Services filed its report on its
investigative audit of our Ohio utilities with the PUCO. The full report can be found on the PUCO’s website,
www.puco.ohio.gov
,
under case number 14-0205-GA-COI. It focused on several specific areas, including the calculation of the GCR, gas supply management
and retention, internal controls within the Ohio utilities, corporate and management structure, and related party transactions.
The examination focused primarily on past practices and procedures, however, as anticipated, the audit report contains various
recommendations to ensure that our utilities are operating in the best interests of their ratepayers going forward. We have made
significant internal changes to our organization to address the issues raised in the audit report, and we have identified additional
opportunities to improve our operations. A condition of that Stipulation was a subsequent management practice audit, which was
conducted in 2016. That audit has not been concluded.
In 2014, the PUCO staff conducted an audit
of NEO and Orwell’s GCR for the periods March 1, 2012 through June 30, 2014, and July 1, 2012 through June 30, 2014; case
numbers 14-209-GA-GCR and 14-212-GA-GCR. These audits include the approximately two year period ending June 30, 2014. The 2014
PUCO staff report identified additional disallowed costs and errors in the GCR calculation. As a result, we adjusted our contingent
liability to settle this matter to $174, which is included as a component of cost of sales – natural gas purchased for 2014.
During the second quarter of 2015, we reached a settlement with the PUCO staff, which was not opposed by the Ohio Consumers’
Counsel, whereby approximately $1,200 will be refunded to our customers through our GCR. As a result of this settlement, we recorded
a charge of $693 to cost of sales – natural gas purchased for 2015. The PUCO approved the settlement and the time for appeal
has now expired, making the settlement final.
Legal Proceedings
From time to time, we are involved in lawsuits
that have arisen in the ordinary course of business. We are contesting each of these lawsuits vigorously and believe we have defenses
to the allegations that have been made. In our opinion, the outcome to these legal actions will not have a material adverse effect
on our financial condition, cash flows or results of operations.
Beginning on December 10, 2013, five putative
shareholder derivative lawsuits were filed by five different individuals, in their capacity as our shareholders, in the United
States District Court for the Northern District of Ohio, purportedly on behalf of us and naming certain of our current and former
executive officers and directors as individual defendants. These five shareholder lawsuits are captioned as follows: (1) Richard
J. Wickham v. Richard M. Osborne, et al., (Case No. 1:13-cv-02718-LW); (2) John Durgerian v. Richard M. Osborne, et al., (Case
No. 1:13-cv-02805-LW); (3) Joseph Ferrigno v. Richard M. Osborne, et al., (Case No. 1:13-cv-02822-LW); (4) Kyle Warner v. Richard
M. Osborne, et al., (Case No. 1:14-cv-00007-LW) and (5) Gary F. Peters v. Richard M. Osborne, (Case No. 1:14-cv-0026-CAB). On February
6, 2014, the five lawsuits were consolidated solely for purposes of conducting limited pretrial discovery, and on February 21,
2014, the Court appointed lead counsel for all five lawsuits.
The consolidated action contains claims against
various of our current or former directors or officers alleging, among other things, violations of federal securities laws, breaches
of fiduciary duty, waste of corporate assets and unjust enrichment arising primarily out of our acquisition of the Ohio utilities,
services provided by JDOG Marketing and the acquisition of JDOG Marketing, and the sale of our common stock by Richard M. Osborne,
our former chairman and chief executive officer, and Thomas J. Smith, our former chief financial officer. The suit, in which we
are named as a nominal defendant, seeks the recovery of unspecified damages allegedly sustained by us, corporate reforms, disgorgement,
restitution, the recovery of plaintiffs’ attorney’s fees and other relief.
On January 13, 2017, (i) plaintiffs John Durgerian
and Joseph Ferrigno, individually and derivatively on behalf of the Company; (ii) certain of the Company’s current and former
officers and directors; and (iii) the Company entered into a Stipulation of Settlement (the “Stipulation”). On January
31, 2017, the Court issued an order in the consolidated action preliminarily approving a proposed settlement (the “Settlement”),
for which we have accrued a liability of $550.
The Settlement is subject to further consideration
at a settlement hearing to be held on April 7, 2017 at 9:00 a.m., before U.S. Magistrate Judge Jonathan D. Greenberg, at the U.S.
District Court, Northern District of Ohio, Carl B. Stokes U.S. Court House, 801 West Superior Avenue, Courtroom 10B, Cleveland,
Ohio 44113. The Settlement, if finally approved, will cause the dismissal with prejudice of the consolidated action. Any objections
to the Settlement must be filed in writing with the Court on or before March 24, 2017. Additional information regarding the terms
of the Stipulation and the requirements for submitting any objections to the Settlement can be found in our Form 8-K filed with
the SEC on February 3, 2017 and on our website at
http://investor.egas.net
.
On November 3, 2016, a putative derivative
and class action lawsuit was filed in the Cuyahoga County Court of Common Pleas, Case Number CV16871400, captioned
Alison D.
“Sunny” Masters vs. Michael B. Bender et. al.
, naming our board of directors, James E. Sprague (our chief financial
officer), Kevin J. Degenstein (our chief operating officer), Jennifer Haberman (our corporate controller), Jed D. Henthorne (our
former corporate controller and currently president of our Energy West Montana subsidiary), Vincent A. Parisi (our former general
counsel), Parent, Merger Sub, First Reserve, Anita G. Zucker, individually, the Article 6 Marital Trust, Under the First Amended
and Restated Jerry Zucker Revocable Trust dated April 2, 2007, InterTech, NIL Funding, as defendants, and the Company, as a nominal
defendant. NIL Funding is an affiliate of InterTech. The chairperson and chief executive officer of InterTech, Anita G. Zucker,
beneficially owns nearly 10% of our outstanding stock through the Zucker Trust. Two members of our board of directors, Mr. Bender
and Mr. Johnston, currently serve as officers of InterTech.
On November 17, 2016, plaintiff filed an amended
complaint. The amended complaint alleges, among other things, that (i) our board breached its fiduciary duties and acted in bad
faith by failing to undertake an adequate sales process during the time leading up to the execution of the Merger Agreement, (ii)
our officers violated their fiduciary duty of loyalty, (iii) the Merger Agreement contains preclusive deal protection devices,
(iv) our board failed to act with due care, loyalty, good faith, and independence owed to our shareholders, (v) that our executive
officers, board members, InterTech, NIL Funding, and First Reserve conspired and aided and abetted such breaches of fiduciary duties,
and (vi) that our board breached their fiduciary duties and violated related federal securities laws by omitting and misrepresenting
material information in the Company’s preliminary proxy statement filed on November 9, 2016. The amended complaint further
alleges various claims against the Zucker Trust and First Reserve including, as applicable, claims for breach of fiduciary duties,
violations of Section 13(d) of the Exchange Act and Exchange Act Rule 13d-2(a).
On November 28, 2016, all defendants removed
the Masters Case to the United States District Court for the Northern District of Ohio, Case Number 1:16-CV-02880. We agreed to
provide expedited discovery to the plaintiff. On December 23, 2016, we entered into a Memorandum of Understanding with the plaintiff
providing for the settlement of the Masters case. In the Memorandum of Understanding, the Company agreed to make certain supplemental
disclosures to the Definitive Proxy Statement filed on November 23, 2016, solely for the purpose of minimizing the time, burden,
and expense of litigation. The Memorandum of Understanding provides that, in exchange for making these disclosures, defendants
will receive, after notice to potential class members and upon court approval, a customary release of claims relating to the Merger.
On December 23, 2016, we filed with the SEC a Form 8-K making supplemental disclosures to our definitive proxy statement. We expect
to incur costs and expenses related to this suit that are not covered by insurance that may be substantial. On March 7, 2017, the
parties executed a Stipulation of Settlement, as contemplated by the Memorandum of Understanding.
On October 20, 2016, Orwell-Trumbull Pipeline
Co., LLC filed a complaint in the Court of Common Pleas in Lake County, Ohio, captioned
Orwell-Trumbull Pipeline Co., LLC v.
Orwell Natural Gas Company
, Case Number 16CV001776. Orwell-Trumbull’s complaint claims that jurisdiction over the Natural
Gas Transportation Service Agreement between it and Orwell and Brainard Gas Corp., which was the subject of Case Number 15-0637-GA-CSS,
filed with the PUCO on March 31, 2015, described below, is proper in the Court of Common Pleas and not the PUCO. Orwell-Trumbull
alleges three causes of action for breach of contract, treble damages, and continuing damages. The complaint alleges that Orwell
failed to remit payment for invoices issued by Orwell-Trumbull pursuant to the Agreement as modified by the PUCO in Case Number
15-0637-GA-CSS. The complaint further alleges claims for treble and continuing damages due to the purported breach of contract.
On November 11, 2016, Orwell filed an answer and counterclaim seeking a declaratory judgment, and a Motion to Expedite the hearing
on the declaratory judgment and requesting the court set an expedited discovery schedule. On December 20, 2016, Orwell filed a
complaint with the PUCO against Orwell-Trumbull, captioned
Orwell Natural Gas Company v. Orwell-Trumbull Pipeline Co., LLC
,
Case Number 16-2419-GA-CSS, described below, alleging that Orwell-Trumbull has been incorrectly invoicing Orwell in violation of
the Agreement as modified by the PUCO in Case Number 15-0637-GA-CSS.
On July 14, 2016, we entered into a settlement
agreement with Richard M. Osborne, our former chairman and chief executive officer (the “Settlement”). Under the Settlement,
we settled numerous, but not all, outstanding litigation and regulatory proceedings between us, including our subsidiaries and
certain of our current and former directors, and Mr. Osborne. All matters previously disclosed and subject to the Settlement are
briefly referred to below and described in further detail in Part II, Item I of our Quarterly Report on Form 10-Q for the quarter
ended March 31, 2016, and under the caption “Litigation with Richard Osborne” in the Company’s Definitive Proxy
Statement, filed with the SEC on May 9, 2016 and June 21, 2016, respectively. The specific litigation and regulatory proceedings
subject to the Settlement:
|
·
|
Richard M. Osborne and Richard M. Osborne Trust, Under Restated and Amended Trust Agreement
of January 13, 1995 v. Gas Natural Inc., et al., Case No. 15CV844836, filed in the Court of Common Pleas in Cuyahoga County, Ohio
on April 28, 2015:
On June 13, 2014, Richard M. Osborne filed a lawsuit against us and our corporate secretary captioned, “Richard
M. Osborne and Richard M. Osborne Trust, Under Restated and Amended Trust Agreement of February 24, 2012 v. Gas Natural, Inc. et
al.,” Case No. 14CV001210 in the Lake County Court of Common Pleas. Mr. Osborne sought an order requiring us to provide him
with meeting minutes and corporate resolutions for the past five years. On February 13, 2015, Mr. Osborne voluntarily dismissed
his complaint. On April 28, 2015, Mr. Osborne refiled this lawsuit in the Cuyahoga County Court of Common Pleas. We filed a counterclaim
against Mr. Osborne seeking to have him declared a vexatious litigator. Pursuant to the Settlement, this case was dismissed with
prejudice.
|
|
·
|
Richard M. Osborne, Richard M. Osborne Trust, Under Restated and Amended Trust Agreement of
February 24, 2012 and John D. Oil and Gas Marketing Company, LLC v. Gas Natural, Inc. et al., Case No. 14CV001512, filed in the
Court of Common Pleas in Lake County, Ohio on July 28, 2014:
Mr. Osborne (1) demanded payment of an earn-out amount associated
with our purchase of assets from JDOG Marketing, (2) alleged that our board of directors breached its fiduciary duties by removing
Mr. Osborne as chairman and chief executive officer, (3) sought to enforce a July 15, 2014, term sheet, where the parties memorialized
certain discussions they had in connection with their efforts to resolve the dispute arising out of the lawsuit, which included
a severance payment of $1,000, and (4) sought to invalidate the results of the July 30, 2014, shareholder meeting and asked the
court to order us to hold a new meeting at a later date. Mr. Osborne also sought compensatory and punitive damages. We asserted
counterclaims including claims for defamation, arising out of the July 9, 2014, letter Mr. Osborne sent to our shareholders and
conversion for a company-provided car Mr. Osborne refuses to return to us. Additional counterclaims included claims for battery
and intentional infliction of emotional distress, asserted by Wade Brooksby and Michael Victor, respectively, former members of
our board of directors. Pursuant to the Settlement, this case was dismissed with prejudice.
|
|
·
|
8500 Station Street LLC v. OsAir Inc., et al, Case No. 14CV002124, transferred from the Mentor
Municipal Court, Case No. CVG1400880 (filed October 2, 2014), to the Court of Common Pleas in Lake County, Ohio on November 3,
2014:
8500 Station Street filed a complaint against OsAir on October 2, 2014 (amended in January 2015) for forcible entry and
detainer for past-due rent and other damages relating to the premises located at 8500 Station Street, Suite 113, Mentor, Ohio.
8500 Station Street claimed damages in the amount of $82 in unpaid rent and physical damage to the premises as a result of fixtures
removed by OsAir in vacating the premises. Pursuant to the Settlement, this case was dismissed with prejudice.
|
|
·
|
Cobra Pipeline Co., Ltd. v. Gas Natural, Inc., et al., Case No. 1:15-cv-00481, filed in the
United States District Court for the Northern District of Ohio on March 12, 2015:
Cobra’s complaint alleged that it uses
a service to track the locations of its vehicles via GPS monitoring. Cobra alleged that we, and other defendants, accessed and
intercepted vehicle tracking data, after we knew or should have known that our authority to do so had ended. The complaint alleged
claims under the Stored Communications Act, the Wiretap Act, and various state-law claims. On September 17, 2015, the court granted
defendants’ motion for summary judgment and dismissed Cobra’s complaint in its entirety. On October 19, 2015, Cobra
filed its Notice of Appeal to the Sixth Circuit Court of Appeals. Pursuant to the Settlement, this case was dismissed with prejudice.
|
|
·
|
Orwell National Gas Company v. Osborne Sr., Richard M., Case No. 15CV001877, filed in the Court
of Common Pleas in Lake County, Ohio on October 29, 2015:
The complaint alleged that Richard M. Osborne, while the chairman,
president and chief executive officer of Orwell, Great Plains, JDOG, and GNSC fraudulently presented demands for payment to GNSC
and Orwell, claiming that payments were due for natural gas purchased from Great Plains and JDOG from January 2012 through September
2013. Mr. Osborne ultimately obtained two checks from Orwell in the total amount of $202. Orwell’s complaint stated a claim
of theft and sought liquidated damages in the amount of these checks. Pursuant to the Settlement, this case was dismissed with
prejudice.
|
|
·
|
Orwell Natural Gas Company v. Ohio Rural Natural Gas Co-Op, et al., Case No. 15CV002063, filed
in the Court of Common Pleas in Lake County, Ohio on November 30, 2015:
Orwell filed a complaint and motion for preliminary
injunction against Ohio Rural Natural Gas Co-Op (“Ohio Rural”) and Mr. Osborne alleging that Ohio Rural and Mr. Osborne
acted in concert to convert, for the use of their own supply, natural gas supply lines owned and operated by Orwell. The complaint
alleged that on November 20, 2015, Ohio Rural and Mr. Osborne tampered with and severed gas lines owned by Orwell on Tin Man Road
in Mentor, Ohio, terminated its service to approximately 50 independently owned businesses, and converted it for their own personal
use. The complaint stated claims for conversion, unjust enrichment and civil remedy against criminal act, and seeks compensatory
and liquidated damages. On November 30, 2015, Orwell filed a case with the PUCO on the same grounds, captioned In the Matter of
Orwell Natural Gas Company, Brainard Gas Corporation and Northeast Ohio Natural Gas Corporations’ Request for Injunctive
Relief, Case No. 15-2015-GA-UNC. Pursuant to the Settlement, this matter was dismissed with prejudice.
|
|
·
|
Orwell Natural Gas Company v. Orwell-Trumbull Pipeline Company, LLC, Case Number 15-0475-GA-CSS,
filed with the PUCO on March 9, 2015:
Orwell’s complaint alleged that on March 5, 2015, an Orwell-Trumbull employee notified
Orwell that a pipeline owned by Orwell-Trumbull along Vrooman Road in Lake County, Ohio would be shut down completely for an alleged
need to conduct maintenance or move Orwell-Trumbull pipelines. The complaint alleged that Orwell-Trumbull violated Ohio law due
to its improper attempt to shut down the pipeline along Vrooman Road and requested the PUCO order Orwell-Trumbull to refrain from
shutting off service to the residential and commercial customers along Vrooman Road. On May 9, 2016, Orwell-Trumbull, Orwell and
the Ohio Consumers’ Counsel filed a stipulation in which Orwell-Trumbull agreed to provide monthly status updates to the
parties to the stipulation regarding the ownership status of certain pipelines along Vrooman Road. The monthly updates will be
required until Orwell-Trumbull has either completed construction to re-establish connections or filed a petition to abandon service
regarding its pipelines on Vrooman Road. On June 1, 2016, the PUCO dismissed Orwell’s complaint on the basis that the May
9, 2016 stipulation resolved all of the issues in the complaint. Pursuant to the Settlement, this case was closed.
|
|
·
|
Orwell-Trumbull Pipeline Company, LLC v. Orwell Natural Gas Company, Case No: 01-15-0002-9137,
filed with the American Arbitration Association on or about March 12, 2015:
Filed by Orwell-Trumbull with respect to a dispute
under the Natural Gas Transportation Service Agreement between it and Orwell and Brainard Gas Corp. Orwell-Trumbull claims Orwell
breached the exclusivity provisions in the Agreement. Orwell filed several counterclaims, including claims for breach of contract,
fraud, and unjust enrichment. Pursuant to the Settlement, this case was dismissed with prejudice.
|
|
·
|
Orwell Natural Gas Company v. Orwell-Trumbull Pipeline Company LLC, Case Number 15-0637-GA-CSS,
filed with the PUCO on March 31, 2015:
On March 31, 2015, Orwell filed a complaint on the same grounds as Case No: 01-15-0002-9137,
described above, with the PUCO to address issues regarding the operation of and contract rights for utilities on the Orwell Trumbull
Pipeline. The PUCO issued an opinion and order on June 15, 2016, asserting jurisdiction over the Natural Gas Transportation Service
Agreement, modifying certain of its terms, ordering any other pipeline owned or controlled by Richard M. Osborne to file a rate
case within 60 days of the order, and ordering the PUCO Staff to undertake an investigative audit of all pipeline companies owned
or controlled by Richard M. Osborne. Although the parties agreed upon certain conduct in the interim, under the Settlement Orwell-Trumbull
has the right to appeal the June 15, 2016 PUCO opinion and order. Orwell-Trumbull filed a request for a rehearing on July 15, 2016.
Orwell filed its memorandum in opposition on July 25, 2016. On August 3, 2016, Orwell-Trumbull’s request for a rehearing
was granted. On October 20, 2016, Orwell-Trumbull filed a complaint in the Court of Common Pleas in Lake County, Ohio, captioned
Orwell-Trumbull Pipeline Co., LLC v. Orwell Natural Gas Company
, Case Number 16CV001776, described above. Orwell-Trumbull’s
complaint claims that jurisdiction over the Natural Gas Transportation Service Agreement between it and Orwell and Brainard Gas
Corp. is proper in the Court of Common Pleas and not the PUCO. On December 20, 2016, Orwell filed a complaint with the PUCO against
Orwell-Trumbull, captioned
Orwell Natural Gas Company v. Orwell-Trumbull Pipeline Co., LLC
, Case Number 16-2419-GA-CSS,
alleging that Orwell-Trumbull has been incorrectly invoicing Orwell in violation of the June 15, 2016 PUCO opinion and order.
|
|
·
|
Gas Natural Resources LLC v. Orwell-Trumbull Pipeline Company LLC, Case No. 16-0663-GA-CSS,
filed with the PUCO on March 28, 2016:
GNR filed a complaint before the PUCO pursuant to a transportation service agreement
between it and Orwell-Trumbull. The agreement was assigned to GNR when we acquired the assets of JDOG Marketing on June 1, 2013.
The complaint alleged that Orwell-Trumbull breached the termination provisions of the agreement and violated Ohio law due to Orwell-Trumbull’s
failure to file the agreement with the PUCO and its improper attempt to discontinue service under agreement. Pursuant to the Settlement,
this case was dismissed with prejudice.
|
We and Mr. Osborne further agreed to dismiss
all other pending or threatened litigation matters between us, although not specifically identified in the agreement. In connection
with the Settlement, Mr. Osborne withdrew the director candidates he had nominated for election to the board at the annual meeting
of shareholders held on July 27, 2016. The proxy materials circulated in support of his candidates were also withdrawn. Pursuant
to the Settlement, further details of the Settlement are confidential.
On March 14, 2017, Richard M. Osborne, our former chairman and
chief executive officer, filed a complaint in the Court of Common Pleas in Cuyahoga County, Ohio, captioned “Richard M. Osborne
and Richard M. Osborne Trust, Under Restated and Amended Trust Agreement of February 24, 2012 v. Gas Natural, Inc.,” Case
No. CV-17-877354. Mr. Osborne’s complaint alleges that we have breached the terms of the Settlement and seeks damages in
excess of $4,000 and legal fees and expenses. We believe Mr. Osborne’s claims are without merit and will vigorously defend
this case on all grounds.
On February 25, 2013, one of our former officers,
Jonathan Harrington, filed a lawsuit captioned “Jonathan Harrington v. Energy West, Inc. and Does 1-4,” Case No. DDV-13-159
in the Montana Eighth Judicial District Court, Cascade County. Mr. Harrington claims he was terminated in violation of a Montana
statute requiring just cause for termination. In addition, he alleges claims for negligent infliction of emotional distress and
negligent slander. Mr. Harrington is seeking relief for economic loss, including lost wages and fringe benefits for a period of
at least four years from the date of discharge, together with interest. Mr. Harrington is an Ohio resident and was employed in
our Ohio corporate offices. On March 20, 2013, we filed a motion to dismiss the lawsuit on the basis that Mr. Harrington was an
Ohio employee, not a Montana employee, and therefore the statute does not apply. On July 1, 2014, the court conducted a hearing,
made extensive findings on the record, and issued an Order finding in our favor and dismissing all of Mr. Harrington’s claims.
On July 21, 2014, Mr. Harrington appealed the dismissal to the Montana Supreme Court. On August 11, 2015, the Montana Supreme Court
agreed with us that Mr. Harrington’s employment was governed by Ohio law, and as such he could not take advantage of Montana’s
Wrongful Discharge from Employment Act. However, the Montana Supreme Court also held the trial court erred in determining it lacked
jurisdiction over the case, finding the trial court should have retained jurisdiction and applied Ohio law to Mr. Harrington’s
claims. As Ohio is an “at will” state, we believe there are no claims under Ohio law and the case will ultimately be
dismissed by the trial court on remand. On September 28, 2015, Mr. Harrington filed a motion to amend complaint to assert new causes
of action not previously alleged including claims for misrepresentation, constructive fraud based on alleged representations, slander,
and mental pain and suffering. We answered the amended complaint to preserve our defenses, and we have also opposed Mr. Harrington’s
motion to amend. On December 14, 2015, we filed a motion to dismiss the Montana action in its entirety on the basis that the forum
is not appropriate. Our motion to dismiss is now fully briefed and is awaiting ruling by the court. We continue to believe Mr.
Harrington’s claims under both Montana and Ohio law are without merit and we will continue to vigorously defend this case
on all grounds.
Note 20 – Accounts Receivable
Changes in, and balances of, the allowance for
doubtful accounts receivable were as follows:
|
|
Balance at
Beginning
of Period
|
|
|
Amounts
Charged/
(Credited)
To Expense
|
|
|
Amounts
Charged Off,
Net of
Recoveries
|
|
|
Balance at
End of
Period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from accounts receivable for doubtful accounts
|
|
$
|
506
|
|
|
$
|
182
|
|
|
$
|
303
|
|
|
$
|
385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from accounts receivable for doubtful accounts
|
|
$
|
371
|
|
|
$
|
278
|
|
|
$
|
143
|
|
|
$
|
506
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from accounts receivable for doubtful accounts
|
|
$
|
1,978
|
|
|
$
|
1,112
|
|
|
$
|
2,719
|
|
|
$
|
371
|
|
During 2013, a large industrial customer of
ours entered bankruptcy proceedings. We believed that we had an administrative claim for the unreserved portion of our accounts
receivable and that we were likely to collect the amount. In June 2014, the bankruptcy court denied our administrative claim on
the customer and, as a result, we wrote off $1,056 of accounts receivable. This receivable was related to our marketing and production
operating segment.
Note 21 – Accrued Liabilities
The following table summarizes the components
of our accrued liabilities balances at December 31, 2016 and 2015.
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Deferred payments received from levelized billing
|
|
$
|
2,896
|
|
|
$
|
3,107
|
|
Taxes other than income
|
|
|
1,922
|
|
|
|
1,861
|
|
Legal settlements
|
|
|
925
|
|
|
|
-
|
|
Accrued accounts payable
|
|
|
666
|
|
|
|
204
|
|
Interest
|
|
|
513
|
|
|
|
446
|
|
Customer deposits
|
|
|
448
|
|
|
|
427
|
|
Employee benefits
|
|
|
422
|
|
|
|
554
|
|
Accrued liabilities to related parties
|
|
|
253
|
|
|
|
170
|
|
Vacation
|
|
|
210
|
|
|
|
104
|
|
Income taxes
|
|
|
10
|
|
|
|
-
|
|
Accrued liabilities
|
|
$
|
8,265
|
|
|
$
|
6,873
|
|
Note 22 – Unaudited Quarterly Results of Operations
|
|
2016 Quarter Ended
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
30,746
|
|
|
$
|
13,355
|
|
|
$
|
17,033
|
|
|
$
|
38,307
|
|
Gross margin
|
|
|
13,170
|
|
|
|
6,576
|
|
|
|
8,433
|
|
|
|
14,745
|
|
Income tax benefit (expense)
|
|
|
(365
|
)
|
|
|
1,778
|
|
|
|
934
|
|
|
|
(1,640
|
)
|
Income (loss) from continuing operations
|
|
|
1,320
|
|
|
|
(1,826
|
)
|
|
|
(1,671
|
)
|
|
|
2,702
|
|
Discontinued operations, net of tax
|
|
|
(5
|
)
|
|
|
2
|
|
|
|
14
|
|
|
|
(23
|
)
|
Net income (loss) and comprehensive income (loss)
|
|
|
1,315
|
|
|
|
(1,824
|
)
|
|
|
(1,657
|
)
|
|
|
2,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.13
|
|
|
$
|
(0.17
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
0.26
|
|
Discontinued operations
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Net income (loss) per share
|
|
$
|
0.13
|
|
|
$
|
(0.17
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
0.26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2015 Quarter Ended
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
29,498
|
|
|
$
|
13,084
|
|
|
$
|
16,046
|
|
|
$
|
53,733
|
|
Gross margin
|
|
|
12,255
|
|
|
|
6,815
|
|
|
|
7,482
|
|
|
|
17,657
|
|
Income tax benefit (expense)
|
|
|
(74
|
)
|
|
|
1,312
|
|
|
|
1,012
|
|
|
|
(2,667
|
)
|
Income (loss) from continuing operations
|
|
|
729
|
|
|
|
(2,264
|
)
|
|
|
(1,713
|
)
|
|
|
4,417
|
|
Discontinued operations, net of tax
|
|
|
(526
|
)
|
|
|
3,395
|
|
|
|
213
|
|
|
|
437
|
|
Net income (loss) and comprehensive income (loss)
|
|
|
203
|
|
|
|
1,131
|
|
|
|
(1,500
|
)
|
|
|
4,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted earnings per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.07
|
|
|
$
|
(0.22
|
)
|
|
$
|
(0.16
|
)
|
|
$
|
0.42
|
|
Discontinued operations
|
|
|
(0.05
|
)
|
|
|
0.32
|
|
|
|
0.02
|
|
|
|
0.04
|
|
Net income (loss) per share
|
|
$
|
0.02
|
|
|
$
|
0.10
|
|
|
$
|
(0.14
|
)
|
|
$
|
0.46
|
|
During the fourth quarter of 2016, we recorded
an adjustment to our accrual for legal settlements of $725 in our general and administrative expenses. We also recorded a charge
of $29 to interest expense to write off debt issue costs related to our former credit facilities at our unregulated utilities.
See
Note 19 – Commitments and Contingencies
and
Note 2 – Significant Accounting Policies
for more information
about our legal proceedings and debt issue costs, respectively.
During the fourth quarter of 2015, we recognized
in other income a $415 gain on the sale of Clarion River and Walker Gas, a $409 loss on the sale of an office building in Mentor,
Ohio, a loss of $341 on the sale of PGC, and a charge to discontinued operations for $413 related to the prepayment of debt. See
Note 3 – Discontinued Operations
and
Note 4 – Disposals
for more information about these transactions.
We also recorded amounts related to the implementation of our ERP system: $513 for training and maintenance, $358 of amortization
of our deferred loss on the sale-leaseback transaction, depreciation of $163, and interest expense of $237.