Commitments and Contingencies | 3 Months Ended |
Mar. 31, 2014 |
Commitments And Contingencies Disclosure [Abstract] | ' |
Commitments and Contingencies | ' |
Note 11 – Commitments and Contingencies |
Legal Proceedings |
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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Shareholders Suit |
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. |
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, a director of the Company and its 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. |
Gas Natural and the other defendants filed a motion to dismiss this 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. |
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 will be responsible for paying before any losses will be covered. Although we believe these insurance proceeds are available, we 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. |
Harrington Employment Suit |
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 that 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 has asked the parties to file comprehensive statements of fact and scheduled a hearing on the motion to dismiss on July 1, 2014. The Company believes his claims under Montana law are without merit, and intends to vigorously defend this case on all grounds. |
PUCO Audits |
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 |
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 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 March 31, 2014 and December 31, 2013, respectively. |
2012 NEO & Orwell Audits |
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. |
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. |
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, a director of the Company and formerly its chairman and chief executive officer, during the periods covered by these audits. The Company examined NEO and Orwell’s GCRs for the periods immediately following the companies’ audit periods. As a result, the Company calculated that a total liability 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 Consolidated Balance Sheets. |
In addition to the GCR adjustments, the PUCO ordered an investigative audit to be conducted of NEO, Orwell and all affiliated and related companies to be undertaken by an outside auditor. This audit will examine the companies’ corporate separation and management structure, internal regulatory and financial controls, compensation system, gas purchasing transactions and practices related to GCR calculations, and financial and accounting statements filed with regulatory agencies. The costs associated with these audits will be the responsibility of the Company. The actual costs associated with such an audit cannot be reasonably estimated at this time and as such no amount has been accrued. These costs may prove to be material once known. |
Trade Receivables |
Included in the accounts receivable, trade line item on the accompanying condensed consolidated balance sheet are $1,079,342 and $1,059,224, net of allowance for doubtful accounts of $1,421,000 and $1,421,000 at March 31, 2014 and December 31, 2013, respectively, for amounts due to the Company by a large industrial customer that is currently under Chapter 11 bankruptcy protection. All but $178,546 of the amounts were incurred after the customer’s petition for bankruptcy was filed and the Company believes it will ultimately receive payment as the customer emerges from bankruptcy protection. |