Commitments and Contingencies | 9 Months Ended |
Sep. 30, 2014 |
Commitments and Contingencies Disclosure [Abstract] | ' |
Commitments and Contingencies | ' |
Note 15 – Commitments and Contingencies |
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Legal Proceedings |
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From time to time, the Company is involved in lawsuits that have arisen in the ordinary course of business. The Company is contesting each of these lawsuits vigorously and believes it has defenses to the allegations that have been made. |
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Richard M. Osborne Suits |
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On June 13, 2014, Richard M. Osborne, father of the Company’s chief executive officer and the Company’s former chairman and chief executive officer, filed a lawsuit against the Company and the Company’s 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 which was filed in the Court of Common Pleas in Lake County, Ohio. In this lawsuit, Mr. Osborne seeks an order requiring the Company to provide him with “the minutes and any corporate resolutions for the past five years.” The Company has provided Mr. Osborne with all the board minutes he requested that have been approved by the board. On October 29, 2014, Mr. Osborne filed an amended complaint in this matter demanding minutes of the committees of the board of directors and additional board minutes which he claims he is entitled to receive. Mr. Osborne has also filed requests for discovery in this lawsuit. |
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On June 26, 2014, Mr. Osborne filed a lawsuit against Gas Natural and the Company’s board of directors captioned “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. 14CV001290, filed in the Court of Common Pleas in Lake County, Ohio. In this lawsuit, among other things, Mr. Osborne (1) demanded payment of an earnout associated with Gas Natural’s purchase of assets from John D. Marketing, (2) alleged that the board of directors breached its fiduciary duties, primarily by removing Mr. Osborne as chairman of the board and chief executive officer, (3) sought injunctive relief to restrain the Company’s board members from “taking any actions on behalf of Gas Natural until they are in compliance with the law and the documents governing corporate governance” and (4) asked the Court to enjoin the 2014 annual meeting that was scheduled to take place on July 30, 2014 and to delay it until such time that the board of directors would be “in compliance with the law and corporate governance.” |
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Mr. Osborne dismissed the lawsuit above on July 15, 2014 without prejudice, as the parties started to engage in settlement negotiations in an attempt to resolve the dispute. After settlement negotiations broke down, Mr. Osborne refiled the lawsuit on July 28, 2014 against Gas Natural and the Company’s board members. In the re-filed lawsuit, among other things, Mr. Osborne (1) demands payment of an earnout amount associated with Gas Natural’s purchase of assets from John D. Marketing, (2) alleges that the board of directors has breached its fiduciary duties by removing Mr. Osborne as chairman and chief executive officer, (3) seeks 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 $1.0 million, and (4) seeks to invalidate the results of the July 30, 2014 shareholder meeting and asks the court to order Gas Natural to hold a new meeting at a later date. Mr. Osborne is also seeking compensatory and punitive damages. The parties are currently conducting discovery in this lawsuit. Gas Natural believes that Mr. Osborne’s claims in this lawsuit are wholly without merit and will vigorously defend this case on all grounds. |
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As disclosed above, on June 26, 2014, Mr. Osborne filed a lawsuit against the Company in the Court of Common Pleas in Lake County, Ohio. In the lawsuit, Mr. Osborne sought injunctive relief delaying the 2014 annual meeting scheduled to take place on July 30, 2014. While that suit was pending, on July 9, 2014, Mr. Osborne mailed the first of several letters to the Company’s shareholders, criticizing the Company’s board and seeking shareholder’s support in replacing them. On July 15, 2014, Mr. Osborne dismissed without prejudice his Lake County lawsuit, but he refiled it on July 28, 2014. He did not again seek to enjoin the annual shareholder meeting, which occurred as scheduled two days later. Instead, he requests in his complaint that the Lake County court void the election of directors at the July 30 meeting and order the Company to conduct another shareholder meeting for the purpose of electing directors no later than February 2015. Mr. Osborne’s refiled lawsuit remains pending. Mr. Osborne wrote two additional letters, dated August 12, 2014 and September 9, 2014, which he mailed to the Company’s shareholders in mid-September. In the letters Mr. Osborne continued to criticize the Company’s board and management. |
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Mr. Osborne did not file his letters with the Securities and Exchange Commission and the Company believes that his letters violated Section 14(a) of the Securities Exchange Act and related regulations that require shareholder solicitations to be filed with the SEC. On October 2, 2014, Gas Natural filed a suit against Mr. Osborne captioned “Gas Natural Inc. v. Richard M. Osborne” in the United States District Court Northern District of Ohio (Case No. 1:14-cv-2181). In this case the Company sought to enjoin Mr. Osborne from sending additional letters to the Company’s shareholders without complying with applicable Federal securities laws. The court held a hearing on October 8, 2014 and the judge granted the injunction, requiring Mr. Osborne to file with the SEC any letters he writes to shareholders so long as his action in Lake County seeking to invalidate the July 30 meeting is pending. Mr. Osborne has appealed the ruling. The Company believes his appeal is wholly without merit and will vigorously contest it. |
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Shareholders Suit |
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Beginning on December 10, 2013, five putative shareholder derivative lawsuits were filed by five different individuals, in their capacity as shareholders of Gas Natural, in the United States District Court for the Northern District of Ohio, purportedly on behalf of Gas Natural and naming certain of the Company’s 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. No formal discovery has been conducted to date. |
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The consolidated action contains claims against various current or former directors or officers of Gas Natural alleging, among other things, violations of federal securities laws, breaches of fiduciary duty, waste of corporate assets and unjust enrichment arising primarily out of the Company’s acquisition of the Ohio utilities, services provided by JDOG Marketing and the acquisition of JDOG Marketing, and the sale of the Company’s common stock by Richard M. Osborne, the Company’s former chairman and chief executive officer, and Thomas J. Smith, a director of the Company and its former chief financial officer. The suit seeks the recovery of unspecified damages allegedly sustained by Gas Natural, which is named as a nominal defendant, corporate reforms, disgorgement, restitution, the recovery of plaintiffs’ attorney’s fees and other relief. |
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Gas Natural and the other defendants filed a motion to dismiss the consolidated action in its entirety on May 8, 2014. The motion to dismiss was based on, among other things, the failure of the plaintiffs to make demand on Gas Natural’s board of directors to address the alleged wrongdoing prior to filing their lawsuits and the failure to state viable claims against various individual defendants. Richard Osborne, individually, is now represented by counsel independent of all other defendants in the case and submitted a filing in support of the motion to dismiss on his own behalf. |
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On September 24, 2014, the magistrate judge assigned to the case issued a report and recommendation in response to the motion to dismiss. The magistrate judge recommended that the plaintiffs’ claims against the individual defendants with respect to the “unjust enrichment” allegation in the complaint be dismissed. The magistrate judge recommended that all other portions of the motion to dismiss be denied. The report and recommendation, the objections filed by the defendants, and the responses from the plaintiffs will all be reviewed by the trial judge assigned to the case who will then either adopt the report and recommendation in full, reject it in full, or adopt in part and modify in part. |
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At this time the Company is unable to provide an estimate of any possible future losses that it may incur in connection to this suit. The Company carries insurance that it believes will cover any negative outcome associated with this action. This insurance carries a $250,000 deductible, which the Company has reached. Although the Company believes these insurance proceeds are available, the Company may incur costs and expenses related to the lawsuits that are not covered by insurance which may be substantial. Any unfavorable outcome of the pending lawsuits could adversely impact the Company’s business and results of operations. |
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Harrington Employment Suit |
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On February 25, 2013, one of the Company’s 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 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 Gas Natural’s Ohio corporate offices. On March 20, 2013, the Company 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. The court had asked the parties to file comprehensive statements of fact and scheduled a hearing on the motion to dismiss on July 1, 2014. On July 1, 2014, the court conducted a hearing, made extensive findings on the record, and issued an Order finding in favor of the Company and dismissing all of Mr. Harrington’s claims. On July 21, 2014, Mr. Harrington appealed the dismissal to the Montana Supreme Court where the matter is presently pending awaiting full briefing by the parties. The Company continues to believe Mr. Harrington’s claims under Montana law are without merit, and will continue to vigorously defend this case on all grounds. |
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Special Committee of the Board Investigation |
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On March 26, 2014, the board of directors formed a special committee comprised of three independent directors to investigate the allegations contained in a letter received from one of our shareholders. The letter demands that the board take legal action to remedy alleged breaches of fiduciary duties by the board and certain of our executive officers in connection with the Order and Opinion issued by the PUCO on November 13, 2013. The special committee has the power to retain any advisors, including legal counsel and accounting, financial and regulatory advisors, that the committee determines to be appropriate to carry out its responsibilities in connection with its investigation. The special committee has retained legal counsel and financial and regulatory advisors and is in the process of investigating and evaluating the allegations in order to determine the position Gas Natural will take with respect to the letter. Although the Company believes that insurance proceeds are available for a portion of the cost of the investigation, the Company will incur costs and expenses related to the investigation that are not covered by insurance which may be substantial. |
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PUCO Audits |
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The Company accounts for purchased gas costs in accordance with procedures authorized by the utility commissions in the states in which it operates. 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 GCRs are monitored closely by the regulatory commissions in all of the states in which the Company operates and are subject to periodic audits or other review processes. The PUCO retrospectively audits the Ohio utility companies’ purchases of natural gas on an annual basis. The purpose of this GCR audit is to reconcile the differences, if any, between the amount the companies paid for natural gas and the amount the companies’ customers paid for natural gas. |
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2010 NEO Audit |
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During the year ended December 31, 2010, the PUCO conducted an audit of NEO’s GCR as filed from September 2007 through August 2009. In connection with the audits, the PUCO found that NEO had under-recovered gas costs of approximately $1.1 million. The collection of the under-recovery for NEO began in February of 2012. This adjustment appeared on the accompanying Condensed Consolidated Balance Sheets as part of “recoverable cost of gas purchases”. The remaining balance in NEO’s recoverable cost of gas purchases was $84,463 and $234,253 at June 30, 2014 and December 31, 2013, respectively. The recovery period for these under collected amounts has concluded. The remaining balance will be included as an adjustment in NEO’s future GCR audits until fully recovered. |
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2012 NEO & Orwell Audits |
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On January 23, 2012, the PUCO directed its staff to examine the compliance of NEO and Orwell under the GCR mechanism. In a non-binding report to the PUCO in February 2013, its staff asserted that NEO could have purchased natural gas from local producers for less and recommended an adjustment to the GCR calculations that would result in a liability for NEO and Orwell to its customers. |
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In July 2013, after a hearing with the PUCO and its staff, the Company determined it was probable that the GCR adjustments recommended by the staff would be adopted by the PUCO and as a result the Company recorded these liabilities in its financial statements for the period ended June 30, 2013. Based on the PUCO staff’s calculations and management’s assessment, a $943,550 liability to its customers was recorded as the Company’s best estimate of the required adjustment to NEO’s GCR and a liability for Orwell to its customers of $251,081. |
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On November 13, 2013, the PUCO issued an Opinion and Order in the NEO and Orwell GCR cases; case numbers 12-209-GA-GCR and 12-212-GA-GCR. The Order concluded that adjustments to NEO and Orwell’s GCRs were appropriate in the amounts of $0.8 million and $0.2 million, respectively. These adjustments represent disallowed agent fees paid by NEO and Orwell to JDOG Marketing for natural gas procurement, disallowed processing and treatment fees paid by NEO to Cobra for NEO’s natural gas supply being delivered through Cobra’s pipeline, and certain excess costs associated with local production gas purchased by NEO and Orwell from JDOG Marketing. Both JDOG Marketing and Cobra were companies controlled by Richard M. Osborne, father of the Company’s chief executive officer and the Company’s former chairman and chief executive officer, during the periods covered by these audits. These adjustments will be paid back to NEO and Orwell’s customers through July of 2015. The balance of these adjustments for NEO and Orwell at September 30, 2014 was $0.7 million and $0.2 million, respectively. The balance of these adjustments for NEO and Orwell at December 31, 2013 was $0.8 million and $0.2 million respectively. |
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In addition to the GCR adjustments, the PUCO ordered an investigative audit to be conducted of NEO, Orwell and all affiliated and related companies. These audits will examine the companies’ corporate separation and management structures, internal regulatory and financial controls, compensation systems, gas purchasing transactions and practices related to GCR calculations, and financial and accounting statements filed with regulatory agencies. The final results of these audits are to be reported to the PUCO by January 5, 2015. The PUCO capped the cost for the audit at $200,000 and provided for an additional $50,000 in fees for the preparation and presentation of expert testimony. These costs associated with the audit will be the responsibility of the Company. |
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After the November 13, 2013 PUCO Opinion and Order, the Company examined NEO and Orwell’s GCRs for the periods immediately following the companies’ audit periods. The Company calculated that a total liability, including the adjustments from the Opinion and Order, to its NEO and Orwell customers to be in the range of $1.5 million to $1.9 million. As a result, the Company accrued an additional $0.3 million in the fourth quarter of 2013 to increase its initial estimated liability to $1.5 million. The Company believes that this amount continues to be the best estimate to resolve this matter. New information may cause the Company to materially change this estimate in future periods. This amount is included as a reduction of the Recoverable cost of gas purchases line item on the accompanying Condensed Consolidated Balance Sheets. |
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Trade Receivables |
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At December 31, 2013, included in the accounts receivable, trade line item on the accompanying Condensed Consolidated Balance Sheet was $1,059,224, net of allowance for doubtful accounts of $1,421,000, due from a large industrial customer in bankruptcy proceedings. At the time, the Company believed that it had an administrative claim for the unreserved portion and that it was likely to collect the amount. In June 2014, the bankruptcy court denied the Company’s administrative claim on the customer. The Company’s claim is now considered that of an unsecured creditor and as such the Company believes that it is unlikely that it will collect any of the previously unreserved amounts. As a result, the Company has written-off the remaining balance of the receivable. This receivable was related to the Company’s Marketing & Production operating segment. The impact of the amount written-off is reflected in the Provision for doubtful accounts line of the Company’s Condensed Consolidated Statement of Comprehensive Income. |
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