Commitments and Contingencies | 12 Months Ended |
Dec. 31, 2014 |
Commitments and Contingencies Disclosure [Abstract] | |
Commitments and Contingencies | Note 24 – Commitments and Contingencies |
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Lease Commitments |
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Operating Leases |
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The Company leases certain properties including land, office buildings, and other equipment under non-cancelable operating leases. Lease expense resulting from operating leases for the years ended December 31, 2014, 2013 and 2012, totaled $184,008, $222,093 and $429,743, respectively. |
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Capital Leases |
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During 2012, the Company entered into an agreement with USPF whereby it is leasing 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 $300,000 per year through 2022. Additionally, the agreement calls for a $120,000 facility service fee to be paid by the Company each year, as long as the leased assets remain in place on the property. Also included in the agreement is a throughput charge of $0.0125 per Mcf moved through the leased pipeline. There were no throughput charge payments made during 2014, 2013 or 2012. During the year end December 31, 2014, the Company paid $120,000 for services related to this lease. There were no facility service fees paid in 2013 or 2012. |
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The cost basis and accumulated depreciation of assets recorded under capital leases, which are included in Property, Plant, and Equipment on the Consolidated Balance Sheets are as follows as of December 31, 2014 and 2013: |
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| | December 31, | | | | | | | |
| | 2014 | | 2013 | | | | | | | |
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Gas transmission & distribution facilities | | $ | 6,320,000 | | $ | 6,320,000 | | | | | | | |
Capital lease assets, gross | | | 6,320,000 | | | 6,320,000 | | | | | | | |
Accumulated depreciation | | | -902,857 | | | -501,587 | | | | | | | |
Capital lease assets, net | | $ | 5,417,143 | | $ | 5,818,413 | | | | | | | |
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Depreciation expense recorded in connection with assets under capital leases was $401,270, $401,270 and $100,317 for the years ended December 31, 2014, 2013 and 2012, respectively. |
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The following schedule presents the future minimum lease payments under the Company’s lease agreements as of December 31, 2014. |
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Future Minimum Lease Payments | | | |
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| | Operating Leases | | Build-to-suit Lease (1) | | Capital Leases | | | | |
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2015 | | $ | 277,634 | | $ | 2,405,890 | | $ | 300,000 | | | | |
2016 | | | 242,917 | | | 2,226,081 | | | 300,000 | | | | |
2017 | | | 233,913 | | | 2,092,063 | | | 300,000 | | | | |
2018 | | | 222,719 | | | 205,958 | | | 300,000 | | | | |
2019 | | | 210,579 | | | - | | | 300,000 | | | | |
Thereafter | | | 994,701 | | | - | | | 900,000 | | | | |
Total minimum lease payments | | $ | 2,182,463 | | $ | 6,929,992 | | | 2,400,000 | | | | |
Less: Interest portion | | | | | | | | | 537,062 | | | | |
Liability | | | | | | | | $ | 1,862,938 | | | | |
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(1) Relates to the Company’s ERP system build-to-suit lease. See Note 15 – Property Plant & Equipment. |
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Long-term Contracts |
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The following table summarizes the Company’s future minimum obligations under its long-term contracts at December 31, 2014. |
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Future Minimum Long-term Contract Obligations |
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| | Northwestern | | | | Maritimes and | | Gas Purchase | |
| | Energy | | Trans-Canada | | Northeast Pipeline | | Contracts | |
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2015 | | $ | 1,434,680 | | $ | 829,775 | | $ | 357,042 | | $ | 2,939,547 | |
2016 | | | 519,356 | | | 368,768 | | | 357,042 | | | 817,325 | |
2017 | | | 519,356 | | | 368,768 | | | 357,042 | | | - | |
2018 | | | 476,076 | | | 338,036 | | | 357,042 | | | - | |
2019 | | | - | | | - | | | 357,042 | | | - | |
Thereafter | | | - | | | - | | | - | | | - | |
Total | | $ | 2,949,468 | | $ | 1,905,347 | | $ | 1,785,210 | | $ | 3,756,872 | |
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One of the Company’s subsidiaries has a long-term contract with Northwestern Energy for pipeline and storage capacity which commits the Company to purchase certain blocks of pipeline capacity through 2018 at the interconnect with the TransCanada pipeline. The Company has a companion contract with TransCanada for pipeline capacity of equal quantities and terms. These agreements are based on current tariff prices as specified in the contracts. |
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The Company’s subsidiary, Bangor Gas, entered into an agreement with Maritimes and Northeast Pipeline for the transportation and storage of natural gas. |
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One of the Company’s subsidiaries has entered into long-term gas purchase agreements committing it to purchase gas through March of 2016 at a fixed spread above AECO pricing. Future commitments under these contracts have been estimated using AECO forward pricing for the periods covered by the agreements. |
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None of the preceding long-term contracts have been recognized on the Company’s Consolidated Balance Sheets. |
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Loss Contingency |
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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 a contingent liability in its financial statements for the period ended June 30, 2013. Based on the PUCO staff’s calculations and management’s assessment, the Company accrued an additional $0.9 million to establish a total liability to its customers of $1.2 million as its best estimate to resolve this matter. |
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On November 13, 2013, the PUCO issued an Opinion and Order related to the outstanding NEO and Orwell GCR cases; case numbers 12-209-GA-GCR and 12-212-GA-GCR. In it, the PUCO ordered adjustments to NEO and Orwell’s GCRs to disallow agent fees paid by the two companies to JDOG Marketing for natural gas procurement, disallow processing and treatment fees paid by NEO to Cobra for NEO’s natural gas supply being delivered through Cobra’s pipeline, and disallow certain excess costs associated with local production gas purchased by NEO and Orwell from JDOG Marketing. The total adjustment for the disallowance for these costs was approximately $1.0 million. Neo and Orwell ceased the inclusion of these disallowed costs in its GCR rates and their payment in the second half of 2013. 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. |
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Immediately following the release of the Opinion and Order, the Company examined NEO and Orwell’s GCRs for these disallowed cost in periods subsequent to the companies’ audit periods. As a result, the Company accrued a $0.5 million contingent liability in the fourth quarter of 2013 as its best estimate of these disallowed costs. The expense associated with this amount was partially offset by the $0.2 million over accrual of the expected audit period adjustments required by the PUCO. |
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In addition to the GCR adjustments called for in the November 2013 Opinion and Order, the PUCO ordered an investigative audit to be conducted of NEO, Orwell and all affiliated and related companies. These audits examined 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 audit was completed and filed with the PUCO and can be found under case number 14-0205-GA-COI. The PUCO has yet to act based on the audit report. Additionally, the Ohio Consumers’ Counsel has intervened and has requested additional documentation associated with the investigative audit. At this time, the Company cannot reasonably estimate the financial impact, if any, of any potential actions taken by the PUCO as a result of this report. Any actions taken by the PUCO as a result of this report could have a material adverse effect on the Company. |
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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 post audit periods discussed above. In addition to the disallowed costs previously identified in the November 2013 Opinion and Order, the 2014 PUCO staff report identified additional disallowed costs and errors in the GCR calculation. The Company does not agree with all of the disallowances as calculated in the PUCO staff report and intends to contest that some of these costs should be allowed as recoverable. The Company calculates that the total liability to NEO and Orwell due to its customers to be in the range of $0.2 million to $1.0 million. As a result, the Company adjusted its contingent liability to settle this mater to $0.2 million. This adjustment is included on the accompanying Consolidated Statement of Comprehensive Income for 2014 as a component of Cost of Sales – Natural gas purchased. New information may cause the Company to materially change this estimate in future periods. |
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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. On November 17, 2014, the defendants moved to dismiss Mr. Osborne’s amended complaint for failure to state a claim upon which relief can be granted, and for summary judgment. On February 11, 2015, the Court granted defendants’ motion, dismissing the case except for one allegation in one paragraph of Mr. Osborne’s amended complaint: that the Company failed to produce minutes of any board meeting that occurred between June 1, 2014 and June 13, 2014. The Court held in abeyance its ruling on this issue, to give Mr. Osborne 30 days to conduct discovery limited to determining whether any board meetings occurred during that two-week period. On February 13, 2015, Mr. Osborne voluntarily dismissed his Complaint, without prejudice. |
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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 above lawsuit 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 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 the shareholders’ 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, 2014 meeting and order the Company to conduct another shareholder meeting for the purpose of electing directors no later than February 2015, which the Court has not done. 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, 2014 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. The parties engaged in a settlement mediation on February 25, 2015. The parties failed to reach a settlement, but discussions are ongoing. |
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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 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 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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