Registration
No. 333-167859
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
WASHINGTON, DC 20549
Amendment No. 1
to
Form S-1
REGISTRATION STATEMENT UNDER
THE SECURITIES ACT OF 1933
GAS
NATURAL INC.
(Exact
name of registrant as specified in its charter)
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Ohio
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4924
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27-3003768
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(State or other jurisdiction
of incorporation or organization)
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(Primary Standard Industrial
Classification Code Number)
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(IRS Employer
Identification No.)
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1 First
Avenue South
Great Falls, Montana 59401
(406) 791-7500
(Address,
including zip code, and telephone number,
including area code, of registrants principal executive
offices)
Kevin J.
Degenstein
President and Chief Operating Officer
Gas Natural Inc.
1 First Avenue South
Great Falls, Montana 59401
(406) 791-7500
(Name,
address, including zip code, and telephone number,
including area code, of agent for service)
With
copies to:
Christopher
J. Hubbert, Esq.
Kohrman Jackson & Krantz P.L.L.
1375 East Ninth Street, 20th Floor
Cleveland, Ohio 44114
(216) 696-8700
Approximate date of commencement of proposed sale to the public:
As soon as practicable after this Registration Statement becomes
effective.
If any of the securities being registered on this Form are being
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following
box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
please check the following box and list the Securities Act
registration statement number of the earlier effective
registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer
or a smaller reporting company. See the definitions of
large accelerated filer, accelerated
filer and smaller reporting company in
Rule 12b-2
of the Exchange Act.
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Large accelerated
filer o
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Accelerated
filer o
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Non-accelerated
filer o
(do not check if a smaller reporting company)
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Smaller reporting
company þ
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CALCULATION
OF REGISTRATION FEE
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Proposed
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Proposed
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Maximum
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Maximum
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Title of Each Class of
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Amount to be
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Offering Price
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Aggregate
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Amount of
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Securities to be Registered
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Registered
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Per Share(1)
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Offering Price
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Registration Fee
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Common Stock of selling shareholder
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1,000,000(2)
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$11.77
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$11,770,000
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$839
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Common Stock to be sold by the registrant(3)
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1,875,000
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$11.77
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$22,068,750
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$1,574
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Total
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2,875,000
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$11.77
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$33,838,750
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$2,413(4)
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(1)
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The registration fee is calculated
pursuant to Rule 457(c) of the Securities Act of 1933 based
on the average of the high and low prices reported by the NYSE
Amex on June 23, 2010.
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(2) |
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The selling shareholder may sell up to 1,000,000 shares in this
offering. For the purpose of calculation of the registration
fee, sale of 1,000,000 shares by the selling shareholder has
been assumed. |
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(3) |
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Includes 375,000 shares that may be issued upon exercise of a
30-day option granted to the underwriters to cover
over-allotments, if any. |
The registrant may amend this registration statement on such
date or dates as may be necessary to delay its effective date
until the registrant shall file a further amendment which
specifically states that this registration statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the registration
statement shall become effective on such date as the commission,
acting pursuant to said Section 8(a), may determine.
The
information in this preliminary prospectus is not complete and
may be changed. These securities may not be sold until the
registration statement filed with the Securities and Exchange
Commission is effective. This preliminary prospectus is not an
offer to sell these securities and it is not soliciting an offer
to buy these securities in any jurisdiction where the offer or
sale is not permitted.
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SUBJECT
TO COMPLETION, DATED JULY 14, 2010
PROSPECTUS
2,500,000 Shares
Common
Stock
We are a natural gas
utility with operations in Montana, Wyoming, Ohio, Pennsylvania,
Maine and North Carolina. We also market and distribute natural
gas and conduct interstate pipeline operations in Montana and
Wyoming.
We are offering
1,500,000 shares of common stock. The Selling Shareholder
is selling up to 1,000,000 shares of common stock. We will
not receive any of the proceeds from the sale of shares by the
Selling Shareholder.
Our common stock is
listed on the NYSE Amex Equities stock exchange under the symbol
EGAS. The last reported sales price of our common
stock on June 28, 2010 was $11.86 per share.
We have granted the
underwriters a 30 day option to purchase up to 375,000
additional shares of common stock to cover over-allotments, if
any.
Investing in our
stock involves risks. See Risk Factors
beginning on page 5.
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Per
Share
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Total
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Public offering price
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$
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$
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Underwriting discounts and commissions
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$
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$
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Proceeds, before expenses, to us
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$
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$
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Proceeds, before expenses, to the Selling Shareholder
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$
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$
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Neither the
Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or
determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
Janney Montgomery
Scott LLC expects to deliver the shares on or about
,
2010.
Janney
Montgomery Scott
The date of this
prospectus is ,
2010.
TABLE OF
CONTENTS
You should rely
only on the information contained in or incorporated by
reference into this prospectus. We have not, and the
underwriters have not, authorized any other person to provide
you with different information. If anyone provides you with
different or inconsistent information, you should not rely on
it. We are not, and the underwriters are not, making an offer to
sell these securities in any jurisdiction where the offer or
sale is not permitted. The information in this prospectus is
current as of the date such information is presented. Our
business, financial condition, results of operations and
prospects may have changed since those dates.
FORWARD-LOOKING
STATEMENTS
This prospectus
contains forward-looking statements within the meaning of the
federal securities laws. Statements that are not historical
facts, including statements about our beliefs and expectations,
are forward-looking statements. Forward-looking statements
include statements preceded by, followed by or that include the
words may, could, would,
should, believe, expect,
anticipate, plan, estimate,
target, project, intend, or
similar expressions. These statements include, among others,
statements regarding our current expectations, estimates and
projections about future events and financial trends affecting
the financial condition and operations of our business.
Forward-looking statements are only predictions and not
guarantees of performance and speak only as of the date they are
made. We undertake no obligation to update any forward-looking
statement in light of new information or future events.
Although we believe
that the expectations, estimates and projections reflected in
the forward-looking statements are based on reasonable
assumptions when they are made, we can give no assurance that
these expectations, estimates and projections can be achieved.
We believe the forward-looking statements in this prospectus are
reasonable; however, you should not place undue reliance on any
forward-looking statement, as they are based on current
expectations. Future events and actual results may differ
materially from those discussed in the forward-looking
statements. Factors that could cause actual results to differ
materially from our expectations include, but are not limited to:
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fluctuating energy
commodity prices,
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the possibility that
regulators may not permit us to pass through all of our
increased costs to our customers,
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the impact of the
Federal Energy Regulatory Commission and state public service
commission statutes, regulations, and actions, including allowed
rates of return, and the resolution of other regulatory matters,
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the impact of
weather conditions and alternative energy sources on our sales
volumes,
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changes in federal
or state laws and regulations to which we are subject, including
tax, environmental, and employment laws and regulations,
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conditions of the
capital markets we utilize to access capital and our ability to
refinance our debt,
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the ability to raise
capital in a cost-effective way,
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our ability to
successfully integrate the operations of the companies we have
recently acquired and consummate additional acquisitions,
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the ability to meet
financial covenants imposed by lenders,
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the effect of
changes in accounting policies, if any,
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the ability to
manage our growth,
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the ability to
control costs,
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the ability of each
business unit to successfully implement key systems, such as
service delivery systems,
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our ability to
develop expanded markets and product offerings and our ability
to maintain existing markets,
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future utilization
of pipeline capacity, which can depend on energy prices,
competition from alternate fuels, the general level of natural
gas and propane demand, decisions by customers not to renew
expiring natural gas contracts and weather conditions,
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our ability to
achieve and maintain effective internal controls in accordance
with Section 404 of the Sarbanes-Oxley Act of 2002,
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our ability to
obtain governmental and regulatory approval of various expansion
or other projects,
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changes in general
economic conditions in the United States and changes in the
industries in which we conduct business,
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the costs and
effects of legal and administrative claims and proceedings
against us or our subsidiaries,
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the ability of
customers of the energy marketing and trading business to obtain
financing for various projects,
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the ability of
customers of the energy marketing and trading business to obtain
governmental and regulatory approval for various projects,
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disruptions to
natural gas supplies or prices caused by man-made or natural
disasters, such as tropical storms or hurricanes, and
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global and domestic
economic repercussions from terrorist activities and the
governments responses to these activities.
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For a more detailed
discussion of these and other risks that may impact our
business, see Risk Factors beginning on page 5.
ii
GLOSSARY
Unless otherwise
stated or the context requires otherwise, references to
we, us, the Company and
Gas Natural refer to Gas Natural Inc. and its
consolidated subsidiaries. In addition, this glossary contains
terms and acronyms that are relevant to natural gas
distribution, natural gas marketing and natural gas pipeline
operations and that are used in this prospectus.
AECO. Alberta Energy
Company Limited (used in reference to the AECO natural gas price
index).
ASC. The term
ASC means FASB Accounting Standards Certification,
standards issued by FASB with respect to GAAP.
Bangor Gas Company.
Bangor Gas Company, LLC.
Brainard. Brainard
Gas Corp.
Bcf. One billion
cubic feet, used in reference to natural gas.
CIG. Colorado
Interstate Gas (used in reference to the Colorado Interstate Gas
Index).
Clarion River.
Clarion River Gas Company.
Cut Bank Gas. Cut
Bank Gas Company.
EPA. The United
States Environmental Protection Agency.
EWR. Energy West
Resources, Inc.
Energy West. Energy
West, Incorporated.
Exchange Act. The
Securities Exchange Act of 1934, as amended.
FASB. Financial
Accounting Standards Board.
FERC. The Federal
Energy Regulatory Commission.
Frontier Natural
Gas. Frontier Natural Gas, LLC.
Frontier Utilities.
Frontier Utilities of North Carolina, Inc.
GPL. Great Plains
Land Development Co., Ltd.
Great Plains. Great
Plains Natural Gas Company.
Huntington. The
Huntington National Bank, N.A.
Kykuit. Kykuit
Resources, LLC.
Lightning Pipeline.
Lightning Pipeline Company, Inc.
MMcf. One million
cubic feet, used in reference to natural gas.
MRP. Energy West
Propane Inc. dba Missouri River Propane.
MPSC. The Montana
Public Service Commission.
MPUC. The Maine
Public Utilities Commission.
NCUC. The North
Carolina Utilities Commission.
NEO. Northeast Ohio
Natural Gas Corp.
NGA. The Natural Gas
Act.
OGCL. The Ohio
General Corporation Law.
Orwell. Orwell
Natural Gas Company.
Osborne Trust. The
Richard M. Osborne Trust, dated January 1, 1995.
PAPUC. The
Pennsylvania Public Utility Commission.
PUCO. The Public
Utilities Commission of Ohio.
Penobscot Natural
Gas. Penobscot Natural Gas Company, Inc.
SEC. The Securities
and Exchange Commission.
Shelby. The Shelby
Gas Association, a Montana utility cooperative.
Securities Act. The
Securities Act of 1933, as amended.
Selling Shareholder.
Richard M. Osborne, our chairman, chief executive officer and
largest shareholder, as trustee of the Osborne Trust and who is
offering to sell a portion of his shares in this public offering.
Walker Gas. Walker
Gas & Oil Company, Inc.
WPSC. The Wyoming
Public Service Commission.
iii
SUMMARY
This summary
highlights selected information appearing elsewhere or
incorporated by reference in this prospectus and may not contain
all of the information that is important to you. This prospectus
includes or incorporates by reference information about the
shares we and the Selling Shareholder are offering and selling
as well as information regarding our business and detailed
financial data. You should read this prospectus and any
information incorporated by reference herein in their entirety
before making an investment decision. The terms Gas
Natural, Company, we,
our, and us refer to Gas Natural Inc.
and its consolidated subsidiaries. The term you
refers to a prospective investor. To understand the offering
fully and for a more complete description of the offering you
should read this entire document carefully, including especially
the Risk Factors section, as well as the documents
to which we have referred you in the section entitled
Where You Can Find More Information.
Our
Company
Gas Natural is a
holding company of natural gas utility and energy-related
businesses serving approximately 62,000 customers. Our natural
gas utility subsidiaries include Energy West, Incorporated
(Montana and Wyoming), Cut Bank Gas Company (Montana), Northeast
Ohio Natural Gas Corporation (Ohio), Brainard Gas Corp. (Ohio),
Orwell Natural Gas Company (Ohio and Pennsylvania), Bangor Gas
Company (Maine) and Frontier Natural Gas (North Carolina). We
were incorporated in Montana in 1909 and reorganized as a
holding company in 2009 as a means to facilitate future
acquisitions and corporate level financings. On July 9,
2010 we moved our state of incorporation to Ohio and changed our
name from Energy, Inc. to Gas Natural Inc.
Our operations are
conducted through three main business segments:
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Natural Gas
Operations. Annually,
we distribute approximately 29 Bcf of natural gas to
approximately 62,000 customers through regulated utilities
operating in Montana, Wyoming, Ohio, Pennsylvania, Maine and
North Carolina. We acquired our Maine and North Carolina
operations in 2007, while Cut Bank Gas in Montana was added in
November 2009. Most recently, we closed the acquisition of our
Ohio and Pennsylvania operations on January 5, 2010.
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Pipeline
Operations. We
own the Shoshone interstate and the Glacier gathering natural
gas pipelines located in Montana and Wyoming through our
subsidiary Energy West Development, Inc. (EWD).
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Marketing and
Production. Annually,
we market approximately 2.4 Bcf of natural gas to
commercial and industrial customers in Montana and Wyoming and
manage midstream supply and production assets for transportation
customers and utilities through our subsidiary, Energy West
Resources, Inc. (EWR) EWR owns an average 48% gross working
interest (an average 41% net revenue interest) in 160 natural
gas producing wells and gas gathering assets.
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2009 Net Income
by Operating Segment
Our
Strategy
Our strategy is to
grow our earnings and increase cash flow by providing natural
gas to users in a safe and reliable manner by executing in the
following areas:
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Invest in
existing utilities to expand our distribution system, grow our
customer base and maintain reliable, high quality
service.
To maintain our position as a respected natural gas utility, we
have invested, and will continue to invest, substantial capital
and resources in our core utility operations in order to meet or
exceed applicable regulatory requirements and maintain our
infrastructure.
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Continue Active
Acquisition
Strategy. We
are actively pursuing potential bolt-on acquisitions to increase
our market penetration by acquiring utility operations in or
near our current service territories with minimal corporate
platform expansion. In addition, we actively seek acquisition
opportunities in new markets by targeting areas with low
saturation rates for natural gas due to reliance by customers on
alternate fuels (e.g. fuel oil and propane).
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Focus on
Efficiency to Maximize
Returns. We
strive to quickly and effectively respond to changing regulatory
and public policy initiatives, leverage new technology solutions
that significantly improve productivity and customer service and
implement organizational changes that improve our performance.
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Our
Strengths
We believe we are
well-positioned to execute our business strategy given the
following competitive strengths:
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Growth-Oriented
Utilities. Our
core business is regulated utility operations, which generated
approximately 90% of our first quarter 2010 revenue, and as we
have invested in our rate base, our earnings and cash flows have
grown with that investment. We believe that there are
significant opportunities for us to expand operations
organically in some of our existing service areas as there are
currently relatively low penetration rates of gas distribution
among potential customers.
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Focused
Acquisition
Strategy. We
continue to emphasize growth and have a successful track record
of executing on our acquisition strategy, and believe we can
replicate those successes through new acquisitions opportunities.
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Diverse Customer
Base. As
a result of our recent acquisitions, we now have operations in
six states located in the West, Midwest, Northeast and
Mid-Atlantic regions of the country, serving customers in a
variety of industry segments.
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Experienced
Management
Team. Our
senior management team is highly experienced in the gas utility
industry. Our senior management team averages approximately
22 years experience in the industry.
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Corporate
Information
Our executive
offices are located at 1 First Avenue South, Great Falls,
Montana 59401. Our telephone number is
(406) 791-7500
and our website is located at www.ewst.com. The
information on our website is not part of this prospectus.
2
The
Offering
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Common stock offered
by us
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1,500,000 shares
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Common stock offered
by the Selling Shareholder
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up to
1,000,000 shares
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Common stock to be
outstanding immediately after this offering*
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7,579,513 shares
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Annualized dividend
rate
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$0.54 per share
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NYSE AMEX Equities
symbol
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EGAS
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Use of Proceeds
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We intend to use the
net proceeds of this offering primarily to expand our
distribution systems in order to gain new customers. We believe
there is high customer interest in natural gas service in our
service areas. We may also use a limited portion of the proceeds
of this offering for working capital and general corporate
purposes. See Use of Proceeds.
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Risk Factors
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Investing in our
common stock involves risks. You should carefully consider the
information set forth in the section of this prospectus entitled
Risk Factors beginning on page 5, as well as
other information included or incorporated by reference in this
prospectus before deciding whether to invest in our common stock.
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* The shares of
our common stock to be outstanding after this offering is based
on 6,079,513 shares outstanding as of June 18, 2010.
3
Summary
Consolidated Financial Data
The following tables
summarize certain of our consolidated financial information.
This information is taken from our audited and unaudited
financial statements contained in our Annual Report on
Form 10-K
for the year ended December 31, 2009, as amended, and our
unaudited financial statements as of and for the three months
ended March 31, 2009 and March 31, 2010 in our
Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2010. The information set
forth below should be read in conjunction with the Consolidated
Financial Statements and accompanying Notes to Consolidated
Financial Statements incorporated by reference in this
prospectus. Historical operating results are not necessarily
indicative of results for any other period and operating results
for the three months ended March 31, 2010, are not
necessarily indicative of operating results which may be
expected for the full year.
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Three Months
Ended March 31,
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Year Ended
December 31,
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2010
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2009
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2009
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2008
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(unaudited)
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(unaudited)
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(in thousands,
except per share)
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Income Statement Data:
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Operating revenue
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$
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34,733
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$
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31,334
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$
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71,454
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$
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87,278
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Operating expenses
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Gas and electric purchases
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22,211
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23,560
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46,699
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63,506
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General and administrative
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3,915
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2,896
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10,562
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11,777
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Maintenance
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291
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171
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667
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645
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Depreciation and amortization
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968
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514
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2,213
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1,999
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Taxes other than income
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1,006
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630
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2,250
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2,501
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Total operating expenses
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28,391
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27,771
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62,391
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80,428
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Operating income
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6,340
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3,563
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9,063
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6,850
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Other income (expense)
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(251
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(25
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(976
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(295
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Total interest charges
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(593
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(346
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(1,241
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(1,224
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Income (loss) before taxes
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5,496
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3,192
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6,846
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5,331
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Income tax expense
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(1,833
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|
|
(1,230
|
)
|
|
|
(27
|
)
|
|
|
(1,985
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
3,663
|
|
|
|
1,962
|
|
|
|
6,819
|
|
|
|
3,346
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share
|
|
$
|
0.61
|
|
|
$
|
0.46
|
|
|
$
|
1.58
|
|
|
$
|
0.77
|
|
Diluted earnings (loss) per common share
|
|
$
|
0.61
|
|
|
$
|
0.46
|
|
|
$
|
1.58
|
|
|
$
|
0.77
|
|
Dividends per common share
|
|
$
|
0.14
|
|
|
$
|
0.12
|
|
|
$
|
0.53
|
|
|
$
|
0.46
|
|
Weighted average common shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding diluted
|
|
|
5,980,627
|
|
|
|
4,301,522
|
|
|
|
4,313,098
|
|
|
|
4,338,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets
|
|
$
|
25,118
|
|
|
$
|
19,430
|
|
|
$
|
25,641
|
|
|
$
|
31,484
|
|
Total assets
|
|
|
118,057
|
|
|
$
|
64,431
|
|
|
$
|
78,626
|
|
|
$
|
75,819
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
37,039
|
|
|
$
|
17,405
|
|
|
$
|
27,428
|
|
|
$
|
30,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
22,581
|
|
|
$
|
13,000
|
|
|
$
|
13,000
|
|
|
$
|
13,000
|
|
Total stockholders equity
|
|
|
55,359
|
|
|
$
|
31,393
|
|
|
$
|
35,688
|
|
|
$
|
30,082
|
|
4
RISK
FACTORS
An investment in our
stock involves a substantial degree of risk. Before making an
investment decision, you should give careful consideration to
the following risk factors in addition to the other information
contained in this prospectus. The following risk factors,
however, may not reflect all of the risks associated with our
business or an investment in our stock.
Risks Related to
Our Business
We are subject to
comprehensive regulation by federal, state and local regulatory
agencies that impact the rates we are able to charge, our costs
and profitability.
The MPSC, WPSC,
PUCO, PAPUC, MPUC, NCUC and FERC regulate many aspects of our
distribution and transmission operations. State regulatory
agencies set the rates that we may charge customers, which
effectively limits the rate of return we are permitted to
realize. Our ability to obtain rate increases and rate
supplements to maintain the current rate of return
and/or
recover costs depends upon regulatory discretion. There can be
no assurance that we will be able to obtain rate increases or
rate supplements or continue to receive the current authorized
rates of return. If we fail to obtain rate increases to recover
our costs and increases in our rate base, we may be unable to
effectively deploy capital, including the proceeds of this
offering, which could negatively impact our financial condition
and results of operations. The state utility regulatory agencies
also regulate our public utilities gas purchases,
construction and maintenance of facilities, the terms of service
to our customers, safety and various other aspects of our
distribution operations. FERC exercises jurisdiction over the
Shoshone transmission pipeline with respect to terms of service,
maintenance of facilities, safety and various other aspects of
our transmission operations. If we fail to comply with
applicable state and federal regulations, we may be subject to
fines or penalties.
Our gas purchase
practices are subject to an annual review by state regulatory
agencies which could impact our earnings and cash
flow.
The regulatory
agencies that oversee our utility operations may review
retrospectively our purchases of natural gas on an annual basis.
The purpose of these annual reviews is to reconcile the
differences, if any, between the amount we paid for natural gas
and the amount our customers paid for natural gas. If any costs
are disallowed in this review process, these disallowed costs
would be expensed in the cost of gas but would not be recovered
by us in the rates charged to our customers. The various state
regulatory agencies reviews of our gas purchase practices
create the potential for the disallowance of our recovery
through gas cost recovery pricing mechanisms. Significant
disallowances could affect our earnings and cash flow.
Operational
issues beyond our control could have an adverse effect on our
business.
We operate in
geographically dispersed areas. Our ability to provide natural
gas depends both on our own operations and facilities and those
of third parties, including local gas producers and natural gas
pipeline operators from whom we receive our natural gas supply.
The loss of use or destruction of our facilities or the
facilities of third parties due to extreme weather conditions,
breakdowns, war, acts of terrorism or other occurrences could
greatly reduce potential earnings and cash flows and increase
our costs of repairs and replacement of assets. Our losses may
not be fully recoverable through insurance or customer rates.
Storing and
transporting natural gas involves inherent risks that could
cause us to incur significant financial losses.
There are inherent
hazards and operation risks in gas distribution activities, such
as leaks, accidental explosions and mechanical problems that
could cause the loss of human life, significant damage to
property, environmental pollution, impairment of operations and
substantial losses to us. The location of pipelines and storage
facilities near populated areas, including residential areas,
commercial business centers and industrial sites, could increase
the level of damages resulting from these risks. These
activities may subject us to litigation and administrative
proceedings that could result in substantial monetary judgments,
fines or penalties against us. To the extent that the occurrence
of any of these events is not fully covered by insurance, they
could adversely affect our earnings and cash flow.
5
Our earnings and
cash flow are sensitive to decreases in customer consumption
resulting from warmer than normal temperatures and customer
conservation.
Our gas sales
revenue is generated primarily through the sale and delivery of
natural gas to residential and commercial customers who use
natural gas mainly for space heating. Consequently, temperatures
have a significant impact on sales and revenue. Given the impact
of weather on our utility operations, our business is a seasonal
business. Most of our gas sales revenue is generated in the
first and fourth quarters of the year (January 1 to March 31 and
October 1 to December 31) as we typically experience losses
in the non-heating season, which occurs in the second and third
quarters of the year (April 1 to September 30).
In addition, the
average annual natural gas consumption of customers has been
decreasing because, among other things, new homes and appliances
are typically more energy efficient than older homes and
appliances, and customers appear to be continuing a pattern of
conserving energy by utilizing more energy efficient heating
systems, insulation, alternative energy sources, and other
energy savings devices and techniques. A mild winter, as well as
continued or increased conservation, in any of our service areas
can have a significant adverse impact on demand for natural gas
and, consequently, earnings and cash flow.
The increased
cost of purchasing natural gas during periods in which natural
gas prices are rising significantly could adversely impact our
earnings and cash flow.
The rates we are
permitted to charge allow us to recover our cost of purchasing
natural gas. In general, the various regulatory agencies allow
us to recover the costs of natural gas purchased for customers
on a
dollar-for-dollar
basis (in the absence of disallowances), without a profit
component. We periodically adjust customer rates for increases
and decreases in the cost of gas purchased by us for sale to our
customers. Under the regulatory body-approved gas cost recovery
pricing mechanisms, the gas commodity charge portion of gas
rates we charge to our customers may be adjusted upward on a
periodic basis. If the cost of purchasing natural gas increases
and we are unable to recover these costs from our customers
immediately, or at all, we may incur increased costs associated
with higher working capital requirements. In addition, any
increases in the cost of purchasing natural gas may result in
higher customer bad debt expense for uncollectible accounts and
reduced sales volume and related margins due to lower customer
consumption.
Volatility in the
price of natural gas could result in customers switching to
alternative energy sources which could reduce our revenue,
earnings and cash flow.
The market price of
alternative energy sources such as coal, electricity, propane,
oil and steam is a competitive factor affecting the demand for
our gas distribution services. Our customers may have or may
acquire the capacity to use one or more of the alternative
energy sources if the price of natural gas and our distribution
services increase significantly. Natural gas has typically been
less expensive than these alternative energy sources. However,
if natural gas prices increase significantly, some of these
alternative energy sources may become more economical or more
attractive than natural gas, which could reduce our earnings and
cash flow.
The gas industry
is intensely competitive and competition has increased in recent
years as a result of changes in the price negotiation process
within the supply and distribution chain of the gas industry,
both of which could negatively impact earnings.
We compete with
companies from various regions of the United States and may
compete with foreign companies for domestic sales, many of whom
are larger and have greater financial, technological, human and
other resources. Additionally, legislative and regulatory
initiatives, at both the federal and state levels, are designed
to promote competition. These challenges have been compounded by
changes in the gas industry that have allowed certain customers
to negotiate gas purchases directly with producers or brokers.
We could lose market share or our profit margins may decline in
the future if we are unable to remain competitive.
Earnings and cash
flow may be adversely affected by downturns in the
economy.
Our operations are
affected by the conditions and overall strength of the national,
regional and local economies, which impact the amount of
residential and industrial growth and actual gas consumption in
our service territories. Our commercial customers use natural
gas in the production of their products. During economic
downturns, these customers may see a decrease in demand for
their products, which in turn may lead to a decrease in the
amount of natural gas they require for production. In addition,
during
6
periods of slow or
little economic growth, energy conservation efforts often
increase and the amount of uncollectible customer accounts
increases. These factors may reduce earnings and cash flow.
Changes in the
market price and transportation costs of natural gas could
result in financial losses that would negatively impact our
results of operations.
We are exposed to
the impact of market fluctuations in the price and
transportation costs of natural gas. We purchase and store gas
for distribution later in the year. We also enter agreements to
buy or sell gas at a fixed price. We may use such arrangements
to protect profit margins on future obligations to deliver gas
at a fixed price, or to attempt to protect against adverse
effects of potential market price declines on future obligations
to purchase gas at fixed prices. Further, we are exposed to
losses in the event of nonperformance or nonpayment by the
counterparties to our supply agreements, which could have a
material adverse impact on our earnings for a given period.
Changes in
current regulations, the regulatory environment and events in
the energy markets that are beyond our control may reduce our
earnings and limit our access to capital markets.
As a result of the
energy crisis in California during 2000 and 2001, the bankruptcy
of some energy companies, and the volatility of natural gas
prices in North America, companies in regulated and unregulated
energy businesses have generally been under increased scrutiny
by regulators, participants in the capital markets and debt
rating agencies. In addition, the Financial Accounting Standards
Board or the SEC could enact new accounting standards that could
impact the way we are required to record revenue, expenses,
assets and liabilities, and state utility regulatory agencies
could enact more stringent rules or standards with respect to
rates, cost recovery, safety, construction, maintenance or other
aspects of our operations. For instance, on April 16, 2010
the Maine Public Utility Commission (MPUC) proposed amendments
to Chapter 420 of its regulations (Safety Standards for
Natural Gas Transmission and Distribution Systems and Liquefied
Natural Gas Facilities). The proposed rules, if adopted in
current form, would impose significant new or enhanced
requirements on Bangor Gas Company with respect to design,
fabrication, installation, inspection, reporting, testing and
safety aspects of operating and maintaining its pipeline system.
A public hearing was held on May 20 and written comments on the
draft rule were due June 21, 2010. Upon adoption of a final
rule, gas utilities and other interested parties may seek
reconsideration by the MPUC or appeal any final decision.
However, we cannot predict or control what effect this proposed
rule, events in the energy markets or other future actions of
regulatory agencies or others in response to such events may
have on our earnings or access to the capital markets.
We acquired
interests in our natural gas wells by quitclaim deed and cannot
guarantee that we hold clear title to our interests or that our
interests will not be challenged in the future.
We own an average
48% gross working interest (average 41% net revenue interest) in
160 natural gas producing wells, which provide our marketing and
production operations a partial natural hedge when market prices
of natural gas are greater than the cost of production. The gas
production from these wells provided approximately 18% of the
volume requirements for EWRs Montana market for 2009. We
acquired our interests in the wells in 2002 and 2003 by
quitclaim deed conveying interests in certain oil and gas leases
for the wells. Because the sellers conveyed their interests by
quitclaim, we received no warranty or representation from them
that they owned their interests free and clear from adverse
claims by third parties or other title defects. We have no title
insurance, guaranty or warranty for our interests in the wells.
Further, the wells may be subject to prior, unregistered
agreements, or transfers which have not been recorded.
Accordingly, we
cannot guarantee that we hold clear title to our interests or
that our interests will not be challenged in the future. If our
interests were challenged, expenses for curative title work,
litigation or other dispute resolution mechanisms may be
incurred. Loss of our interests would reduce or eliminate our
production operations and reduce or eliminate the partial
natural hedge that our marketing and production subsidiary
currently enjoys as a result of our production capabilities. For
all of these reasons, a challenge to our ownership could
negatively impact our earnings, profits and results of
operations.
Failure to
maintain effective internal controls in accordance with
Section 404 of the Sarbanes-Oxley Act could have a material
adverse effect on our business and stock price.
Section 404 of
the Sarbanes-Oxley Act of 2002 (Section 404) contains
provisions requiring an annual assessment by management, as of
the end of the fiscal year, of the effectiveness of internal
control for financial reporting, as well as attestation and
reporting by independent auditors on managements
assessment as well as other control-related matters. Beginning
with our
7
Form 10-K
for the fiscal year ended June 30, 2008, we began complying
with Section 404 and that
Form 10-K
included a report by our management on our internal control over
financial reporting. Our auditors have not yet been required to
opine on our internal controls, but will do so for the year
ended December 31, 2010.
Compliance with
Section 404 is both costly and challenging. Going forward,
there is a risk that neither we nor our independent auditors
will be able to conclude that our internal control over
financial reporting is effective as required by
Section 404. Further, during the course of our testing we
may identify deficiencies that we may not be able to remediate
in time to meet the deadlines imposed under the Sarbanes-Oxley
Act for compliance with Section 404. Moreover, effective
internal controls, particularly those related to revenue
recognition, are necessary for us to produce reliable financial
reports and are important to help prevent financial fraud. If we
cannot provide reliable financial reports or prevent fraud, our
business and operating results could be harmed, investors could
lose confidence in our reported financial information, and the
trading price of our stock could be adversely affected.
We are subject to
numerous environmental laws and regulations that may increase
our cost of operations, impact our business plans and expose us
to environmental liabilities.
Environmental
regulations that may affect our present and future operations
include regulation of air emissions, water quality, wastewater
discharges, solid waste and hazardous waste. These laws and
regulations can result in increased capital expenditures and
operating costs. These laws and regulations generally require us
to obtain and comply with a wide variety of environmental
licenses, permits, inspections and other approvals. Both public
officials and private individuals may seek to enforce applicable
environmental laws and regulations. We cannot predict the
outcome (financial or operational) of any related litigation
that may arise.
We may be a
responsible party for environmental
clean-up at
sites identified by a regulatory body in the future. If that
occurs, we cannot predict with certainty the amount and timing
of all future expenditures related to environmental matters
because of the difficulty of estimating
clean-up
costs. There is also uncertainty in quantifying liabilities
under environmental laws that impose joint and several
liabilities on all potentially responsible parties.
We cannot be sure
that existing environmental regulations will not be revised or
that new regulations intended to protect the environment will
not be adopted or become applicable to us. Revised or additional
regulations that result in increased compliance costs or
additional operating restrictions could have a material adverse
effect on our results of operations.
We have a net
deferred tax asset of $14.0 million and we cannot guarantee
that we will be able to generate sufficient future taxable
income to realize a significant portion of this net deferred tax
asset, which could lead to a write-down (or even a loss) of the
net deferred tax asset and adversely affect our operating
results and financial position.
We have a net
deferred tax asset of $14.0 million at December 31,
2009. The net deferred tax asset is the result of our
acquisitions of Frontier Natural Gas and Bangor Gas Company in
2007. We may continue to depreciate approximately
$82.0 million of their capital assets using the useful
lives and rates employed by those companies, resulting in a
potential future federal and state income tax benefit of
approximately $19.1 million over a
20-year
period using applicable federal and state income tax rates.
Under Internal Revenue Code Section 382, our ability to
recognize tax deductions as a result of this tax benefit will be
limited during the first 5 years following the acquisitions.
Following
ASC 740, our balance sheet at December 31, 2008
reflected a gross deferred tax asset of approximately
$19.0 million, offset by a valuation allowance of
approximately $7.5 million, resulting in a net deferred tax
asset associated with the acquisition of approximately
$11.5 million. The excess of the net deferred tax assets
received in the transactions over their respective purchase
prices has been reflected as an extraordinary gain of
approximately $6.8 million on our income statement for the
year ended June 30, 2008 in accordance with the provisions
of ASC 805.
During the year
ended December 31, 2009, we conducted a study of the
deferred tax asset and valuation allowance, and based on our
updated earnings projections and more complete data from the
sellers tax returns, we determined that $2.8 million
of the valuation allowance related to federal taxes is no longer
needed, but that the state portion should be increased by
$400,000. Accordingly, we reduced the valuation allowance to
approximately $5.1 million. In addition, we increased the
gross deferred tax asset to $19.1 million. As a result, the
net deferred tax asset increased to approximately
$14.0 million at December 31, 2009. Included in the
results of our corporate and other segment for the year ended
December 31, 2009 was the income tax benefit of
8
approximately
$2.8 million related to the elimination of the federal
portion of the valuation allowance. An income tax expense of
$300,000 resulting from the increase in the state portion of the
valuation allowance partially offset by the increase in the
gross deferred tax asset was included in the results of the
natural gas operations segment.
We cannot guarantee
that we will be able to generate sufficient future taxable
income to realize the $14.0 million net deferred tax asset
over the next 20 years. Management will reevaluate the
valuation allowance each year on completion of updated estimates
of taxable income for future periods, and will further reduce
the deferred tax asset by the new valuation allowance if, based
on the weight of available evidence, it is more likely than not
that we will not realize some portion or all of the recognized
deferred tax assets. If the estimates indicate that we are
unable to use all or a portion of the net deferred tax asset
balance, we will record and charge a greater valuation allowance
to income tax expense. Failure to achieve projected levels of
profitability could lead to a write down in the deferred tax
asset if the recovery period becomes uncertain or longer than
expected and could also lead to the expiration of the deferred
tax asset between now and 2029, either of which would adversely
affect our operating results and financial position.
Our actual
results of operations could differ from estimates used to
prepare our financial statements.
In preparing our
financial statements in accordance with generally accepted
accounting principles, our management often must make estimates
and assumptions that affect the reported amounts of assets,
liabilities, revenue, expenses and related disclosures at the
date of the financial statements and during the reporting
period. Some of those judgments can be subjective and complex,
and actual results could differ from those estimates. We
consider the regulatory accounting policy to be our most
critical because of the uncertainties, judgments, and
complexities of the underlying accounting standards and
operations involved. Regulatory accounting allows for the
actions of regulators to be reflected in the financial
statements. Their actions may cause us to capitalize costs that
would otherwise be included as an expense in the current period
by unregulated companies. If future recovery of costs ceases to
be probable, the assets will be written off as a charge in
current period earnings.
Risks Related to
Our Acquisition Strategy
We face a variety
of risks associated with acquiring and integrating new business
operations.
The growth and
success of our business will depend to a great extent on our
ability to acquire new assets or business operations and to
integrate the operations of businesses that we have recently
acquired, including the Ohio companies as well as those that we
may acquire in the future. We cannot provide assurance that we
will be able to:
|
|
|
|
|
identify suitable
acquisition candidates or opportunities,
|
|
|
|
acquire assets or
business operations on commercially acceptable terms,
|
|
|
|
effectively
integrate the operations of any acquired assets or businesses
with our existing operations,
|
|
|
|
manage effectively
the combined operations of the acquired businesses,
|
|
|
|
achieve our
operating and growth strategies with respect to the acquired
assets or businesses,
|
|
|
|
reduce our overall
selling, general, and administrative expenses associated with
the acquired assets or businesses, or
|
|
|
|
comply with the
internal control requirements of Section 404 as a result of
an acquisition.
|
The integration of
the management, personnel, operations, products, services,
technologies, and facilities of Orwell, NEO or any businesses
that we acquire in the future could involve unforeseen
difficulties. These difficulties could disrupt our ongoing
businesses, distract our management and employees, and increase
our expenses, which could have a material adverse affect on our
business, financial condition, and operating results.
To the extent we
are successful in making an acquisition, we may face a number of
related risks.
Any acquisition may
involve a number of risks, including the assumption of material
liabilities, the terms and conditions of any state or federal
regulatory approvals required for an acquisition, the diversion
of managements attention from the management of daily
operations to the integration of acquired operations,
difficulties in the integration and retention of employees and
difficulties in the integration of different cultures and
practices, as well as in the integration of broad and
geographically dispersed personnel
9
and operations. The
failure to make and integrate acquisitions successfully,
including the Ohio companies, could have an adverse effect on
our ability to grow our business.
Subsequent to the
consummation of an acquisition, we may be required to take
write-downs or write-offs, restructuring and impairment charges
or other charges that could have a significant negative impact
on our financial condition, results of operations and our stock
price.
We recently acquired
our Ohio operations and are in the process of exploring
potential acquisitions. There could be material issues present
inside a particular target business that are not uncovered in
the course of due diligence performed prior to the acquisition,
and there could be factors outside of the target business and
outside of our control that later arise. As a result of these
factors, after an acquisition is completed, we may be forced to
write-down or write-off assets, restructure our operations or
incur impairment or other charges relating to an evaluation of
goodwill and acquisition-related intangible assets that could
result in our reporting losses. In addition, unexpected risks
may arise and previously known risks may materialize in a manner
not consistent with our preliminary risk analysis.
Risks Related to
Our Common Stock
Our ability to
pay dividends on our common stock is limited, and our ability to
pay dividends may be reduced as a result of the dilutive effect
of this offering.
We cannot assure you
that we will continue to pay dividends at our current monthly
dividend rate or at all. In particular, our ability to pay
dividends in the future will depend upon, among other things,
our future earnings, cash requirements and covenants under our
existing credit facilities and any future credit agreements to
which we may be a party. In addition, acquisitions funded by the
issuance of our common stock, such as our acquisition of our
Ohio operations, increase the number of our shares outstanding
and may make it more difficult to continue dividends at our
current rate. Further, as a result of this offering, we will
have substantially more shares of our common stock outstanding,
which will dilute the pool of funds available to pay dividends.
This offering
likely will have the effect of reducing our earnings per share
for some period of time.
This offering will
increase the number of shares of our common stock outstanding
and considered in computing our earnings per share. For some
period of time, we do not expect to generate additional earnings
sufficient to offset the additional shares to be outstanding as
a result of this offering. Thus, during that period, the effect
of this offering will be to reduce our earnings per share from
the amount we would have reported had we not sold the shares in
this offering. We cannot assure you that we will generate
sufficient earnings to offset the effect of the offering.
Your interest in
us will be immediately diluted if you purchase common stock in
this offering.
Our net tangible
book value per common share at March 31, 2010 was $9.12.
After giving effect to the sale of 1.5 million shares of
our common stock in this offering at an assumed offering price
of $ per share, our book
value per share will be approximately
$ . Therefore, if you
purchase common stock in this offering, you will experience an
immediate dilution of $ per
share, based upon an assumed offering price of
$ per share, because that
price is higher than the net tangible book value of each share
of common stock outstanding immediately after this offering.
Our directors and
officers own a significant interest in the Company and could
limit new shareholders influence on corporate
decisions.
Our directors and
officers control 42.3% of our outstanding shares
( % following completion of this
offering). Accordingly, they possess a significant influence on
all matters submitted to a vote of our shareholders including
the election of the members of our board. The interests of these
shareholders may not always coincide with our corporate
interests or the interests of other shareholders, and they may
act in a manner with which you may not agree or that may not be
in the best interests of our other shareholders. Also, this
concentration of ownership may have the effect of preventing or
discouraging transactions involving an actual or a potential
change of control of the Company, regardless of whether a
premium is offered over then current market prices.
10
Like other
small-cap companies, the price of our common stock can be
volatile due to its relatively low trading volume, and sales of
shares by our directors and officers could cause decreases in
price, particularly if sales were to occur in the months
following this offering.
As a smaller public
company, our common stock typically has a lower trading volume
than Fortune 500 companies and other larger public
companies. The average daily volume for the quarter ended
March 31, 2010 was 11,343 shares per day. This low
trading volume may have a significant effect on the market price
of our common stock. The trading volume in our common stock may
not increase after the offering. Additionally, our directors and
officers own 42.3% of our outstanding shares
( % following completion of this
offering), which contributes to our low public float, and sales
by those individuals could be perceived unfavorably in the
market and adversely affect the price of the Companys
common stock. Due to these characteristics of our common stock,
investors in this offering may be unable to resell their shares
at prices equal to or greater than the offering price.
The possible
issuance of future series of preferred stock could adversely
affect the holders of our common stock.
Pursuant to our
articles of incorporation, our board of directors has the
authority to fix the rights, preferences, privileges and
restrictions of unissued preferred stock and to issue those
shares without any further action or vote by the shareholders.
The rights of the holders of our common stock will be subject
to, and may be adversely affected by, the rights of the holders
of any series of preferred stock that may be issued in the
future. These adverse effects could include subordination to
preferred shareholders in the payment of dividends and upon our
liquidation and dissolution, and the use of preferred stock as
an anti-takeover measure, which could impede a change in control
that is otherwise in the interests of holders of our common
stock.
Our charter
documents and Ohio law, as well as certain utility laws and
regulations, may discourage a third party from attempting to
acquire us by means of a tender offer, proxy contest or
otherwise, which could adversely affect the market price of our
common shares.
Provisions of our
articles of incorporation and regulations and state utility laws
and regulations, including regulatory approval requirements,
could make it more difficult for a third party to acquire us,
even if doing so would be perceived to be beneficial to our
shareholders. For example, our charter documents do not permit
cumulative voting, allow the removal of directors only for
cause, and establish certain advance notice procedures for
nomination of candidates for election as directors and for
shareholder proposals to be considered at shareholders
meetings. Additionally, Ohio corporate law provides that certain
notice and informational filings and special shareholder meeting
and voting procedures must be followed prior to consummation of
a proposed control share acquisition as defined in
the Ohio Revised Code. Assuming compliance with the prescribed
notice and information filings, a proposed control share
acquisition may be made only if, at a special meeting of
shareholders, the acquisition is approved by both a majority of
our voting power represented at the meeting and a majority of
the voting power remaining after excluding the combined voting
of the interested shares, as defined in the Ohio
Revised Code. Some takeover attempts may even be subject to
approval by the Ohio Division of Securities or PUCO. The
application of these provisions may inhibit a non-negotiated
merger or other business combination, which, in turn, could
adversely affect the market price of our common stock.
Organization,
Structure and Management Risks
Our credit
facilities contain restrictive covenants that may reduce our
flexibility, and adversely affect our business, earnings, cash
flow, liquidity and financial condition.
The terms of our
credit facilities impose significant restrictions on our ability
and, in some cases, the ability of our subsidiaries, to take a
number of actions that we may otherwise desire to take,
including:
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requiring us to
dedicate a substantial portion of our cash flow from operations
to the payment of principal and interest on our indebtedness,
thereby reducing the availability of cash flow for working
capital, capital expenditures and other business activities,
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requiring us to meet
certain financial tests, which may affect our flexibility in
planning for, or reacting to, changes in our business and the
industries in which we operate,
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limiting our ability
to sell assets, make investments or acquire assets of, or merge
or consolidate with, other companies,
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limiting our ability
to repurchase or redeem our stock or enter into transactions
with our shareholders or affiliates, and
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11
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limiting our ability
to grant liens, incur additional indebtedness or contingent
obligations or obtain additional financing for working capital,
capital expenditures, acquisitions and general corporate and
other activities.
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These covenants
place constraints on our business and may adversely affect our
growth, business, earnings, cash flow, liquidity and financial
condition. Our failure to comply with any of the financial
covenants in the credit facilities may result in an event of
default which, if not cured or waived, could result in the
acceleration of the debt under the credit facilities or other
agreements we may enter into from time to time that contain
cross-acceleration or cross-default provisions. If this occurs,
there can be no assurance that we would be able to refinance or
otherwise repay such indebtedness, which could result in a
material adverse effect on our business, earnings, cash flow,
liquidity and financial condition.
Our primary
assets are our operating subsidiaries, and there are limits on
our ability to obtain revenue from those subsidiaries, which may
limit our ability to pay dividends to shareholders.
We are a holding
company with no direct operations and our principal assets are
the equity securities of our subsidiary utilities. We rely on
dividends from our subsidiaries for our cash flows, thus our
ability to pay dividends to our shareholders and finance
acquisitions would be dependent on the ability of our
subsidiaries to generate sufficient net income and cash flows to
pay upstream dividends to us. Further, our subsidiaries are
legally distinct from us, and although they are wholly-owned and
controlled by us, our ability to obtain distributions from them
by way of dividends, interest or other payments (including
intercompany loans) is subject to restrictions imposed by their
term loans and credit facilities (under which they are borrowers
and we are a guarantor). For example,
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We may cause our
Montana, Wyoming, North Carolina and Maine operating
subsidiaries to pay a dividend only if the dividend, when
combined with dividends over the previous five years, would not
exceed 75% of their net income over those years,
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We may cause Orwell
and Lightning Pipeline to distribute no more than 60% of
Orwells net income to us during any fiscal year, and
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We may cause NEO,
Great Plains and GPL to distribute dividends to us only if their
consolidated net worth, after payment of the dividend, is no
less than $1,815,000 as positively increased by 100% of net
income as of the end of each fiscal quarter and year.
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Additionally, as a
condition to approving our holding company reorganization, the
MPSC required that we stipulate to ring-fencing restrictions
under which our Montana, Wyoming, North Carolina and Maine
operating subsidiaries must meet certain notice and financial
requirements prior to paying dividends that are above certain
financial thresholds or irregularly timed. In a case currently
pending before the WPSC, similar ring-fencing provisions to
those imposed by the MPSC have been proposed.
These dividend
restrictions, in addition to other financial covenants contained
in the credit facilities and ring-fencing restrictions, place
constraints on our business and may adversely affect our cash
flow, liquidity and financial condition as well as our ability
to finance acquisitions or pay dividends. Further, we may be
required to comply with additional covenants. Failure to comply
with financial covenants may result in the acceleration of the
debt and foreclosure of our assets, which would have a material
adverse effect on our business, earnings, cash flow, liquidity
and financial condition. For further details on the financial
covenants contained in the credit facilities, see
Restrictions on Payment of Dividends on page 17
of this prospectus.
The Wyoming
Public Service Commission may assert jurisdiction over Gas
Natural, including to approve this offering.
We obtained the
approval of the WPSC for our holding company reorganization in
October 2008, but in connection with its approval of our
acquisition of the Ohio companies, the WPSC issued an order
asserting jurisdiction over Gas Natural as a public utility in
Wyoming and requested that ring-fencing measures be created and
implemented. We requested rehearing of that order to clarify the
scope of the jurisdiction WPSC seeks to assert. Our request was
granted, but as of this date no final appealable order has been
issued. Because the jurisdictional issue remains unresolved, we
have filed an application to exempt this offering from Wyoming
Statute
Section 37-6-103,
based on a finding that approval is not required by the public
interest. We have requested expedited consideration and approval
of this application for exemption.
12
In acquiring our
Ohio operations, we guaranteed $20.9 million of their debt,
$7.8 million of which will mature November 28, 2010.
The additional debt could limit our flexibility, and our
inability to satisfy debts and comply with other financial
covenants could materially and adversely affect our business,
earnings, cash flow, liquidity and financial
condition.
When we acquired our
Ohio operations, we guaranteed approximately $20.9 million
of the acquired companies debt. Richard M. Osborne, our
chairman of the board and chief executive officer, guarantees
substantially all of the third party debt of our Ohio companies.
Our debt service requirements have increased dramatically as a
result of the acquisition. In addition, approximately
$7.8 million of this debt will mature by November 28,
2010. This additional debt has made us more leveraged on a
consolidated basis.
Our debt may
adversely affect our ability to respond to adverse changes in
economic, business or market conditions. For example:
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we may be required
to dedicate a substantial portion of our cash flow from
operations to required payments on debt, thereby reducing the
availability of cash flow for working capital, capital
expenditures and other general corporate activities, and
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covenants relating
to our debt may limit our ability to obtain additional financing
for working capital, capital expenditures and other general
corporate activities.
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The occurrence of
any one of these events could have a material adverse effect on
our business, financial condition, results of operations,
prospects and ability to satisfy our obligations under our
credit facilities in the short and long term.
Further, our failure
to comply with the financial covenants, pay our debt service
requirements and pay or refinance our short term debt may result
in an event of default which, if not cured or waived, could
result in the acceleration of the debt under our credit
facilities or other agreements that we may enter into from time
to time that contain cross-acceleration or cross-default
provisions. If this occurs, there can be no assurance that we
would be able to refinance or otherwise repay such debt, which
could result in a material adverse effect on our business,
earnings, cash flow, liquidity and financial condition.
Our performance
depends substantially on the performance of our executive
officers and other key personnel and the ability of our
management team to fully implement our business
strategy.
The success of our
business depends on our ability to attract, train, retain, and
motivate high quality personnel, especially highly qualified
managerial personnel. Poor execution in the performance of our
management team or the loss of services of key executive
officers or personnel could impair our ability to successfully
operate the Company and to acquire and integrate new business
operations, either of which could have a material adverse effect
on our business, results of operations and financial condition.
We have entered
into a limited liability operating agreement with third parties
to develop and operate oil, gas and mineral leasehold estates,
which exposes us to the risk associated with oil, gas and
mineral exploration as well as the risks inherent in relying
upon third parties in business ventures and we may enter into
similar agreements in the future.
Through our
subsidiary Energy West Resources, Inc. (EWR), we have entered
into an operating agreement with various third parties regarding
Kykuit Resources, LLC (Kykuit), a developer and operator of oil,
gas and mineral leasehold estates located in Montana. Through
EWR, we own 22.0% of the membership interests of Kykuit, and
because Kykuits primary purpose is oil, gas and mineral
exploration, our investment in Kykuit is subject to the risks
associated with that business, including the risk that little or
no oil, gas or minerals will be found. We have a net investment
of $800,000 after undistributed losses of approximately $700,000
in Kykuit, and we may be required to invest additional amounts
of up to approximately $1.5 million. Whether or not we may
be required to invest additional funds will depend on the
success, or lack thereof, of Kykuit in its initial drilling. We
are entitled under the Kykuit operating agreement, as amended
and restated, to exercise reasonable discretion to cease further
investments in the event certain initial exploratory drilling
efforts are unsuccessful.
We depend upon the
performance of third party participants in endeavors such as
Kykuit, and their performance of their obligations to us are
outside our control. If these parties do not meet or satisfy
their obligations under these arrangements, the performance and
success of endeavors such as Kykuit may be adversely affected.
If third parties to operating agreements and
13
similar agreements
are unable to meet their obligations we may be forced to
undertake the obligations ourselves or incur additional expenses
in order to have some other party perform such obligations. We
may also be required to enforce our rights that may cause
disputes among third parties and us. If any of these events
occur, they may adversely impact us, our financial performance
and results of operations.
We have entered
into various transactions in which some of our directors have a
financial interest.
We have entered into
agreements and transactions in which our directors have a
financial interest. For example, Richard M. Osborne, our
chairman of the board and chief executive officer, owned nearly
all of the stock of the Ohio companies we acquired in January of
this year. Lightning Pipeline and Brainard Gas Corp. are
currently indebted to Mr. Osborne in the principal amount
of approximately $1.7 million and the Ohio companies are
party to various leases, gas sales, transportation and metering
agreements with entities owned and controlled by
Mr. Osborne. This is not a complete list of transactions
with our directors. There are additional agreements and
arrangements that we have entered into with members of our
board. In the future we may enter into other additional related
party transactions on a case by case basis. For more information
on our related party transactions, see Certain
Relationships and Related Party Transactions in our
Definitive Proxy Statement filed with the SEC May 27, 2010
and incorporated by reference herein as indicated on
page 62 of this prospectus.
14
USE OF
PROCEEDS
The net proceeds of
this offering, after deducting estimated offering and related
transaction fees and expenses and underwriter discounts, all of
which are payable by us, are expected to be
$ ,
or
$
if the underwriters option to purchase additional shares
is exercised in full. Some of the shares of common stock offered
by this prospectus are being sold by the Selling Shareholder.
For information about the Selling Shareholder, see
Principal and Selling Shareholders on page 56.
We will not receive any of the proceeds from the sale of shares
by the Selling Shareholder.
We intend to use the
net proceeds of this offering primarily to expand our
distribution systems in order to gain new customers. We believe
there is high customer interest in natural gas service in our
service areas. We may also use a limited portion of the proceeds
of this offering for working capital and general corporate
purposes.
Please refer to
Our Business beginning on page 19 for
information on our recent acquisitions and details on our future
acquisition strategy as well as our natural gas operations.
CAPITALIZATION
The following table
sets forth, as of March 31, 2010, our capitalization on an
actual basis and on an adjusted basis to give effect to the sale
of the shares of common stock in this offering and the
anticipated application of the net proceeds of
from this offering as described in Use of Proceeds.
You should read this table in conjunction with our Consolidated
Financial Statements and Notes thereto in our Quarterly Report
on
Form 10-Q
for the quarter ended March 31, 2010 that are incorporated
by reference herein.
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As of
March 31, 2010
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% of
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% of
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Actual
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Capitalization
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As
Adjusted
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Capitalization
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(Unaudited)
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(In thousands)
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Cash and cash equivalents
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$
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3,333
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4.3
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%
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$
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%
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Long-term debt
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$
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22,581
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29.0
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%
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$
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%
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Stockholders Equity
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Preferred stock
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Common stock
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911
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1.2
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%
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%
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Additional paid-in capital
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23,354
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30.0
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%
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%
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Accumulated comprehensive (loss) income
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(20
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)
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*
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%
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Retained earnings
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31,114
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40.0
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%
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%
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Total stockholders equity
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55,359
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71.0
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%
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%
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Total capitalization
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$
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77,940
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$
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15
COMMON STOCK
PRICE RANGE AND DIVIDENDS
Our common stock
trades on the NYSE Amex Equities (formerly known as the American
Stock Exchange) under the symbol EGAS. Prior to
December 17, 2009, our stock traded on the Nasdaq Global
Market. The following table sets forth, for the quarters
indicated, the range of high and low prices of our common stock
from the Nasdaq Monthly Statistical Reports and NYSE Amex. On
June 28, 2010, our common stock closed at $11.86.
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Year
Ending 12/31/10
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High
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Low
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First Quarter
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$
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10.92
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$
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9.65
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Second Quarter
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$
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$
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Year
Ended 12/31/09
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High
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Low
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First Quarter
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$
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8.39
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$
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6.61
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Second Quarter
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$
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8.65
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$
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7.24
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Third Quarter
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$
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8.55
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$
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7.74
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Fourth Quarter
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$
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10.61
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$
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8.12
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Six
Months Ended 12/31/08
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High
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Low
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First Quarter
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$
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10.70
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$
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7.27
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Second Quarter
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$
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8.48
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$
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5.92
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Year
Ended 6/30/08
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High
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Low
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First Quarter
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$
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9.49
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$
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8.14
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Second Quarter
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$
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9.80
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$
|
8.19
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Third Quarter
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$
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9.68
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$
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7.59
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Fourth Quarter
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$
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11.21
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$
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7.40
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In November 2003,
several new directors joined our board. At that time, the
Companys financial condition was poor and dividends had
been suspended. Subsequently, the board made changes to our
management team, which then implemented various changes in our
operations and personnel, and with a strengthened financial
condition we were able to restore cash dividends beginning in
October 2005. Quarterly dividend payments increased steadily
from $0.03 per share in October 2005 to $0.11 per share in
November 2007. We then began to pay dividends monthly. Our
monthly dividend increased from $0.036 on December 28, 2007
to $0.040 on June 30, 2008, and again to $0.045 per share
in April 2009:
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May 31, 2010
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$
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0.045
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April 30, 2010
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|
$
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0.045
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March 31, 2010
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$
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0.045
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February 26, 2010
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$
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0.045
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January 29, 2010
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$
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0.045
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December 31, 2009
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$
|
0.045
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November 30, 2009
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$
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0.045
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October 30, 2009
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|
$
|
0.045
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September 30, 2009
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$
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0.045
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September 4, 2009
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$
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0.045
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July 31, 2009
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|
$
|
0.045
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July 2, 2009
|
|
$
|
0.045
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May 29, 2009
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$
|
0.045
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April 30, 2009
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$
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0.045
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16
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March 31, 2009
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$
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0.040
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February 27, 2009
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$
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0.040
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January 30, 2009
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$
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0.040
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December 30, 2008
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|
$
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0.040
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December 1, 2008
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|
$
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0.040
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October 30, 2008
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|
$
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0.040
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September 30, 2008
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|
$
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0.040
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August 29, 2008
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$
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0.040
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July 31, 2008
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$
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0.040
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June 30, 2008
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$
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0.040
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May 30, 2008
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$
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0.036
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April 30, 2008
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$
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0.036
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March 28, 2008
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$
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0.036
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February 28, 2008
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$
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0.036
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January 28, 2008
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$
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0.036
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We intend to
continue paying cash dividends at similar per share levels, and
we believe we can continue to do so following this offering.
However, we cannot guarantee that our dividend will continue at
the current level or increase at the same rate it has increased
since 2005. Also, our ability to pay dividends is restricted in
certain respects. Those restrictions are described below.
Restrictions on
Payment of Dividends
As a holding
company, our primary assets and sources of cash flow are our
operating subsidiaries. The credit facilities of our operating
subsidiaries restrict their ability to pay dividends to us,
which restricts our ability to pay dividends to our
shareholders. Payment of future cash dividends, if any, and
their amounts, will be dependent upon a number of factors,
including those restrictions, our earnings, financial
requirements, number of shares of capital stock outstanding and
other factors deemed relevant by our board of directors.
Energy West, which
currently serves as a distribution company in Montana and
Wyoming and serves as a holding company for our distribution
operations in North Carolina and Maine, has a credit facility
with Bank of America that restricts Energy Wests ability
to pay dividends to us. Under the terms of the credit facility,
Energy West is permitted to pay dividends no more frequently
than once each calendar month. Further, Energy West is forbidden
from paying dividends in certain circumstances. For instance,
Energy West may not pay a dividend if the dividend, when
combined with dividends over the previous five years, would
exceed 75% of Energy Wests net income over those years.
For the purposes of this restriction, extraordinary gain, such
as the $6.8 million of extraordinary gain associated with
the purchase of Frontier Natural Gas and Bangor Gas Company, is
not included in net income. Further, stock repurchases and
redemptions are treated as payments of dividends for purposes of
determining whether it is permissible to pay the proposed
dividend under this restriction. In addition, Energy West may
not pay a dividend if Energy West is in default, or if payment
would cause Energy West to be in default, under the terms of the
unsecured credit agreement. Energy West also may not pay a
dividend if payment would cause Energy Wests earnings
before interest and taxes (EBIT), to be less than twice its
interest expense. For the purpose of this restriction, EBIT and
interest expense are measured over a four-quarter time period
that ends with the most recently completed fiscal quarter.
Similarly, they may not pay a dividend if payment would cause
their total debt to exceed 65% of their capital. For the purpose
of this restriction, total debt and capital are measured for the
most recently completed fiscal quarter.
In addition to the
Bank of America credit facility, Energy West, also has unsecured
senior notes outstanding that also contain restrictions on
dividend payments. Under the unsecured senior notes, Energy West
may not pay a dividend to us if payment would cause its total
payments of dividends for the five years prior to the proposed
payment to exceed its consolidated net income for those five
years.
Additionally, as a
condition to approving our holding company reorganization, the
MPSC required that we stipulate to ring-fencing restrictions
that require Energy West to meet certain notice and financial
requirements prior to paying dividends that are either above
certain financial thresholds or irregularly timed (or both).
Similar ring-fencing provisions have been proposed in a pending
case before the WPSC. Our Ohio subsidiaries credit
facilities with The Huntington National Bank, N.A.
(Huntington) and Citizens
17
Bank limit their
ability to transfer funds to us in the form of loans, advances,
dividends or other distributions. The Citizens Bank credit
facility allows NEO, Great Plains and GPL to pay dividends to
Gas Natural only if their net worth (as defined in the loan
agreements) after payment of any dividends would not be less
than $1,815,000 on a consolidated basis as positively increased
by 100% of net income as of the end of each fiscal quarter and
fiscal year. The Huntington credit facility allows Orwell and
Lightning Pipeline to pay dividends to Gas Natural only if the
aggregate amount of all dividends, distributions, redemptions
and repurchases in any fiscal year do not exceed 60% of net
income (as defined in the loan agreements) of Orwell for each
fiscal year.
For additional
information on loan covenants and restrictions contained in the
Bank of America, Citizens Bank and Huntington credit facilities,
see Management Discussion and Analysis
Liquidity and Capital Resources on page 38.
Additional information on the covenants and restrictions of the
Bank of America loan may also be found in Note 11 to our
Consolidated Financial Statements.
Holders of
Record
As of June 25,
2010, there were approximately 328 record owners of our common
stock. We estimate that approximately 3,200 additional
shareholders own stock in accounts at brokerage firms and other
financial institutions.
Performance
Graph
The graph below
matches our cumulative five-year total shareholder return on
common stock with the cumulative total returns of the S&P
500 index and the S&P Utilities index. The graph tracks the
performance of a $100 investment in our common stock and in each
of the indexes (with the reinvestment of all dividends) from
December 31, 2004 to December 31, 2009. That $100
investment would be worth approximately $272 at
December 31, 2009.
18
OUR
BUSINESS
Gas Natural is a
holding company of natural gas utility and energy-related
businesses serving approximately 62,000 customers. Our natural
gas utility subsidiaries include Energy West, Incorporated
(Montana and Wyoming), Cut Bank Gas Company (Montana), Northeast
Ohio Natural Gas Corporation (Ohio), Brainard Gas Corp. (Ohio),
Orwell Natural Gas Company (Ohio and Pennsylvania), Bangor Gas
Company (Maine) and Frontier Natural Gas (North Carolina). We
were incorporated in Montana in 1909 and reorganized as a
holding company in 2009 as a means to facilitate future
acquisitions and corporate level financings. On July 9,
2010 we moved our state of incorporation to Ohio and changed our
name from Energy, Inc. to Gas Natural Inc.
Our operations are
conducted through three main business segments:
|
|
|
|
|
Natural Gas
Operations. Annually,
we distribute approximately 29 Bcf of natural gas to
approximately 62,000 customers through regulated utilities
operating in Montana, Wyoming, Ohio, Pennsylvania, Maine and
North Carolina. We acquired our North Carolina and Maine
operations in 2007, while Cut Bank Gas in Montana was added in
November 2009. Most recently, we closed the acquisition of our
Ohio and Pennsylvania operations on January 5, 2010.
|
|
|
|
Pipeline
Operations. We
own the Shoshone interstate and the Glacier gathering natural
gas pipelines located in Montana and Wyoming through our
subsidiary Energy West Development, Inc.
|
|
|
|
Marketing and
Production. Annually,
we market approximately 2.4 Bcf of natural gas to
commercial and industrial customers in Montana and Wyoming and
manage midstream supply and production assets for transportation
customers and utilities through our subsidiary, Energy West
Resources, Inc. EWR owns an average 48% gross working interest
(an average 41% net revenue interest) in 160 natural gas
producing wells and gas gathering assets.
|
2009 Net Income
by Operating Segment
Recent Industry
Trends
Since 2000, domestic
energy markets have experienced significant price fluctuations.
Natural gas markets have been particularly volatile, principally
due to weather and concerns over supply. Increasing supplies and
price-induced conservation have favorably impacted natural gas
prices and we believe this trend is likely to continue. Given
the current environment, we expect that natural gas will
maintain a favorable competitive position compared with other
fossil fuels which have also experienced significant price
increases. We believe that conditions are favorable for
consumers to convert to natural gas from more expensive fossil
fuels even if the cost of conversion includes equipment
purchases. Additionally, given the clean burning attributes of
natural gas, we believe environmental regulations may enhance
this competitive outlook.
19
Financial
Performance Overview
The following table
presents operating income for the business operating segments,
excluding results from discontinued operations, and deferred tax
benefits reported in the corporate and other segment. Results
from our Ohio utilities, which we acquired in January 2010, are
included only in the quarter ended March 31, 2010. We
generate a majority of our operating income from regulated
operations. Effective December 31, 2008, we changed our
fiscal year from June 30 to December 31.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarters
Ended
|
|
|
For the Years
Ended
|
|
Operating
Income
|
|
March 31,
|
|
|
December 31,
|
|
($
thousands)
|
|
2010
|
|
|
%
|
|
|
2009
|
|
|
%
|
|
|
2009
|
|
|
%
|
|
|
2008
|
|
|
%
|
|
|
|
(unaudited)
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
Natural Gas Operations
|
|
|
$5,928
|
|
|
|
93.5
|
%
|
|
|
$2,769
|
|
|
|
77.7
|
%
|
|
|
$7,051
|
|
|
|
77.7
|
%
|
|
|
$4,651
|
|
|
|
63.8%
|
|
Marketing & Production
|
|
|
350
|
|
|
|
5.5
|
%
|
|
|
744
|
|
|
|
20.9
|
%
|
|
|
1,747
|
|
|
|
19.3
|
%
|
|
|
2,448
|
|
|
|
33.6%
|
|
Pipeline Operations
|
|
|
64
|
|
|
|
1.0
|
%
|
|
|
51
|
|
|
|
1.4
|
%
|
|
|
273
|
|
|
|
3.0
|
%
|
|
|
192
|
|
|
|
2.6%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$6,342
|
|
|
|
100
|
%
|
|
|
$3,564
|
|
|
|
100.0
|
%
|
|
|
$9,071
|
|
|
|
100.0
|
%
|
|
|
$7,291
|
|
|
|
100.0%
|
|
Net income from our
regulated utilities continues to grow on a
year-over-year
basis due to investment in the system, improved volumes and
customer growth, favorable economics relative to alternate
fuels, and cost controls. The table below excludes results from
our corporate and other and discontinued operations segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarters
Ended
|
|
|
For the Years
Ended
|
|
Net
Income
|
|
March 31,
|
|
|
December 31,
|
|
($
thousands)
|
|
2010
|
|
|
%
|
|
|
2009
|
|
|
%
|
|
|
2009
|
|
|
%
|
|
|
2008
|
|
|
%
|
|
|
|
(unaudited)
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
|
|
Natural Gas Operations
|
|
|
$3,731
|
|
|
|
101.1
|
%
|
|
|
$1,539
|
|
|
|
77.3
|
%
|
|
|
$3,889
|
|
|
|
84.5
|
%
|
|
|
$2,319
|
|
|
|
59.0%
|
|
Marketing & Production
|
|
|
(79
|
)
|
|
|
(2.1
|
)%
|
|
|
423
|
|
|
|
21.2
|
%
|
|
|
558
|
|
|
|
12.1
|
%
|
|
|
1,504
|
|
|
|
38.3%
|
|
Pipeline Operations
|
|
|
36
|
|
|
|
1.0
|
%
|
|
|
30
|
|
|
|
1.5
|
%
|
|
|
157
|
|
|
|
3.4
|
%
|
|
|
107
|
|
|
|
2.7%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$3,688
|
|
|
|
100.0
|
%
|
|
|
$1,992
|
|
|
|
100.0
|
%
|
|
|
$4,604
|
|
|
|
100.0
|
%
|
|
|
$3,930
|
|
|
|
100.0%
|
|
Through acquisitions
and organic growth, gas volumes remain a source of growth for
us. Our emphasis on investing in our regulated gas utility
segment is shown in increased volumes of gas distributed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years
Ended
|
|
|
For the Years
Ended
|
|
|
|
December 31,
|
|
|
June 30,
|
|
Gas
Volumes (MMcf)
|
|
2009
|
|
|
2008
|
|
|
2008*
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
Montana
|
|
|
5,508
|
|
|
|
5,245
|
|
|
|
5,200
|
|
|
|
4,890
|
|
|
|
4,712
|
|
|
|
4,896
|
|
Wyoming
|
|
|
1,407
|
|
|
|
1,532
|
|
|
|
1,514
|
|
|
|
1,591
|
|
|
|
1,729
|
|
|
|
1,744
|
|
North Carolina
|
|
|
2,108
|
|
|
|
2,107
|
|
|
|
1,713
|
|
|
|
NA
|
|
|
|
NA
|
|
|
|
NA
|
|
Maine
|
|
|
15,738
|
|
|
|
14,969
|
|
|
|
8,900
|
|
|
|
NA
|
|
|
|
NA
|
|
|
|
NA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
24,761
|
|
|
|
23,853
|
|
|
|
17,327
|
|
|
|
6,481
|
|
|
|
6,441
|
|
|
|
6,640
|
|
* For the
fiscal year ending June 30, 2008, volumes from our North
Carolina and Maine utilities reflect only nine months and seven
months, respectively, of operations due to when those
transactions closed.
Business
Strategy
Our strategy is to
grow our earnings and increase cash flow by providing natural
gas to users in a safe and reliable manner by executing in the
following areas:
|
|
|
|
|
Invest in
existing utilities to expand our distribution system, grow our
customer base and maintain reliable, high quality
service. To
maintain our position as a respected natural gas utility, we
have invested, and will continue to invest, substantial capital
and resources in our core utility operations in order to meet or
exceed applicable regulatory requirements and maintain our
infrastructure. We are focused on prudently increasing our
customer count and volumes,
|
20
|
|
|
|
|
and increasing our
market penetration and market share in areas where we have a
competitive advantage on installed services, customer service or
pricing to ensure that new customers provide sufficient margins
for an appropriate return on the capital investments required to
serve those customers. These capital improvements and expansion
projects to our existing utilities enable us to continue to
build rate base throughout our service footprint.
|
|
|
|
|
|
Continue Active
Acquisition
Strategy. We
are actively pursuing potential bolt-on acquisitions to increase
our market penetration by acquiring utility operations in or
near our current service territories with minimal corporate
platform expansion. We also will opportunistically explore
transformational acquisition opportunities that would provide
significant operational and customer growth, as well as assist
in ensuring access to long-term sources of capital and credit.
|
|
|
|
Focus on
Efficiency to Maximize
Returns. We
strive to quickly and effectively respond to changing regulatory
and public policy initiatives, leverage new technology solutions
that significantly improve productivity and customer service and
implement organizational changes that improve our performance.
By focusing on these critical areas and continuous improvement
of operational efficiencies, we expect to be able to effectively
control costs and provide reasonable returns to stakeholders by
attaining our regulated allowable return on equity as
established by our regulators.
|
Competitive
Strengths
We believe we are
well-positioned to execute our business strategy given the
following competitive strengths:
|
|
|
|
|
Growth-Oriented
Utilities. Our
core assets consist of distribution facilities necessary for the
delivery of our customers natural gas supply needs within
our service territories and regulatory assets related to our
regulated utility operations. Approximately 90% of our first
quarter 2010 revenue was from regulated gas distribution
operations, providing a level of stability to our earnings and
cash flows. As we have invested in our rate base, our earnings
and cash flows have grown with that investment. We operate under
a
cost-of-service
regulatory regime that allows us to recover our reasonable
operating costs from customers and earn a reasonable return on
our invested capital. We believe that there are significant
opportunities for us to expand operations organically in some of
our existing service areas as there are currently relatively low
penetration rates of gas distribution among potential customers.
|
|
|
|
Focused
Acquisition
Strategy. We
continue to emphasize growth and have a successful track record
of executing on our acquisition strategy. Since 2007, we have
made acquisitions in five states representing more than 25,000
additional gas utility customers. These recent acquisitions and
our integration of their operations, management, infrastructure,
technology and employees provide us with the necessary platform
and experience to replicate these successes through new
acquisitions opportunities. We believe our track record to date
promotes positive relationships and credibility with regulators,
municipalities, developers and customers in both existing and
prospective service areas.
|
|
|
|
Diverse Customer
Base. As
a result of our recent acquisitions, we now have operations in
six states located in the West, Midwest, Northeast and
Mid-Atlantic regions of the country. We believe that this
geographically diverse customer base enhances stability of
operations and provide us with the opportunity to increase our
market penetration in various regions. Additionally, our
customers represent a mix of residential, commercial, industrial
and transportation and no single customer represented more than
1.4% of our natural gas revenue in the first quarter of 2010.
Our sales to large commercial and industrial customers are not
concentrated in one industry segment but vary across several
industry segments, reflecting the diverse nature of the
communities we serve.
|
|
|
|
Experienced
Management
Team. Our
senior management team is highly experienced in the gas utility
industry. Our senior management team averages approximately
22 years experience in the industry. We believe our
management team is well-equipped to lead the continued execution
of the Companys growth strategy.
|
Natural Gas
Operations
Our natural gas
operations are located in Montana, Wyoming, Ohio, Pennsylvania,
Maine and North Carolina, and our revenue from the natural gas
operations are generated under tariffs regulated by those
states. In many states, including all of our service territories
but Maine, the tariff rates of natural gas utilities are
generally established to allow the utility to earn revenue
sufficient to recover operating and maintenance costs, plus
profits in amounts equal to a reasonable rate of return on their
rate base. A gas utilitys rate base generally
includes the utilitys original cost, cost of inventory and
an allowance for working capital, less accumulated depreciation
of installed used and useful gas pipeline and other gas
distribution or transmission facilities.
21
Montana
Our operations in
Montana provide natural gas service to customers in and around
Great Falls, Cascade, West Yellowstone, and Cut Bank, Montana.
The population of our service area is approximately
65,000 people. Our Montana operations provide service to
approximately 30,000 customers.
We have right of way
privileges for our Montana distribution systems either through
franchise agreements or right of way agreements within our
service territories. The Great Falls distribution component of
our Montana operations also provides natural gas transportation
service to certain customers who purchase natural gas from other
suppliers.
Our largest utility,
Energy West, has a traditional rate base structure in Montana,
as established in a rate proceeding at the MPSC, and its rates
are based upon the opportunity to earn an allowed return on
equity and an overall rate of return. Cut Bank, which is a
subsidiary of Energy West, has separate rates that were also
established in a rate case where cost of service analysis was
employed and an authorized overall rate of return identified.
The following table
shows the volumes of natural gas, expressed in millions of cubic
feet, sold or transported by our Montana operations for the
years ended December 31, 2009 and 2008, for the six months
ended December 31, 2008 and 2007 and for the years ending
June 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas Volumes
|
|
|
|
|
|
|
|
|
|
(in MMcf)
|
|
|
|
|
|
|
Years ended
|
|
|
Six months
ended
|
|
|
Years ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Residential
|
|
|
2,368
|
|
|
|
2,262
|
|
|
|
891
|
|
|
|
841
|
|
|
|
2,212
|
|
|
|
2,097
|
|
Commercial
|
|
|
1,370
|
|
|
|
1,338
|
|
|
|
478
|
|
|
|
476
|
|
|
|
1,336
|
|
|
|
1,267
|
|
Transportation
|
|
|
1,770
|
|
|
|
1,645
|
|
|
|
742
|
|
|
|
749
|
|
|
|
1,652
|
|
|
|
1,526
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gas Sales
|
|
|
5,508
|
|
|
|
5,245
|
|
|
|
2,111
|
|
|
|
2,066
|
|
|
|
5,200
|
|
|
|
4,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wyoming
Our operations in
Wyoming provide natural gas service to customers in and around
Cody, Meeteetse, and Ralston, Wyoming. This service area has a
population of approximately 14,400 people. Our Wyoming
operations provide service to approximately 6,400 customers,
including one large industrial customer. Our marketing and
production operations supply natural gas to our Wyoming
operations pursuant to an agreement through October 2010.
We have a
certificate of public convenience and necessity granted by the
WPSC for transportation and distribution covering the west side
of the Big Horn Basin, which extends approximately 70 miles
north and south and 40 miles east and west from Cody. Our
Wyoming operations also offer transportation through its
pipeline system. This service is designed to permit producers
and other purchasers of gas to transport their gas to markets
outside of our Wyoming operations distribution and
transmission system.
Our Wyoming utility
operates under a traditional rate base mechanism as filed with
the WPSC, and its rates are established to permit the utility an
opportunity to earn an allowed return on equity and overall
return.
22
The following table
shows volumes of natural gas sold by our Wyoming operations for
the years ended December 31, 2009 and 2008, for the six
months ended December 31, 2008 and 2007 and for the years
ended June 30, 2008 and 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas Volumes
|
|
|
|
|
|
|
|
|
|
(in MMcf)
|
|
|
|
|
|
|
Years ended
|
|
|
Six months
ended
|
|
|
Years ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
Residential
|
|
|
584
|
|
|
|
578
|
|
|
|
230
|
|
|
|
219
|
|
|
|
567
|
|
|
|
526
|
|
Commercial
|
|
|
634
|
|
|
|
628
|
|
|
|
286
|
|
|
|
271
|
|
|
|
613
|
|
|
|
593
|
|
Transportation
|
|
|
189
|
|
|
|
326
|
|
|
|
138
|
|
|
|
146
|
|
|
|
334
|
|
|
|
472
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gas Sales
|
|
|
1,407
|
|
|
|
1,532
|
|
|
|
654
|
|
|
|
636
|
|
|
|
1,514
|
|
|
|
1,591
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ohio and
Pennsylvania
On January 5,
2010, we completed the acquisition of Northeast Ohio Natural Gas
Corporation (NEO), Orwell Natural Gas Company (Orwell), and
Brainard Gas Corp. (Brainard) natural gas
distribution companies that serve approximately 23,131 customers
in Northeastern Ohio and Western Pennsylvania. The acquisition
increased the Companys customers by more than 50%. We have
opportunities for incremental growth in Ohio in suburban
expansion areas and bedroom communities for gas
service adjacent to our current service areas. These utilities
provide both retail natural gas sales service and transportation
service through approximately 1,000 miles of distribution
pipelines.
All of our Ohio
utilities operate under a traditional rate base regulatory
mechanism. However, only NEO has tariff rates established after
a general rate case. A cost of service analysis was done in that
case resulting in a stipulation of all parties. The stipulation
identified an authorized rate of return on rate base but did not
articulate a capital structure or an allowable return on equity.
Orwells
currently approved tariff rates were established in June 2007 in
an application not for an increase in rates,
sometimes referred to as a first filing. This term
indicates that previously Orwell had no tariff rates in place
for these services. No cost of service analysis is required in a
first filing and the PUCO approved the current rates
by finding them not to be unjust or unreasonable. Prior to the
approval of these tariff rates by the PUCO, Orwells rates
had been established either by municipal ordinance in villages
exercising their home rule powers, or by
special arrangements authorized by Ohio law and
approved by PUCO on a
case-by-case
basis. When Orwell acquired its Clarion River and Walker Gas
divisions in Pennsylvania in 2005, it adopted the tariffs of
those utilities without cost of service analysis being
performed. Brainard adopted the tariff of its predecessor
company when the PUCO approved its acquisition of Power Energy
in August 1999. The rates included in that tariff were
originally approved by the PUCO as not being unjust and
unreasonable in a first filing by Power Energy in
1998. No cost of service analysis was performed.
The following table
shows volumes of natural gas sold by our Ohio and Pennsylvania
operations for the years ended December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
Gas Volumes
|
|
|
|
(in MMcf)
|
|
|
|
Years ended
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Residential
|
|
|
1,674
|
|
|
|
1,523
|
|
Commercial
|
|
|
1,390
|
|
|
|
1,030
|
|
Transportation
|
|
|
1,399
|
|
|
|
1,159
|
|
|
|
|
|
|
|
|
|
|
Total Gas Sales
|
|
|
4,463
|
|
|
|
3,712
|
|
|
|
|
|
|
|
|
|
|
23
Maine
On December 1,
2007, we acquired Bangor Gas Company, a natural gas utility in
Bangor, Maine. Our operations in Maine provide natural gas
service to customers in Bangor, Brewer, Old Town, Orono and
Veazie through 10 miles of transmission pipeline and
100 miles of distribution system. This service area has a
population of approximately 60,000 people. We have
certificates of public convenience and necessity granted by the
Maine Public Utilities Commission (MPUC) for our Maine service
territories.
Our Maine operations
provide service to approximately 1,252 residential, commercial
and industrial customers. We offer transportation services to 36
customers through special pricing contracts. These customers
accounted for approximately 31.7% of the revenue of our Maine
operations in 2009.
In Maine, our tariff
rates and permitted rate of return are not based upon the
concept of rate base, but are based upon historical costs of
alternate fuels so that we may compete with distributors of such
fuels, and if we exceed a given rate of return, excess earnings
are shared with our gas customers. Bangor Gas operates under a
rate plan approved by the MPUC that establishes maximum delivery
charges on this basis. The rate plan extends through 2012, and
the maximum rate can be adjusted once annually.
The following table
shows volumes of natural gas sold by our Maine operations for
the years ended December 31, 2009 and 2008, for the six
months ended December 31, 2008 and 2007, and for the fiscal
year ended June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas Volumes
|
|
|
|
|
|
|
|
|
|
|
|
|
(in MMcf)
|
|
|
|
|
|
|
Years ended
|
|
|
Six months
ended
|
|
|
Year ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
June
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007*
|
|
|
2008*
|
|
|
Residential
|
|
|
50
|
|
|
|
26
|
|
|
|
13
|
|
|
|
3
|
|
|
|
16
|
|
Commercial
|
|
|
526
|
|
|
|
308
|
|
|
|
134
|
|
|
|
47
|
|
|
|
221
|
|
Transportation
|
|
|
1,035
|
|
|
|
851
|
|
|
|
400
|
|
|
|
81
|
|
|
|
532
|
|
Bucksport
|
|
|
14,127
|
|
|
|
13,784
|
|
|
|
6,811
|
|
|
|
1,158
|
|
|
|
8,131
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gas Sales
|
|
|
15,738
|
|
|
|
14,969
|
|
|
|
7,358
|
|
|
|
1,289
|
|
|
|
8,900
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Because we
acquired our Maine operations during the last quarter of the
year, the six months ended December 31, 2007 includes one
month of Maine operations and the fiscal year ended
June 30, 2008 includes seven months of operations.
North
Carolina
On October 1,
2007, we acquired Frontier Natural Gas, a natural gas utility in
Elkin, North Carolina. Our North Carolina operations provide
natural gas service to customers in Ashe, Surry, Warren, Wilkes,
Watauga, and Yadkin Counties. This service area has a population
of approximately 42,000 people. The major communities in
our North Carolina service area are Boone, Elkin, Mount Airy,
Wilkesboro, Warrenton and Yadkinville. We have certificates of
public convenience and necessity granted by the NCUC for
transportation and distribution in these counties and franchise
agreements with municipalities located within these counties.
Our North Carolina
operations provide service to approximately 1,082 residential,
commercial and transportation customers through 139 miles
of transmission pipeline and 215 miles of distribution
system. We offer transportation services to 23 customers through
special pricing contracts. For 2009, these customers accounted
for approximately 45.4% of the revenue of our North Carolina
operation.
When the NCUC
approved our acquisition of Frontier Natural Gas, it instituted
a set of regulatory conditions including a rate moratorium for a
period of five years and a reduction of its margin rates for
residential and small general firm service by 10%. These rates
are to be maintained through September 2012. The margin rate
consists of the tariff rate less benchmark gas costs.
24
The following table
shows volumes of natural gas sold by our North Carolina
operations for the years ended December 31, 2009 and 2008,
for the six months ended December 31, 2008 and 2007, and
for the fiscal year ended June 30, 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas Volumes
|
|
|
|
|
|
|
|
|
|
|
|
|
(in MMcf)
|
|
|
|
|
|
|
Years ended
|
|
|
Six months
ended
|
|
|
Year ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
June
30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007*
|
|
|
2008*
|
|
|
Residential
|
|
|
25
|
|
|
|
20
|
|
|
|
8
|
|
|
|
6
|
|
|
|
18
|
|
Commercial
|
|
|
378
|
|
|
|
220
|
|
|
|
107
|
|
|
|
49
|
|
|
|
162
|
|
Transportation
|
|
|
1,705
|
|
|
|
1,867
|
|
|
|
840
|
|
|
|
506
|
|
|
|
1,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gas Sales
|
|
|
2,108
|
|
|
|
2,107
|
|
|
|
955
|
|
|
|
561
|
|
|
|
1,713
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* Because we
acquired our North Carolina operations during the last quarter
of the year, the six months ended December 31, 2007
includes three months of operations and the fiscal year ended
June 30, 2008 includes nine months of operations.
Marketing and
Production Operations (EWR)
We market
approximately 2.4 Bcf of natural gas annually to commercial
and industrial customers in Montana and Wyoming and manage
midstream supply and production assets for transportation
customers and utilities through our Montana marketing
subsidiary, Energy West Resources, Inc. In order to provide a
stable source of natural gas for a portion of its requirements,
EWR has an ownership interest in two natural gas production
properties and three gathering systems, located in north central
Montana. EWR currently holds an average 48% gross working
interest (average 41% net revenue interest) in 160 natural gas
producing wells in operation. This production gives EWR a
partial natural hedge when market prices of natural gas are
greater than the cost of production. The gas production from
these wells and assets provided approximately 18% of the volume
requirements for EWR in our Montana market for 2009.
Pipeline
Operations
Through Energy West
Development, Inc. we operate two natural gas pipelines, the
Glacier natural gas gathering pipeline placed in
service in July 2002 and the Shoshone transmission
pipeline placed in service in March 2003. The pipelines extend
from the north of Cody, Wyoming to Warren, Montana. The Shoshone
pipeline is an approximately 30 miles long bidirectional
pipeline that transports natural gas between Montana and
Wyoming. This enables us to sell natural gas to customers in
Wyoming and Montana through our EWR subsidiary and gives EWR
access to the Alberta Energy Company (AECO) and Colorado
Interstate Gas (CIG) natural gas price indices. The Glacier
gathering pipeline is approximately 40 miles in length and
enables us to transport production gas for processing. We
believe that our pipeline operations represent an opportunity to
increase our profitability over time by taking advantage of
summer/winter pricing differentials as well as AECO and CIG
natural gas index differentials and to continue transporting
more production gas to market. We currently are seeking ways in
which we can maximize our pipeline operations by increasing the
capacity and throughput of our existing pipeline assets.
Acquisitions
As a result of our
success in strengthening our core natural gas business, we are
now able to focus on our growth strategy which includes the
acquisition and expansion of our natural gas utility operations
in small and emerging markets. We regularly evaluate gas
utilities of varying sizes for potential acquisition.
Our acquisition
strategy includes identifying geographic areas that have low
market saturation rates in terms of natural gas utilization as a
result of historical reliance by customers on alternate fuels
such as heating oil. According to the American Gas Association,
the national average for natural gas saturation in the
residential heating market was approximately 51% in 2005,
whereas large segments of the North Carolina and Maine market
remain unsaturated, with penetration rates of less than 3% and
as low as 1% in certain areas. We believe these low penetration
rates are partially the result of these geographic areas being
overlooked by other gas distributors in light of this historical
reliance on other energy sources. The high market price of oil
over the
25
past several years
presents an opportunity for gas distributors to capture a larger
share of the energy market in these states. This strategy led to
our acquisitions of Frontier Utilities and Bangor Gas Company,
which are briefly described below.
In addition to
acquiring utilities in low saturation markets or close proximity
to our current service areas, we continue to evaluate acquiring
under-performing utilities in more mature gas markets or smaller
utilities that are part of larger utility holding companies. We
believe our focus on operational excellence, cost controls, and
prudent capital investment facilitates our ability to increase
performance and profitability of under-performing assets and
non-core assets. Our strategy also includes adding geographic
locations that provide balance and organic growth prospects to
our overall performance, while mitigating weather, economic,
regulatory
and/or
competitive risks.
2007 Expansion
into Maine and North Carolina
In 2006, we began
investigating potential acquisitions in Maine and North
Carolina. On January 30, 2007, we entered stock purchase
agreements with Sempra Energy for the purchase of natural gas
distribution companies in each of these states. On
October 1, 2007, we consummated the acquisition of Frontier
Natural Gas, which operates a natural gas utility in Elkin,
North Carolina. The purchase price was $4.9 million in
cash. On December 1, 2007, we acquired Bangor Gas Company,
a natural gas utility in Bangor, Maine for a purchase price of
$434,000.
Frontier Natural Gas
and Bangor Gas Company provided us with a unique opportunity to
gain market share within these service areas since their
distribution systems are relatively new and have considerable
incremental capacity available to sustain a greater customer
load. The acquisitions of Frontier Natural Gas and Bangor Gas
Company provided us with substantial assets and potential
customers in those service areas, including 149 miles of
transmission pipeline and 315 miles of distribution system.
2009
Acquisition of Additional Operations in Montana
On November 2,
2009, we completed the acquisition of a majority of the
outstanding shares of Cut Bank Gas Company, a natural gas
utility serving Cut Bank, Montana. Pursuant to a stock purchase
agreement with the founders and controlling shareholders of Cut
Bank Gas, we acquired 83.2% of the shares for a purchase price
of $500,000 paid in shares of our common stock. We also offered
to purchase the remaining shares of Cut Bank Gas from the
shareholders that owned the other 16.8% of the shares. In April
2010, we completed the acquisition of the remaining shares in
Cut Bank Gas for a cash purchase price of $101,000. The
acquisition increased our customer base by approximately 1,500.
2010 Expansion
into Ohio and Pennsylvania
On January 5,
2010, we completed the acquisition of our Ohio utilities,
Orwell, NEO and Brainard, and their parents and affiliates,
Lightning Pipeline, Great Plains and GPL (collectively, the Ohio
companies). Orwell, NEO and Brainard are natural gas
distribution companies that serve customers in Northeastern Ohio
and Western Pennsylvania. GPL is a real estate holding company
whose primary asset is real estate that is leased to NEO. The
purchase price for our Ohio companies was $37.9 million,
which consisted of approximately $20.8 million in debt of
the acquired companies with the remainder of the purchase price
paid in 1,707,308 unregistered shares of our common stock. Our
acquisition of the Ohio companies was a substantial step in our
growth, providing us with a presence in the Midwestern United
States and increasing our customer count by more than 50%.
Focused
Acquisition Strategy
We intend to
continue to look for natural gas utilities to acquire. We
believe we have the operating expertise to handle a
significantly greater number of customers. For example, several
operational managers have joined our team who have natural gas
utility experience with significantly larger companies. We
intend to focus on acquisitions that will enable us to grow our
customer base and in a manner and to a scale consistent with the
full strategic vision of our senior leadership team. We believe
that there are opportunities to acquire financially-sound
smaller natural gas utility companies that are individually
owned or controlled. In addition, we intend to target larger
diversified utility companies that have a natural gas
distribution operating segment that they are willing to sell.
Our acquisition
strategy includes combining newly acquired operations with our
current operations to maximize efficiency and profitability.
Upon acquiring a distribution company, management intends to
centralize functions (i.e. accounting) or decentralize functions
(i.e. gas marketing), as appropriate. We believe our senior
managements gas utility experience and expertise will
improve the acquired companys operating efficiency and gas
marketing capabilities, and as a result, its profitability.
26
We may acquire
natural gas utilities that have related non-regulated operations
such as gathering, storage and marketing operations. Although
these non-regulated operations are not the focus of our
acquisition strategy, we will not disregard a potential target
because of these operations. Rather, upon consummation of the
acquisition, we will evaluate the non-regulated operations to
determine whether these operations could be complementary to our
core business or whether they should be divested.
Competition
In all states, we
generally face competition in the distribution and sales of
natural gas from suppliers of other fuels, including
electricity, oil, propane, and coal. Traditionally, the
principal considerations affecting a customers selection
of utility gas service over competing energy sources include
service, price, equipment costs, reliability, and ease of
delivery. In addition, the type of equipment already installed
in a business and residence significantly affects the
customers choice of energy. However, with respect to the
majority of our service territory, previously installed
equipment is not an issue. Households in recent years have
generally preferred the installation of natural gas
and/or
propane for space and water heating as an energy source.
In Montana and Ohio,
the regulatory framework does not provide gas distribution
companies with exclusive geographic service territories. In
Maine, although the MPUC may establish exclusive service
territories, it certificated both Bangor Gas Company and Central
Maine Gas to serve in the same area that had not previously been
served by a gas utility. However, in Montana and Maine, we have
faced relatively little competition from other gas companies
primarily because geographic barriers to entry make it
cost-prohibitive for competitors to enter noncontiguous
locations. By contrast, in Ohio, we face significant competition
from larger natural gas companies.
The following table
summarizes our major competitors by state.
|
|
|
State
|
|
Competition
|
|
Montana
|
|
Northwestern Energy, Montana-Dakota Utilities Co.
|
Wyoming
|
|
Various propane distributors, electric providers
|
Ohio
|
|
Dominion East Ohio, Columbia Gas of Ohio, various propane and
fuel oil distributors, electric providers
|
Pennsylvania
|
|
Various propane and fuel oil distributors, electric providers
|
Maine
|
|
Northern Utilities Inc., Maine Natural Gas, various fuel oil
distributors, electric providers
|
North Carolina
|
|
Various propane distributors, electric providers
|
Our marketing and
production operations compete principally with other natural gas
marketing firms doing business in Montana and Wyoming.
Gas Supply
Marketers and Gas Supply Contracts
We purchase gas for
our natural gas operations and marketing and production
operations from various gas supply marketers. For the past
several years, the primary gas supply marketers for our natural
gas distribution operations have been Jefferson Energy Trading,
LLC (Jetco) and Tenaska Marketing Ventures. Jetco has also been
a significant gas supply marketer for our marketing and
production subsidiary, EWR. Other gas supply marketers are also
used by EWR from time to time. EWR also supplies itself with
natural gas through ownership of an average 48% gross working
interest (41% net revenue interest) in 160 natural gas producing
wells in operation in north central Montana. This production
gives EWR a partial natural hedge when market prices of natural
gas are greater than the cost of production. The gas production
from these wells and assets provided approximately 18% of the
volume requirements for EWRs Montana market during 2009.
In Ohio, our utilities have gas supply agreements with John D.
Oil and Gas Marketing Co. LLC, which also acts as agent for
these utilities to identify suppliers of natural gas in the
interstate market. Currently such gas suppliers include South
Jersey Resources Group LLC, Shell Energy North America (US)
L.P., BP Canada Energy Marketing Corp. and Constellation Energy.
In North Carolina, our primary gas supply marketer for Frontier
Natural Gas is BP Energy, and in Maine, our primary gas supply
marketer for Bangor Gas Company is Repsol Energy North America
Corporation.
We purchase and
store gas for distribution later in the year. We also enter into
agreements to buy or sell gas at a fixed price. We may use such
arrangements to protect profit margins on future obligations to
deliver gas at a fixed price, or to attempt to protect against
adverse effects of potential market price declines on future
obligations to purchase gas at fixed prices.
27
Governmental
Regulation
State
Regulation
Our utility
operations are subject to regulation by the Montana Public
Service Commission (MPSC), the Wyoming Public Service Commission
(WPSC), the Public Utilities Commission of Ohio (PUCO), the
Pennsylvania Public Utility Commission (PAPUC), the Maine Public
Utilities Commission (MPUC) and the North Carolina Utilities
Commission (NCUC). These authorities regulate many aspects of
our distribution operations, including construction and
maintenance of facilities, operations, safety, the rates we may
charge customers, the terms of service to our customers and the
rate of return we are allowed to realize.
Rate Regulation,
Cost Recovery and Rate Cases
The various
regulatory commissions approve rates intended to permit a
reasonable rate of return on investment. Our tariffs allow gas
cost to be recovered in full (barring a finding of imprudence)
in regular (as often as monthly) rate adjustments. These pricing
mechanisms have substantially reduced any delay between the
incurrence and recovery of gas costs. Local distribution
companies periodically file rate cases with state regulatory
authorities to seek permission to increase rates. We monitor our
need to file rate cases with state regulators for such rate
increases for our retail gas and transportation services.
Through these rate cases, we are able to adjust the prices we
charge customers for selling and transporting natural gas.
However, in connection with our acquisitions of Frontier Natural
Gas and Bangor Gas Company, the NCUC and MPUC extended the rate
plans in effect at the time of acquisition for these entities
for a period of five years. Accordingly, we cannot seek a new
rate plan in these states until October and December 2012,
respectively, although the Maine rate plan does allow us to
periodically increase and adjust our rates within certain
parameters within our rate plan. For additional information on
how our rates are regulated in the six states in which we
operate, see Our Business Natural Gas
Operations at page 21.
Holding Company
Reorganization and Ring-Fencing Measures
In August 2009, we
implemented a holding company structure to reduce the
limitations imposed on us by state regulatory commissions, but
those agencies may still place limitations on us with respect to
certain corporate and financial activities. For example, as a
condition to approving our holding company reorganization, the
MPSC imposed ring-fencing measures under which our Montana,
Wyoming, North Carolina and Maine operating subsidiaries must
meet certain notice and financial requirements prior to paying
dividends that are above certain financial thresholds or
irregularly timed. Another condition of the MPSCs approval
was that our Maine and North Carolina utilities, which are
currently subsidiaries of our Montana operating subsidiary
Energy West, become subsidiaries of Gas Natural in the event
Energy West refinances its debt. However, the MPUC subsequently
conditioned its approval of the reorganization on the
opportunity to approve, in advance, any such spin-out of the
Maine utilities. We believe we would be able to obtain the
MPUCs approval of a spin-out when necessary, but we cannot
predict what conditions, qualifications or limitations the MPUC
would seek to impose as a condition to such an approval. Similar
ring-fencing measures to those adopted by the MPSC have been
proposed in a case currently pending before the WPSC. We
obtained the approval of the WPSC for our holding company
reorganization in October 2008, but in connection with its
approval of our acquisition of the Ohio companies, the WPSC
issued an order asserting jurisdiction over Gas Natural as a
public utility in Wyoming and requested that ring-fencing
measures be created and implemented. We requested rehearing of
that order to clarify the scope of the jurisdiction WPSC seeks
to assert. Our request was granted, but as of this date no final
appealable order has been issued. Because the jurisdictional
issue remains unresolved, we have filed an application to exempt
this offering from Wyoming Statute
Section 37-6-103,
based on a finding that approval is not required by the public
interest. We have requested expedited consideration and approval
of this application for exemption.
Certificated
Territories and Franchise Agreements
In some states,
local distribution companies are required to obtain certificates
of public convenience or necessity from the state regulatory
commissions before they may distribute gas in a particular
geographic area. In addition, local distribution companies are
often subject to franchise agreements entered into with local
governments. While the number of local governments that require
franchise agreements is diminishing historically, many of the
local governments in our service areas still require them and
could require us to cease our occupation of the streets and
public grounds or prohibit us from extending our facilities into
any new area of that city or community if a franchise agreement
is not in effect. Accordingly, when and where franchise
agreements are required, we enter into agreements for franchises
with the cities and communities in which we operate authorizing
us to place our facilities in the streets and public grounds,
and we attempt to acquire or reacquire franchises whenever
feasible.
We have obtained all
certificates of convenience and necessity
and/or
franchise agreements from state regulatory commissions and from
local governments in those states where required in order to
provide natural gas utility service. In most cases,
28
certificates of
public convenience and necessity and franchise agreements do not
provide us with exclusive distribution rights. The specific
requirements of the states and services areas in which we
operate are discussed below.
Certificates of
public convenience and necessity are required in Wyoming, Maine,
North Carolina and Pennsylvania. In Wyoming, we have a
certificate of public convenience and necessity granted by the
WPSC for transportation and distribution covering the west side
of the Big Horn Basin. Certificates of public convenience and
necessity are not required in Ohio or Montana. In Maine, we have
been granted the right by the MPUC to distribute gas in our
service areas under certificates of public convenience and
necessity. A currently certificated gas utility is not required
to seek MPUC authority to serve in a municipality not served by
another gas utility, but otherwise must seek MPUC approval to
serve. In North Carolina, the right to distribute gas is
regulated by the NCUC, which generally divides service
territories by county, and we have been granted the right by the
NCUC to distribute gas in the six counties in which we operate
under certificates of public convenience and necessity from the
NCUC. In Pennsylvania, our service territories are exclusive
under certificates of public convenience and authority granted
by PAPUC.
Franchise agreements
are utilized in Montana, Wyoming and North Carolina. In Montana,
we hold a franchise in the cities of Great Falls and West
Yellowstone. In Wyoming, we hold franchises in the cities of
Cody and Meeteetse. In North Carolina, we have franchise
agreements with all of the incorporated municipalities in the
six counties certificated by NCUC to install and operate gas
lines in those municipalities streets and
right-of-ways.
We are not required to obtain franchise agreements for our
operations in Maine, Ohio or Pennsylvania, although in Ohio
non-exclusive franchise ordinances or agreements are permitted.
Federal
Regulations
Our interstate
operations are also subject to federal regulations with respect
to rates, services, construction/maintenance and safety
standards. This regulation plays a significant role in
determining our profitability. Various aspects of the
transportation of natural gas are also subject to, or affected
by, federal regulation under the Natural Gas Act (NGA), the
Natural Gas Policy Act of 1978 and the Natural Gas Wellhead
Decontrol Act of 1989. The Federal Energy Regulatory Commission
(FERC) is the federal agency vested with authority to regulate
the interstate gas transportation industry. Among aspects of our
business subject to FERC regulation, our Shoshone transmission
pipeline is subject to certain FERC regulations applicable to
interstate activities, including (among other things)
regulations regarding rates charged. Our pipeline rates must be
filed with FERC. The Shoshone pipeline has rates on file with
FERC for firm and interruptible transportation that have been
determined to be just and reasonable. The operations of the
Shoshone pipeline are subject to certain standards of conduct
established by FERC that require the Shoshone pipeline to
operate separately from, and without sharing confidential
business information with, EWR to the maximum extent
practicable. In contrast, FERC has determined that our
interstate pipeline and natural gas operations in Wyoming may
share operating personnel so long as our natural gas operations
in Wyoming do not market natural gas.
Under certain
circumstances, gathering pipelines are exempt from regulation by
FERC. Our Glacier gathering pipeline has been determined to be
non-jurisdictional by FERC, and is therefore not subject to
regulation by FERC.
Our interstate
pipeline operations are also subject to federal safety standards
promulgated by the Department of Transportation under applicable
federal pipeline safety legislation, as supplemented by various
state safety statutes and regulations.
Environmental
Matters
Environmental
Laws and Regulations
Our business is
subject to environmental risks normally incident to the
operation and construction of gathering lines, pipelines, plants
and other facilities for gathering, processing, treatment,
storing and transporting natural gas and other products. These
environmental risks include uncontrollable flows of natural gas,
fluids and other substances into the environment, explosions,
fires, pollution and other environmental and safety risks. The
following is a discussion of certain environmental and safety
concerns related to our business. It is not intended to
constitute a complete discussion of the various federal, state
and local statutes, rules, regulations, or orders to which our
operations may be subject. For example, we, even without regard
to fault, could incur liability under the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980,
as amended (also known as the Superfund law), or
state counterparts, in connection with the disposal or other
releases of hazardous substances and for damage to natural
resources.
Our activities in
connection with the operation and construction of gathering
lines, pipelines, plants, storage caverns, and other facilities
for gathering, processing, treatment, storing and transporting
natural gas and other products are subject to environmental and
safety regulation by federal and state authorities, including,
without limitation, the state environmental agencies and the
Environmental Protection Agency (EPA), which can increase the
costs of designing, installing and operating
29
such facilities. In
most instances, the regulatory requirements relate to the
discharge of substances into the environment and include
measures to control water and air pollution. Environmental laws
and regulations may require the acquisition of a permit or other
authorization before certain activities may be conducted. These
laws also include fines and penalties for non-compliance.
Further, these laws and regulations may limit or prohibit
activities on certain lands lying within wilderness areas,
wetlands, areas providing habitat for certain species or other
protected areas. We are also subject to other federal, state,
and local laws covering the handling, storage or discharge of
materials used in our business and laws otherwise relating to
protection of the environment, safety and health. Because the
requirements imposed by environmental laws and regulations
frequently change, we are unable to predict the ultimate costs
of compliance with such requirements or whether the incurrence
of such costs would have a material adverse effect on our
operations.
Remediation of
Montana Manufactured Gas Plant
Energy West owns
property in Montana on which we operated a manufactured gas
plant from 1909 to 1928. We currently use this site as an office
for field personnel and storage location for certain equipment
and materials. The coal gasification process utilized in the
plant resulted in the production of certain by-products that
have been classified by the federal government and the State of
Montana as hazardous to the environment.
We have completed
our remediation of soil contaminants at the plant site. In April
2002 we received a closure letter from the Montana Department of
Environmental Quality (MDEQ) approving the completion of such
remediation program. We and our consultants continue to work
with the MDEQ relating to the remediation plan for water
contaminants.
Although we incurred
considerable costs to evaluate and remediate the site, we have
been permitted by the MPSC to recover the vast majority of those
costs. At December 31, 2009, we had incurred cumulative
costs of approximately $2.1 million in connection with our
evaluation and remediation of the site and had recovered nearly
all of these costs pursuant to the order. The MPSC issued its
order granting recovery through February 28, 2010. The
recovery is now complete. No additional recovery has been
requested and the recovery surcharge has been extinguished.
We periodically
conduct environmental assessments of our assets and operations.
As set forth above, we continue to work with the MDEQ to address
the water contamination problems associated with the former
manufactured gas plant site and we believe that under EPA
standards, further remediation may be technically impracticable.
We are not aware of any other material environmental problems
requiring remediation. For these reasons, we believe that we are
in material compliance with all applicable environmental laws
and regulations.
Seasonality
Our business and
that of our subsidiaries in all segments is
temperature-sensitive. In any given period, sales volumes
reflect the impact of weather, in addition to other factors.
Colder temperatures generally result in increased sales, while
warmer temperatures generally result in reduced sales. Most of
our gas sales revenue is generated in the first and fourth
quarters of the year (January 1 to March 31 and October 1 to
December 31) as we typically experience losses in the
non-heating season, which occurs in the second and third
quarters of the year (April 1 to September 30). We anticipate
that this sensitivity to seasonal and other weather conditions
will continue to be reflected in our sales volumes in future
periods.
Employees
We had a total of
175 employees as of March 31, 2010. Two of these
employees are employed by our marketing and production
operations, 157 by our natural gas operations and 16 at the
corporate office. Our natural gas operations include
13 employees represented by two labor unions, the Laborers
Union and Local Union No. 41. Negotiations were completed
in June 2010 with the Laborers Union, with a contract in place
until June 30, 2013. A three-year contract with Local Union
No. 41 expires June 30, 2013. We believe our
relationship with our employees and unions is good.
Properties
Montana and
Wyoming
In Great Falls,
Montana, we own an 11,000 square foot office building,
which serves as our headquarters, and a 3,000 square foot
service and operating center (with various outbuildings), which
supports
day-to-day
maintenance and construction operations. In West Yellowstone,
Montana, we own an office building. In Cut Bank, Montana we own
an office building/operating center.
30
In Cody, Wyoming, we
lease office and service buildings under long-term lease
agreements.
Our pipeline
operations own two pipelines in Wyoming and Montana. One is
currently being operated as a gathering system. The other
pipeline is operating as a FERC regulated natural gas interstate
transmission line. The pipelines extend from north of Cody,
Wyoming to Warren, Montana.
Ohio and
Pennsylvania
We maintain
facilities for our Ohio and Pennsylvania operations located in
Lancaster, Strasburg and Orwell, Ohio. These facilities for
office and service space are leased under various long-term
lease agreements with related parties.
In addition, we
lease 4,025 square feet of office space in Mentor, Ohio
that serves as the offices for our chief executive officer,
chief financial officer and certain other personnel associated
with our Ohio subsidiaries and our holding company operations
under a three year lease agreement.
Maine
In Bangor, Maine, we
lease two office buildings under long-term lease agreements.
North
Carolina
Our North Carolina
operations are headquartered in Elkin, North Carolina. The
facility is a 16,000 square foot building that has a
combination of office, shop and warehouse space. We are subject
to a lease agreement through June 2011.
For information with
respect to our natural gas distribution systems and production
assets, please see Our Business Natural Gas
Operations and Our Business Marketing
and Production Operations at pages 21 and 25, which
are incorporated by reference herein.
Legal
Proceedings
On February 21,
2008, a lawsuit captioned Shelby Gas Association v.
Energy West Resources, Inc., Case
No. DV-08-008,
was filed in the Ninth Judicial District Court of Toole County,
Montana. Shelby Gas Association (Shelby) alleges a breach of
contract by our subsidiary, EWR, to provide natural gas to
Shelby. On March 24, 2010, the court granted our motions in
limine regarding various aspects of damages which Shelby was
seeking, including disallowance of attorneys fees,
punitive damages and consequential damages. The trial was
completed on April 27, 2010, and the jury in the case
awarded Shelby damages in the amount of $523,438.62. We had an
existing liability recorded of $82,000 and we have recorded the
remaining liability and associated expense of $440,000 in our
balance sheet and statement of income for the period ending
March 31, 2010.
We are involved in
certain other 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.
31
MANAGEMENTS
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following
discussion and analysis of the quarters ended March 31,
2010 and 2009, and years ended December 31, 2009 and 2008,
was contained in our Quarterly Report on
Form 10-Q
for the quarter ended March 31, 2010 and our Annual Report
on
Form 10-K
for the year ended December 31, 2009, as amended. The
following discussion and analysis should be read in conjunction
with Risk Factors, Forward-Looking
Statements and our consolidated financial statements and
related notes included and incorporated by reference in this
prospectus. Managements discussion and analysis contains
forward-looking statements that are provided to assist in the
understanding of anticipated future performance. However, future
performance involves risks and uncertainties which may cause
actual results to differ materially from those expressed in the
forward-looking statements. See Forward-Looking
Statements.
Overview
We are a natural gas
utility with operations in Montana, Wyoming, Ohio, Pennsylvania,
Maine and North Carolina. We distribute 29 billion cubic
feet (Bcf) of natural gas annually to approximately 62,000
residential, commercial and industrial customers. In addition to
our core natural gas distribution business, we market
approximately 2.4 Bcf of natural gas annually to commercial
and industrial customers in Montana and Wyoming. We also have an
average 48% gross working interest (average 41% net revenue
interest) in 160 natural gas producing wells and gas gathering
assets that provide our marketing and production operation with
a partial hedge when gas prices are greater than the cost of
production. In addition, we own the Shoshone interstate and the
Glacier gathering pipelines located in Montana and Wyoming. We
have four reporting segments. Our primary segments are natural
gas operations, marketing and production operations and pipeline
operations. Our other segment is corporate and other.
Quarter Ended
March 31, 2010 Compared With Quarter Ended March 31,
2009
Acquisitions and
continued growth in our existing operations lead to our results
for the quarter ended March 31, 2010. Our earnings
increased to $3.7 million from net income of
$2.0 million in the first quarter of 2009, an increase of
85%.
Our natural gas
segment continues to grow through the acquisition of the Ohio
Companies and customer growth in our existing operations. For
the quarter, the natural gas segment contributed net income of
$3.7 million compared with a net income $1.5 million
for the same period last year, an increase of 147%. Net income
from the Ohio companies accounted for $1.4 million of the
$2.2 million increase.
In our marketing and
production segment, we saw a significant drop in the price we
received for volumes produced from 2009 to 2010 which
significantly reduced revenue received in our production
operation. In addition, we experienced decreased sales in our
gas marketing operation in 2010 compared with 2009. The trial in
our lawsuit with Shelby Gas Association (Shelby)
concluded on April 27, 2010 with the jury awarding Shelby
damages in the amount of $522,000. After taking into account the
existing liability of $82,000, we recorded the remaining
liability and associated expense of $440,000 in the first
quarter of 2010. Please refer to Note 12 in the Notes to
Condensed Consolidated Financial Statements for further
discussion. These factors led to a decline of 119% in earnings
for the quarter to a net loss of $79,000 from net income of
$423,000 for the same period in 2009.
Our pipeline
operations segment returned net income of $36,000 for the three
months ended March 31, 2010 compared with $30,000 for 2009
and Corporate and other operations incurred a net loss of
$26,000 for the three months ended March 31, 2010 compared
with a net loss of $29,000 for the same period in 2009.
Quarterly
Results of Consolidated Operations
The following
discussion of our financial condition and results of operations
should be read in conjunction with the Condensed Consolidated
Financial Statements and Notes thereto and other financial
information included elsewhere in this report and our Annual
Report on
Form 10-K
for the period ended December 31, 2009. The following gives
effect to the unaudited Condensed Consolidated Financial
Statements as of March 31, 2010 and for the three month
period ended March 31, 2010. Results of operations for
interim periods are not necessarily indicative of results to be
attained for any future period.
Net Income
(Loss)
Our net income for the three months ended March 31, 2010
was approximately $3.7 million compared with net income of
approximately $2.0 million for the three months ended
March 31, 2009, an increase of $1.7 million or 85%.
The three months ended March 31, 2010 included net income
of approximately $1.4 million from the operations of the
Ohio companies, acquired on January 5, 2010. An additional
$100,000 increase was due to a $600,000 increase in net income
from existing natural gas operations, offset by a decrease of
$500,000 from our gas marketing and production operation.
32
Revenue
Our revenue for the three months ended March 31, 2010 was
approximately $34.7 million compared with approximately
$31.3 million for the three months ended March 31,
2009, an increase of $3.4 million. The increase was
primarily attributable to: (1) a natural gas operations
revenue increase of $5.4 million, due primarily to revenue
from our recently acquired Ohio companies of $10.7 and partially
offset by a decrease in revenue from our existing natural gas
operations of $5.3 million due to significantly lower
commodity gas costs passed through to our customers and
(2) a decrease in our marketing and production
operations revenue of $2.0 million caused primarily
by significantly lower index prices for natural gas.
Gross
Margin
Gross margin increased $4.7 million, to approximately
$12.5 million in the three months ended March 31, 2010
from approximately $7.8 million in three months ended
March 31, 2009. Our natural gas operations margins
increased $5.2 million with $4.1 million coming from
the recently acquired Ohio companies, $800,000 from sales growth
in our North Carolina and Maine markets and $264,000 from our
recently acquired Cut Bank operation. Our marketing and
production operations margin decreased by $428,000 due to
lower sales in our marketing operation and lower prices received
for gas produced in our production operation.
Expenses Other
Than Cost of Goods
Sold
Expenses other than cost of sales increased by $2.0 million
to $6.2 million in the three months ended March 31,
2010 as compared with $4.2 million in the three months
ended March 31, 2009. Expenses from the recently acquired
Ohio companies totaled $1.9 million with the remaining
$100,000 increase caused by increases in depreciation,
maintenance and distribution, general and administrative
expenses in our existing operations.
Other
Loss
Other expenses increased by $226,000 to a loss of $251,000 in
the three months ended March 31, 2010 from a loss of
$25,000 in the three months ended March 31, 2009. This
increase was caused by (1) expense of $440,000 in marketing
and production related to the conclusion of the lawsuit with
Shelby Gas Association and a $20,000 loss from our equity
investment in Kykuit, (2) other income from the Ohio
companies of $160,000, offset by expense in existing natural gas
operations of $6,000, and (3) a $80,000 increase in other
income in our corporate and other segment.
Interest
Expense
Interest expense increased by $247,000 to approximately $593,000
in the three months ended March 31, 2010 from approximately
$346,000 in the three months ended March 31, 2009. Interest
expense from the recently acquired Ohio companies totaled
$264,000 partially offset by a decrease in short term interest
expense of $17,000 from existing operations.
Income Tax
Expense
Income tax expense increased by $600,000 to $1.8 million in
the three months ended March 31, 2010 as compared with
$1.2 million in the three months ended March 31, 2009.
Income tax expense from the Ohio companies totaled $750,000 and
higher pre-tax income in our existing operations caused a
$20,000 increase in expense. These were offset by a $190,000
income tax benefit from an adjustment to true up the deferred
tax balance for a change in the effective state tax rate for
2010.
33
Quarterly
Results of our Natural Gas Operations
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(unaudited)
|
|
|
|
(in
thousands)
|
|
|
Natural Gas Operations
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
$
|
31,506
|
|
|
$
|
26,142
|
|
Gas Purchased
|
|
|
19,621
|
|
|
|
19,435
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
11,885
|
|
|
|
6,707
|
|
Operating expenses
|
|
|
5,957
|
|
|
|
3,938
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
5,928
|
|
|
|
2,769
|
|
Other income (expense)
|
|
|
173
|
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
Income before interest and taxes
|
|
|
6,101
|
|
|
|
2,788
|
|
Interest (expense)
|
|
|
(568
|
)
|
|
|
(287
|
)
|
|
|
|
|
|
|
|
|
|
Income before income and taxes
|
|
|
5,533
|
|
|
|
2,501
|
|
Income tax (expense)
|
|
|
(1,802
|
)
|
|
|
(962
|
)
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,731
|
|
|
$
|
1,539
|
|
|
|
|
|
|
|
|
|
|
Natural Gas
Revenue and Gross
Margins
Our operating revenue in the three months ended March 31,
2010 increased by $5.4 million to approximately
$31.5 million from approximately $26.1 million in the
three months ended March 31, 2009. Revenue from our
recently acquired Ohio companies caused a $10.7 million
increase in revenue. Revenue in our existing natural gas
operations decreased by $5.3 million, caused primarily by
significantly lower commodity gas costs passed through to our
customers.
Gas purchases in our
natural gas operations increased by $200,000 to approximately
$19.6 million in the three months ended March 31, 2010
from approximately $19.4 million in the three months ended
March 31, 2009. Gas purchases from our recently acquired
Ohio companies were $6.6 million. Gas purchases in our
existing natural gas operations decreased by $6.4 million
due primarily to significantly lower commodity gas prices.
Gross margin was
approximately $11.9 million for the three months ended
March 31, 2010, compared with approximately
$6.7 million for the three months ended March 31,
2009. Of this $5.2 million increase, the recently acquired
Ohio companies accounted for $4.1 million. Sales growth in
our North Carolina and Maine markets accounted for $800,000 of
the increase and $264,000 was earned from our recently acquired
Cut Bank operation.
Natural Gas
Operating
Expenses
Our operating expenses were approximately $6.0 million for
the three months ended March 31, 2010, compared with
approximately $3.9 million for the three months ended
March 31, 2009. The $2.1 million increase was due
primarily to operating expenses from our recently acquired Ohio
companies of $1.9 million, with the remaining $200,000 due
to increases in depreciation, maintenance, and distribution,
general and administrative expenses in our existing operations.
Natural Gas Other
Income
Other income increased by $154,000 to $173,000 in the three
months ended March 31, 2010 from $19,000 in the three
months ended March 31, 2009. Other income from the recently
acquired Ohio companies was $160,000, with the offsetting loss
of $6,000 coming from existing operations.
Natural Gas
Interest
Expense
Interest expense increased by $281,000 to $568,000 in the three
months ended March 31, 2010 from $287,000 in the three
months ended March 31, 2009. Interest expense from the
recently acquired Ohio companies was $264,000, with the
remaining $17,000 from existing operations.
Natural Gas
Income Tax
Expense
Income tax expense increased from $800,000 to approximately
$1.8 million in the three months ended March 31, 2010
from approximately $1.0 million in the three months ended
March 31, 2009. Income tax expense from the recently
acquired Ohio companies was $75,000 with another $240,000 due to
higher pre-tax income in our existing
34
operations. These
were offset by a $190,000 income tax benefit from an adjustment
to true up the deferred tax balances for a change in the
effective state tax rate for 2010.
Quarterly
Results of our Marketing and Production Operations
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(unaudited)
|
|
|
|
(in
thousands)
|
|
|
Energy West Resources
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
$
|
3,118
|
|
|
$
|
5,080
|
|
Gas Purchased
|
|
|
2,591
|
|
|
|
4,125
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
527
|
|
|
|
955
|
|
Operating expenses
|
|
|
177
|
|
|
|
211
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
350
|
|
|
|
744
|
|
Other income (expense)
|
|
|
(460
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before interest and taxes
|
|
|
(110
|
)
|
|
|
744
|
|
Interest (expense)
|
|
|
(20
|
)
|
|
|
(55
|
)
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
(130
|
)
|
|
|
689
|
|
Income tax (expense)
|
|
|
51
|
|
|
|
(266
|
)
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
(79
|
)
|
|
$
|
423
|
|
|
|
|
|
|
|
|
|
|
Marketing and
Production Revenue and Gross
Margins
Our revenue decreased $2.0 million to approximately
$3.1 million in the three months ended March 31, 2010
from approximately $5.1 million in the three months ended
March 31, 2009. Retail gas revenue decreased by
$1.8 million due to lower sales volumes in our Wyoming
market and production revenue decreased by $227,000 due to lower
prices received for volumes produced.
The gross margin in
our marketing and production operations decreased $428,000 to
approximately $527,000 million in the three months ended
March 31, 2010 from approximately $955,000 in the three
months ended March 31, 2009. Gross margin from retail gas
decreased by $239,000 due to the lower sales volumes and gross
margin from gas production decreased by $189,000, due to the
lower revenue from volumes produced.
Marketing and
Production Operating
Expenses
Our operating expenses decreased approximately $34,000, to
$177,000 in the three months ended March 31, 2010 from
$211,000 in the three months ended March 31, 2009.
Decreases in expense for professional services account for this
change.
Marketing and
Production Other Income
(loss)
We incurred a loss of $460,000 in the three months ended
March 31, 2010. A loss on our equity investment in Kykuit
accounts for $20,000 of the loss. The trial in our lawsuit with
Shelby concluded on April 27, 2010 with the jury awarding
Shelby damages in the amount of $522,000. We had an existing
liability recorded of $82,000 and recorded the remaining
liability and associated expense of $440,000 in the first
quarter of 2010. Please refer to Note 12 in the Notes to
our Condensed Consolidated Interim Financial Statements
(unaudited) for further discussion. There was no other income or
loss in the three months ended March 31, 2009.
Marketing and
Production Interest
Expense
Interest expense decreased approximately $35,000 to $20,000 in
the three months ended March 31, 2010 from $55,000 in the
three months ended March 31, 2009.
Marketing and
Production Income Tax
Expense
Income tax expense decreased approximately $317,000 to a benefit
of $51,000 in the three months ended March 31, 2010 from an
expense of $266,000 in the three months ended March 31,
2009, due to a decrease in pretax results to a pre-tax loss in
the three months ended March 31, 2010 compared with pre-tax
income in the three months ended March 31, 2009.
35
Quarterly
Results of our Pipeline Operations
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(unaudited)
|
|
|
|
(in
thousands)
|
|
|
Pipeline Operations
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
$
|
109
|
|
|
$
|
113
|
|
Gas Purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
109
|
|
|
|
113
|
|
Operating expenses
|
|
|
45
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
64
|
|
|
|
51
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before interest and taxes
|
|
|
64
|
|
|
|
51
|
|
Interest (expense)
|
|
|
(5
|
)
|
|
|
(3
|
)
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
59
|
|
|
|
48
|
|
Income tax (expense)
|
|
|
(23
|
)
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
36
|
|
|
$
|
30
|
|
|
|
|
|
|
|
|
|
|
Net income increased
$6,000 to approximately $36,000 in the three months ended
March 31, 2010 from approximately $30,000 in the three
months ended March 31, 2009, and the overall impact of our
pipeline operations was not material to our results of
consolidated operations.
Quarterly
Results of our Corporate and Other Operations
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(unaudited)
|
|
|
|
(in
thousands)
|
|
|
Corporate and Other
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
$
|
|
|
|
$
|
|
|
Gas Purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
(3
|
)
|
|
|
|
|
Other income (expense)
|
|
|
36
|
|
|
|
(44
|
)
|
|
|
|
|
|
|
|
|
|
Income before interest and taxes
|
|
|
33
|
|
|
|
(44
|
)
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
33
|
|
|
|
(47
|
)
|
Income tax benefit (expense)
|
|
|
(59
|
)
|
|
|
16
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
(26
|
)
|
|
$
|
(29
|
)
|
|
|
|
|
|
|
|
|
|
36
Our corporate
and other reporting segment is intended primarily to
encompass the results of corporate acquisitions and other equity
transactions, as well as certain other income and expense items
associated with Gas Naturals holding company functions.
Therefore, it does not have standard revenue, gas purchase
costs, or gross margin.
Results of corporate
and other operations for the three months ended March 31,
2010 included dividends from marketable securities of
approximately $81,000, offset by administrative costs of $2,500,
costs related to acquisition activities of $46,000, and the
related income taxes expense of $59,000, for a net loss of
approximately $26,000.
Results of corporate
and other operations for the three months ended March 31,
2009 included costs related to acquisition activities of
$89,000, offset by dividends from marketable securities of
approximately $44,000 and the applicable income tax benefit of
approximately $16,000, for a net loss of approximately $29,000.
Consolidated
Cash Flow Analysis for the Quarters Ended March 31, 2010
and 2009
Sources and Uses
of Cash at March 31, 2010 and 2009
Operating activities
provide our primary source of cash. Cash provided by operating
activities consists of net income (loss) adjusted for non-cash
items, including depreciation, depletion, amortization, deferred
income taxes and changes in working capital.
Our ability to
maintain liquidity depends upon our $20.0 million credit
facility with Bank of America, our $2.1 million credit
facility with Citizens Bank, and our $1.5 million credit
facility with Huntington National Bank N.A., shown in total as
line of credit on the accompanying balance sheets. Our use of
revolving lines of credit at March 31, 2010 was
$7.6 million at the Bank of America, $2.1 million at
Citizens Bank, and $1.5 million at Huntington National
Bank, N.A. This was an increase from our $5.6 million line
of credit balance at March 31, 2009. This change in our
line of credit was caused primarily by decreased collections of
recoverable costs of gas and accounts receivable, increased
purchases of natural gas to fill storage at low rates, and
increased payments of accrued liabilities and accounts payable.
Long-term and
current debt was $27.7 million at March 31, 2010, and
$13.0 million at March 31, 2009. $14.9 million of
long-term debt was purchased as part of the of the Ohio
companies acquisition, and with $200,000 in payments made since
the purchase date.
Cash increased by
$581,000 from December 31, 2009 to March 31, 2010,
compared with the $354,000 increase in cash for the quarter
ended March 31, 2009. That change is illustrated in the
following table:
|
|
|
|
|
|
|
|
|
|
|
Three Months
Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(unaudited)
|
|
|
Cash provided by (used in) operating activities
|
|
$
|
10,055,057
|
|
|
$
|
14,893,827
|
|
Cash (used in) provided by investing activities
|
|
|
(874,375
|
)
|
|
|
(2,117,692
|
)
|
Cash (used in) provided by financing activities
|
|
|
(8,599,940
|
)
|
|
|
(12,422,162
|
)
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash
|
|
$
|
580,742
|
|
|
$
|
353,973
|
|
|
|
|
|
|
|
|
|
|
Cash provided by
operating activities was approximately $4.8 million lower
in the three months ended March 31, 2010 than the three
months ended March 31, 2009. Items affecting the use of
cash included an increase in amounts paid for gas inventory of
$4.9 million, a $1.8 million increase in payments of
accounts payable, a $4.2 million increase in accounts
receivable collections, an increase in net income of
$1.7 million, and a $4.2 million decrease in
collections of recoverable costs of gas.
Cash used in
investing activities was approximately $1.2 million lower
in the three months ended March 31, 2010, than the three
months ended March 31, 2009, primarily due to a $600,000
decrease in construction expenditures. Other changes include a
$300,000 increase in sales of marketable securities, a $200,000
decrease in purchases of other investments, and $100,000 in cash
purchased in the Ohio acquisition.
Cash used in
financing activities in the three months ended March 31,
2010 was $8.6 million. This was $3.8 million less than
the cash used of $12.4 million in the three months ended
March 31, 2009 and was due to increased net borrowings on
the line of credit of $4.8 million, increased payments on
long and short-term borrowings of $700,000, and a $300,000
increase in dividends paid as compared with the three months
ended March 31, 2009.
37
Liquidity and
Capital Resources at March 31, 2010
We fund our
operating cash needs, as well as dividend payments and capital
expenditures, primarily through cash flow from operating
activities and short-term borrowing. Historically, to the extent
cash flow has not been sufficient to fund these expenditures, we
have used our working capital line of credit. We have greater
need for short-term borrowing during periods when internally
generated funds are not sufficient to cover all capital and
operating requirements, including costs of gas purchased and
capital expenditures. In general, our short-term borrowing needs
for purchases of gas inventory and capital expenditures are
greatest during the summer and fall months and our short-term
borrowing needs for financing customer accounts receivable are
greatest during the winter months.
With the acquisition
of the Ohio companies, we now have two additional lines of
credit from Citizens Bank and Huntington National Bank, N.A.,
which are used for working capital needs by NEO and Orwell,
respectively.
Long Term Debt
and Bank of America Credit Facility
Long-term
Debt
$13.0 million 6.16% Senior Unsecured Notes
On June 29, 2007, we issued
$13.0 million aggregate principal amount of our
6.16% Senior Unsecured Notes, due June 29, 2017. The
proceeds of these notes were used to refinance our existing
notes. With this refinancing, we expensed the remaining debt
issue costs of $991,000 in fiscal 2007, and incurred
approximately $463,000 in new debt issue costs to be amortized
over the life of the new note.
Bank of America
Line Credit
Facility
On June 29, 2007, we established our five-year unsecured
credit facility with Bank of America, replacing a previous
$20.0 million one-year facility with Bank of America which
was scheduled to expire in November 2007. The credit facility
includes an annual commitment fee equal to 0.20% of the unused
portion of the facility and interest on amounts outstanding at
the London Interbank Offered Rate, plus 120 to 145 basis
points, for interest periods selected by us. At March 31,
2010, the Company had $7.6 million in borrowings on the
line of credit.
|
|
|
|
|
Minimum borrowing
|
|
$
|
7,298,000
|
|
Maximum borrowing
|
|
$
|
14,650,000
|
|
Average borrowing
|
|
$
|
10,218,000
|
|
Our
6.16% Senior Unsecured Notes and Bank of America credit
facility agreements contain various covenants, which include,
among others, limitations on total dividends and distributions
made in the immediately preceding
60-month
period to 75% of aggregate consolidated net income for such
period, restrictions on certain indebtedness, limitations on
asset sales, and maintenance of certain
debt-to-capital
and interest coverage ratios. At March 31, 2010 and 2009,
we believe we were in compliance with the financial covenants
under our debt agreements.
Citizens Bank
Credit Facility
In connection with
our acquisition of our Ohio operations, NEO, Great Plains and
GPL each entered modifications/amendments to its credit facility
with Citizens Bank. The Citizens credit facility consists of a
revolving line of credit and term loan to NEO, and two other
term loans to Great Plains and GPL respectively. Each
amendment/modification was initially effective as of
December 1, 2009, but was later modified to be effective as
of January 5, 2010. Gas Natural guarantees each loan. Our
chairman and chief executive officer, Richard M. Osborne,
guarantees each loan both individually and as trustee of the
Osborne Trust, and Great Plains guarantees NEOs revolving
line of credit and term loan as well as GPLs term note.
Long-term
Debt
$10.3 million 5.00% Secured Notes
NEOs, Great Plains and GPLs
term loans with Citizens Bank are in the amounts of
$7.8 million, $2.4 million and $823,000 respectively.
Each term note has a maturity date of July 1, 2013 and
bears interest at an annual rate of
30-day LIBOR
(Eurodollar) plus 400 basis points with an interest rate
floor of 5.00% per annum. Currently, the interest rate is 5.00%
per annum. The term notes require monthly payments of
approximately $63,000 in the aggregate.
Line of
Credit
NEOs revolving credit line with Citizens Bank has a
maximum credit commitment of $2.1 million. The revolving
line bears interest at an annual rate of
30-day LIBOR
(Eurodollar) plus 400 basis points with an interest rate
floor of 5.00% per annum. Currently, the interest rate is 5.00%
per annum. The revolving line requires monthly interest payments
with the principal due at maturity, November 30, 2010.
The Citizens credit
facility requires Great Plains, GPL and NEO to maintain a debt
service coverage ratio of at least 1.25 to 1.0 measured
quarterly on a rolling four quarter basis. The Citizens credit
facility also requires NEO, Great Plains and GPL to maintain a
minimum net worth, on a combined basis, equal to the sum of
$1,815,000 plus 100% of net income less the pro-rata
38
share of any
dividend paid to Gas Natural, measured on a quarterly basis
beginning with the quarter ended December 31, 2009. The
Citizens credit facility allows NEO, Great Plains and to pay
dividends to Gas Natural if those entities combined net
worth (as defined in the Citizens loan documents) after payment
of any dividends would not be less than $1,815,000 on a
consolidated basis as positively increased by 100% of net income
as of the end of each fiscal quarter and fiscal year.
At March 31,
2010, $2.1 million has been borrowed under the revolving
line of credit, $7.2 million under the NEO term loan,
$2.4 million under the Great Plains term loan and $798,000
under the GPL term loan.
Huntington Credit
Facility
On December 31,
2009, Orwell entered into an amended and restated short-term
credit facility with The Huntington National Bank, N.A.
(Huntington). The Huntington credit facility amends and restates
the previous credit facility that matured on November 30,
2009. The loan is secured by all of the assets of Orwell. The
Huntington credit facility is guaranteed by Gas Natural,
Lightning Pipeline, Mr. Osborne individually and as Trustee
of the Osborne Trust, and certain entities owned and controlled
by Mr. Osborne.
Long-term
Debt
$4.6 Million Secured Note The Huntington
credit facility includes a $4.6 million term note that
bears interest at an annual rate of
30-day LIBOR
(Eurodollar) plus 300 basis points with LIBOR floor of 1%
per annum. Currently, the interest rate is 4.00% per annum. The
term note requires monthly payments of approximately $35,000 and
matures on November 28, 2010.
Line of
Credit
The Huntington credit facility also includes a $1.5 million
line of credit. The credit line bears interest at an annual rate
of 30-day
LIBOR (Eurodollar) plus 300 basis points with LIBOR floor
of 1% per annum. Currently, the interest rate is 4.00% per
annum. The credit line requires monthly interest payments with
the principal due at maturity, November 28, 2010.
The Huntington
credit facility requires Orwell to maintain a fixed charge
coverage ratio of at least 1 to 1 of EBITDA to the sum of
(i) scheduled principal payments on debt and capital
leases, plus (ii) interest expense, plus
(iii) federal, state and local income tax expense, plus
(iv) dividends and distributions, measured on a rolling
four quarter basis. The Huntington credit facility allows Orwell
to pay dividends to Gas Natural as long as the aggregate amount
of all dividends, distributions, redemptions and repurchases in
any fiscal year do not exceed 60% of net income (as defined in
the Huntington credit facility) of Orwell for each fiscal year.
At March 31,
2010, $1.5 million has been borrowed under the credit line
and $4.4 million under the term note. The Huntington credit
facility is also secured by a pledge of $3.0 million in
market value of Gas Natural stock by the RMO Trust.
Combined Long
Term Debt, Term Loans and Credit Facilities
At March 31,
2010, the Company had approximately $3.3 million in cash
($2.7 million net of bank overdrafts). In addition, at
March 31, 2010, Gas Natural had $11.2 million in
borrowings under its lines of credit and our net available
borrowing capacity at March 31 was $12.4 million.
The total amount
outstanding under all Gas Naturals long-term debt
obligations was $27.7 million and $13.0 million at
March 31, 2010 and 2009 respectively. The portion of such
obligations due within one year was $5.2 million and $0.0
at March 31, 2010, and 2009, respectively.
Capital
Expenditures at March 31, 2010
We conduct ongoing
construction activities in all of our utility service areas in
order to support expansion, maintenance, and enhancement of our
gas pipeline systems. We are actively expanding our systems in
North Carolina and Maine to meet the high customer interest in
natural gas service in those two service areas. During the three
months ended March 31, 2010 and 2009
39
capital expenditures
were $1.3 million and $1.9 million, respectively. We
estimate future cash requirements for capital expenditures, and
future capital expenditures if this offering is completed, will
be as follows:
|
|
|
|
|
|
|
Estimated
|
|
|
|
Future Cash
|
|
|
|
Requirements
|
|
|
|
through
12/31/10
|
|
|
|
(in
thousands)
|
|
|
Natural Gas Operations
|
|
$
|
6,061
|
|
Energy West Resources
|
|
|
|
|
Pipeline Operations
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
$
|
6,061
|
|
|
|
|
|
|
We fund our
operating cash needs, as well as dividend payments and capital
expenditures, primarily though cash flow from operating
activities and short-term borrowings. Historically, to the
extent cash flow has not been sufficient to fund these
expenditures, we have used our working capital line of credit.
Off-Balance Sheet
Arrangements at March 31, 2010
We do not have any
off-balance-sheet arrangements, other than those currently
disclosed that have or are reasonably likely to have a current
or future effect on financial condition, changes in financial
condition, revenue or expenses, results of operations,
liquidity, capital expenditures or capital resources that is
material to investors.
Year Ended
December 31, 2009 Compared With the Year Ended
December 31, 2008
Executive
Overview
Our primary source
of revenue and operating margin has been the distribution of
natural gas to end-use residential, commercial, and industrial
customers. We have natural gas distribution operations in
Montana, Wyoming, and we recently acquired distribution
operations in North Carolina and Maine. We also market and
distribute natural gas in Montana and Wyoming and conduct
interstate pipeline operations in Montana and Wyoming. Formerly,
we conducted propane operations in Arizona, but those operations
were sold in 2007.
We have five
reporting segments: natural gas operations, marketing and
production operations, pipeline operations, discontinued
operations and corporate and other. Information regarding our
Arizona propane operations is reported under discontinued
operations. Our corporate and other reporting segment was
recently established to report various income and expense items
associated with corporate acquisitions and other equity
transactions, including a deferred tax asset we received in
connection with the acquisitions of our North Carolina and Maine
distribution operations.
Critical
Accounting Policies and Estimates
Our discussion and
analysis of our financial condition and results of operation are
based upon consolidated financial statements, which have been
prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of
these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets,
liabilities, revenue and expenses, and disclosure of contingent
assets and liabilities, if any, at the date of the financial
statements. We analyze our estimates, including those related to
regulatory assets and liabilities, income taxes and
contingencies and litigation. We base our estimates on
historical experience and various other assumptions that are
believed to be reasonable under the circumstances. Actual
results may differ from these estimates. We believe the
following critical accounting policies affect our more
significant judgments and estimates used in the preparation of
our consolidated financial statements. See a complete list of
significant accounting policies in Note 1 of the notes to
the consolidated financial statements included herein.
Regulatory
Accounting
Our accounting
policies historically reflect the effects of the rate-making
process in accordance with ASC 980 Regulated Operations.
Our regulated natural gas segment continues to be
cost-of-service
rate regulated, and we believe the application of ASC 980
to that segment continues to be appropriate. We must reaffirm
this conclusion at each balance sheet date. If, as a result of a
change in
40
circumstances, we
determine that the regulated natural gas segment no longer meets
the criteria of regulatory accounting under ASC 980, that
segment will have to discontinue regulatory accounting and write
off the respective regulatory assets and liabilities.
The application of
ASC 980 results in recording regulatory assets and
liabilities. Regulatory assets represent the deferral of
incurred costs that are probable of future recovery in customer
rates. In some cases, we record regulatory assets before we have
received approval for recovery from the state regulatory
agencies. We must use judgment to conclude that costs deferred
as regulatory assets are probable of future recovery. We base
this conclusion on certain factors, including changes in the
regulatory environment, recent rate orders issued by regulatory
agencies, and the status of any potential new legislation.
Regulatory liabilities represent revenue received from customers
to fund expected costs that have not yet been incurred or for
probable future refunds to customers. At December 31, 2009,
our total regulatory assets were $2.4 million and our total
regulatory liabilities were $1.7 million. A write-off of
the regulatory assets and liabilities could have a material
impact on our consolidated financial statements.
Our natural gas
segment contains regulated utility businesses in the states of
Montana, Wyoming, Ohio, Pennsylvania, Maine and North Carolina
and the regulation varies from state to state. If future
recovery of costs, in any such jurisdiction, ceases to be
probable, we would be required to charge these assets to current
earnings. However, there are no current or expected proposals or
changes in the regulatory environment that impact the
probability of future recovery of these assets. In addition,
deregulation would be a change that occurs over time, due to
legal processes and procedures, which could moderate the impact
to our consolidated financial statements.
Our most significant
regulatory asset/liability relates to the recoverable/refundable
costs of gas purchases. We account for purchased gas costs in
accordance with procedures authorized by the state regulatory
agencies, under which purchased gas costs that are different
from those provided for in present rates are accumulated and
recovered or credited through future rate changes.
Our gas cost
recoveries are monitored closely by the regulatory commissions
in all of the states in which we operate. In addition, MPUC,
NCUC, MPSC AND WPSC require us to submit gas procurement plans,
which we follow closely. These plans are reviewed annually by
each of the regulatory commissions. In Ohio and Pennsylvania,
gas procurement audits are performed annually. The adjustment of
gas cost recoveries and the gas procurement plans reduce the
risk of disallowance of recoverable gas costs. The regulatory
commissions have not disallowed any of our recoverable gas costs
or other costs included in our regulatory assets in the last
three years. Therefore, we believe it is highly probable that we
will recover the regulatory assets that have been recorded.
We use our best
judgment when recording regulatory assets and liabilities.
Regulatory commissions, however, can reach different conclusions
about the recovery of costs and those conclusions could have a
material impact on our consolidated financial statements.
Accumulated
Provisions for Doubtful Accounts
We encounter risks
associated with the collection of our accounts receivable. As
such, we record a provision for those accounts receivable that
are considered to be uncollectible. In order to calculate the
appropriate provision, we primarily utilize the historical
accounts receivable write-off amounts. The underlying
assumptions used for the provision can change from period to
period and the provision could potentially cause a material
impact to our income statement and working capital. The actual
weather, commodity prices, and other internal and external
economic conditions, such as the mix of the customer base
between residential, commercial and industrial, may vary
significantly from our assumptions and may impact our operating
income.
Unbilled Revenue
and Gas Costs
We estimate the gas
service that has been rendered from the latest date of each
meter reading cycle to the month end. This estimate of unbilled
usage is based on projected base load usage for each day
unbilled plus projected weather sensitive usage for each degree
day during the unbilled period. Unbilled revenue and gas costs
are calculated from the estimate of unbilled usage multiplied by
the rates in effect at month end. Each month the estimated
unbilled revenue amounts are recorded as revenue and a
receivable, and the prior months estimate is reversed.
Likewise, the associated gas costs are recorded as cost of
revenue and a payable and the prior months estimate is
reversed. Actual price and usage patterns may vary from these
assumptions and may impact revenue recognized and costs
recorded. The critical component of calculating unbilled revenue
is estimating the usage on a calendar month basis. Our estimated
volumes used in the unbilled revenue calculation have varied
from our actual monthly metered volumes by no more than plus or
minus 10% on December 31, 2009, December 31, 2008 and
on June 30 of each of the last three fiscal years. A variance of
10% on our gross margin at December 31, 2009 would have
been ($114,000).
41
Fair Value of
Financial Instruments
Our financial
instruments consist of cash and cash equivalents, accounts
receivable, accounts payable, and bank borrowings. The carrying
amounts of cash and cash equivalents, accounts receivable and
accounts payable approximate fair value due to the highly liquid
nature of these short-term instruments. The allowance for
doubtful accounts receivable is assessed quarterly based on
sales and the breakout of aged receivables. In June, when the
revenue cycle is low, specific customer accounts are chosen for
write off. After this adjustment is made, the adequacy of the
allowance is considered once again, based on the aging of total
accounts receivable and is adjusted if needed. The fair values
of the bank borrowings approximate the carrying amounts as of
December 31, 2009, December 31, 2008 and at
June 30, 2008 and 2007, and were determined based upon
variable interest rates currently available to us for borrowings
with similar terms.
Recoverable/Refundable
Costs of Gas
We account for
purchased gas costs in accordance with procedures authorized by
the state regulatory agencies, under which purchased gas costs
that are different from those provided for in present rates are
accumulated and recovered or credited through future rate
changes.
Deferred Tax
Asset and Income Tax Accruals
Judgment,
uncertainty, and estimates are a significant aspect of the
income tax accrual process that accounts for the effects of
current and deferred income taxes. Uncertainty associated with
the application of tax statutes and regulations and the outcomes
of tax audits and appeals require that judgment and estimates be
made in the accrual process and in the calculation of effective
tax rates.
Effective tax rates
(ETR) are also highly impacted by assumptions. ETR calculations
are revised every quarter based on best available year-end tax
assumptions (income levels, deductions, credits, etc.) by legal
entity; adjusted in the following year after returns are filed,
with the tax accrual estimates being
trued-up to
the actual amounts claimed on the tax returns; and further
adjusted after examinations by taxing authorities have been
completed.
In accordance with
the interim reporting rules under ASC 740, a tax expense or
benefit is recorded every quarter to adjust our tax expense to
the estimated annual effective rate.
We have a net
deferred tax asset of $14.0 million. The net deferred tax
asset is the result of our recent acquisitions of Frontier
Natural Gas and Bangor Gas Company. We may continue to
depreciate approximately $82.0 million of their capital
assets using the useful lives and rates employed by those
companies, resulting in a potential future federal and state
income tax benefit of approximately $19.1 million over the
20 year period using applicable federal and state income
tax rates. Under Internal Revenue Code Section 382, our
ability to recognize tax deductions as a result of this tax
benefit will be limited during the first five years following
the acquisitions.
Following
ASC 740, our balance sheet at December 31, 2008
reflects a gross deferred tax asset of approximately
$19.0 million, offset by a valuation allowance of
approximately $7.5 million, resulting in a net deferred tax
asset associated with the acquisition of approximately
$11.5 million. The excess of the net deferred tax assets
received in the transactions over their respective purchase
prices has been reflected as an extraordinary gain of
approximately $6.8 million on our income statement for the
twelve months ended June 30, 2008 in accordance with the
provisions of ASC 805.
During the year
ended December 31, 2009, we conducted a study of the
deferred tax asset and valuation allowance, and based on our
updated earnings projections and more complete data from the
sellers tax returns, we determined that $2.8 million
of the valuation allowance related to federal taxes is no longer
needed but that the state portion should be increased by
$400,000. Accordingly, we reduced the valuation allowance to
approximately $5.1 million. In addition, we increased the
gross deferred tax asset to $19.1 million. As a result, the
net deferred tax asset increased to approximately
$14.0 million at December 31, 2009. Included in the
results of our corporate and other segment for the year ended
December 31, 2009 is the income tax benefit of
approximately $2.8 million related to the elimination of
the federal portion of the valuation allowance. An income tax
expense of $300,000 resulting from the increase in the state
portion of the valuation allowance partially offset by the
increase in the gross deferred tax asset is included in the
results of the Natural Gas Operations segment.
We cannot guarantee
that we will be able to generate sufficient future taxable
income to realize the $14.0 million net deferred tax asset
over the next 20 years. Management will reevaluate the
valuation allowance each year on completion of updated estimates
of taxable income for future periods, and will reduce the
deferred tax asset by the new valuation allowance if, based on
the weight of available evidence, it is more likely than not
that we will not realize some portion or all of the deferred tax
assets. If the
42
estimates indicate
that we are unable to use all or a portion of the net deferred
tax asset balance, we will record and charge a greater valuation
allowance to income tax expense. Our calculation of the
valuation allowance is based on projections of our taxable
income in future years. Based on these projections, we estimate
that the state tax portion of the benefit will result in large
net operating losses that may not be recoverable. Accordingly,
we have placed the valuation allowance of approximately
$5.1 million on this portion.
For the federal tax
portion, there are three years remaining of the five year
Internal Revenue Code limitation period discussed above. We
estimate that approximately 7% of the tax benefit will be
available to us during this three year period. Based on our
estimates of taxable income, we project that we will recover
approximately 92% of the benefit in the following nine years,
with 1% recovered in small increments in the remaining years.
Based on this analysis, we believe that a valuation allowance on
the federal portion of the benefit is not necessary. Failure to
achieve projected levels of profitability could lead to a
write-down in the deferred tax asset if the recovery period
becomes uncertain or longer than expected and could also lead to
the expiration of the deferred tax asset between now and 2029,
either of which would adversely affect our operating results and
financial position.
Goodwill
Goodwill represents
the excess of the purchase price over the fair value of
identifiable net tangible and intangible assets acquired in a
business combination. Goodwill is required to be tested for
impairment annually, which is completed in the fourth quarter,
or more frequently if events or changes in circumstances
indicate that goodwill may be impaired.
Annual Results
of Consolidated Operations
The following
discussion of financial condition and results of operations
should be read in conjunction with the Consolidated Financial
Statements and Notes thereto and other financial information
included elsewhere in this Annual Report. Effective
December 31, 2008, we changed our fiscal year end from June
30 to December 31. This change was made in order to align
our fiscal year end with other companies within the industry. In
order to provide a meaningful comparison with the calendar year
2009 results, the tables and discussion that follow compare the
results for the twelve months ended December 31 2009 with the
unaudited results of the twelve months ended December 31,
2008.
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in
thousands)
|
|
|
Consolidated Operations
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
$
|
71,454
|
|
|
$
|
87,278
|
|
Gas Purchased
|
|
|
46,699
|
|
|
|
63,506
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
24,755
|
|
|
|
23,772
|
|
Operating expenses
|
|
|
15,692
|
|
|
|
16,922
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
9,063
|
|
|
|
6,850
|
|
Other income (expense)
|
|
|
(976
|
)
|
|
|
(295
|
)
|
|
|
|
|
|
|
|
|
|
Income before interest and taxes
|
|
|
8,087
|
|
|
|
6,555
|
|
Interest (expense)
|
|
|
(1,241
|
)
|
|
|
(1,224
|
)
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
6,846
|
|
|
|
5,331
|
|
Income tax (expense)
|
|
|
(27
|
)
|
|
|
(1,985
|
)
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
6,819
|
|
|
|
3,346
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
Gain from disposal of operations
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
|
|
|
|
|
|
Income tax (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before extraordinary item
|
|
|
6,819
|
|
|
|
3,346
|
|
Extraordinary gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,819
|
|
|
$
|
3,346
|
|
|
|
|
|
|
|
|
|
|
43
Net
Income
Our net income for the year ended December 31, 2009 was
approximately $6.8 million, compared with net income of
approximately $3.3 million for the year ended
December 31, 2008, an increase of $3.5 million, or
106%. This increase was primarily the result of an increase in
the net income from our natural gas operations of
$1.6 million and from our corporate and other operations
segment of $2.8 million, offset by a decrease in net income
from our gas marketing and production operation of $950,000. The
increase in income in our corporate and other operations segment
was due primarily to the tax benefit realized from the reduction
of the valuation allowance on our deferred tax asset. (See
Note 3 to our Consolidated Financial Statements for further
discussion of the deferred tax asset). The principal changes
that contributed to the improvement in net income are explained
below.
Revenue
Our revenue for the year ended December 31, 2009 was
approximately $71.5 million compared with
$87.3 million in the year ended December 31, 2008, a
decrease of $15.8 million or 18%. The decrease was
primarily attributable to: (1) a natural gas revenue
decrease of $8.3 million, due to the significantly lower
index price of natural gas passed through to our customers in
2009 and partially offset by increased sales in our Maine market
and (2) a decrease in our marketing and production
operations revenue of $7.6 million, due also to
significantly lower prices for natural gas and to lower volumes
produced from our production operation.
Gross
Margin
Gross margin was approximately $24.8 million in the year
ended December 31, 2009 compared with $23.8 million in
the year ended December 31, 2008, an increase of $983,000,
or 4%. Our natural gas operations margins increased
$1.5 million, of which $1.2 million was due to sales
growth in our Maine market, and $194,000 was earned from two
months of operations from our Cut Bank acquisition. Gross margin
from our marketing and production operations decreased $500,000,
due to a $1.1 million decrease in margin from gas
production, a $100,000 decrease in mark to market revenue,
partially offset by a $700,000 increase in margin from gas
marketing.
Expenses Other
Than Cost of
Sales
Expenses other than cost of sales decreased by $1.2 million
to $15.7 million in the year ended December 31, 2009
from $16.9 million in the year ended December 31,
2008. The year ended December 31, 2008 included $441,000 of
costs related to an equity offering that was not completed. In
addition, the year ended December 31, 2008 included an
increase in expense for vacation accrual of approximately
$401,000 because of the accrual needed for vacation that would
accrue on January 1, 2009. In 2009, we changed our vacation
plan so that employees accrue vacation on a monthly basis,
resulting in a decrease in the accrual at December 31, 2009
of approximately $409,000. The end result was a decrease in
vacation accrual expense of approximately $810,000 when
comparing the year ended December 31, 2009 with the year
ended December 31, 2008.
Other Income
(Expense)
Other expense increased by $681,000 to a loss of $976,000 in the
year ended December 31, 2009 from a loss of $295,000 in the
year ended December 31, 2008. The increase was caused by
(1) an increased loss in our marketing and production
operations equity investment in Kykuit of approximately
$650,000 due to the write off of drilling costs related to dry
holes, (2) an increase in costs from our corporate and
other segment of $69,000, and (3) an offsetting increase in
other income in our natural gas operations of $38,000.
Interest
Expense
Interest expense remained constant at approximately
$1.2 million for the years ended December 31, 2009 and
2008.
Income Tax
Expense
Income tax expense decreased by approximately $2.0 million
to approximately $27,000 in the year ended December 31,
2009 from approximately $2.0 million in the year ended
December 31, 2008. During 2009, we performed a study of our
deferred tax asset related to the purchase of Frontier Natural
Gas and Penobscot Natural Gas. As discussed in Note 3 to
our Consolidated Financial Statements, we increased the gross
amount of the deferred tax asset by $100,000, reduced the
valuation allowance related to the federal portion of the
deferred tax asset by $2.8 million to zero and increased
the state portion of the valuation allowance by $400,000. The
net result was an income tax benefit of approximately
$2.5 million. Offsetting this was an increase due to
increased pre-tax income.
44
Annual Results
of our Natural Gas Operations
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in
thousands)
|
|
|
Natural Gas Operations
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
$
|
58,766
|
|
|
$
|
67,061
|
|
Gas Purchased
|
|
|
37,052
|
|
|
|
46,825
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
21,714
|
|
|
|
20,236
|
|
Operating expenses
|
|
|
14,663
|
|
|
|
15,585
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
7,051
|
|
|
|
4,651
|
|
Other income (expense)
|
|
|
254
|
|
|
|
216
|
|
|
|
|
|
|
|
|
|
|
Income before interest and taxes
|
|
|
7,305
|
|
|
|
4,867
|
|
Interest (expense)
|
|
|
(1,135
|
)
|
|
|
(1,057
|
)
|
|
|
|
|
|
|
|
|
|
Income before income and taxes
|
|
|
6,170
|
|
|
|
3,810
|
|
Income tax (expense)
|
|
|
(2,281
|
)
|
|
|
(1,491
|
)
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,889
|
|
|
$
|
2,319
|
|
|
|
|
|
|
|
|
|
|
Natural Gas
Revenue and Gross
Margin
Operating revenue for the year ended December 31, 2009
decreased to approximately $58.8 million from approximately
$67.1 million in the year ended December 31, 2008.
This $8.3 million decrease was due to the significantly
lower index price of natural gas passed through to our customers
in 2009, partially offset by revenue from increased sales
volumes in our Maine market.
Gas purchases in
natural gas operations decreased to approximately
$37.1 million for the year ended December 31, 2009
from approximately $46.8 million for the year ended
December 31, 2008. This $9.7 million decrease reflects
the significantly lower index price of natural gas.
Gross margin
increased to approximately $21.7 million for the year ended
December 31, 2009 from approximately $20.2 million for
the year ended December 31, 2008, an increase of
$1.5 million. Sales growth in our Maine market contributed
an increase in margin of approximately $1.2 million, with
our Great Falls, Montana and North Carolina markets contributing
the remainder of the increase. Two months of operations from our
Cut Bank Gas acquisition contributed $194,000 of gross margin in
2009.
Natural Gas
Operating
Expenses
Operating expenses decreased to approximately $14.7 million
for the year ended December 31, 2009 from
$15.6 million for the year ended December 31, 2008, a
decrease of approximately $900,000. Of the $810,000 decrease in
expense related to vacation accrual discussed above in
consolidated operations, approximately $805,000 was attributable
to natural gas operations. The remaining decrease was due to
lower costs for maintenance and taxes other than income taxes,
partially offset by an increase in depreciation expense.
Natural Gas Other
Income
Other income increased by $38,000 to approximately $254,000 in
the year ended December 31, 2009 from $216,000 for the year
ended December 31, 2008.
Natural Gas
Interest
Expense
Interest expense increased by $78,000 to approximately
$1.1 million for the year ended December 31, 2009 from
$1.1 million for the year ended December 31, 2008.
Natural Gas
Income Tax Benefit
(Expense)
Income tax expense increased by approximately $800,000 to
approximately $2.3 million for the year ended
December 31, 2009 from $1.5 million for the year ended
December 31, 2008, due to higher pre-tax income, and the
$400,000 increase to the state portion of the deferred tax asset
valuation allowance, offset by the $100,000 increase in the
gross deferred tax asset, discussed in Note 3 to our
Consolidated Financial Statements.
45
Annual Results
of our Marketing and Production Operations
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in
thousands)
|
|
|
Energy West Resources
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
$
|
12,239
|
|
|
$
|
19,808
|
|
Gas Purchased
|
|
|
9,648
|
|
|
|
16,681
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
2,591
|
|
|
|
3,127
|
|
Operating expenses
|
|
|
844
|
|
|
|
679
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
1,747
|
|
|
|
2,448
|
|
Other income (expense)
|
|
|
(687
|
)
|
|
|
(37
|
)
|
|
|
|
|
|
|
|
|
|
Income before interest and taxes
|
|
|
1,060
|
|
|
|
2,411
|
|
Interest (expense)
|
|
|
(89
|
)
|
|
|
(149
|
)
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
971
|
|
|
|
2,262
|
|
Income tax (expense)
|
|
|
(413
|
)
|
|
|
(758
|
)
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
558
|
|
|
$
|
1,504
|
|
|
|
|
|
|
|
|
|
|
With the sale of our
Arizona propane assets, we have reclassified our former propane
operation, Missouri River Propane, into our marketing and
production operations. This is a small unregulated propane
supply operation that provides propane to our affiliated
regulated company accounted for in our natural gas operations.
Results from this operation include a net loss of $25,000 and
net income of $4,000 for the years ended December 31, 2009
and 2008, respectively.
Marketing and
Production Revenue and Gross
Margins
Revenue in EWR decreased $7.6 million to $12.2 million
for the year ended December 31, 2009 from approximately
$19.8 million for the year ended December 31, 2008.
Retail gas and propane revenue decreased by approximately
$5.9 million, due to significantly lower index prices for
natural gas in 2009. Production revenue also decreased by
$1.3 million due to the significantly lower index prices
received for volumes produced and less volumes produced in 2009.
Our marketing and production operations gross margin of
approximately $2.6 million for the year ended
December 31, 2009 represents a decrease of approximately
$500,000 from gross margin of approximately $3.1 million
earned in the year ended December 31, 2008. Gross margin
from gas production decreased by $1.1 million due to the
significantly lower index prices received for volumes produced
and lower production volumes, and a decrease of $100,000 in mark
to market revenue. Gross margin from gas marketing increased by
$700,000, due to a more favorable cost of supply relative to our
sales contracts.
Marketing and
Production Operating
Expenses
Operating expenses increased approximately $165,000 to $844,000
for the year ended December 31, 2009 from $679,000 for the
year ended December 31, 2008. This change was caused by a
one-time payment made to the pipeline company that delivers much
of our gas supply for facilities improvements , along with
increases in salaries and employee benefits expense, employee
travel expenses, professional services, and depreciation and
depletion expense.
Marketing and
Production Other Income
(expense)
Other expense increased approximately $650,000 to approximately
$687,000 in the year ended December 31, 2009 from $37,000
for the year ended December 31, 2008. Our loss on equity
investment in Kykuit totaled $687,000 in 2009 due to the
write-off of drilling costs relating to dry holes, compared with
$37,000 in 2008.
Marketing and
Production Interest
Expense
Interest expense decreased by $60,000 to $89,000 in the year
ended December 31, 2009 from $149,000 in the year ended
December 31, 2008, due primarily to a decrease in short
term interest due to lower costs for gas placed in storage.
Marketing and
Production Income Tax
Expense
Income tax expense decreased to $413,000 in the year ended
December 31, 2009 from $758,000 in the year ended
December 31, 2008, due to lower taxable income.
46
Annual Results
of our Pipeline Operations
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in
thousands)
|
|
|
Pipeline Operations
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
$
|
450
|
|
|
$
|
409
|
|
Gas Purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
450
|
|
|
|
409
|
|
Operating expenses
|
|
|
177
|
|
|
|
217
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
273
|
|
|
|
192
|
|
Other income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before interest and taxes
|
|
|
273
|
|
|
|
192
|
|
Interest (expense)
|
|
|
(17
|
)
|
|
|
(18
|
)
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
256
|
|
|
|
174
|
|
Income tax (expense)
|
|
|
(99
|
)
|
|
|
(67
|
)
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
157
|
|
|
$
|
107
|
|
|
|
|
|
|
|
|
|
|
There were no
material changes in pipeline operations during the year ended
December 31, 2009 compared with the year ended
December 31, 2008, as illustrated in the table above.
Annual Results
of our Corporate and Other Operations
|
|
|
|
|
|
|
|
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(in thousands)
|
|
|
Corporate and Other
|
|
|
|
|
|
|
|
|
Operating revenue
|
|
$
|
|
|
|
$
|
|
|
Gas Purchased
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Margin
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
8
|
|
|
|
441
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
(8
|
)
|
|
|
(441
|
)
|
Other income (expense)
|
|
|
(543
|
)
|
|
|
(474
|
)
|
|
|
|
|
|
|
|
|
|
Income before interest and taxes
|
|
|
(551
|
)
|
|
|
(915
|
)
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
(551
|
)
|
|
|
(915
|
)
|
Income tax benefit (expense)
|
|
|
2,766
|
|
|
|
331
|
|
|
|
|
|
|
|
|
|
|
Income before extraordinary item
|
|
|
2,215
|
|
|
|
(584
|
)
|
|
|
|
|
|
|
|
|
|
Extraordinary gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,215
|
|
|
$
|
(584
|
)
|
|
|
|
|
|
|
|
|
|
47
During fiscal 2008,
corporate and other operations was created to accumulate revenue
and expenses that were not allocable to our utilities or other
operations. Therefore, it does not have standard revenue, gas
purchase costs, or gross margin.
For the year ended
December 31, 2009, corporate and other operations included
administrative expenses of $8,000, acquisition expenses of
$830,000, related primarily to the acquisition of Cut Bank Gas
and the Ohio companies, offset by interest and dividend income
of $190,000 and a recognized gain on the sale of marketable
securities of $97,000 for a total loss before income taxes of
$551,000. Also included in the year ended December 31, 2009
is the income tax benefit applicable to the above items of
$30,000. In addition, during 2009, we performed a study of our
deferred tax asset related to the purchase of Frontier Natural
Gas and Bangor Gas Company and determined that the valuation
allowance related to the federal portion of the deferred tax
asset was no longer needed. This resulted in an income tax
benefit of approximately $2.8 million. Please see
Note 3 to our Consolidated Financial Statements for further
discussion.
For the year ended
December 31, 2008, results of corporate and other
operations included $441,000 from an equity offering that did
not occur, acquisition expenses of $585,000 written off as part
of the transition to ASC 805, and offset by $50,000 of
interest and dividend income and $61,000 from recognized gains
on the sale of marketable securities, and the applicable income
tax benefit of $331,000.
Consolidated
Cash Flow Analysis for the Years Ended December 31, 2009
and 2008
Sources and Uses
of Cash at December 31, 2009 and 2008
Operating activities
provide our primary source of cash. Cash provided by operating
activities consists of net income (loss) adjusted for non-cash
items, including depreciation, depletion, amortization, deferred
income taxes, and changes in working capital.
Our ability to
maintain liquidity depends upon our $20.0 million credit
facility with Bank of America, shown as line of credit on the
accompanying balance sheets. Our use of the Bank of America
revolving line of credit was $14.7 million and
$17.6 million at December 31, 2009 and 2008,
respectively. This change in our cash position is primarily due
to decreased costs for gas put in storage, offset by increases
in our capital expenditures due to expansion in our North
Carolina and Maine markets.
We made capital
expenditures for continuing operations of $8.9 million and
$7.0 million for the years ended December 31, 2009 and
2008, respectively. We finance our capital expenditures on an
interim basis by the use of our operating cash flow and use of
the Bank of America revolving line of credit.
We periodically
repay our short-term borrowings under the Bank of America
revolving line of credit by using the net proceeds from the sale
of long-term debt and equity securities. Long-term debt was
$13.0 million at December 31, 2009, and 2008.
Cash increased to
$2,752,000 at December 31, 2009, compared with $1,065,000
at December 31, 2008. This $1.7 million increase in
cash for the year ended December 31, 2009 is compared with
the $840,000 decrease for the year ended December 31, 2008,
as shown in the following table:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
2009
|
|
2008
|
|
|
|
|
(unaudited)
|
|
Cash provided by (used in) operating activities
|
|
$
|
16,301,000
|
|
|
$
|
1,644,000
|
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided by investing activities
|
|
|
(9,185,000
|
)
|
|
|
(11,149,000
|
)
|
|
|
|
|
|
|
|
|
|
Cash (used in) provided by financing activities
|
|
|
(5,429,000
|
)
|
|
|
8,665,000
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash
|
|
$
|
1,687,000
|
|
|
$
|
(840,000
|
)
|
For the year ended
December 31, 2009, cash provided by operating activities
increased $14.7 million as compared with the year ended
December 31, 2008. Items affecting the use of cash included
a decrease in amounts paid for gas inventory of
$6.5 million, a $1.0 million decrease in payments of
accrued and other liabilities, an increase in accounts
receivable collections of $3.3 million, an increase in net
income of $3.5 million, a $2.4 million increase in
collections of recoverable costs of gas, and $600,000 in
investment impairments, partially offset by a $2.7 million
increase in net deferred tax assets.
For the year ended
December 31, 2009, cash used in investing activities
decreased by $2.0 million as compared with the year ended
December 31, 2008, primarily due to a decrease of
$2.9 million in the purchase of marketable securities.
Other changes include increased construction expenditures of
$1.8 million and an increase of $800,000 in sales of
marketable securities.
48
For the year ended
December 31, 2009, cash used by financing activities
decreased by $14.1 million as compared with the year ended
December 31, 2008. Line of credit proceeds decreased by
$8.2 million, while payments increased by
$5.9 million. Other offsetting changes included a decrease
in stock repurchases of $400,000 and an increase of $300,000 in
dividends paid.
Liquidity and
Capital Resources at December 31, 2009
We fund our
operating cash needs, as well as dividend payments and capital
expenditures, primarily through cash flow from operating
activities and short-term borrowing. Historically, to the extent
cash flow has not been sufficient to fund these expenditures; we
have used our working capital line of credit. We have greater
need for short-term borrowing during periods when internally
generated funds are not sufficient to cover all capital and
operating requirements, including costs of gas purchased and
capital expenditures. In general, our short-term borrowing needs
for purchases of gas inventory and capital expenditures are
greatest during the summer and fall months and our short-term
borrowing needs for financing customer accounts receivable are
greatest during the winter months.
Bank of America
Term Loans and Credit Facility
On June 29,
2007, we replaced our existing credit facility and long-term
notes with a new $20.0 million revolving credit facility,
and issued $13.0 million of 6.16% senior unsecured
notes. The prior Bank of America credit facility had been
secured, on an equal and ratable basis with our previously
outstanding long-term debt, by substantially all of our assets.
Long-term
Debt $13.0 million 6.16% Senior Unsecured
Notes On
June 29, 2007, we issued $13.0 million aggregate
principal amount of our 6.16% Senior Unsecured Notes, due
June 29, 2017. The proceeds of these notes were used to
refinance our existing notes. With this refinancing, we expensed
the remaining debt issue costs of $991,000 in fiscal 2007, and
incurred approximately $463,000 in new debt issue costs to be
amortized over the life of the new note.
Line of
Credit
On June 29, 2007, we established our new five-year
unsecured credit facility with Bank of America for
$20.0 million which replaced a previous one-year facility
with Bank of America for the same. The current credit facility
includes an annual commitment fee equal to 0.20% of the unused
portion of the facility and interest on amounts outstanding at
the London Interbank Offered Rate, plus 120 to 145 basis
points, for interest periods selected by us.
The following table
represents borrowings under the Bank of America revolving line
of credit for each of the fiscal quarters in the year ended
December 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31, 2009
|
|
|
|
First
|
|
|
Second
|
|
|
Third
|
|
|
Fourth
|
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Quarter
|
|
|
Minimum borrowing
|
|
$
|
5,595,000
|
|
|
$
|
|
|
|
$
|
3,600,000
|
|
|
$
|
9,950,000
|
|
Maximum borrowing
|
|
$
|
18,095,000
|
|
|
$
|
5,045,000
|
|
|
$
|
10,250,000
|
|
|
$
|
15,250,000
|
|
Average borrowing
|
|
$
|
11,987,000
|
|
|
$
|
2,002,000
|
|
|
$
|
7,654,000
|
|
|
$
|
12,351,000
|
|
Our
6.16% Senior Unsecured Note and Bank of America credit
facility agreements contain various covenants, which include,
among others, limitations on total dividends and distributions
made in the immediately preceding
60-month
period to 75% of aggregate consolidated net income for such
period, restrictions on certain indebtedness, limitations on
asset sales, and maintenance of certain
debt-to-capital
and interest coverage ratios. At December 31, 2009 and
2008, we believe we are in compliance with the financial
covenants under our debt agreements or have received waivers for
any defaults.
At December 31,
2009, we had approximately $2.8 million of cash on hand. In
addition, at December 31, 2009, we had $14.7 million
of borrowings under the $20.0 million Bank of America
revolving line of credit. Our short-term borrowings under our
line of credit during the year ended December 31, 2009 had
a daily weighted average interest rate of 3.25% per annum.
Our
6.16% Senior Unsecured Note and Bank of America credit
facility agreements contain various covenants, which include,
among others, limitations on total dividends and distributions
made in the immediately preceding
60-month
period to 75% of aggregate consolidated net income for such
period, restrictions on certain indebtedness, limitations on
asset sales, and maintenance of certain
debt-to-capital
and interest coverage ratios. At December 31, 2009 and
2008, we believe we are in compliance with the financial
covenants under our debt agreements or have received waivers for
any defaults.
49
Citizens Bank
Credit Facility
In connection with
our acquisition of our Ohio operations, NEO, Great Plains and
GPL each entered modifications/amendments to its credit facility
with Citizens Bank (the Citizens Credit Facility).
The Citizens Credit Facility consists of a revolving line of
credit and term loan to NEO, and two other term loans to Great
Plains and GPL respectively. Each amendment/modification was
initially effective as of December 1, 2009, but was later
modified to be effective as of January 5, 2010. Gas Natural
guarantees each loan. Our chairman and chief executive officer,
Richard M. Osborne, guarantees each loan both individually and
as trustee of the RMO Trust, and Great Plains guarantees
NEOs revolving line of credit and term loan as well as
GPLs term note.
Long-term
Debt $10.3 million 5.00% Senior Secured
Notes
NEOs,
Great Plains and GPLs term loans with Citizens Bank
are in the amounts of $7.8 million, $2.4 million and
$823,000 respectively. Each term note has a maturity date of
July 1, 2013 and bears interest at an annual rate of
30-day LIBOR
(Eurodollar) plus 400 basis points with an interest rate
floor of 5.00% per annum. Currently, the interest rate is 5.00%
per annum. The term notes require monthly payments of
approximately $63,000 in the aggregate.
Line of
Credit
NEOs
revolving credit line with Citizens Bank has a maximum credit
commitment of $2.1 million. The revolving line bears
interest at an annual rate of
30-day LIBOR
(Eurodollar) plus 400 basis points with an interest rate
floor of 5.00% per annum. Currently, the interest rate is 5.00%
per annum. The revolving line requires monthly interest payments
with the principal due at maturity, November 30, 2010.
The Citizens Credit
Facility requires Great Plains, GPL and NEO to maintain a debt
service coverage ratio of at least 1.25 to 1.0 measured
quarterly on a rolling four quarter basis. The Citizens Credit
Facility also requires NEO, Great Plains and GPL to maintain a
minimum net worth, on a combined basis, equal to the sum of
$1,815,000 plus 100% of net income less the pro-rata share of
any dividend paid to Gas Natural, measured on a quarterly basis
beginning with the quarter ended December 31, 2009. The
Citizens Credit Facility allows NEO, Great Plains and GPL Ohio
Companies a party thereto to pay dividends to Gas Natural if
those entities combined net worth (as defined in the
Citizens loan documents) after payment of any dividends would
not be less than $1,815,000 on a consolidated basis as
positively increased by 100% of net income as of the end of each
fiscal quarter and fiscal year.
At December 31,
2009, $2.1 million has been borrowed under the revolving
line of credit, $7.1 million under the NEO term loan,
$2.4 million under the Great Plains term loan and $813,000
under the GPL term loan.
Huntington Credit
Facility
On December 31,
2009, Orwell entered into an amended and restated short-term
credit facility with The Huntington National Bank, N.A. (the
Huntington Credit Facility). The Huntington Credit
Facility amends and restates the previous credit facility that
matured on November 30, 2009. The loan is secured by all of
the assets of Orwell. The Huntington Credit Facility is
guaranteed by Gas Natural, Lightning Pipeline, Mr. Osborne
individually and as Trustee of the RMO Trust, and certain
entities owned and controlled by Mr. Osborne.
Long-term
Debt
$4.6 Million Senior Secured Note The Huntington
Credit Facility includes a $4.6 million term note that
bears interest at an annual rate of
30-day LIBOR
(Eurodollar) plus 300 basis points with LIBOR floor of 1%
per annum. Currently, the interest rate is 4.00% per annum. The
term note requires monthly payments of approximately $35,000 and
matures on November 29, 2010.
Line of Credit
The Huntington Credit Facility also includes a $1.5 million
line of credit. The credit line bears interest at an annual rate
of 30-day
LIBOR (Eurodollar) plus 300 basis points with LIBOR floor
of 1% per annum. Currently, the interest rate is 4.00% per
annum. The credit line requires monthly interest payments with
the principal due at maturity, November 29, 2010.
The Huntington
Credit Facility requires Orwell to maintain a fixed charge
coverage ratio of at least 1 to 1 of EBITDA to the sum of
(i) scheduled principal payments on debt and capital
leases, plus (ii) interest expense, plus
(iii) federal, state and local income tax expense, plus
(iv) dividends and distributions, measured on a rolling
four quarter basis. The Huntington Credit Facility allows Orwell
to pay dividends to Gas Natural as long as the aggregate amount
of all dividends, distributions, redemptions and repurchases in
any fiscal year do not exceed 60% of net income (as defined in
the Huntington Credit Facility) of Orwell for each fiscal year.
At December 31, 2009, $1.5 million has been borrowed
under the credit line and $4.3 million under the term note.
The Huntington Credit Facility is also secured by a pledge of
$3.0 million in market value of Gas Natural stock by the
RMO Trust.
50
Combined Term
Loans and Credit Facilities
The
$14.7 million of borrowings at December 31, 2009,
leaves our borrowing capacity at $5.3 million. Including
the amounts related to the Ohio companies, we have
$18.3 million of borrowings and borrowing capacity of
$5.3 million. As discussed above, this level of borrowings
is due primarily to increased costs for gas put in storage,
increases in our capital expenditures due to expansion in our
North Carolina and Maine markets, and the acquisition of the
Ohio Companies.
As explained above,
the cash flow from our business is seasonal and the line of
credit balance in December normally represents the high point of
borrowings in our annual cash flow cycle. Our cash flow
increases and our borrowings decrease, beginning in January, as
monthly heating bills are paid and the gas we paid for and
placed in storage in the summer months is used to supply our
customers.
The total amount
outstanding under all of our long term debt obligations was
approximately $13.0 million at December 31, 2009, with
none being due within one year. Including the amounts related to
the Ohio companies, the total amount is approximately
$27.6 million, with approximately $5.1 million due
within one year.
Capital
Expenditures at December 31, 2009
We conduct ongoing
construction activities in all of our utility service areas in
order to support expansion, maintenance, and enhancement of our
gas pipeline systems. We are actively expanding our systems in
North Carolina and Maine to meet the high customer interest in
natural gas service in those two service areas. As indicated in
the table below, for the years ended December 31, 2009 and
2008, our total capital expenditures were approximately
$8.9 million and $7.0 million, respectively.
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
(unaudited)
|
|
|
|
(In thousands)
|
|
|
Natural Gas Operations
|
|
$
|
8,649
|
|
|
$
|
6,894
|
|
Energy West Resources
|
|
|
191
|
|
|
|
122
|
|
Pipeline Operations
|
|
|
|
|
|
|
4
|
|
Corporate and Other
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total capital expenditures
|
|
$
|
8,854
|
|
|
$
|
7,020
|
|
|
|
|
|
|
|
|
|
|
We fund our
operating cash needs, as well as dividend payments and capital
expenditures, primarily though cash flow from operating
activities and short-term borrowings. Historically, to the
extent cash flow has not been sufficient to fund these
expenditures, we have used our working capital line of credit.
Off-Balance-Sheet
Arrangements at December 31, 2009
We do not have any
off-balance-sheet arrangements, other than those currently
disclosed that have or are reasonably likely to have a current
or future effect on financial condition, changes in financial
condition, revenue or expenses, results of operations,
liquidity, capital expenditures or capital resources that is
material to investors.
New Accounting
Pronouncements
Recently
Adopted
Fair Value
Measurements
In September 2006, the FASB issued guidance that defines fair
value, establishes a framework and gives guidance regarding the
methods used for measuring fair value, and expands disclosures
about fair value measurements. This guidance was effective for
financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years. On January 1, 2008 we elected to implement this
guidance with the one-year deferral and the adoption did not
have a material impact on our financial position, results of
operations or cash flows. Beginning January 1, 2009, we
have adopted the provisions for non-financial assets and
nonfinancial liabilities that are not required or permitted to
be measured at fair value on a recurring basis.
51
Business
Combinations
In December 2007, the FASB issued new guidance on business
combinations which requires an acquirer to recognize and measure
the assets acquired, liabilities assumed and any non-controlling
interests in the acquiree at the acquisition date, measured at
their fair values as of that date, with limited exception. In
addition, the new guidance requires that acquisition-related
costs will be generally expensed as incurred and also expands
the disclosure requirements for business combinations. The
effective date of this new guidance is for years beginning after
December 15, 2008 and we have adopted it on our
consolidated financial statements, effective January 1,
2009. In addition, we have recorded as expense in the year
ending December 31, 2009, and the six months ending
December 31, 2008 $662,000 and $585,000, respectively of
acquisition costs related to acquisitions in progress as part of
the transition to the new guidance.
Non-controlling
Interests
In December 2007, the FASB issued new guidance establishing
standards of accounting and reporting on non-controlling
interests in consolidated financial statements. Also provided is
guidance on accounting for changes in the parents
ownership interest in a subsidiary, and standards of accounting
of the deconsolidation of a subsidiary due to the loss of
control. The effective date of this guidance is for fiscal years
beginning after December 15, 2008. We have adopted the
guidance on our consolidated financial statements, effective
January 1, 2009, and the implementation did not have a
material impact on our consolidated financial statements.
Derivative
Instruments and Hedging
Activities
In March 2008, the FASB released new guidance which amends and
expands previous disclosure requirements for derivative
instruments and hedging activities and requires qualitative
disclosures about objectives and strategies for using
derivatives, quantitative disclosures about fair value amounts
of gains and losses on derivative instruments, and disclosures
about credit-risk-related contingent features in derivative
agreements. The new guidance is effective for financial
statements issued for fiscal periods beginning after
November 15, 2008. We implemented the guidance on
January 1, 2009, and the implementation did not have a
material impact on our consolidated financial statements.
Interim Fair
Value Disclosures
In April
2009, the FASB issued new guidance on interim disclosures about
fair value of financial instruments which requires that
disclosures regarding the fair value of financial instruments be
included in interim financial statements. This new guidance was
effective for interim periods ending after June 15, 2009.
We adopted this guidance for the period ending June 30,
2009.
Other-Than-Temporary
Impairments
In April 2009, the FASB also issued released new guidance on
presentation of
other-than-temporary
impairments which changes the method for determining whether an
other-than-temporary
impairment exists for debt securities, and also requires
additional disclosures regarding
other-than-temporary
impairments. This new guidance is effective for interim and
annual periods ending after June 15, 2009. We implemented
the guidance on July 1, 2009, and the implementation did
not have a material impact on our consolidated financial
statements.
Accounting
Standards Codification
(Codification)
In June 2009, the FASB established the Codification as the
source of authoritative generally accepted accounting principles
recognized by the FASB. All existing accounting standards are
superseded, aside from those issued by the SEC. All other
accounting literature not included in the Codification is
considered
non-authoritative.
We adopted the Codification as of September 30, 2009, which
is reflected in our disclosures and references to accounting
standards, with no impact to our financial position or results
of operations.
Earnings Per
Share
In
September 2009, the FASB issued guidance that provided
corrections to various parts of the Codification regarding EPS.
The guidance is effective immediately upon being issued. The
initial adoption of this guidance did not have an impact on the
consolidated earnings or financial position of the Company as
the update amended the reference between the Codification and
pre-Codification references.
Subsequent
Events
In May 2009, the FASB issued subsequent events guidance which
establishes standards of accounting for and disclosure of events
that occur after the balance sheet date but before financial
statements are issued or are available to be issued. In addition
it requires disclosure of the date through which the Company has
evaluated subsequent events and whether it represents the date
the financial statements were issued or were available to be
issued. This guidance was effective for the Company on
June 30, 2009. The adoption of the subsequent events
guidance did not have a material effect on the Companys
financial position or results of operations.
Recently
Issued
Consolidation of
Variable Interest
Entities
In June 2009, the FASB issued new guidance on consolidation of
variable interest entities. The guidance will significantly
affect various elements of consolidation under existing
accounting standards, including the determination of whether an
entity is a variable interest entity and whether an enterprise
is a variable interest entitys primary
52
beneficiary. This
new guidance is effective for interim and annual periods
beginning after November 15, 2009. We do not expect the
implementation of the guidance to have a material impact on our
consolidated financial statements.
Fair Value
Measurement
Disclosures
In January 2010, the FASB issued Fair Value Measurements and
Disclosures (Topic 820) Improving Disclosures about
Fair Value Measurements (ASU
No. 2010-06),
which will update the Codification to require new disclosures
for assets and liabilities measured at fair value. The
requirements include expanded disclosure of valuation
methodologies for Level 2 and Level 3 fair value
measurements, transfers in and out of Levels 1 and 2, and
gross rather than net presentation of certain changes in
Level 3 fair value measurements. The updates to the
Codification contained in ASU
No. 2010-06
are effective for interim and annual periods beginning after
December 15, 2009, except for requirements related to gross
presentation of certain changes in Level 3 fair value
measurements, which are effective for interim and annual periods
beginning after December 15, 2010. We do not expect the
implementation of the guidance to have a material impact on our
consolidated financial statements.
Quantitative and
Qualitative Disclosures about Market Risk
We are subject to
certain market risks, including commodity price risk (i.e.,
natural gas and propane prices) and interest rate risk. The
adverse effects of potential changes in these market risks are
discussed below. The sensitivity analyses presented do not
consider the effects that such adverse changes may have on
overall economic activity nor do they consider additional
actions management may take to mitigate our exposure to such
changes. Actual results may differ. See the notes to the
financial statements for a description of our accounting
policies and other information related to these financial
instruments.
Commodity
Price Risk
We seek to protect
ourselves against natural gas price fluctuations by limiting the
aggregate level of net open positions that are exposed to market
price changes. We manage open positions with policies designed
to limit the exposure to market risk, with regular reporting to
management of potential financial exposure. Our Risk Management
Committee has limited the types of contracts we will consider to
those related to physical natural gas deliveries. Therefore,
management believes that our results of operations are not
significantly exposed to changes in natural gas prices.
Interest Rate
Risk
Our results of
operations are affected by fluctuations in interest rates (e.g.
interest expense on debt). We mitigate this risk by entering
into long-term debt agreements with fixed interest rates. Some
of our notes payable, however, may be subject to variable
interest rates that we may mitigate by entering into interest
rate swaps. A hypothetical 100 basis point change in market
rates applied to the balance of the notes payable would change
our interest expense by approximately $181,000 annually.
Credit
Risk
Credit risk relates
to the risk of loss that we would incur as a result of
non-performance by counterparties of their contractual
obligations under various instruments with us. Credit risk may
be concentrated to the extent that one or more groups of
counterparties have similar economic, industry or other
characteristics that would cause their ability to meet
contractual obligations to be similarly affected by changes in
market or other conditions. In addition, credit risk includes
not only the risk that a counterparty may default due to
circumstances relating directly to it, but also the risk that a
counterparty may default due to circumstances which relate to
other market participants that have a direct or indirect
relationship with such counterparty. We seek to mitigate credit
risk by evaluating the financial strength of potential
counterparties. However, despite mitigation efforts, defaults by
counterparties may occur from time to time. To date, no such
default has occurred.
Equity Price
Risk
Equity securities
are subject to equity price risk, which is defined as the
potential for loss in market value due to a decline in equity
prices. The value of common stock equity investments is
dependent upon the general conditions in the securities markets
and the business and financial performance of the individual
companies in the portfolio. Values are typically based on future
economic prospects as perceived by investors in the equity
markets. We regularly review the carrying value of our
investments and identify and record losses when events and
circumstances indicate that such declines in the fair value of
such assets below our accounting basis are
other-than-temporary.
For additional discussion of our equity securities, see
Note 2 to the unaudited financial statements included
herein.
53
MANAGEMENT
The following table
sets forth the names, ages and positions of our directors and
executive officers.
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Name
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Age
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Position
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Director
or Officer Since
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W.E. Gene Argo
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68
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Director
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2002
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Terence P. Coyne
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40
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Director
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2010
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Gregory J. Osborne
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31
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Director
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2009
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Richard M. Osborne
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64
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Chief Executive Officer, Chairman of the Board and Director
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2003
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James R. Smail
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63
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Director
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2007
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Thomas J. Smith
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66
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Chief Financial Officer and Director
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2003
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Michael T. Victor
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48
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Director
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2008
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Kevin J. Degenstein
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51
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President and Chief Operating Officer
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2007
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Jed D. Henthorne
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50
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Vice President of Administration
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1998
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David C. Shipley
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49
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Vice President of Operations
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2007
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Directors
W. E.
Gene Argo
has been
a director since 2002. He retired in 2004 as the president and
general manager of Midwest Energy, Inc., a gas and electric
cooperative in Hays, Kansas, in which capacity he had served
since 1992. Over the course of Mr. Argos long tenure
on our board, he has developed a detailed knowledge and
understanding of Gas Natural and he provides our board with
continuity that contributes to our long term success. His past
experience in energy and utility related industries also imparts
insight into our industry.
Terence P. Coyne
has been
a commercial real estate broker with Grubb & Ellis, a
publicly traded commercial real estate services firm, since
1996, representing parties in the acquisition and disposition of
commercial real estate. From 2006 to August 2009 he was a
director of John D. Oil and Gas Company, a publicly-held oil and
gas exploration company in Mentor, Ohio. Mr. Coynes
past service on the board of a publicly-held company in a
related industry provides him with background on various issues
applicable to our company and, as a newcomer to our board, we
believe he will bring a fresh perspective to our longer-tenured
directors.
Gregory J.
Osborne
has
served as a director since September 2009. He has been president
and chief operating officer of John D. Oil and Gas Company, a
publicly-held oil and gas exploration company, since April 2006
and a director of John D. Oil and Gas Company since February
2006. From 2003 until joining John D. Oil and Gas Company, he
was president of Great Plains Exploration LLC, an oil and gas
exploration company based in Mentor, Ohio that owns and operates
oil and gas wells. From 2001 until joining Great Plains, he
served as executive vice president of Orwell Natural Gas
Company, a regulated gas public utility company operating in
Ohio that we acquired in January, 2010. He is a director of
Corning Natural Gas Corporation, a publicly-held public utility
company in Corning, New York, and a trustee of the Ohio Oil and
Gas Association. He is the son of Richard Osborne, our chairman
and chief executive officer. Gregory Osbornes managerial
experience and service on the board of various energy related
companies provides our board with a wide range of industry
specific knowledge.
Richard M.
Osborne
has been
a director since 2003, chairman of the board since 2005 and
chief executive officer since November 2007. He is the president
and chief executive officer of OsAir, Inc., a company he founded
in 1963, which operates as a property developer and manufacturer
of industrial gases for pipeline delivery, and chairman of each
of Northeast Ohio Natural Gas Corporation and Orwell Natural Gas
Company, natural gas distribution companies acquired by us in
January 2010. Since 1998, Mr. Osborne has been chairman of
the board, chief executive officer and a director of John D. Oil
and Gas Company, a publicly-held oil and gas exploration company
in Mentor, Ohio. From 2006 to February 2009 he was a director of
Corning Natural Gas Corporation, a publicly-held public utility
company in Corning, New York and from September 2008 to January
2009 he was a director of PVF Capital Corp., a publicly held
holding company for Park View Federal Savings Bank in Solon,
Ohio. Richard Osbornes background as chairman and chief
executive officer of various public companies and many years of
experience owning and managing companies in energy and utility
related industries provides our board with invaluable management
and operational direction as well as a unique insight in
considering growth opportunities for the Company.
Thomas J. Smith
has
served as a director since December 2003 and was appointed our
vice president and chief financial officer in November 2007. He
also served as our interim president from August 2007 to
November 2007. From 1998 to 2006, he was the president, chief
operating officer and a director of John D. Oil and Gas Company,
a publicly-held oil and gas exploration company in Mentor, Ohio,
of which he remains a director. Since 2003, he has been
president, treasurer, and secretary of NEO, and since
54
2002 he has been
president, treasurer and secretary of Orwell, natural gas
distribution companies acquired by us in January 2010. He is
also a director of Corning Natural Gas Corporation, a public
utility company in Corning, New York. From November 2009 to
April 2010, he was a director of PVF Capital Corp., a
publicly-held holding company for Park View Federal Savings Bank
in Solon, Ohio. Mr. Smiths financial and disclosure
experience gained as the chief financial officer of
publicly-held companies, including Gas Natural, as well as his
experience as a director of energy and utility related companies
provides extensive specialized knowledge and expertise to our
board.
James R. Smail
has been
a director since 2007. For the past thirty years, he has served
as chairman of the board of J.R. Smail, Inc., an oil and gas
production company he founded. He is also the chairman of the
board and owner of The Monitor Bank of Big Prairie, Ohio, an
Ohio state-chartered commercial bank and a director of National
Bancshares Corporation, a publicly-held holding company for
First National Bank in Orrville, Ohio. From June 2008 to
February 2009 he was a director of Ohio Legacy Corp., a
publicly-held holding company for Premier Bank &
Trust, N.A. in North Canton, Ohio, and from 2007 to August 2009
he was a director of John D. Oil and Gas Company, a
publicly-held oil and gas exploration company in Mentor, Ohio.
Mr. Smails experience in finance and accounting
gained as chairman and a director in the banking industry and
his knowledge of compliance matters gained as a director of a
public company are highly beneficial to our board.
Michael T. Victor
has
served as a director since December 2008. Since 2006, he has
been the president of Lake Erie College, a private liberal arts
college located in Painesville, Ohio. From 2002 through 2005, he
served as dean of the Walker School of Business, Communication
and Hotel, Restaurant and Institutional Management at Mercyhurst
College, a private liberal arts college located in Erie,
Pennsylvania. Mr. Victor also serves as a trustee of the
Ohio Foundation of Independent Colleges and Universities.
Mr. Victors executive and managerial roles in
academia enable him to add a unique perspective and insight to
our boards discussions.
Executive
Officers
Kevin J.
Degenstein
was
appointed our president and chief operating officer in June
2008. Previously, he served as our senior vice president of
operations since 2006. Prior to joining us, Mr. Degenstein
was employed by EN Engineering, an engineering consulting firm,
as vice president of distribution from 2002 until 2003 and vice
president of technology from 2004 until 2006. From 1982 through
2001 Mr. Degenstein held various operating positions at
Nicor Gas, a natural gas utility in Illinois, including Chief
Engineer. He is a Registered Professional Engineer.
Jed D. Henthorne
was
appointed vice president of administration in 2006. He has been
employed by us since 1988 and has served in professional and
management capacities related to customer service, information
technology and accounting.
David C. Shipley
has
served as our vice president of eastern operations since May
2007. He also serves as president of our east coast companies in
Maine and North Carolina. Prior to joining us, Mr. Shipley
was employed by Nicor Gas, a natural gas utility in Illinois,
from 1985 to 2007 serving in various management capacities
including management and supervision of underground natural gas
storage, construction and maintenance, customer service field
operations, research and development, quality control, workload
management, alliance development and procurement.
Director
Independence
The board of
directors has determined and confirmed that each of
Mr. Argo, Mr. Coyne, Mr. Smail, and
Mr. Victor do not have a material relationship with Gas
Natural that would interfere with the exercise of independent
judgment and are independent pursuant to applicable laws and
regulations and the listing standards of the NYSE Amex.
Incorporation by
Reference
Information
regarding executive compensation, director compensation, board
matters and transactions with related persons required by
Item 11 of
Form S-1
is incorporated by reference to our Proxy Statement on
Schedule 14A filed by us with the SEC on May 27, 2010
. See Incorporation of Certain Information By
Reference beginning at page 62.
55
PRINCIPAL AND
SELLING SHAREHOLDERS
The following table
sets forth, as of June 25, 2010, information regarding the
beneficial ownership of our common stock by
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each shareholder
known by us to be the beneficial owner of more than 5% of the
stock,
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each director and
director nominee,
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the Selling
Shareholder,
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each executive
officer listed in the summary compensation table of our proxy
statement,
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all our current
directors and officers as a group.
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The information
contained in this table does not include 375,000 shares of
our common stock issuable pursuant to the underwriters
over-allotment and 130,500 shares reserved for issuance
under our stock options plans.
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Beneficial
Ownership(1)
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Total Shares
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Percentage
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Shares
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Percentage
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Common
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Stock
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Owned Prior to
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Prior to
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Shares
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Owned After
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After
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Names
and
Address(2)
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Stock
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Options(3)
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the
Offering
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Offering
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Offered(8)
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Offering(8)
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Offering(8)
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Richard M.
Osborne(4)
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2,422,271
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2,422,271
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39.9
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%
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1,000,000
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1,422,271
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18.8
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%
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Thomas J. Smith
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88,619
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88,619
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1.5
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%
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88,619
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1.2
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%
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James R.
Smail(5)
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32,550
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32,550
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*
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32,550
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*
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Ian J. Abrams
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9,877
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9,877
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*
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9,877
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*
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Michael T.
Victor(6)
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5,800
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5,800
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*
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5,800
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*
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Terence P. Coyne
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4,050
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4,050
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*
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4,050
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*
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W.E. Gene Argo
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1,275
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1,275
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*
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1,275
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*
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Kevin J.
Degenstein(7)
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370
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7,500
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7,870
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*
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7,870
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*
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David C.
Shipley(7)
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118
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118
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*
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118
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*
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Gregory J. Osborne
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All directors, nominees and executive officers as a group (10
individuals)
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2,564,930
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7,500
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2,572,430
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42.3
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%
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1,000,000
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1,572,430
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20.7
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%
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*
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Less
than 1%
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(1)
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Unless
otherwise indicated, we believe that all persons named in the
table have sole investment and voting power over the shares of
stock owned.
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(2)
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Unless
otherwise indicated, the address of each of the beneficial
owners identified is
c/o Gas
Natural Inc., 1 First Avenue South, Great Falls, Montana 59401.
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(3)
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Shares
of common stock the beneficial owners have the right to acquire
through stock options that are or will become exercisable within
60 days.
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(4)
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Shares
owned by Richard M. Osborne, Trustee.
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(5)
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Shares
are held by J.R. Smail, Inc., an Ohio corporation of which
Mr. Smail is chairman and sole shareholder.
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(6)
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Shares
are held by Michael T. Victor Revocable Trust HDI U/A DTD
12/15/2000.
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(7)
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Shares
of common stock are held in our 401(k) plan. Pursuant to the
terms of the plan, each participant has the right to direct the
voting of the shares held by the plan.
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(8)
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The
Selling Shareholder will sell up to 1,000,000 shares in
this offering. The numbers below assume the sale of
1,000,000 shares by the Selling Shareholder.
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For information on
the relationship of the Selling Shareholder to the Company,
please refer to Management at page 54 of this
prospectus.
56
DESCRIPTION OF
CAPITAL STOCK
Common
Stock
General
Our articles of
incorporation provide that we are authorized to issue
15.0 million shares of common stock, par value $0.15 per
share, and 1.5 million shares of preferred stock, par value
$0.15 per share.
Voting
Rights
The holders of our
common stock are entitled to one vote per share on all matters
to be voted upon by our shareholders, including the election of
directors. Cumulative voting is not permitted in the election of
directors.
Dividend
Rights
Subject to
preferences that may apply to shares of preferred stock
outstanding at the time, the holders of outstanding shares of
our common stock are entitled to receive dividends out of funds
legally available if our board of directors, in its discretion,
determines to issue dividends and only then at the times and in
the amounts that our board of directors may determine.
Liquidation
Rights
In the event of our
liquidation, dissolution, or winding up, our common shareholders
receive ratably any net assets that remain after the payment of
all of our debts and other liabilities, subject to the senior
rights of any preferred stock then outstanding.
Other
Our shares of common
stock are not convertible into any other security and do not
have any preemptive rights, conversion rights, redemption rights
or sinking fund provisions. The rights, preferences and
privileges, including voting rights, of holders of our common
stock are subject to, and may be adversely affected by, the
rights of the holders of shares of preferred stock that the
board may designate and issue in the future. There are currently
no preferred shares outstanding. All of our outstanding shares
of common stock are fully paid and non-assessable.
Preferred
Stock
We are authorized to
issue up to 1.5 million shares of preferred stock, in one
or more series with such designations, relative rights,
preferences, voting rights, limitations, dividend rates,
redemption prices, liquidation prices, conversion rights,
sinking or purchase fund rights, and other provisions as the
board may fix or determine. Any series of preferred stock may
have rights and privileges superior to those of common stock.
No shares of
preferred stock have been issued to date, nor do we have any
currently designated shares of preferred stock. We currently
have no plans to issue any shares of preferred stock.
Anti-takeover
Effects of Certain Provisions of Our Articles of Incorporation,
Code of Regulations and the Ohio General Corporation
Law
The provisions of
our articles of incorporation and code of regulations and of
Ohio law summarized below may have the effect of discouraging,
delaying or preventing a hostile takeover, including one that
might result in a premium being paid over the market price of
our common stock, and discouraging, delaying or preventing
changes in the control or management of our company.
Articles of
Incorporation and Code of Regulations
No Cumulative
Voting. Where
cumulative voting is permitted in the election of directors,
each share is entitled to as many votes as there are directors
to be elected and each shareholder may cast all of its votes for
a single director nominee or distribute them among two or more
director nominees. Thus, cumulative voting makes it easier for a
minority shareholder to elect a director. Our articles of
incorporation deny shareholders the right to vote cumulatively.
Authorized But
Unissued
Shares. Our
articles of incorporation permit the board to authorize the
issuance of preferred stock, and to designate the rights and
preferences of our preferred stock, without obtaining
shareholder approval. One of the effects of undesignated
preferred stock may be to enable the board to render more
difficult or to discourage a third partys attempt to
obtain control of Gas Natural by means of a tender offer, proxy
contest, merger, or otherwise. The issuance of shares of
preferred stock
57
also may discourage
a party from making a bid for the common stock because the
issuance may adversely affect the rights of the holders of
common stock. For example, preferred stock that we issue may
rank prior to the common stock as to dividend rights,
liquidation preference, or both, may have special voting rights
and may be convertible into shares of common stock. Accordingly,
the issuance of shares of preferred stock may discourage bids
for our common stock or may otherwise adversely affect the
market price of our common stock.
Advance Notice
Requirements for Shareholder Proposals and Director
Nominations. Our
code of regulations provides that shareholders seeking to bring
business before, or nominate candidates for election as
directors at, meetings of shareholders must provide timely
notice to us in writing. To be timely for an annual meeting, a
shareholders notice must be received at our principal
office not less than 60 days nor more than 120 days
prior to the first anniversary date of the previous years
annual meeting. Our code of regulations also prescribes the
information required in a shareholders notice. These
provisions may preclude shareholders from bringing business
before, or making nominations for directors at, meetings of
shareholders.
Ohio
Law
Merger Moratorium
Statute. Chapter 1704
of the Ohio Revised Code, entitled Interested Shareholder
Transactions Law and more commonly known as the Merger
Moratorium Statute, generally prohibits a wide range of business
combinations and other transactions between a publicly-traded
Ohio corporation and any person that owns shares representing at
least 10% of the voting shares outstanding for three years after
the person crosses the 10% threshold, unless prior to crossing
the threshold:
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1)
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the board approved
for purposes of Chapter 1704 the acquisition that resulted
in the interested shareholder crossing the 10% threshold; or
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2)
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the board approved
the business combination or other affected transaction.
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The Merger
Moratorium Statute was designed to prevent many of the
self-dealing activities that often accompany highly leveraged
acquisitions by preventing an interested shareholder from using
the Ohio corporation or its assets or shares for its special
benefit without prior board approval. In adopting this statute,
Ohio intended to encourage potential acquirers to negotiate with
the board of directors of any Ohio corporation to ensure that
the shareholders receive fair and equitable consideration for
their shares. However, because of (1) the three year
moratorium and the requirement for the approval of the business
combination or other affected transaction even after the
moratorium period, and the fact that (2) the moratorium may
not be lifted regardless of the amount of voting stock acquired
and regardless of whether a significant percentage of the
shareholders approve of the business combination or other
transaction, the Merger Moratorium Statute could deter a
potential acquirer from making a takeover offer, particularly a
hostile offer.
Control Share
Acquisition
Statute. In
addition to the Merger Moratorium Statute, Ohio has adopted Ohio
Revised Code Section 1701.831, known as the Control Share
Acquisition Statute. The Control Share Acquisition Statute
requires shareholder approval of any acquisition, directly or
indirectly, by any person, of shares that, together with shares
already owned, would entitle the person to exercise more than
20%,
331/3%
or 50% of the total voting shares outstanding. The control share
acquisition must be approved in advance by the holders of:
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1)
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at least a majority
of the outstanding voting shares represented at a meeting at
which a quorum is present; and
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2)
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the holders of a
majority of the portion of the voting shares outstanding
represented at the meeting, excluding voting shares:
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a)
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owned by the
acquiring shareholder,
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b)
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owned by officers
and
employee-directors
of the corporation, or
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c)
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that are acquired
between the date of the first public disclosure of the proposed
control share acquisition and the record date of the meeting to
approve the proposed control share acquisition if (1) the
owner of such shares paid consideration that exceeds $250,000 or
(2) the number of shares acquired exceeds 0.5% of the
voting shares outstanding.
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The stated purpose
of Ohios Control Share Acquisition Statute is to give
shareholders of an Ohio public corporation a reasonable
opportunity to express their views on a proposed shift in
control and in that way to reduce the coercion inherent in an
unfriendly
58
takeover. However,
because of the shareholder vote requirement and the potential
difficulties in obtaining the required vote, the Control Share
Acquisition Statute could deter a potential acquirer from making
a takeover offer.
Ohio Natural Gas
Utility Control Bid
Statute. Another
control bid statute (apart from the Control Share Acquisition
Statute) applies only to hostile control bids for securities of
natural gas companies or their parent holding companies.
Section 4905.403 of the Ohio Revised Code, applies to any
offer to purchase from an Ohio resident, by a tender offer or
otherwise, equity securities of a natural gas company in
Ohio that is a public utility, or equity securities of a holding
company that controls such a gas company, if after the purchase
the offeror would be the direct or indirect beneficial owner of
over 10% of a class of equity securities of the gas company or
parent holding company. Section 4905.403 only applies to
hostile bids. It does not apply to acquisitions if the target
companys directors approved the acquisition before the
bidder became the owner of more than 10% of any class of the
targets equity securities.
If a control bid is
covered by the statute, the offeror must file the bid with the
PUCO at the time it is made. Within three days of the filing,
the PUCO must fix a time for a hearing on whether the
acquisition will promote public convenience in Ohio and will
result in adequate natural gas service in Ohio by the company at
a reasonable rate. Within 20 days of the filing (or a later
date agreed to by both the bidder and the target), the PUCO is
to issue a public report on its findings. The statute does not
permit the PUCO to suspend the control bid. Essentially the
legislation require companies to explain on the record how their
hostile takeover bids would benefit Ohio consumers, businesses
and communities. Section 4905.403 attempts to protect Ohio
consumers through disclosure and public awareness of the control
bids impact.
Other Provisions
of Ohio
Law. Section 1707.043
of the Ohio Revised Code provides a corporation, or in certain
instances the shareholders of the corporation, a cause of action
to recover profits realized under certain circumstances by
persons who dispose of securities of the corporation within
18 months after proposing to acquire the corporation. Also,
Section 1707.041 of the Ohio Revised Code imposes advance
filing and notice requirements for tender offers for more than
10% of certain Ohio corporations.
59
UNDERWRITING
Janney Montgomery
Scott LLC and
are the underwriters. Subject to the terms and conditions of the
underwriting agreement dated
,
2010, the underwriters have agreed to purchase, and we and the
Selling Shareholder have agreed to sell to the underwriters, the
number of shares of common stock set forth opposite their
respective names below at the public offering price less the
underwriting discount on the cover page of this prospectus.
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Underwriters
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Number
of Shares
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Janney Montgomery Scott LLC
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Total
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2,500,000
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The underwriting
agreement provides that obligations of the underwriters to
purchase the shares of common stock that are being offered are
subject to the approval of certain legal matters by counsel to
the underwriters and to certain other conditions. Each
underwriter is obligated to purchase all of the shares of common
stock being offered by this prospectus (other than shares of
common stock covered by the over-allotment option described
below) if it purchases any of the shares of common stock.
The underwriters
propose to offer some of the shares of common stock to the
public initially at the offering price per share shown on the
cover page of this prospectus and may offer shares to certain
dealers at such price less a concession not in excess of
$ per share. The
underwriters may allow, and such dealers may re-allow, a
concession not in excess of
$ per share to certain
other dealers. After the public offering of the shares of common
stock, the public offering price and the concessions may be
changed by the underwriters.
The following table
shows the per share and total underwriting discount to be paid
to the underwriters by us and the Selling Shareholder. These
amounts are shown assuming both no exercise and full exercise of
the underwriters option to purchase the over allotment
shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per
Share
|
|
|
Total
|
|
|
|
Without
|
|
|
With
|
|
|
Without
|
|
|
With
|
|
|
|
Over-allotment
|
|
|
Over-allotment
|
|
|
Over-allotment
|
|
|
Over-allotment
|
|
|
Underwriting discounts and commissions to be paid by us
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting discounts and commissions to be paid by the Selling
Shareholder
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
We estimate that our
out-of-pocket
expenses for this offering, including the non-accountable
expense allowance equal to $50,000 to be paid to the
underwriters, will be approximately
$ .
We have granted to
the underwriters an option, exercisable for up to 30 days
after the date of this prospectus, to purchase up to 375,000
additional shares of common stock, at the same price per share
as the public offering price, less the underwriting discounts
and commissions shown on the cover page of this prospectus. The
underwriters may exercise such option in whole or in part only
to cover over-allotments in the sale of shares of common stock
offered by this prospectus. To the extent the underwriters
exercise this option, each of the underwriters has a firm
commitment, subject to certain conditions, to purchase a number
of the additional shares of common stock proportionate to such
underwriters initial commitment as indicated in the table
above that lists the underwriters.
In connection with
this offering and in compliance with applicable securities laws,
the underwriters may over-allot (i.e., sell more shares of
common stock than is shown on the cover page of this prospectus)
and may effect transactions that stabilize, maintain or
otherwise affect the market price of the shares of common stock
at levels above those which might otherwise prevail in the open
market. Such transactions may include making short sales and
placing bids for the shares of common stock or effecting
purchases of the shares of common stock for the purpose of
pegging, fixing or maintaining the price of the shares of common
stock or for the purpose of reducing a short position created in
connection with the offering. A short position may be covered by
exercise of the over-allotment option described above in place
of or in addition to open market purchases.
Additionally, the
underwriters may engage in syndicate covering transactions,
which involve purchases of shares of common stock in the open
market after the distribution has been completed in order to
cover syndicate short positions. In determining the source of
shares to close out a covered short sale, the underwriters will
consider, among other things, the open market price of shares
compared with the price available under the over-allotment
option.
60
The underwriters may
also sell shares in excess of the over-allotment option,
creating a naked short position. The underwriters must close out
any naked short position by purchasing shares in the open
market. A naked short position is more likely to be created if
the underwriters are concerned that there may be downward
pressure on the price of the common stock in the open market
after pricing that could adversely affect investors who purchase
in the offering.
The underwriters may
also impose a penalty bid. Penalty bids permit the underwriters
to reclaim a selling concession from a syndicate member when the
common stock originally sold by that syndicate member are
purchased in a stabilizing transaction or syndicate covering
transaction to cover syndicate short positions. The imposition
of a penalty bid may have an effect on the price of the common
stock to the extent that it may discourage re-sales of the
shares of common stock.
In connection with
this offering, the underwriters, selling group members or their
respective affiliates who are qualified market makers on the
NYSE Amex Equities may engage in passive market making
transactions in our common stock on the NYSE Amex Equities in
accordance with Rule 103 of Regulation M under the
Exchange Act during the five business days prior to the pricing
of the offering before the commencement of offers and sales of
the common stock. Passive market makers must comply with
applicable volume and price limitations and must be identified
as such. In general, a passive market maker must display its bid
at a price not in excess of the highest independent bid for such
security. If all independent bids are lowered below the passive
market makers bid, however, such bid must then be lowered
when certain purchase limits are exceeded.
We, the Selling
Shareholder and the underwriters make no representation or
prediction as to the direction or magnitude of any effect that
these transactions may have on the price of the common stock. In
addition, we, the Selling Shareholder and the underwriters make
no representation that the underwriters will engage in such
transactions or that such transactions, once commenced, will not
be discontinued without notice.
Each underwriter
does not intend to confirm sales of the common stock to any
accounts over which it exercises discretionary authority.
The underwriting
agreement provides that the Selling Shareholder and our
directors and executive officers will agree not to, directly or
indirectly, sell or otherwise dispose of any of our shares of
common stock for a period of 90 days after the completion
of this offering, without the prior written consent of Janney
Montgomery Scott LLC, on behalf of the underwriters. Together,
this group owns, prior to the offering, 42.3% of the outstanding
shares of common stock on
,
2010. We have also agreed to make no such sales during this
period except in connection with the issuance of shares pursuant
to our stock incentive plans for eligible employees,
non-employee director stock plan, 401(k) plan and common share
purchase and dividend reinvestment plan.
We and the Selling
Shareholder have agreed to indemnify the underwriters against
certain liabilities that may be incurred in connection with this
offering, including liabilities under the Securities Act.
The underwriters and
their affiliates may from time to time in the future provide
investment banking and other services to us for which they are
expected to receive customary fees and commissions.
The common shares
are listed on the NYSE Amex Equities stock exchange under the
symbol EGAS.
This prospectus in
electronic format may be made available on the websites
maintained by one or more of the underwriters, or selling group
members, if any, participating in this offering and one or more
of the underwriters participating in this offering may
distribute this prospectus electronically. The representatives
may agree to allocate a number of shares to underwriters and
selling group members for sale to their online brokerage account
holders. Internet distributions will be allocated by the
underwriters and selling group members that will make internet
distributions on the same basis as other allocations. Other than
the prospectus in electronic format, the information on any of
these websites and any other information contained on a website
maintained by an underwriter or selling group member is not part
of this prospectus supplement or the accompanying prospectus.
61
EXPERTS
The consolidated
financial statements and accompanying notes of Gas Natural for
the year ended December 31, 2009, for the transition period
ending December 31, 2008 and for the fiscal year ended
June 30, 2008 included in this prospectus and the related
registration statement have been audited by Hein &
Associates LLP, independent registered public accounting firm,
as set forth in their report on the financials appearing
elsewhere in this prospectus, and are included in reliance upon
such report given on the authority of Hein &
Associates LLP as experts in accounting and auditing.
LEGAL
MATTERS
Certain legal
matters with respect to our shares of common stock to be sold in
this offering will be passed upon for us by Kohrman
Jackson & Krantz P.L.L., Cleveland, Ohio. Certain
legal matters will be passed upon for the underwriters by
Squire, Sanders & Dempsey L.L.P., Cleveland, Ohio.
WHERE YOU CAN
FIND MORE INFORMATION
We file annual,
quarterly and current reports, proxy statements and other
information with the SEC. You may read and copy any document we
file at the SECs Public Reference Room at 100 F. Street,
N.E., Washington, D.C., 20549. You can request copies of
these documents by contacting the SEC upon payment of fees
prescribed by the SEC and paying a fee for the copying cost.
Information on the operation of the Public Reference Room can be
obtained by calling the SEC at
1-800-SEC-0330.
Our SEC filings are also available to the public from the
SECs website at www.sec.gov.
INCORPORATION OF
CERTAIN INFORMATION BY REFERENCE
This prospectus is
part of a registration statement on
Form S-1
filed by us with the SEC. This prospectus does not contain all
of the information included in the registration statement,
certain parts of which are omitted in accordance with the rules
and regulations of the SEC.
The SEC allows us to
incorporate by reference certain documents that we
file with the SEC, which means that we can disclose important
information to you by referring you to those documents that are
considered part of this prospectus. The information incorporated
by reference is considered to be part of this prospectus.
Information in this prospectus supersedes information
incorporated by reference that we filed with the SEC before the
date of this prospectus. Statements contained in this prospectus
as to the contents of any contract or other document referred to
are not necessarily complete and in each instance reference is
made to the copy of the contract or other document filed as an
exhibit to the registration statement. We incorporate by
reference into this prospectus the documents listed below:
|
|
|
|
|
our Annual Report on
Form 10-K
for the year ended December 31, 2009 as filed on
March 31, 2010 (File
No. 001-34585)
and as amended,
|
|
|
|
our Proxy Statement
on Schedule 14A for our 2010 Annual Meeting of Shareholders
as filed on May 27, 2010 (File
No. 001-34585),
|
|
|
|
our Quarterly Report
on
Form 10-Q
for the quarter ended March 31, 2010 as filed on
May 14, 2010 (File
No. 001-34585), and
|
|
|
|
|
|
our Current Reports
on
Form 8-K
filed on July 2, 2010, May 17, 2010, April 12,
2010, April 6, 2010, February 24, 2010 and
January 11, 2010 (each, File
No. 001-34585).
|
You may request
copies of these filings, at no cost, by writing or calling us at:
Gas Natural Inc.
1 First Avenue South
Great Falls, Montana
59401
Attn: Jed Henthorne,
Vice President of Administration
Telephone:
(406) 791-4500
Fax:
(936) 566-4630
Our SEC filings also
are available on our website at www.ewst.com. The information on
our website is not, and you must not consider the information to
be, a part of this prospectus.
62
INDEX TO
FINANCIAL STATEMENTS
OF GAS
NATURAL INC.
(formerly
Energy, Inc.)*
|
|
|
|
|
|
|
Page
|
|
Interim Financial Statements for the Three Months Ended
March 31, 2010 (unaudited)
|
|
|
|
|
|
|
|
F-2
|
|
|
|
|
F-3
|
|
|
|
|
F-4
|
|
|
|
|
F-5
|
|
|
|
|
F-18
|
|
Annual Financial Statements for the Fiscal Year Ended
December 31, 2009, the Six Months Ended December 31,
2008, and the Years Ended June 30, 2008 and 2007
(audited)
|
|
|
|
|
|
|
|
F-19
|
|
|
|
|
F-20
|
|
|
|
|
F-21
|
|
|
|
|
F-22
|
|
|
|
|
F-24
|
|
|
|
|
* |
|
On July 9, 2010 the registrant reincorporated under the laws of
the State of Ohio and changed its name from Energy, Inc. to Gas
Natural Inc. |
F-1
ENERGY,
INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
3,332,910
|
|
|
$
|
1,419,502
|
|
|
$
|
2,752,168
|
|
Marketable securities
|
|
|
3,917,281
|
|
|
|
3,158,289
|
|
|
|
4,411,171
|
|
Accounts and notes receivable less $484,059, $279,033, and
$233,332, respectively, allowance for bad debt
|
|
|
8,360,143
|
|
|
|
7,719,238
|
|
|
|
7,579,974
|
|
Accounts and notes receivable related parties
|
|
|
745,868
|
|
|
|
|
|
|
|
|
|
Unbilled gas
|
|
|
3,379,014
|
|
|
|
3,090,245
|
|
|
|
2,869,826
|
|
Natural gas and propane inventories
|
|
|
1,230,476
|
|
|
|
308,719
|
|
|
|
5,251,942
|
|
Materials and supplies
|
|
|
1,494,386
|
|
|
|
1,178,781
|
|
|
|
1,018,673
|
|
Prepayments and other
|
|
|
713,239
|
|
|
|
592,877
|
|
|
|
552,641
|
|
Recoverable cost of gas purchases
|
|
|
1,624,381
|
|
|
|
920,872
|
|
|
|
641,755
|
|
Deferred tax asset
|
|
|
320,140
|
|
|
|
1,041,679
|
|
|
|
562,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
25,117,838
|
|
|
|
19,430,202
|
|
|
|
25,641,086
|
|
Property, Plant and Equipment, Net
|
|
|
71,141,025
|
|
|
|
35,922,043
|
|
|
|
41,203,668
|
|
Deferred Tax Assets Long-Term
|
|
|
4,119,023
|
|
|
|
5,238,266
|
|
|
|
7,550,970
|
|
Deferred Charges
|
|
|
2,018,103
|
|
|
|
2,422,311
|
|
|
|
2,094,468
|
|
Other Investments
|
|
|
830,432
|
|
|
|
1,323,298
|
|
|
|
784,363
|
|
Goodwill
|
|
|
13,813,626
|
|
|
|
|
|
|
|
1,056,771
|
|
Customer Relationships
|
|
|
679,292
|
|
|
|
|
|
|
|
|
|
Note Receivable Related Party
|
|
|
52,901
|
|
|
|
|
|
|
|
|
|
Other Assets
|
|
|
284,613
|
|
|
|
94,646
|
|
|
|
294,356
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
118,056,853
|
|
|
$
|
64,430,766
|
|
|
$
|
78,625,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND CAPITALIZATION
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Bank overdraft
|
|
$
|
659,105
|
|
|
$
|
463,700
|
|
|
$
|
663,777
|
|
Accounts payable
|
|
|
7,540,774
|
|
|
|
5,092,863
|
|
|
|
5,530,645
|
|
Accounts payable related parties
|
|
|
1,414,910
|
|
|
|
|
|
|
|
|
|
Line of credit
|
|
|
11,198,337
|
|
|
|
5,595,000
|
|
|
|
14,651,265
|
|
Notes payable
|
|
|
5,183,007
|
|
|
|
|
|
|
|
|
|
Notes payable related parties
|
|
|
1,704,345
|
|
|
|
|
|
|
|
|
|
Accrued taxes
|
|
|
301,394
|
|
|
|
478,818
|
|
|
|
534,710
|
|
Accrued and other current liabilities
|
|
|
8,595,224
|
|
|
|
4,339,533
|
|
|
|
4,594,883
|
|
Overrecovered gas purchases
|
|
|
441,749
|
|
|
|
1,435,172
|
|
|
|
1,452,580
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
37,038,845
|
|
|
|
17,405,086
|
|
|
|
27,427,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred investment tax credits
|
|
|
213,238
|
|
|
|
234,300
|
|
|
|
218,503
|
|
Other long-term liabilities
|
|
|
2,864,955
|
|
|
|
2,398,502
|
|
|
|
2,291,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
3,078,193
|
|
|
|
2,632,802
|
|
|
|
2,510,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt
|
|
|
22,581,334
|
|
|
|
13,000,000
|
|
|
|
13,000,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (see note 12)
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock; $.15 par value, 1,500,000 shares
authorized, no shares outstanding
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock; $.15 par value, 15,000,000 shares
authorized, 6,070,903, 4,299,536, and 4,361,869 shares
outstanding at March 31, 2010 and 2009, and
December 31, 2009, respectively
|
|
|
910,635
|
|
|
|
652,943
|
|
|
|
654,280
|
|
Treasury stock
|
|
|
|
|
|
|
(8,012
|
)
|
|
|
|
|
Capital in excess of par value
|
|
|
23,353,754
|
|
|
|
5,952,168
|
|
|
|
6,514,851
|
|
Capital in excess of par value noncontrolling
interest
|
|
|
|
|
|
|
|
|
|
|
100,989
|
|
Accumulated other comprehensive (loss) income
|
|
|
(20,346
|
)
|
|
|
(453,665
|
)
|
|
|
146,701
|
|
Retained earnings
|
|
|
31,114,438
|
|
|
|
25,249,444
|
|
|
|
28,270,987
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
55,358,481
|
|
|
|
31,392,878
|
|
|
|
35,687,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL CAPITALIZATION
|
|
|
77,939,815
|
|
|
|
44,392,878
|
|
|
|
48,687,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND CAPITALIZATION
|
|
$
|
118,056,853
|
|
|
$
|
64,430,766
|
|
|
$
|
78,625,682
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
financial statements.
F-2
ENERGY,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
Natural gas operations
|
|
$
|
31,506,160
|
|
|
$
|
26,141,570
|
|
Gas and electric wholesale
|
|
|
3,118,323
|
|
|
|
5,079,587
|
|
Pipeline operations
|
|
|
108,602
|
|
|
|
112,666
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
34,733,085
|
|
|
|
31,333,823
|
|
|
|
|
|
|
|
|
|
|
EXPENSES:
|
|
|
|
|
|
|
|
|
Gas purchased
|
|
|
19,620,814
|
|
|
|
19,434,852
|
|
Gas and electric wholesale
|
|
|
2,591,411
|
|
|
|
4,124,894
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
|
22,212,225
|
|
|
|
23,559,746
|
|
|
|
|
|
|
|
|
|
|
GROSS MARGIN
|
|
|
12,520,860
|
|
|
|
7,774,077
|
|
Distribution, general, and administrative
|
|
|
3,915,442
|
|
|
|
2,895,554
|
|
Maintenance
|
|
|
291,329
|
|
|
|
171,407
|
|
Depreciation and amortization
|
|
|
968,029
|
|
|
|
513,674
|
|
Taxes other than income
|
|
|
1,006,283
|
|
|
|
629,580
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
6,181,083
|
|
|
|
4,210,215
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME
|
|
|
6,339,777
|
|
|
|
3,563,862
|
|
OTHER LOSS
|
|
|
(251,415
|
)
|
|
|
(24,979
|
)
|
INTEREST EXPENSE
|
|
|
(592,784
|
)
|
|
|
(345,952
|
)
|
|
|
|
|
|
|
|
|
|
INCOME FROM OPERATIONS BEFORE INCOME TAX EXPENSE
|
|
|
5,495,578
|
|
|
|
3,192,931
|
|
INCOME TAX EXPENSE
|
|
|
(1,832,636
|
)
|
|
|
(1,230,208
|
)
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
3,662,942
|
|
|
$
|
1,962,723
|
|
|
|
|
|
|
|
|
|
|
BASIC INCOME PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
0.61
|
|
|
$
|
0.46
|
|
DILUTED INCOME PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
Income from operations
|
|
$
|
0.61
|
|
|
$
|
0.46
|
|
DIVIDENDS DECLARED PER COMMON SHARE:
|
|
$
|
0.14
|
|
|
$
|
0.12
|
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
|
|
|
|
|
|
|
|
|
Basic
|
|
|
5,973,851
|
|
|
|
4,298,092
|
|
Diluted
|
|
|
5,980,627
|
|
|
|
4,301,522
|
|
The accompanying notes are an integral part of these condensed
financial statements.
F-3
ENERGY,
INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
|
(Unaudited)
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,662,942
|
|
|
$
|
1,962,723
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization, including deferred charges and
financing costs
|
|
|
991,289
|
|
|
|
606,456
|
|
Stock-based compensation
|
|
|
22,174
|
|
|
|
26,579
|
|
Gain on sale of securities
|
|
|
(26,609
|
)
|
|
|
|
|
Investment tax credit
|
|
|
(5,265
|
)
|
|
|
(5,265
|
)
|
Deferred income taxes
|
|
|
1,510,504
|
|
|
|
738,193
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts and notes receivable
|
|
|
6,338,850
|
|
|
|
1,460,348
|
|
Accounts and notes receivable related parties
|
|
|
(743,539
|
)
|
|
|
|
|
Natural gas and propane inventories
|
|
|
4,653,044
|
|
|
|
9,583,082
|
|
Accounts payable
|
|
|
(3,799,570
|
)
|
|
|
(708,840
|
)
|
Accounts payable related parties
|
|
|
1,306,603
|
|
|
|
|
|
Recoverable/refundable cost of gas purchases
|
|
|
(2,701,968
|
)
|
|
|
1,532,727
|
|
Prepayments and other
|
|
|
105,608
|
|
|
|
(170,363
|
)
|
Asset retirement obligation liability
|
|
|
29,100
|
|
|
|
9,984
|
|
Other assets & liabilities
|
|
|
(1,288,106
|
)
|
|
|
(141,797
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
10,055,057
|
|
|
|
14,893,827
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Construction expenditures
|
|
|
(1,272,034
|
)
|
|
|
(1,888,448
|
)
|
Sale of marketable securities
|
|
|
301,897
|
|
|
|
|
|
Purchase of Cut Bank shares
|
|
|
(97,667
|
)
|
|
|
|
|
Cash acquired in acquisitions
|
|
|
144,203
|
|
|
|
|
|
Other investments
|
|
|
(32,486
|
)
|
|
|
(241,875
|
)
|
Customer advances received for construction
|
|
|
56,899
|
|
|
|
5,195
|
|
Increase from contributions in aid of construction
|
|
|
24,813
|
|
|
|
7,436
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(874,375
|
)
|
|
|
(2,117,692
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Repayments of long-term debt
|
|
|
(234,229
|
)
|
|
|
|
|
Proceeds from lines of credit
|
|
|
3,700,000
|
|
|
|
1,700,000
|
|
Repayment of notes payable
|
|
|
(10,752,098
|
)
|
|
|
(13,600,000
|
)
|
Repayments of other short-term borrowings
|
|
|
(494,169
|
)
|
|
|
|
|
Dividends paid
|
|
|
(819,444
|
)
|
|
|
(522,162
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(8,599,940
|
)
|
|
|
(12,422,162
|
)
|
|
|
|
|
|
|
|
|
|
NET INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
580,742
|
|
|
|
353,973
|
|
CASH AND CASH EQUIVALENTS:
|
|
|
|
|
|
|
|
|
Beginning of period
|
|
|
2,752,168
|
|
|
|
1,065,529
|
|
|
|
|
|
|
|
|
|
|
End of period
|
|
$
|
3,332,910
|
|
|
$
|
1,419,502
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed
financial statements.
F-4
Basis of
Presentation
Effective on August 3, 2009, Energy West, Incorporated
(Energy West) reorganized into a holding company
organizational structure pursuant to an Agreement and Plan of
Merger with, among others, Energy, Inc. The primary purpose of
the reorganization was to provide flexibility to make future
acquisitions through subsidiaries of the new holding company
rather than Energy West or its subsidiaries. The business
operations of the Company have not changed as a result of the
reorganization.
The accompanying unaudited condensed consolidated financial
statements of Energy, Inc. and its subsidiaries (collectively,
the Company) have been prepared in accordance with
accounting principles generally accepted in the United States of
America for interim financial information and with the
instructions to
Form 10-Q
and
Article 8-03
of
Regulation S-X.
Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management,
all adjustments considered necessary for a fair presentation
have been included and are of a normal and recurring nature.
We follow accounting standards set by the Financial Accounting
Standards Board (FASB). The FASB sets generally
accepted accounting principles (GAAP) that we follow
to ensure that we consistently report our financial condition,
results of operations and cash flows. Over the years, the FASB
and other designated GAAP-setting bodies, have issued standards
in the form of FASB Statements, Interpretations, FASB Staff
Positions, EITF consensuses, AICPA Statements of Position, etc.
References to GAAP issued by the FASB in these footnotes are to
the FASB Accounting Standards Codification, sometimes
referred to as the Codification or ASC. The FASB finalized the
Codification for periods ending on or after September 15,
2009. Prior FASB standards are no longer being issued in the
previous format.
Operating results for the three month period ended
March 31, 2010 are not necessarily indicative of the
results that may be expected for future fiscal periods. Events
occurring subsequent to March 31, 2010 have been evaluated
as to their potential impact to the financial statements through
the date of issuance. The financial statements should be read in
conjunction with the audited consolidated financial statements
and footnotes thereto included in the Companys Annual
Report on
Form 10-K
for the period ended December 31, 2009.
Energy, Inc. is the parent company of Energy West, Incorporated
which is a natural gas utility with operations in Montana,
Wyoming, North Carolina and Maine, Lightning Pipeline Company,
Inc. with utility operations in Ohio and Pennsylvania and Great
Plains Natural Gas Company and Brainard Gas Corp, each with
utility operations in Ohio. The Company was originally
incorporated in Montana in 1909. The Company currently has four
reporting segments:
|
|
|
|
|
|
|
Natural Gas Operations
|
|
Annually, we distribute approximately 29 billion cubic feet of
natural gas to approximately 62,000 customers through regulated
utilities operating in and around Great Falls and West
Yellowstone, Montana, Cody, Wyoming, Bangor, Maine, Elkin, North
Carolina and various cities in Ohio and Western Pennsylvania.
The approximate population of the service territories is 5.3
million. The operation in Elkin, North Carolina was added
October 1, 2007. The operation in Bangor, Maine was added
December 1, 2007. Our Ohio and Pennsylvania operations were
added January 5, 2010.
|
F-5
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
|
|
|
|
|
|
|
Marketing and
Production Operations
(EWR)
|
|
Annually, we market approximately 2.4 billion cubic feet of
natural gas to commercial and industrial customers in Montana
and Wyoming and manage midstream supply and production assets
for transportation customers and utilities through our
subsidiary, Energy West Resources, Inc. (EWR). EWR owns an
average 48% gross working interest (an average 41% net revenue
interest) in 160 natural gas producing wells and gas gathering
assets. Energy West Propane, Inc. dba Missouri River Propane
(MRP), our small Montana wholesale distribution company that
sells propane to our affiliated utility, had been reported in
our propane operations. It is now being reported in marketing
and production operations.
|
|
|
Pipeline Operations (EWD)
|
|
The Company owns the Shoshone interstate and the Glacier
gathering natural gas pipelines located in Montana and Wyoming
through our subsidiary Energy West Development, Inc. (EWD).
Certain natural gas producing wells owned by the Companys
pipeline operations are being managed and reported under our
marketing and production operations.
|
|
|
Corporate and Other
|
|
Corporate and other encompasses the results of corporate
acquisitions and other equity transactions. Reported in
Corporate and other for the three months ended March 31, 2010
and 2009 are costs associated with business development and
acquisitions, and dividend income and recognized gains from the
sale of marketable securities.
|
Note 1
Acquisitions
On January 5, 2010 we completed the acquisition of
Lightning Pipeline Company, Inc. (Lightning
Pipeline), Great Plains Natural Gas Company (Great
Plains), Brainard Gas Corp. (BGC) and Great
Plains Land Development Co., LTD. (GPL, and
collectively with Lightning Pipeline, Great Plains and BGC, the
Ohio Companies and each an Ohio
Company). Lightning Pipeline is the parent company of
Orwell Natural Gas Company (Orwell) and Great Plains
is the parent company of Northeast Ohio Natural Gas Corp.
(NEO). Orwell, NEO and BGC are natural gas
distribution companies that serve approximately 23,131 customers
in Northeastern Ohio and Western Pennsylvania. The acquisition
increased the Companys customers by more than 50%. GPL is
a real estate holding company whose primary asset is real estate
that is leased to NEO.
Merger Agreements Energy West, Incorporated,
now a wholly-owned subsidiary of the Company (Energy
West), entered into an Agreement and Plan of Merger (the
Merger Agreement) on June 29, 2009 with Richard
M. Osborne, as Trustee of the Richard M. Osborne Trust (the
RMO Trust), Rebecca Howell, Stephen M. Rigo, Marty
Whelan, and Thomas J. Smith (Messrs. Osborne, Rigo, Whelan
and Smith and Ms. Howell are hereinafter collectively
referred to as Shareholders), Lightning Pipeline,
Great Plains, BGC and three to-be-formed wholly-owned Ohio
subsidiary corporations of Energy West. On June 29, 2009,
Energy West also entered into an Agreement and Plan of Merger
(together with the Merger Agreement, the Merger
Agreements) with GPL, the RMO Trust and a fourth
to-be-formed Ohio acquisition subsidiary (each acquisition
subsidiary hereinafter referred to as an Acquisition
Sub and collectively, as the Acquisition Subs)
of Energy West. Mr. Osborne is our chairman of the board
and chief executive officer, Mr. Smith is a director and
our chief financial officer, and Ms. Howell is our
corporate secretary. We completed on August 3, 2009 a
reorganization to implement a holding company structure.
F-6
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
The Company, as the new holding company, became the successor
issuer to Energy West, and Energy West assigned its rights under
the Merger Agreements to the Company. Pursuant to the terms of
the Merger Agreements, on January 5, 2010, four separate
mergers occurred whereby an Acquisition Sub of Energy, Inc.
merged with and into each Ohio Company. The Ohio Companies
survived the mergers, becoming four separate wholly-owned
subsidiaries of the Company. The transactions contemplated by
the Merger Agreements are referred to herein as the Merger
Transaction.
Merger Consideration Issuance of
Shares The final aggregate purchase price for
the Ohio Companies was $37.9 million, which consisted of
approximately $20.8 million in debt of the Ohio Companies
with the remainder of the purchase price paid in unregistered
shares of common stock of the Company. In accordance with the
Merger Agreements, on January 5, 2010, the shares of common
stock of Lightning Pipeline, Great Plains and BGC and the
membership units of GPL were converted into the right to receive
unregistered shares of common stock of the Company (the
Shares) in accordance with the following calculation:
The total number of Shares the Shareholders received equaled the
total of $34,304,000 plus $3,565,339 (which was the number of
additional active customers of the Ohio Companies in excess of
20,900 at closing (23,131-20,900=2,231) multiplied by
$1,598.09), less $20,796,254 (which was the debt of the Ohio
Companies at closing), divided by $10.
Based on this calculation, we issued 1,707,308 Shares in
the aggregate. We issued Mr. Osborne, as trustee,
1,565,701 Shares, Mr. Smith 73,244 Shares and
Ms. Howell 19,532 Shares. After the closing of the
Merger Transaction on January 5, 2010, Mr. Osborne
owned 2,487,972 Shares, or 41.0% of the Company,
Mr. Smith owned 86,744 Shares, or 1.4% of the Company
and Ms. Howell owned 19,532 Shares, or less than 1% of
the Company.
The acquisition of the Ohio Companies is being accounted for
under the purchase method of accounting. Under the purchase
method of accounting, the purchase price is allocated to the
assets acquired and liabilities assumed based on their estimated
fair values. For purposes of measuring the estimated fair value
of the assets acquired and liabilities assumed, an independent
appraisal firm conducted a valuation analysis as of date of
acquisition, January 5, 2010. The following table
summarizes the estimated fair values of the assets acquired and
liabilities assumed at the date of acquisition:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Ohio
|
|
|
|
|
|
Lightning
|
|
|
|
|
|
|
Companies
|
|
|
Great Plains
|
|
|
Pipeline
|
|
|
Brainard
|
|
|
Current assets
|
|
$
|
12,004,979
|
|
|
$
|
7,760,134
|
|
|
$
|
4,098,704
|
|
|
$
|
146,141
|
|
Property and equipment
|
|
|
29,530,636
|
|
|
|
18,290,612
|
|
|
|
10,818,923
|
|
|
|
421,101
|
|
Deferred tax assets
|
|
|
212,111
|
|
|
|
|
|
|
|
172,598
|
|
|
|
39,513
|
|
Other noncurrent assets
|
|
|
152,585
|
|
|
|
1,000
|
|
|
|
140,002
|
|
|
|
11,583
|
|
Customer relationships
|
|
|
685,000
|
|
|
|
640,000
|
|
|
|
45,000
|
|
|
|
|
|
Goodwill
|
|
|
12,756,854
|
|
|
|
8,844,116
|
|
|
|
3,855,573
|
|
|
|
57,165
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired
|
|
|
55,342,165
|
|
|
|
35,535,862
|
|
|
|
19,130,800
|
|
|
|
675,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
13,690,076
|
|
|
|
7,497,196
|
|
|
|
5,788,829
|
|
|
|
404,051
|
|
Asset retirement obligation
|
|
|
487,447
|
|
|
|
|
|
|
|
477,939
|
|
|
|
9,508
|
|
Deferred tax liability
|
|
|
3,295,303
|
|
|
|
1,723,801
|
|
|
|
1,495,948
|
|
|
|
75,554
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
17,472,826
|
|
|
|
9,220,997
|
|
|
|
7,762,716
|
|
|
|
489,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired:
|
|
$
|
37,869,339
|
|
|
$
|
26,314,865
|
|
|
$
|
11,368,084
|
|
|
$
|
186,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the total purchase price, approximately $12.8 million
has been allocated to goodwill. Goodwill represents intangible
assets that do not qualify for separate recognition. Goodwill is
not amortized, rather, the goodwill will be
F-7
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
tested for impairment, at least annually, or more frequently if
there is an indication of impairment. The goodwill resulting
from this acquisition is not deductible for tax purposes.
The following table shows results of operations (in thousands)
for the three months ended March 31, 2010, including the
results of the Ohio Companies since the acquisition date of
January 5, 2010. The table also shows pro-forma results for
the three months ended March 31, 2009 as if the acquisition
had occurred on January 1, 2009. These unaudited pro forma
results of operations are based on the historical financial
statements and related notes of each of the Company and the Ohio
Companies for the three months ended March 31, 2009, and
contain adjustments to depreciation and amortization for the
effects of the purchase price allocation, and to income tax
expense to record income tax expense for the Ohio Companies. The
results of operations for the Ohio companies for the period from
January 1, 2010 to January 4, 2010 were not material.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
|
2010
|
|
2009
|
|
|
|
|
Pro forma
|
|
|
(In thousands)
|
|
Revenues
|
|
$
|
34,733
|
|
|
$
|
47,078
|
|
Operating income
|
|
|
6,340
|
|
|
|
6,101
|
|
Net income
|
|
|
3,663
|
|
|
|
3,533
|
|
Earnings per share basic
|
|
$
|
0.58
|
|
|
$
|
0.59
|
|
Earnings per share diluted
|
|
$
|
0.58
|
|
|
$
|
0.59
|
|
The revenue and net income of the Ohio companies included in the
consolidated statement of income for the quarter ended
March 31, 2010 were approximately $10,737,000 and
$1,407,000, respectively.
The pro forma information is presented for informational
purposes only and is not necessarily indicative of the results
of operations that actually would have been achieved had the
acquisition been consummated as of that time, nor is it intended
to be a projection of future results.
Note 2
Marketable Securities
Securities investments are classified as
available-for-sale
securities.
Available-for-sale
securities are recorded at fair value in marketable securities
on the balance sheet, with the change in fair value during the
period excluded from earnings and recorded net of tax as a
component of other comprehensive income.
The following is a summary of
available-for-sale
securities at:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketable Securities
|
|
|
|
Investment
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
at Cost
|
|
|
Losses
|
|
|
Fair Value
|
|
|
March 31, 2010
|
|
$
|
3,950,559
|
|
|
$
|
(33,278
|
)
|
|
$
|
3,917,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
$
|
4,172,899
|
|
|
$
|
238,272
|
|
|
$
|
4,411,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2009
|
|
$
|
3,895,476
|
|
|
$
|
(737,187
|
)
|
|
$
|
3,158,289
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain (loss) on
available-for-sale
securities of ($20,346), $146,701 and ($453,665) (net of
($12,932), $91,571, and ($283,522) in taxes), was included in
accumulated other comprehensive income in the accompanying
unaudited condensed balance sheets at March 31, 2010,
December 31, 2009 and March 31, 2009, respectively.
The fair value of cash and cash equivalents, notes and accounts
receivable and notes and accounts payable are not materially
different from their carrying amounts. The fair values of
marketable securities are estimated based on closing share price
on the quoted market price for those investments. The fair value
of Energy, Inc.s long-term debt is estimated based on the
quoted market prices for the same or similar issues, or the
current rates for debt of the same remaining maturities and
credit quality. Cost basis is determined by specific
identification of securities sold.
F-8
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
Note 3
Fair Value Measurements
Fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date
(i.e., an exit price). Measuring fair value requires the use of
market data or assumptions that market participants would use in
pricing the asset or liability, including assumptions about risk
and the risks inherent in the inputs to the valuation technique.
These inputs can be readily observable, corroborated by market
data, or generally unobservable. Valuation techniques are
required to maximize the use of observable inputs and minimize
the use of unobservable inputs.
Valuation
Hierarchy
A fair value hierarchy that prioritizes the inputs used to
measure fair value, and requires fair value measurements to be
categorized based on the observability of those inputs has been
established by the applicable accounting guidance. The hierarchy
gives the highest priority to unadjusted quoted prices in active
markets for identical assets or liabilities (Level 1
inputs) and the lowest priority to unobservable inputs
(Level 3 inputs). The following table represents the
Companys fair value hierarchy for its financial assets
measured at fair value on a recurring basis as of March 31,
2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2010
|
|
|
|
Level I
|
|
|
Level II
|
|
|
Level III
|
|
|
Total
|
|
|
Available-for-sale
securities
|
|
$
|
3,917,281
|
|
|
|
|
|
|
|
|
|
|
$
|
3,917,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets at fair value
|
|
$
|
3,917,281
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,917,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 4
Deferred Charges
Deferred Charges consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
Regulatory asset for property taxes
|
|
$
|
1,171,432
|
|
|
$
|
1,477,683
|
|
|
$
|
1,247,993
|
|
Regulatory asset for income taxes
|
|
|
452,645
|
|
|
|
452,645
|
|
|
|
452,646
|
|
Regulatory asset for deferred environmental remediation costs
|
|
|
(18,444
|
)
|
|
|
67,040
|
|
|
|
22,042
|
|
Rate case costs
|
|
|
13,903
|
|
|
|
18,538
|
|
|
|
15,448
|
|
Unamortized debt issue costs
|
|
|
398,567
|
|
|
|
406,405
|
|
|
|
356,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,018,103
|
|
|
$
|
2,422,311
|
|
|
$
|
2,094,468
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Regulatory assets will be recovered over a period of
approximately seven to twenty years.
The property tax asset does not earn a return in the rate base;
however the property tax is recovered in rates over a ten-year
period starting January 1, 2004. The income taxes and
environmental remediation costs earn a return equal to that of
the Companys rate base. No other assets earn a return or
are recovered in the rate structure.
F-9
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
Note 5
Accrued and Other Current Liabilities
Accrued and other current liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
Property tax settlement current portion
|
|
$
|
242,120
|
|
|
$
|
242,120
|
|
|
$
|
242,120
|
|
Payable to employee benefit plans
|
|
|
131,721
|
|
|
|
92,091
|
|
|
|
81,045
|
|
Accrued vacation
|
|
|
114,852
|
|
|
|
536,268
|
|
|
|
55,416
|
|
Customer deposits
|
|
|
680,231
|
|
|
|
500,811
|
|
|
|
521,535
|
|
Accrued interest
|
|
|
566,856
|
|
|
|
207,597
|
|
|
|
31,900
|
|
Accrued taxes other than income
|
|
|
3,013,889
|
|
|
|
845,684
|
|
|
|
640,801
|
|
Deferred payments from levelized billing
|
|
|
2,447,126
|
|
|
|
1,017,353
|
|
|
|
2,176,671
|
|
Shelby lawsuit contingency
|
|
|
522,000
|
|
|
|
|
|
|
|
|
|
Other regulatory liabilities
|
|
|
38,463
|
|
|
|
|
|
|
|
59,996
|
|
Other
|
|
|
837,966
|
|
|
|
897,609
|
|
|
|
785,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,595,224
|
|
|
$
|
4,339,533
|
|
|
$
|
4,594,883
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 6
Other Long Term Liabilities
Other long-term liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
Asset retirement obligation
|
|
$
|
1,303,778
|
|
|
$
|
756,183
|
|
|
$
|
787,233
|
|
Customer advances for construction
|
|
|
857,149
|
|
|
|
830,150
|
|
|
|
800,250
|
|
Regulatory liability for income taxes
|
|
|
83,161
|
|
|
|
83,161
|
|
|
|
83,161
|
|
Regulatory liability for gas costs
|
|
|
131,443
|
|
|
|
|
|
|
|
131,443
|
|
Long term notes payable
|
|
|
3,416
|
|
|
|
|
|
|
|
3,416
|
|
Property tax settlement
|
|
|
486,008
|
|
|
|
729,008
|
|
|
|
486,008
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,864,955
|
|
|
$
|
2,398,502
|
|
|
$
|
2,291,511
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 7
Lines of Credit and Long-Term Debt
The Company funds its operating cash needs, as well as dividend
payments and capital expenditures, primarily through cash flow
from operating activities and short-term borrowing.
Historically, to the extent cash flow has not been sufficient to
fund these expenditures, Energy, Inc. has used the working
capital line of credit portion of the credit facility with Bank
of America, N.A. (Bank of America) (fka LaSalle
Bank, N.A.) Energy, Inc. has greater need for short-term
borrowing during periods when internally generated funds are not
sufficient to cover all capital and operating requirements,
including costs of gas purchased and capital expenditures. In
general, Energy, Inc.s short-term borrowing needs for
purchases of gas inventory and capital expenditures are greatest
during the summer and fall months and our short-term borrowing
needs for financing customer accounts receivable are greatest
during the winter months.
With the acquisition of the Ohio Companies, Energy, Inc. now has
two additional lines of credit from Citizens Bank and Huntington
National Bank, N.A., which are used for working capital needs by
NEO and Orwell, respectively.
F-10
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
Long Term
Debt and Bank of America Line of Credit
Long-term Debt $13.0 million
6.16% Senior Unsecured Notes On
June 29, 2007, Energy, Inc. authorized the sale of
$13.0 million aggregate principal amount of its
6.16% Senior Unsecured Notes, due June 29, 2017. The
proceeds of these notes were used to refinance Energy,
Inc.s existing notes. With this refinancing, the Company
expensed the remaining debt issue costs of $991,000 in fiscal
2007, and incurred approximately $463,000 in new debt issue
costs to be amortized over the life of the new notes.
Bank of America Line of Credit On
June 29, 2007, Energy, Inc. established its five-year
unsecured credit facility with Bank of America, replacing a
previous $20 million one-year facility with Bank of America
which was scheduled to expire in November 2007. The credit
facility includes an annual commitment fee equal to 0.20% of the
unused portion of the facility and interest on amounts
outstanding at the London Interbank Offered Rate, plus 120 to
145 basis points, for interest periods selected by Energy,
Inc. At March 31, 2010, the Company had $7.6 million
in borrowings on the line of credit.
Debt Covenants Energy, Inc.s
6.16% Senior Unsecured Notes and the Bank of America credit
facility agreements contain various covenants, which include,
among others, limitations on total dividends and distributions
made in the immediately preceding
60-month
period to 75% of aggregate consolidated net income for such
period, restrictions on certain indebtedness, limitations on
asset sales, and maintenance of certain
debt-to-capital
and interest coverage ratios. At March 31, 2010, Energy,
Inc. believes it was in compliance with the financial covenants
under its debt agreements.
Citizens
Bank Credit Facility
In connection with our acquisition of our Ohio operations, NEO,
Great Plains and GPL each entered modifications/amendments to
its credit facility with Citizens Bank (the Citizens
Credit Facility). The Citizens Credit Facility consists of
a revolving line of credit and term loan to NEO, and two other
term loans to Great Plains and GPL respectively. Each
amendment/modification was initially effective as of
December 1, 2009, but was later modified to be effective as
of January 5, 2010. The Citizens Credit Facility is
collateralized by a security interest in the cash, accounts
receivable, inventory and certain intangible assets of the
borrower to the respective credit facility. Energy, Inc.
guarantees each loan. Our chairman and chief executive officer,
Richard M. Osborne, guarantees each loan both individually and
as trustee of the RMO Trust, and Great Plains guarantees
NEOs revolving line of credit and term loan as well as
GPLs term note.
Long-term Debt $10.3 million
5.00% Senior Secured Notes NEOs,
Great Plains and GPLs term loans with Citizens Bank
are in the amounts of $7.8 million, $2.4 million and
$823,000 respectively. Each term note has a maturity date of
July 1, 2013 and bears interest at an annual rate of
30-day LIBOR
(Eurodollar) plus 400 basis points with an interest rate
floor of 5.00% per annum. Currently, the interest rate is 5.00%
per annum. The term notes require monthly payments of
approximately $63,000 in the aggregate.
Line of Credit NEOs revolving credit
line with Citizens Bank has a maximum credit commitment of
$2.1 million. The revolving line bears interest at an
annual rate of
30-day LIBOR
(Eurodollar) plus 400 basis points with an interest rate
floor of 5.00% per annum. Currently, the interest rate is 5.00%
per annum. The revolving line requires monthly interest payments
with the principal due at maturity, November 30, 2010.
The Citizens Credit Facility requires Great Plains, GPL and NEO
to maintain a debt service coverage ratio of at least 1.25 to
1.0 measured quarterly on a rolling four quarter basis. The
Citizens Credit Facility also requires NEO, Great Plains and GPL
to maintain a minimum net worth, on a combined basis, equal to
the sum of $1,815,000 plus 100% of net income less the pro-rata
share of any dividend paid to Energy, Inc., measured on a
quarterly basis beginning with the quarter ended
December 31, 2009. The Citizens Credit Facility allows NEO,
Great Plains and GPL to pay dividends to Energy, Inc. if those
entities combined net worth (as defined in the Citizens
loan documents) after payment of any dividends would not be less
than $1,815,000 on a consolidated basis as positively increased
by 100% of net income as of the end of each fiscal quarter and
fiscal year.
F-11
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
At March 31, 2010, $2.1 million has been borrowed
under the revolving line of credit, $7.2 million under the
NEO term loan, $2.4 million under the Great Plains term
loan and $798,000 under the GPL term loan.
Huntington
Credit Facility
On December 31, 2009, Orwell entered into an amended and
restated short-term credit facility with The Huntington National
Bank, N.A. (the Huntington Credit Facility). The
Huntington Credit Facility amends and restates the previous
credit facility that matured on November 30, 2009. The loan
is secured by all of the assets of Orwell. The Huntington Credit
Facility is guaranteed by Energy, Inc., Lightning Pipeline,
Mr. Osborne individually and as Trustee of the RMO Trust,
and certain entities owned and controlled by Mr. Osborne.
Long-term Debt $4.6 Million Senior Secured Note
The Huntington Credit Facility includes a
$4.6 million term note that bears interest at an annual
rate of
30-day LIBOR
(Eurodollar) plus 300 basis points with LIBOR floor of 1%
per annum. Currently, the interest rate is 4.00% per annum. The
term note requires monthly payments of approximately $35,000 and
matures on November 29, 2010.
Line of Credit The Huntington Credit Facility
also includes a $1.5 million line of credit. The credit
line bears interest at an annual rate of
30-day LIBOR
(Eurodollar) plus 300 basis points with LIBOR floor of 1%
per annum. Currently, the interest rate is 4.00% per annum. The
credit line requires monthly interest payments with the
principal due at maturity, November 29, 2010.
The Huntington Credit Facility requires Orwell to maintain a
fixed charge coverage ratio of at least 1 to 1 of EBITDA to the
sum of (i) scheduled principal payments on debt and capital
leases, plus (ii) interest expense, plus
(iii) federal, state and local income tax expense, plus
(iv)dividends and distributions, measured on a rolling four
quarter basis. The Huntington Credit Facility allows Orwell to
pay dividends to Energy, Inc. as long as the aggregate amount of
all dividends, distributions, redemptions and repurchases in any
fiscal year do not exceed 60% of net income (as defined in the
Huntington Credit Facility) of Orwell for each fiscal year. At
March 31, 2010, $1.5 million has been borrowed under
the credit line and $4.4 million under the term note. The
Huntington Credit Facility is also secured by a pledge of
$3.0 million in market value of Energy, Inc. stock by the
RMO Trust.
Combined
Term Loans and Credit Facilities
At March 31, 2010, the Company had approximately
$3.3 million in cash ($2.7 million net of bank
overdrafts). In addition, at March 31, 2010, Energy, Inc.
had $11.2 million in borrowings under its lines of credit
and net available borrowing capacity at March 31, 2010 of
$12.4 million.
The total amount outstanding under all Energy, Inc.s
long-term debt obligations was $27.7 million and
$13.0 million at March 31, 2010 and 2009 respectively.
The portion of such obligations due within one year was
$5.2 million, and $0 at March 31, 2010 and 2009,
respectively.
Note 8
Income Tax Expense (Benefit)
Income tax expense (benefit) differs from the amount computed by
applying the federal statutory rate to pre-tax income or loss as
demonstrated in the following table:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
Income tax from continuing operations:
|
|
|
|
|
|
|
|
|
Tax expense at statutory rate of 34%
|
|
$
|
1,868,497
|
|
|
$
|
1,085,597
|
|
State income tax expense, net of federal tax expense
|
|
|
76,640
|
|
|
|
72,914
|
|
Amortization of deferred investment tax credits
|
|
|
(5,265
|
)
|
|
|
(5,265
|
)
|
Other
|
|
|
(107,236
|
)
|
|
|
76,962
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
1,832,636
|
|
|
$
|
1,230,208
|
|
|
|
|
|
|
|
|
|
|
F-12
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
Other taxes includes an adjustment to true up net deferred tax
assets to a new effective state tax rate. The rate decreased due
to the purchase of the Ohio companies.
The Company recognizes interest accrued related to unrecognized
tax benefits in interest expense and penalties in operating
expense. No interest and penalties related to unrecognized tax
benefits were accrued at March 31, 2010.
The tax years 2004 through 2009 remain open to examination by
the major taxing jurisdictions in which the Company operates,
although no material changes to unrecognized tax positions are
expected within the next twelve months.
Note 9
Segments of Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Natural Gas
|
|
|
and
|
|
|
Pipeline
|
|
|
Corporate and
|
|
|
|
|
|
|
|
March 31, 2010
|
|
Operations
|
|
|
Production
|
|
|
Operations
|
|
|
Other
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas operations
|
|
$
|
31,584,769
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(78,609
|
)
|
|
$
|
31,506,160
|
|
Marketing and production
|
|
|
|
|
|
|
5,483,312
|
|
|
|
|
|
|
|
|
|
|
|
(2,364,989
|
)
|
|
|
3,118,323
|
|
Pipeline operations
|
|
|
|
|
|
|
|
|
|
|
108,602
|
|
|
|
|
|
|
|
|
|
|
|
108,602
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenue
|
|
|
31,584,769
|
|
|
|
5,483,312
|
|
|
|
108,602
|
|
|
|
|
|
|
|
(2,443,598
|
)
|
|
|
34,733,085
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas purchased
|
|
|
19,699,423
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(78,609
|
)
|
|
|
19,620,814
|
|
Gas and electric Wholesale
|
|
|
|
|
|
|
4,956,400
|
|
|
|
|
|
|
|
|
|
|
|
(2,364,989
|
)
|
|
|
2,591,411
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
|
19,699,423
|
|
|
|
4,956,400
|
|
|
|
|
|
|
|
|
|
|
|
(2,443,598
|
)
|
|
|
22,212,225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
$
|
11,885,346
|
|
|
$
|
526,912
|
|
|
$
|
108,602
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
12,520,860
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income:
|
|
$
|
5,928,490
|
|
|
$
|
350,156
|
|
|
$
|
63,652
|
|
|
$
|
(2,521
|
)
|
|
$
|
|
|
|
$
|
6,339,777
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,731,295
|
|
|
$
|
(78,950
|
)
|
|
$
|
36,235
|
|
|
$
|
(25,638
|
)
|
|
$
|
|
|
|
$
|
3,662,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
107,073,699
|
|
|
|
5,527,569
|
|
|
|
749,855
|
|
|
|
63,245,099
|
|
|
|
(58,543,369
|
)
|
|
$
|
118,056,853
|
|
Goodwill
|
|
|
13,813,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
13,813,626
|
|
F-13
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Natural Gas
|
|
|
and
|
|
|
Pipeline
|
|
|
Corporate and
|
|
|
|
|
|
|
|
March 31, 2009
|
|
Operations
|
|
|
Production
|
|
|
Operations
|
|
|
Other
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Operating revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas operations
|
|
$
|
26,383,092
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(241,522
|
)
|
|
$
|
26,141,570
|
|
Marketing and production
|
|
|
|
|
|
|
7,374,463
|
|
|
|
|
|
|
|
|
|
|
|
(2,294,876
|
)
|
|
|
5,079,587
|
|
Pipeline operations
|
|
|
|
|
|
|
|
|
|
|
112,666
|
|
|
|
|
|
|
|
|
|
|
|
112,666
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenue
|
|
|
26,383,092
|
|
|
|
7,374,463
|
|
|
|
112,666
|
|
|
|
|
|
|
|
(2,536,398
|
)
|
|
|
31,333,823
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas purchased
|
|
|
19,676,374
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(241,522
|
)
|
|
|
19,434,852
|
|
Gas and electric Wholesale
|
|
|
|
|
|
|
6,419,770
|
|
|
|
|
|
|
|
|
|
|
|
(2,294,876
|
)
|
|
|
4,124,894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
|
19,676,374
|
|
|
|
6,419,770
|
|
|
|
|
|
|
|
|
|
|
|
(2,536,398
|
)
|
|
|
23,559,746
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin
|
|
$
|
6,706,718
|
|
|
$
|
954,693
|
|
|
$
|
112,666
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
7,774,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income:
|
|
$
|
2,768,806
|
|
|
$
|
744,188
|
|
|
$
|
50,868
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,563,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,538,833
|
|
|
$
|
422,915
|
|
|
$
|
29,508
|
|
|
$
|
(28,533
|
)
|
|
$
|
|
|
|
$
|
1,962,723
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
|
51,164,792
|
|
|
|
7,499,870
|
|
|
|
797,807
|
|
|
|
37,327,368
|
|
|
|
(32,359,071
|
)
|
|
$
|
64,430,766
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
|
|
Note 10
Stock Options and Shareholder Rights Plans
2002 Stock Option Plan The Energy, Inc. 2002
Stock Option Plan (the Option Plan) provides for the
issuance of up to 300,000 options to purchase the Companys
common stock to be issued to certain key employees. As of
March 31, 2010, there were 29,500 options outstanding, and
the maximum number of shares available for future grants under
this plan is 63,500 shares. Under the Option Plan, the
option price may not be less than 100% of the common stock fair
market value on the date of grant (in the event of incentive
stock options, 110% of the fair market value if the employee
owns more than 10% of the Companys outstanding common
stock). Pursuant to the Option Plan, the options vest over four
to five years and are exercisable over a five to ten-year period
from date of issuance.
Stock Option Disclosures The fair value of
each option grant is estimated on the date of grant using the
Black-Scholes option pricing model. In the quarters ended
March 31, 2010 and 2009, no options were granted. At
March 31, 2010 and 2009, a total of 29,500 and 29,500
options were outstanding, respectively.
A summary of the status of the Companys stock option plans
as of March 31, 2010 and December 31, 2009 and changes
during the periods ended on these dates is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Average
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Value
|
|
|
Outstanding December 31, 2009
|
|
|
44,500
|
|
|
$
|
8.52
|
|
|
|
|
|
Granted
|
|
|
|
|
|
$
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
$
|
|
|
|
|
|
|
Expired
|
|
|
(15,000
|
)
|
|
$
|
9.93
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding March 31, 2010
|
|
|
29,500
|
|
|
$
|
7.81
|
|
|
$
|
69,755
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable March 31, 2010
|
|
|
8,750
|
|
|
$
|
7.79
|
|
|
$
|
20,812
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-14
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
The following information applies to options outstanding at
March 31, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
|
|
|
|
Number
|
|
|
Exercise
|
|
|
Life
|
|
|
Number
|
|
Grant Date
|
|
Outstanding
|
|
|
Price
|
|
|
(Years)
|
|
|
Exercisable
|
|
|
1/6/2006
|
|
|
4,500
|
|
|
$
|
6.35
|
|
|
|
0.77
|
|
|
|
0
|
|
12/1/2008
|
|
|
10,000
|
|
|
$
|
7.10
|
|
|
|
8.67
|
|
|
|
5,000
|
|
6/3/2009
|
|
|
5,000
|
|
|
$
|
8.44
|
|
|
|
4.18
|
|
|
|
1,250
|
|
12/1/2009
|
|
|
10,000
|
|
|
$
|
8.85
|
|
|
|
9.67
|
|
|
|
2,500
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,500
|
|
|
|
|
|
|
|
|
|
|
|
8,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 11
Comprehensive Income
Comprehensive income includes net income and other comprehensive
income, which is primarily comprised of unrealized holding gains
or losses on our
available-for-sale
securities that are excluded from the statement of income in
computing net income and reported separately in
stockholders equity. Comprehensive income and its
components are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Twelve Months Ended
|
|
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2010
|
|
|
2009
|
|
|
2009
|
|
|
Net income
|
|
$
|
3,662,942
|
|
|
$
|
1,962,723
|
|
|
$
|
6,818,537
|
|
Other comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gain (loss) on
available-for-sale
securities, net of tax
|
|
|
(167,112
|
)
|
|
|
(134,518
|
)
|
|
|
465,848
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
3,495,830
|
|
|
$
|
1,828,205
|
|
|
$
|
7,284,385
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income is reported net of tax of ($104,439)
and $(84,068) as of March 31, 2010 and 2009, and $291,025
as of December 31, 2009.
Note 12
Contingencies
Derivative Contingencies Among the risks
involved in natural gas marketing is the risk of nonperformance
by counterparties to contracts for purchase and sale of natural
gas. The Companys marketing operation is party to certain
contracts for purchase or sale of natural gas at fixed prices
for fixed time periods. The Company determined that these
contracts qualify for treatment as a normal purchase or
normal sale scope exception under current accounting
standards.
Legal Proceedings On February 21, 2008,
a lawsuit captioned Shelby Gas Association v. Energy
West Resources, Inc., Case
No. DV-08-008,
was filed in the Ninth Judicial District Court of Toole County,
Montana. Shelby Gas Association (Shelby) alleges a
breach of contract by the Companys subsidiary, EWR, to
provide natural gas to Shelby. The parties each filed cross
motions for summary judgment. The court heard oral arguments for
the pending motions on July 24, 2009. On September 9,
2009, the court ruled that Shelby Gas Association can proceed
with their case for damages. The court also ruled that we can
seek a setoff against any damages awarded to Shelby in an amount
equal to the damages the Company has suffered as a result of
Shelbys alleged breach of contract. On March 24,
2010, the court granted the Companys motions in limine
regarding various aspects of damages which Shelby was seeking,
including disallowance of attorneys fees, punitive damages
and consequential damages. The trial was completed on
April 27, 2010, and the jury in the case awarded Shelby
damages in the amount of $522,000. We had an existing liability
recorded of $82,000 and we have recorded the remaining liability
F-15
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
and associated expense of $440,000 in our statement of income
and balance sheet for the period ending March 31, 2010.
The Company is involved in certain other 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.
Note 13
Related Party Transactions
As a result of our purchase of the Ohio Companies, we are party
to certain agreements and transactions with our chairman and
chief executive officer, Richard M. Osborne, or companies owned
or controlled by Mr. Osborne. These transactions can be
generally grouped into three categories as follows:
Note
Payable to Mr. Osborne
We have two notes payable to Mr. Osborne. The first carries
an annual interest rate of 6.0%, with a maturity date of
January 3, 2014 and has a balance at March 31, 2010 of
$1,654,985. The second note carries an annual interest rate
equal to the prime rate as published by Key Bank, NA, is payable
on demand, and has a balance at March 31, 2010 of $49,361.
Interest related to these two notes of $47,645 was accrued
during the three months ended March 31, 2010.
Gas
Supply and Pipeline Transport
The table below details gas supply and transport related
balances and transactions with companies owned or controlled by
Mr. Osborne:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
Accounts
|
|
Accounts
|
|
March 31, 2010
|
|
|
Receivable
|
|
Payable
|
|
Volumes
|
|
Amounts
|
|
|
3/31/2010
|
|
3/31/2010
|
|
Purchased/(Sold)
|
|
Purchased/(Sold)
|
|
John D. Oil and Gas Marketing
|
|
|
90,655
|
|
|
|
220,406
|
|
|
|
701,791
|
|
|
$
|
1,101,189
|
|
Cobra Pipeline
|
|
|
9,315
|
|
|
|
1,088,209
|
|
|
|
172,597
|
|
|
|
617,168
|
|
Orwell Trumbull Pipeline
|
|
|
|
|
|
|
369
|
|
|
|
182,054
|
|
|
|
175,104
|
|
Great Plains Exploration
|
|
|
347,697
|
|
|
|
59,053
|
|
|
|
(359,471
|
)
|
|
|
(1,015,541
|
)
|
Administrative
and Other
We have a note receivable from ONG Marketing with a maturity
date of December 31, 2016 and an annual interest rate of
7.0% relating to funds loaned to ONG Marketing to finance the
acquisition of a gas pipeline. At March 31, 2009 the
balance was $61,978 with $9,077 due within one year. We have a
corresponding agreement to lease the pipeline from ONG Marketing
through December 31, 2016. During the three months ended
March 31, 2010 we made $3,300 of rental payments.
During the three months ended March 31, 2010 we purchased
$144,476 of pipe and other construction supplies from Big Oats
Pipeline Supply, a company controlled by Mr. Osborne. The
balance due at March 31, 2010 was $46,875.
We also provided management and other services to various
companies controlled by Mr. Osborne of $38,877 during the
quarter. The balance receivable for these services totaled
$289,124 at March 31, 2010.
Note 14
New Accounting Pronouncements
Recently
Adopted
Consolidation of Variable Interest
Entities In June 2009, the FASB issued new
guidance on consolidation of variable interest entities. The
guidance will significantly affect various elements of
consolidation under existing
F-16
NOTES TO
CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED) (Continued)
accounting standards, including the determination of whether an
entity is a variable interest entity and whether an enterprise
is a variable interest entitys primary beneficiary. This
new guidance is effective for interim and annual periods
beginning after November 15, 2009. We implemented the
guidance on January 1, 2010 and the implementation did not
have a material impact on our consolidated financial statements.
Fair Value Measurement Disclosures In
January 2010, the FASB issued Fair Value Measurements and
Disclosures (Topic 820) Improving Disclosures about
Fair Value Measurements (ASU
No. 2010-06),
which will update the Codification to require new disclosures
for assets and liabilities measured at fair value. The
requirements include expanded disclosure of valuation
methodologies for Level 2 and Level 3 fair value
measurements, transfers in and out of Levels 1 and 2, and
gross rather than net presentation of certain changes in
Level 3 fair value measurements. The updates to the
Codification contained in ASU
No. 2010-06
are effective for interim and annual periods beginning after
December 15, 2009, except for requirements related to gross
presentation of certain changes in Level 3 fair value
measurements, which are effective for interim and annual periods
beginning after December 15, 2010. We implemented the
portions of the guidance required on January 1, 2010 and
the implementation did not have a material impact on our
consolidated financial statements.
F-17
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Energy, Inc.
Great Falls, Montana
We have audited the consolidated balance sheets of Energy, Inc.
and subsidiaries as of December 31, 2009 and 2008, and the
related consolidated statements of income, stockholders
equity and comprehensive income and cash flows for the year
ended December 31, 2009, the six months ended
December 31, 2008 and the years ended June 30, 2008
and 2007. Our audits also included the financial statement
schedule as of, and for the twelve months ending
December 31, 2009, the six months ended December 31,
2008 and years ended June 30, 2008 and 2007 listed in the
index as Item 15(a). These financial statements and
financial statement schedule are the responsibility of the
Companys management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of Energy, Inc. and subsidiaries as of
December 31, 2009 and 2008, and the results of their
operations and their cash flows for the year ended
December 31, 2009, the six months ended December 31,
2008, and the years ended June 30, 2008 and 2007, in
conformity with U.S. generally accepted accounting
principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic
consolidated financial statements taken as a whole, presents
fairly in all material respects the information set forth
therein.
We were not engaged to examine managements assessment of
the effectiveness of Energy, Inc.s internal control over
financial reporting as of December 31, 2009, included in
the accompanying Managements Report on Internal Control
Over Financial Reporting and, accordingly, we do not express an
opinion there on.
/s/ HEIN &
ASSOCIATES LLP
Denver, Colorado
March 31, 2010
F-18
ENERGY,
INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Audited)
|
|
|
ASSETS
|
Current Assets:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
2,752,168
|
|
|
$
|
1,065,529
|
|
Marketable securities
|
|
|
4,411,171
|
|
|
|
3,376,875
|
|
Accounts receivable less $233,332 and $207,942, respectively,
allowance for bad debt
|
|
|
7,579,974
|
|
|
|
7,430,694
|
|
Unbilled gas
|
|
|
2,869,826
|
|
|
|
4,839,138
|
|
Natural gas and propane inventories
|
|
|
5,251,942
|
|
|
|
9,891,802
|
|
Materials and supplies
|
|
|
1,018,673
|
|
|
|
1,175,596
|
|
Prepayment and other
|
|
|
552,641
|
|
|
|
422,514
|
|
Income tax receivable
|
|
|
|
|
|
|
1,014,806
|
|
Recoverable cost of gas purchases
|
|
|
641,755
|
|
|
|
2,041,280
|
|
Deferred tax asset
|
|
|
562,936
|
|
|
|
225,953
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
25,641,086
|
|
|
|
31,484,187
|
|
|
|
|
|
|
|
|
|
|
Property, Plant and Equipment, Net
|
|
|
41,203,668
|
|
|
|
34,904,442
|
|
Deferred Charges
|
|
|
2,094,468
|
|
|
|
2,558,156
|
|
Deferred Tax Assets Long term
|
|
|
7,550,970
|
|
|
|
5,693,310
|
|
Other Investments
|
|
|
784,363
|
|
|
|
1,081,423
|
|
Goodwill
|
|
|
1,056,771
|
|
|
|
|
|
Other Assets
|
|
|
294,356
|
|
|
|
97,447
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
78,625,682
|
|
|
$
|
75,818,965
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND CAPITALIZATION
|
Current Liabilities:
|
|
|
|
|
|
|
|
|
Bank overdraft
|
|
$
|
663,777
|
|
|
$
|
773,199
|
|
Accounts payable
|
|
|
5,530,645
|
|
|
|
5,783,927
|
|
Line of credit
|
|
|
14,651,265
|
|
|
|
17,551,276
|
|
Accrued income taxes
|
|
|
534,710
|
|
|
|
35,236
|
|
Overrecovered gas purchases
|
|
|
1,452,580
|
|
|
|
1,022,853
|
|
Accrued and other current liabilities
|
|
|
4,594,883
|
|
|
|
4,947,448
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
27,427,860
|
|
|
|
30,113,939
|
|
|
|
|
|
|
|
|
|
|
Other Obligations:
|
|
|
|
|
|
|
|
|
Deferred investment tax credits
|
|
|
218,503
|
|
|
|
239,565
|
|
Other long-term liabilities
|
|
|
2,291,511
|
|
|
|
2,383,323
|
|
|
|
|
|
|
|
|
|
|
Total other obligations
|
|
|
2,510,014
|
|
|
|
2,622,888
|
|
|
|
|
|
|
|
|
|
|
Long-Term Debt
|
|
|
13,000,000
|
|
|
|
13,000,000
|
|
|
|
|
|
|
|
|
|
|
Commitments and Contingencies (notes 16)
|
|
|
|
|
|
|
|
|
Stockholders Equity:
|
|
|
|
|
|
|
|
|
Preferred stock; $.15 par value, 1,500,000 shares
authorized, no shares outstanding
|
|
|
|
|
|
|
|
|
Common stock; $.15 par value, 5,000,000 shares
authorized, 4,361,869, and 4,296,603 shares outstanding at
December 31, 2009 and 2008, respectively
|
|
|
654,280
|
|
|
|
652,503
|
|
Treasury Stock
|
|
|
|
|
|
|
(8,012
|
)
|
Capital in excess of par value
|
|
|
6,514,851
|
|
|
|
5,926,028
|
|
Capital in excess of par value noncontrolling
interest
|
|
|
100,989
|
|
|
|
|
|
Accumulated other comprehensive income
|
|
|
146,701
|
|
|
|
(319,147
|
)
|
Retained earnings
|
|
|
28,270,987
|
|
|
|
23,830,766
|
|
|
|
|
|
|
|
|
|
|
Total stockholders equity
|
|
|
35,687,808
|
|
|
|
30,082,138
|
|
|
|
|
|
|
|
|
|
|
TOTAL CAPITALIZATION
|
|
|
48,687,808
|
|
|
|
43,082,138
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND CAPITALIZATION
|
|
$
|
78,625,682
|
|
|
$
|
75,818,965
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-19
ENERGY,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year
|
|
|
Six Months
|
|
|
|
|
|
|
Ended
|
|
|
Ended
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
|
(Audited)
|
|
|
(Audited)
|
|
|
REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas operations
|
|
$
|
58,765,618
|
|
|
$
|
28,840,123
|
|
|
$
|
59,338,996
|
|
|
$
|
46,439,506
|
|
Gas and electric wholesale
|
|
|
12,238,906
|
|
|
|
9,691,560
|
|
|
|
17,124,081
|
|
|
|
12,545,359
|
|
Pipeline operations
|
|
|
449,757
|
|
|
|
226,157
|
|
|
|
370,171
|
|
|
|
388,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
71,454,281
|
|
|
|
38,757,840
|
|
|
|
76,833,248
|
|
|
|
59,373,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF SALES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas purchased
|
|
|
37,051,852
|
|
|
|
19,459,908
|
|
|
|
41,337,397
|
|
|
|
33,541,993
|
|
Gas and electric wholesale
|
|
|
9,647,693
|
|
|
|
7,770,347
|
|
|
|
14,833,353
|
|
|
|
10,264,633
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total cost of sales
|
|
|
46,699,545
|
|
|
|
27,230,255
|
|
|
|
56,170,750
|
|
|
|
43,806,626
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
GROSS MARGIN
|
|
|
24,754,736
|
|
|
|
11,527,585
|
|
|
|
20,662,498
|
|
|
|
15,566,414
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Distribution, general, and administrative
|
|
|
10,562,069
|
|
|
|
5,717,406
|
|
|
|
10,661,878
|
|
|
|
6,197,529
|
|
Maintenance
|
|
|
666,477
|
|
|
|
319,798
|
|
|
|
650,553
|
|
|
|
566,683
|
|
Depreciation and amortization
|
|
|
2,212,553
|
|
|
|
1,023,381
|
|
|
|
1,865,294
|
|
|
|
1,692,486
|
|
Taxes other than income
|
|
|
2,250,298
|
|
|
|
1,284,557
|
|
|
|
2,080,144
|
|
|
|
1,696,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
15,691,397
|
|
|
|
8,345,142
|
|
|
|
15,257,869
|
|
|
|
10,153,634
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING INCOME
|
|
|
9,063,339
|
|
|
|
3,182,443
|
|
|
|
5,404,629
|
|
|
|
5,412,780
|
|
OTHER INCOME (EXPENSE)
|
|
|
(976,334
|
)
|
|
|
(420,349
|
)
|
|
|
315,779
|
|
|
|
241,519
|
|
INTEREST (EXPENSE)
|
|
|
(1,241,226
|
)
|
|
|
(677,056
|
)
|
|
|
(1,076,345
|
)
|
|
|
(2,124,155
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAX EXPENSE
|
|
|
6,845,779
|
|
|
|
2,085,038
|
|
|
|
4,644,063
|
|
|
|
3,530,144
|
|
INCOME TAX (EXPENSE)
|
|
|
(27,242
|
)
|
|
|
(926,457
|
)
|
|
|
(1,332,688
|
)
|
|
|
(1,272,664
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM CONTINUING OPERATIONS
|
|
|
6,818,537
|
|
|
|
1,158,581
|
|
|
|
3,311,375
|
|
|
|
2,257,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DISCONTINUED OPERATIONS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain from disposal of operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,479,166
|
|
Income from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
975,484
|
|
Income tax (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,499,875
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM DISCONTINUED OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,954,775
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE EXTRAORDINARY ITEM
|
|
|
6,818,537
|
|
|
|
1,158,581
|
|
|
|
3,311,375
|
|
|
|
6,212,255
|
|
EXTRAORDINARY GAIN
|
|
|
|
|
|
|
|
|
|
|
6,819,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
6,818,537
|
|
|
$
|
1,158,581
|
|
|
$
|
10,130,557
|
|
|
$
|
6,212,255
|
|
BASIC INCOME PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
1.58
|
|
|
$
|
0.27
|
|
|
$
|
0.77
|
|
|
$
|
0.51
|
|
Income from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.89
|
|
Income from extraordinary gain
|
|
|
|
|
|
|
|
|
|
|
1.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.58
|
|
|
$
|
0.27
|
|
|
$
|
2.35
|
|
|
$
|
1.40
|
|
DILUTED INCOME PER COMMON SHARE:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
1.58
|
|
|
$
|
0.27
|
|
|
$
|
0.77
|
|
|
$
|
0.51
|
|
Income from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.88
|
|
Income from extraordinary gain
|
|
|
|
|
|
|
|
|
|
|
1.58
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1.58
|
|
|
$
|
0.27
|
|
|
$
|
2.35
|
|
|
$
|
1.39
|
|
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
4,309,852
|
|
|
|
4,330,200
|
|
|
|
4,314,748
|
|
|
|
4,437,807
|
|
Diluted
|
|
|
4,313,098
|
|
|
|
4,331,726
|
|
|
|
4,316,244
|
|
|
|
4,484,073
|
|
See notes to consolidated financial statements.
F-20
ENERGY,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
AND COMPREHENSIVE INCOME
FOR THE YEAR ENDED DECEMBER 31, 2009,
THE SIX MONTHS ENDED DECEMBER 31, 2008,
AND THE YEARS ENDED JUNE 30, 2008 and 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital in
|
|
|
Other
|
|
|
Cut Bank
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Common
|
|
|
Treasury
|
|
|
Treasury
|
|
|
Excess of
|
|
|
Comprehensive
|
|
|
Noncontrolling
|
|
|
Retained
|
|
|
|
|
|
|
Shares
|
|
|
Stock
|
|
|
Shares
|
|
|
Stock
|
|
|
Par Value
|
|
|
Income (Loss)
|
|
|
Interest
|
|
|
Earnings
|
|
|
Total
|
|
|
BALANCE AT JULY 1, 2006
|
|
|
4,401,266
|
|
|
$
|
660,191
|
|
|
|
|
|
|
$
|
|
|
|
$
|
7,414,273
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
11,090,649
|
|
|
$
|
19,165,113
|
|
Stock Compensation
|
|
|
13,163
|
|
|
|
1,974
|
|
|
|
|
|
|
|
|
|
|
|
83,111
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85,085
|
|
Repurchase of Stock stock buyback program
|
|
|
(219,522
|
)
|
|
|
(32,928
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,162,133
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,195,061
|
)
|
Costs associated with stock buyback
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(81,280
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(81,280
|
)
|
Stock option liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115,603
|
|
Exercise of stock options @ $4.31 to $7.00
|
|
|
93,750
|
|
|
|
14,062
|
|
|
|
|
|
|
|
|
|
|
|
498,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
512,214
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,212,255
|
|
|
|
6,212,255
|
|
Dividends paid @ $0.34
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,518,219
|
)
|
|
|
(1,518,219
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT JUNE 30, 2007
|
|
|
4,288,657
|
|
|
$
|
643,299
|
|
|
|
|
|
|
$
|
|
|
|
$
|
5,867,726
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
15,784,685
|
|
|
$
|
22,295,710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation
|
|
|
3,750
|
|
|
|
563
|
|
|
|
|
|
|
|
|
|
|
|
248,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
249,091
|
|
Repurchase of Stock stock buyback program
|
|
|
(16,780
|
)
|
|
|
(2,517
|
)
|
|
|
|
|
|
|
|
|
|
|
(156,821
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(159,338
|
)
|
Costs associated with stock buyback
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,313
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,313
|
)
|
Exercise of stock options @ $4.31 to $10.00
|
|
|
109,500
|
|
|
|
16,424
|
|
|
|
|
|
|
|
|
|
|
|
611,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
627,915
|
|
Intrinsic value of stock exercised tax effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80,933
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80,933
|
|
Return of stock at market price in exchange for stock options
|
|
|
(37,500
|
)
|
|
|
(5,625
|
)
|
|
|
|
|
|
|
|
|
|
|
(368,874
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(374,499
|
)
|
Rounding adjustments for stock split issuance
|
|
|
142
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
(21
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,130,557
|
|
|
|
10,130,557
|
|
Dividends paid @ $0.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,199,277
|
)
|
|
|
(2,199,277
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT JUNE 30, 2008
|
|
|
4,347,769
|
|
|
$
|
652,165
|
|
|
|
|
|
|
$
|
|
|
|
$
|
6,280,649
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
23,715,965
|
|
|
$
|
30,648,779
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,158,581
|
|
|
|
1,158,581
|
|
Net unrealized losses on
available-for-sale
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(319,147
|
)
|
|
|
|
|
|
|
|
|
|
|
(319,147
|
)
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
839,434
|
|
Stock compensation
|
|
|
2,250
|
|
|
|
338
|
|
|
|
|
|
|
|
|
|
|
|
35,655
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,993
|
|
Repurchase of Stock stock buyback program
|
|
|
(53,416
|
)
|
|
|
|
|
|
|
53,416
|
|
|
|
(8,012
|
)
|
|
|
(398,027
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(406,039
|
)
|
Intrinsic value of stock exercised tax effect
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,751
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,751
|
|
Dividends paid @ $0.47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,043,780
|
)
|
|
|
(1,043,780
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT DECEMBER 31, 2008
|
|
|
4,296,603
|
|
|
$
|
652,503
|
|
|
|
53,416
|
|
|
$
|
(8,012
|
)
|
|
$
|
5,926,028
|
|
|
$
|
(319,147
|
)
|
|
$
|
|
|
|
$
|
23,830,766
|
|
|
$
|
30,082,138
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,818,537
|
|
|
|
6,818,537
|
|
Net unrealized gains on
available-for-sale
securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
465,848
|
|
|
|
|
|
|
|
|
|
|
|
465,848
|
|
Total comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,284,385
|
|
Stock compensation
|
|
|
8,366
|
|
|
|
1,255
|
|
|
|
|
|
|
|
|
|
|
|
98,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99,600
|
|
Reissue treasury stock
|
|
|
53,416
|
|
|
|
|
|
|
|
(53,416
|
)
|
|
|
8,012
|
|
|
|
(8,012
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cut Bank Acquisition
|
|
|
3,484
|
|
|
|
522
|
|
|
|
|
|
|
|
|
|
|
|
498,490
|
|
|
|
|
|
|
|
100,989
|
|
|
|
|
|
|
|
600,001
|
|
Dividends paid @ $0.53
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,378,316
|
)
|
|
|
(2,378,316
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE AT DECEMBER 31, 2009
|
|
|
4,361,869
|
|
|
$
|
654,280
|
|
|
|
|
|
|
$
|
|
|
|
$
|
6,514,851
|
|
|
$
|
146,701
|
|
|
$
|
100,989
|
|
|
$
|
28,270,987
|
|
|
$
|
35,687,808
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-21
ENERGY,
INC. AND SUBSIDIARIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
Year Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
|
(Audited)
|
|
|
(Audited)
|
|
|
(Audited)
|
|
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
6,818,537
|
|
|
$
|
1,158,581
|
|
|
$
|
10,130,557
|
|
|
$
|
6,212,255
|
|
Adjustments to reconcile net income to
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization, including deferred charges and
financing costs
|
|
|
2,583,322
|
|
|
|
1,204,233
|
|
|
|
2,037,070
|
|
|
|
3,011,727
|
|
Stock-based compensation
|
|
|
99,600
|
|
|
|
35,993
|
|
|
|
249,090
|
|
|
|
|
|
Derivative assets
|
|
|
|
|
|
|
145,428
|
|
|
|
(87,581
|
)
|
|
|
80,018
|
|
Derivative liabilities
|
|
|
|
|
|
|
(146,206
|
)
|
|
|
88,188
|
|
|
|
15,354
|
|
Deferred gain
|
|
|
|
|
|
|
(82,062
|
)
|
|
|
|
|
|
|
(325,582
|
)
|
Gain on sale of assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,479,166
|
)
|
Gain on sale of securities
|
|
|
(96,888
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment tax credit
|
|
|
(21,062
|
)
|
|
|
(10,531
|
)
|
|
|
(21,062
|
)
|
|
|
(21,062
|
)
|
Deferred income taxes
|
|
|
(2,545,742
|
)
|
|
|
491,286
|
|
|
|
(176,719
|
)
|
|
|
(1,573,249
|
)
|
Impairment of other investments
|
|
|
620,789
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Extraordinary gain
|
|
|
|
|
|
|
|
|
|
|
(6,819,182
|
)
|
|
|
|
|
Changes in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
1,938,979
|
|
|
|
(5,908,400
|
)
|
|
|
(779,559
|
)
|
|
|
509,893
|
|
Natural gas and propane inventories
|
|
|
4,641,344
|
|
|
|
(4,386,465
|
)
|
|
|
(31,027
|
)
|
|
|
(615,710
|
)
|
Accounts payable
|
|
|
(238,499
|
)
|
|
|
(1,520,915
|
)
|
|
|
1,925,899
|
|
|
|
971,466
|
|
Recoverable/refundable cost of gas purchases
|
|
|
1,750,042
|
|
|
|
(485,900
|
)
|
|
|
(260,137
|
)
|
|
|
(228,388
|
)
|
Prepayments and other
|
|
|
(123,454
|
)
|
|
|
(228,933
|
)
|
|
|
(25,069
|
)
|
|
|
118,800
|
|
Equity in income of Kykuit
|
|
|
65,982
|
|
|
|
36,841
|
|
|
|
|
|
|
|
|
|
Net assets held for sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,219,927
|
)
|
Other assets
|
|
|
314,051
|
|
|
|
18,378
|
|
|
|
(309,466
|
)
|
|
|
(275,609
|
)
|
Accrued and other liabilities
|
|
|
493,998
|
|
|
|
1,576,528
|
|
|
|
(483,719
|
)
|
|
|
(2,086,253
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
16,300,999
|
|
|
|
(8,102,144
|
)
|
|
|
5,437,283
|
|
|
|
(905,433
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Construction expenditures
|
|
|
(8,854,010
|
)
|
|
|
(4,534,180
|
)
|
|
|
(3,869,832
|
)
|
|
|
(2,406,910
|
)
|
Construction expenditures discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(365,845
|
)
|
Purchase of marketable securities
|
|
|
(1,392,275
|
)
|
|
|
(2,985,898
|
)
|
|
|
(1,301,524
|
)
|
|
|
|
|
Sale of marketable securities
|
|
|
1,211,740
|
|
|
|
|
|
|
|
390,746
|
|
|
|
|
|
Purchase of fixed assets Acquisition of Bangor and
Frontier
|
|
|
|
|
|
|
|
|
|
|
(5,357,850
|
)
|
|
|
|
|
Cash acquired in acquisition
|
|
|
48,020
|
|
|
|
|
|
|
|
960,464
|
|
|
|
|
|
Proceeds from sale of assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,899,266
|
|
Other investments
|
|
|
(386,888
|
)
|
|
|
(242,606
|
)
|
|
|
(875,658
|
)
|
|
|
|
|
Customer advances received for construction
|
|
|
(70,851
|
)
|
|
|
90,093
|
|
|
|
129,641
|
|
|
|
327,376
|
|
Increase from contributions in aid of construction
|
|
|
259,090
|
|
|
|
|
|
|
|
125,678
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(9,185,174
|
)
|
|
|
(7,672,591
|
)
|
|
|
(9,798,335
|
)
|
|
|
15,453,887
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,663,213
|
)
|
Repayments of other short-term borrowings
|
|
|
(54,967
|
)
|
|
|
(1,309
|
)
|
|
|
|
|
|
|
|
|
Proceeds from lines of credit
|
|
|
19,550,000
|
|
|
|
22,100,000
|
|
|
|
14,075,495
|
|
|
|
11,012,000
|
|
Repayments of lines of credit
|
|
|
(22,645,000
|
)
|
|
|
(4,605,000
|
)
|
|
|
(14,075,495
|
)
|
|
|
(11,012,000
|
)
|
Proceeds from long-term debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,000,000
|
|
Repurchase of common stock
|
|
|
|
|
|
|
(406,038
|
)
|
|
|
(161,651
|
)
|
|
|
(2,276,192
|
)
|
Debt issuance cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(317,539
|
)
|
Sale of common stock
|
|
|
(17
|
)
|
|
|
|
|
|
|
334,350
|
|
|
|
597,151
|
|
Dividends paid
|
|
|
(2,279,202
|
)
|
|
|
(1,043,691
|
)
|
|
|
(2,025,365
|
)
|
|
|
(1,518,219
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(5,429,186
|
)
|
|
|
16,043,962
|
|
|
|
(1,852,666
|
)
|
|
|
(9,178,012
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
|
|
|
1,686,639
|
|
|
|
269,227
|
|
|
|
(6,213,718
|
)
|
|
|
5,370,442
|
|
CASH AND CASH EQUIVALENTS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
1,065,529
|
|
|
|
796,302
|
|
|
|
7,010,020
|
|
|
|
1,639,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
$
|
2,752,168
|
|
|
$
|
1,065,529
|
|
|
$
|
796,302
|
|
|
$
|
7,010,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See notes to consolidated financial statements.
F-22
ENERGY,
INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Ended
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
Year Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
|
(Audited)
|
|
|
(Audited)
|
|
|
(Audited)
|
|
|
(Audited)
|
|
|
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the period for interest
|
|
$
|
1,107,269
|
|
|
$
|
624,549
|
|
|
$
|
922,359
|
|
|
$
|
1,410,114
|
|
Cash paid during the period for income taxes
|
|
|
1,053,830
|
|
|
|
444,000
|
|
|
|
1,929,499
|
|
|
|
5,474,500
|
|
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares issued to satisfy deferred board compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84,046
|
|
Shares issued to purchase Cut Bank Gas
|
|
|
499,013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of Kykuit investment
|
|
|
|
|
|
|
|
|
|
|
242,606
|
|
|
|
|
|
Construction expenditures included in accounts payable
|
|
|
44,928
|
|
|
|
338,000
|
|
|
|
|
|
|
|
|
|
Capitalized interest
|
|
|
14,231
|
|
|
|
11,322
|
|
|
|
11,512
|
|
|
|
21,414
|
|
Repurchase of stock noncash
|
|
|
|
|
|
|
|
|
|
|
374,499
|
|
|
|
|
|
Accrued dividends
|
|
|
273,114
|
|
|
|
174,001
|
|
|
|
173,911
|
|
|
|
|
|
F-23
ENERGY,
INC. AND SUBSIDIARIES
For the year ended December 31, 2009, the six months
ended December 31, 2008,
and the years ended June 30, 2008 and 2007
|
|
1.
|
Summary
of Business and Significant Accounting Policies
|
Nature of Business Energy, Inc. (the Company)
is a regulated public entity with certain non-regulated
operations conducted through its subsidiaries. Our regulated
utility operations involve the distribution and sale of natural
gas to the public in and around Great Falls, Cascade, Cut Bank
and West Yellowstone, Montana, Cody, Wyoming, Bangor, Maine and
Elkin, North Carolina, and the distribution and sale of propane
to the public through underground propane vapor systems in
Cascade, Montana, and, until April 1, 2007, in and around
Payson, Arizona. Our West Yellowstone, Montana operation is
supplied by liquefied natural gas. Also, on January 5, 2010
we completed the acquisition of additional regulated utility
operations in Ohio and Western Pennsylvania.
Our non-regulated operations included wholesale distribution of
bulk propane in Arizona, and the retail distribution of bulk
propane in Arizona, until the sale of the Arizona operations on
April 1, 2007. The Company also markets gas and electricity
in Montana and Wyoming through its non-regulated subsidiary,
Energy West Resources (EWR).
Effective on August 3, 2009, Energy West, Incorporated
(Energy West) reorganized into a holding company
organizational structure pursuant to an Agreement and Plan of
Merger with, among others, Energy, Inc. The primary purpose of
the reorganization was to provide flexibility to make future
acquisitions through subsidiaries of the new holding company
rather than Energy West or its subsidiaries. The business
operations of the Company have not changed as a result of the
reorganization.
Basis of Presentation Effective
December 31, 2008, the Company changed its fiscal year end
from June 30 to December 31. This change was made in order
to align the Companys fiscal year end with other companies
within the industry. The resulting six-month period ended
December 31, 2008 may be referred to herein as the
Transition Period. The Company refers to the period
beginning July 1, 2007 and ending June 30, 2008 as
fiscal 2008, and the period beginning July 1,
2006 and ending June 30, 2007 as fiscal 2007.
We follow accounting standards set by the Financial Accounting
Standards Board (FASB). The FASB sets generally
accepted accounting principles (GAAP) that we follow
to ensure that we consistently report our financial condition,
results of operations and cash flows. Over the years, the FASB
and other designated GAAP-setting bodies, have issued standards
in the form of FASB Statements, Interpretations, FASB Staff
Positions, EITF consensuses, AICPA Statements of Position, etc.
References to GAAP issued by the FASB in these footnotes are to
the FASB Accounting Standards Codification, sometimes
referred to as the Codification or ASC. The FASB finalized the
Codification for periods ending on or after September 15,
2009. Prior FASB standards are no longer being issued in the
previous format
Reclassifications Certain reclassifications
of prior year reported amounts have been made for comparative
purposes. The results of operations for the propane assets
related to the sale of Arizona assets have been reclassified as
income from discontinued operations. Cash flows used in
discontinued operations for construction expenditures were
reclassified for the year ending June 30, 2007 to reflect
the expenditures as an investing activity.
Principles of Consolidation The consolidated
financial statements include the accounts of the Company and its
wholly-owned subsidiaries, Energy West Propane (EWP), EWR,
Energy West Development (EWD or Pipeline Operations), Frontier
Utilities of North Carolina (FUNC) and Penobscot Natural Gas
(PNB). The consolidated financial statements also include our
proportionate share of the assets, liabilities, revenues, and
expenses of certain producing natural gas properties that were
acquired in fiscal years 2002 and 2003. All intercompany
transactions and accounts have been eliminated.
Segments The Company reports financial
results for five business segments: Natural Gas Operations, EWR,
Pipeline Operations, Discontinued Operations, formerly reported
as Propane Operations, and Corporate and Other. Summarized
financial information for these five segments is set forth in
Note 14.
F-24
ENERGY,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Use of Estimates in Preparing Financial
Statements The preparation of financial
statements in conformity with accounting principles generally
accepted in the United States of America 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. The
Company has used estimates in measuring certain deferred charges
and deferred credits related to items subject to approval of the
various public service commissions with jurisdiction over the
Company. Estimates are also used in the development of discount
rates and trend rates related to the measurement of
postretirement benefit obligations and accrual amounts,
allowances for doubtful accounts, asset retirement obligations,
valuing derivative instruments, and in the determination of
depreciable lives of utility plant. The deferred tax asset,
valuation allowance and related extraordinary gain 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, an estimated valuation allowance, and other
assumptions.
Natural Gas Inventories Natural gas inventory
is stated at the lower of weighted average cost or net
realizable value except for Energy West Montana
Great Falls, which is stated at the rate approved by the Montana
Public Service Commission (MPSC), which includes transportation
and storage costs.
Accumulated Provisions for Doubtful Accounts
We encounter risks associated with the collection of our
accounts receivable. As such, we record a provision for those
accounts receivable that are considered to be uncollectible. In
order to calculate the appropriate provision, we primarily
utilize the historical accounts receivable write-off amounts.
The underlying assumptions used for the provision can change
from period to period and the provision could potentially cause
a material impact to our income statement and working capital.
Recoverable/Refundable Costs of Gas and Propane
Purchases The Company accounts for purchased gas
and propane costs in accordance with procedures authorized by
the MPSC, the Wyoming Public Service Commission (WPSC), the
North Carolina Utilities Commission (NCUC), the Maine Public
Utilities Commission (MPUC) and, until April 1, 2007 with
the sale of our Arizona Propane operations, the Arizona
Corporation Commission (ACC). Purchased gas and propane costs
that are different from those provided for in present rates, and
approved by the applicable commissions, are accumulated and
recovered or credited through future rate changes. As of
December 31, 2009 and 2008 and June 30, 2008 and 2007,
the Company had unrecovered purchase gas costs of $641,755 and
$2,041,280, respectively, and over-recovered purchase gas costs
of $1,452,580 and $1,022,853, respectively.
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, as applicable, at various rates. These assets are
depreciated and amortized over three to forty years.
Contributions in Aid 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
refunded wholly or in part.
Natural Gas Reserves EWR owns an undivided
interest in certain producing natural gas reserves on properties
located in northern Montana. EWD also owns an undivided interest
in certain natural gas producing properties located in northern
Montana. The Company is depleting these reserves using the
units-of-production
method. The production activities are being accounted for using
the successful efforts method. The oil and gas producing
properties are included at cost in Property, Plant and
Equipment, Net in the accompanying consolidated financial
statements. The Company is not the operator of any of the
natural gas producing wells on these properties. The production
of the gas reserves is not considered to be significant to the
operations of the Company as defined by ASC 932, Extractive
Activities Oil and Gas.
F-25
ENERGY,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Impairment of Long-Lived Assets The Company
evaluates its 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.
Recoverability of assets to be held and used is measured 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 to be recognized is measured by the amount by which
the carrying amount of the assets exceeds the fair value of the
assets. As of December 31, 2009 and 2008, and June 30,
2008 and 2007, management does not consider the value of any of
its long-lived assets to be impaired.
Stock-Based Compensation The Company accounts
for share-based compensation arrangements by recognizing
compensation costs for all share-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 grant on
the date it was awarded.
Accordingly, during the year ended December 31, 2009, the
six months ended December 31, 2008, and the years ended
June 30, 2008 and 2007, the Company recorded $27,143,
$17,355, $213,286, and $58,229, respectively, ($16,704, $10,680,
$131,256, and $35,811 net of related tax effects) of
compensation expense for stock options granted after
July 1, 2005, and for the unvested portion of previously
granted stock options that remained outstanding as of
July 1, 2005.
In the year ended December 31, 2009 and the six months
ended December 31, 2008, 15,000 and 10,000 options were
granted, respectively. In the fiscal years ended June 30,
2008 and 2007, 30,000 and 45,000 options were granted,
respectively. At December 31, 2009 and 2008, and at
June 30, 2008 and 2007, a total of 44,500, 29,500, 19,500
and 165,000 options were outstanding, respectively.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
|
|
|
Twelve Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
|
December 31, 2009
|
|
December 31, 2008
|
|
2008
|
|
2007
|
|
Expected dividend rate
|
|
|
5.24
|
%
|
|
|
5.81
|
%
|
|
|
4.47
|
%
|
|
|
4.00
|
%
|
Risk free interest rate
|
|
|
3.39
|
%
|
|
|
1.87
|
%
|
|
|
3.61
|
%
|
|
|
5.10
|
%
|
Weighted average expected lives, in years
|
|
|
8.33
|
|
|
|
3.50
|
|
|
|
2.50
|
|
|
|
2.26
|
|
Price volatility
|
|
|
42.23
|
%
|
|
|
73.24
|
%
|
|
|
31.16
|
%
|
|
|
30.00
|
%
|
Total intrinsic value of options exercised
|
|
$
|
|
|
|
$
|
|
|
|
$
|
419,890
|
|
|
$
|
218,609
|
|
Total cash received from options exercised
|
|
$
|
|
|
|
$
|
|
|
|
$
|
293,930
|
|
|
$
|
512,175
|
|
Comprehensive Income Comprehensive income
includes net income and other comprehensive income, which for
the Company is primarily comprised of unrealized holding gains
or losses on our
available-for-sale
securities that are excluded from the statement of operations in
computing net loss and reported separately in shareholders
equity. Comprehensive income and its components are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
|
|
|
|
Twelve Months Ended
|
|
|
Six Months Ended
|
|
|
June 30
|
|
|
|
December 31 2009
|
|
|
December 31 2008
|
|
|
2008
|
|
|
2007
|
|
|
Net income
|
|
$
|
6,818,537
|
|
|
$
|
1,158,581
|
|
|
$
|
10,130,557
|
|
|
$
|
6,212,255
|
|
Other comprehensive income Change in unrealized gain/loss on
available-for-sale
securities, net of ($291,025) and $199,454 of income tax
|
|
|
465,848
|
|
|
|
(319,147
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
$
|
7,284,385
|
|
|
$
|
839,434
|
|
|
$
|
10,130,557
|
|
|
$
|
6,212,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-26
ENERGY,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Revenue Recognition Revenues are recognized
in the period that services are provided or products are
delivered. The Company records gas distribution revenues for gas
delivered to residential and commercial customers but not billed
at the end of the accounting period. The Company periodically
collects revenues subject to possible refunds pending final
orders from regulatory agencies. When this occurs, appropriate
reserves for such revenues collected subject to refund are
established.
Derivatives The Company accounts for
derivative financial instruments that are used to manage risk is
in accordance with ASC 815, Derivatives and Hedging (ASC 815).
Derivatives are recorded at estimated fair value and gains and
losses from derivative instruments are included as a component
of gas and electric wholesale revenues in the
accompanying consolidated statements of income. Contracts for
the purchase or sale of natural gas at fixed prices and notional
volumes must be valued at fair value unless the contracts
qualify for treatment as a normal purchase or
normal sale and the appropriate election has been
made. As of December 31, 2009 and 2008 and June 30,
2008 and 2007, the Company has no derivative instruments
designated and qualifying as hedges under ASC 815.
Debt Issuance and Reacquisition Costs Debt
premium, discount, and issue costs are amortized over the life
of each debt issue. Costs associated with refinanced debt are
amortized over the remaining life of the new debt.
Cash and Cash Equivalents All highly liquid
investments with original maturities of three months or less at
the date of acquisition are considered to be cash equivalents.
The Company maintains cash balances at several banks. Accounts
at each institution are insured by the Federal Deposit Insurance
Corporation up to $250,000. Deposits exceeding federal insurable
limits as of December 31, 2009 were $997,669.
Earnings Per Share Net income per common
share is computed by both the basic method, which uses the
weighted average number of our common shares outstanding, and
the diluted method, which includes the dilutive common shares
from stock options, as calculated using the treasury stock
method. The only potentially dilutive securities are the stock
options described in Note 15. Options to purchase 44,500,
29,500, 19,500 and 165,000 shares of common stock were
outstanding at December 31, 2009 and 2008 and June 30,
2008 and 2007, respectively. Earnings per share of prior periods
have been adjusted for the
3-for-2
stock split effectuated February 1, 2008.
Credit Risk Our primary market areas are
Montana, Wyoming, North Carolina, Maine and, until April 1,
2007, Arizona. Exposure to credit risk may be impacted by the
concentration of customers in these areas due to changes in
economic or other conditions. Customers include individuals and
numerous industries that may be affected differently by changing
conditions. Management believes that its credit review
procedures, loss reserves, customer deposits, and collection
procedures have adequately provided for usual and customary
credit related losses.
Effects of Regulation The Company follows the
provisions of Accounting Standards Codification (ASC) 980,
Regulated Operations, and its consolidated financial statements
reflect the effects of the different rate-making principles
followed by the various jurisdictions regulating the Company.
The economic effects of regulation can result in regulated
companies recording costs that have been or are expected to be
allowed in the ratemaking 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 (regulatory liabilities).
Income Taxes The Company files its income tax
returns on a consolidated basis. Rate-regulated operations
record cumulative increases in deferred taxes as income taxes
recoverable from customers. The Company uses 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
F-27
ENERGY,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
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. The Company has no unrecognized tax
benefits that would have a material impact to the Companys
financial statements for any open tax years. No adjustments were
recognized for uncertain tax positions during the years ended
December 31, 2009 and 2008, the six months ended
December 31, 2008, and the fiscal years ended June 30,
2008 and 2007.
The Company recognizes interest and penalties related to
unrecognized tax benefits in operating expense. As of
December 31, 2009 and 2008, the Company had no unrecognized
tax benefits, recognized no interest and penalties and had no
interest or penalties accrued related to unrecognized tax
benefits.
The Company, or one or more of its subsidiaries, files income
tax returns in the U.S. federal jurisdiction and various
state jurisdictions. With few exceptions, the Company is no
longer subject to U.S. federal tax or state and local
income tax examinations by tax authorities for tax years prior
to June 30, 2005. Currently, the Company is not being
examined by any taxing authorities.
Financial Instruments The fair value of all
financial instruments with the exception of fixed rate long-term
debt approximates carrying value because they have short
maturities or variable rates of interest that approximate
prevailing market interest rates. See Note 6 for a
discussion of the fair value of the fixed rate long-term debt.
Asset Retirement Obligations (ARO) The
Company records the fair value of a liability for an asset
retirement obligation in the period in which it was incurred.
The associated asset retirement costs are capitalized as part of
the carrying amount of the long-lived asset. The increase in
carrying value of a property associated with the capitalization
of an asset retirement cost is included in Property, plant
and equipment, net in the accompanying consolidated
balance sheets. The Company depreciates the amount added to
property, plant, and equipment, net. The accretion of the asset
retirement liability is allocated to operating expense using a
systematic and rational method. As of December 31, 2009 and
2008, the Company has recorded a net asset of $214,531 and
$256,153 and a related liability of $787,233, and $746,199,
respectively. In the future, the Company may have other asset
retirement obligations arising from its business operations.
The Company has identified but not recognized ARO liabilities
related to gas transmission and distribution assets resulting
from easements over property not owned by the Company. These
easements are generally perpetual and only require retirement
action upon abandonment or cessation of use of the property for
the specified purpose. The ARO liability is not estimable for
such easements as the Company intends to utilize these
properties indefinitely. In the event the Company decides to
abandon or cease the use of a particular easement, an ARO
liability would be recorded at that time.
Changes in the asset retirement obligation are as follows:
|
|
|
|
|
Balance July 1, 2006
|
|
$
|
650,717
|
|
Accretion
|
|
|
37,654
|
|
Balance July 1, 2007
|
|
$
|
688,371
|
|
Accretion
|
|
|
37,860
|
|
Balance June 30, 2008
|
|
$
|
726,231
|
|
Accretion
|
|
|
19,968
|
|
Balance December 31, 2008
|
|
$
|
746,199
|
|
Accretion
|
|
|
41,034
|
|
|
|
|
|
|
Balance December 31, 2009
|
|
$
|
787,233
|
|
|
|
|
|
|
Goodwill Goodwill represents the excess of
the purchase price over the fair value of identifiable net
tangible and intangible assets acquired in a business
combination. Goodwill is required to be tested for impairment
F-28
ENERGY,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
annually, which is completed in the fourth quarter, or more
frequently if events or changes in circumstances indicate that
goodwill may be impaired. At December 31, 2009, the Company
has recorded $1,056,771 of goodwill related to the acquisition
of Cut Bank Gas Company. This acquisition was completed on
November 2, 2009.
Equity Method Investments Our marketing and
production operations segment owns a 21.98% interest in Kykuit
Resources, LLC, (Kykuit), a developer and operator of oil, gas
and mineral leasehold estates located in Montana. We have
invested a total of approximately $1.5 million in Kykuit,
with a net investment after undistributed losses of
approximately $782,000.
Our obligations to make additional investments in Kykuit are
limited under the Kykuit operating agreement. We are entitled to
cease further investments in Kykuit if, in our reasonable
discretion after the results of certain initial exploration
activities are known, we deem the venture unworthy of further
investments. Even if the venture is reasonably successful, we
are obligated to invest no more than an additional
$1.5 million over the life of the venture. Other investors
in Kykuit include our chairman of the board, Richard M. Osborne,
and John D. Oil and Gas Company, a publicly held gas exploration
company, which is also the managing member of Kykuit. Also,
Mr. Osborne is the chairman of the board and chief
executive officer, and our director Mr. Gregory J. Osborne
is president and Mr. Smith is a director of John D. Oil and
Gas Company.
The loss on our equity investment in Kykuit for 2009 included an
impairment charge of $687,000, due to the write-off of drilling
costs resulting in dry holes.
We are accounting for the investment in Kykuit using the equity
method. The Companys investment in Kykuit at
December 31, 2009 and 2008 was approximately $782,000 and
$1.1 million including undistributed losses of
approximately $700,000 and $37,000, respectively.
New
Accounting Pronouncements
Recently
Adopted
Fair Value Measurements In September 2006,
the FASB issued guidance that defines fair value, establishes a
framework and gives guidance regarding the methods used for
measuring fair value, and expands disclosures about fair value
measurements. This guidance is effective for financial
statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal
years. On January 1, 2008 we elected to implement this
guidance with the one-year deferral and the adoption did not
have a material impact on our financial position, results of
operations or cash flows. Beginning January 1, 2009, we
have adopted the provisions for non-financial assets and
non-financial liabilities that are not required or permitted to
be measured at fair value on a recurring basis.
Business Combinations In December 2007, the
FASB issued new guidance on business combinations which requires
an acquirer to recognize and measure the assets acquired,
liabilities assumed and any non-controlling interests in the
acquiree at the acquisition date, measured at their fair values
as of that date, with limited exception. In addition, the new
guidance requires that acquisition-related costs will be
generally expensed as incurred and also expands the disclosure
requirements for business combinations. The effective date of
this new guidance is for years beginning after December 15,
2008 and we have adopted it on our consolidated financial
statements, effective January 1, 2009. In addition, we have
recorded as expense in the year ending December 31, 2009,
and the six months ending December 31, 2008, $830,000 and
$585,000, respectively of acquisition costs related to
acquisitions in progress as part of the transition to the new
guidance.
Noncontrolling Interests In December 2007,
the FASB issued new guidance establishing standards of
accounting and reporting on non-controlling interests in
consolidated financial statements. Also provided is guidance on
accounting for changes in the parents ownership interest
in a subsidiary, and standards of accounting for the
deconsolidation of a subsidiary due to the loss of control. The
effective date of this guidance is for fiscal years beginning
after December 15, 2008. We have adopted the guidance on
our consolidated financial statements,
F-29
ENERGY,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
effective January 1, 2009. The implementation did not have
a material impact on our consolidated financial statements.
Derivative Instruments and Hedging Activities
In March 2008, the FASB released new guidance which amends and
expands previous disclosure requirements for derivative
instruments and hedging activities and requires qualitative
disclosures about objectives and strategies for using
derivatives, quantitative disclosures about fair value amounts
of gains and losses on derivative instruments, and disclosures
about credit-risk-related contingent features in derivative
agreements. The new guidance is effective for financial
statements issued for fiscal periods beginning after
November 15, 2008. We implemented the guidance on
January 1, 2009. The implementation did not have a material
impact on our consolidated financial statements.
Interim Fair Value Disclosures In April 2009,
the FASB issued new guidance on interim disclosures about fair
value of financial instruments which requires that disclosures
regarding the fair value of financial instruments be included in
interim financial statements. This new guidance was effective
for interim periods ending after June 15, 2009. We adopted
this guidance for the period ending June 30, 2009.
Other-Than-Temporary
Impairments In April 2009, the FASB also issued
released new guidance on presentation of
other-than-temporary
impairments which changes the method for determining whether an
other-than-temporary
impairment exists for debt securities, and also requires
additional disclosures regarding
other-than-temporary
impairments. This new guidance is effective for interim and
annual periods ending after June 15, 2009. We implemented
the guidance on July 1, 2009. The implementation did not
have a material impact on our consolidated financial statements.
Accounting Standards Codification
(Codification) In June 2009, the FASB
established the Codification as the source of authoritative
generally accepted accounting principles recognized by the FASB.
All existing accounting standards are superseded, aside from
those issued by the SEC. All other accounting literature not
included in the Codification is considered non-authoritative. We
adopted the Codification as of September 30, 2009, which is
reflected in our disclosures and references to accounting
standards, with no impact to our financial position or results
of operations.
Earnings Per Share In September 2009, the
FASB issued guidance that provided corrections to various parts
of the Codification regarding EPS. The guidance is effective
immediately upon being issued. The initial adoption of this
guidance did not have an impact on the consolidated earnings or
financial position of the Company as the update amended the
reference between the Codification and pre-Codification
references.
Subsequent Events In May 2009, the FASB
issued subsequent events guidance which establishes standards of
accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or
are available to be issued. In addition it requires disclosure
of the date through which the Company has evaluated subsequent
events and whether it represents the date the financial
statements were issued or were available to be issued. This
guidance was effective for the Company on June 30, 2009.
The adoption of the subsequent events guidance did not have a
material effect on the Companys financial position or
results of operations.
Recently
Issued
Consolidation of Variable Interest Entities
In June 2009, the FASB issued new guidance on consolidation of
variable interest entities. The guidance will significantly
affect various elements of consolidation under existing
accounting standards, including the determination of whether an
entity is a variable interest entity and whether an enterprise
is a variable interest entitys primary beneficiary. This
new guidance is effective for interim and annual periods
beginning after November 15, 2009. We do not expect the
implementation of the guidance to have a material impact on our
consolidated financial statements.
F-30
ENERGY,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Fair Value Measurement Disclosures In January
2010, the FASB issued Fair Value Measurements and Disclosures
(Topic 820) Improving Disclosures about Fair Value
Measurements (ASU
No. 2010-06),
which will update the Codification to require new disclosures
for assets and liabilities measured at fair value. The
requirements include expanded disclosure of valuation
methodologies for Level 2 and Level 3 fair value
measurements, transfers in and out of Levels 1 and 2, and
gross rather than net presentation of certain changes in
Level 3 fair value measurements. The updates to the
Codification contained in ASU
No. 2010-06
are effective for interim and annual periods beginning after
December 15, 2009, except for requirements related to gross
presentation of certain changes in Level 3 fair value
measurements, which are effective for interim and annual periods
beginning after December 15, 2010. We do not expect the
implementation of the guidance to have a material impact on our
consolidated financial statements.
|
|
2.
|
Discontinued
Operations
|
Until March 31, 2007, we were engaged in the regulated sale
of propane under the business name Energy West Arizona, or
EWA, and the unregulated sale of propane under the
business name Energy West Propane Arizona, or
EWPA, collectively known as EWP. EWP distributed
propane in the Payson, Pine, and Strawberry, Arizona area
located about 75 miles northeast of Phoenix in the Arizona
Rim Country. EWPs service area included approximately
575 square miles and a population of approximately 50,000.
On July 17, 2006, we entered into an Asset Purchase
Agreement among Energy West, EWP, and SemStream, L.P. Pursuant
to the Asset Purchase Agreement, we agreed to sell, and
SemStream agreed to buy, (i) all of the assets and business
operations associated with our regulated propane gas
distribution system operated in the cities and outlying areas of
Payson, Pine, and Strawberry, Arizona (the Regulated
Business), and (ii) all of the assets and business
operations of EWP that are associated with certain
non-regulated propane assets (the
Non-Regulated Business, and together with the
Regulated Business, the Business).
SemStream purchased only the assets and business operations of
EWP that pertain to the Business within the state of Arizona,
and that also pertain to the Energy West Propane
Arizona division of our company
and/or EWP
(collectively, the Arizona Assets). Pursuant to the
Asset Purchase Agreement, SemStream paid a cash purchase price
of $15,000,000 for the Arizona Assets, plus working capital.
Pursuant to the Purchase and Sale Agreement, the sale was
conditioned on approval by the Arizona Corporation Commission,
or ACC, with the closing to occur on the first day
of the month after receipt of ACC approval. This approval was
received on March 13, 2007, and the closing date of the
transaction was April 1, 2007.
F-31
ENERGY,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The gain on the sale of these assets is presented under the
heading Gain from disposal of operations. The
results of operations for the propane assets related to this
sale have been reclassified as income from discontinued
operations in the accompanying Statement of Income, and consist
of the following:
|
|
|
|
|
|
|
Years Ended June 30
|
|
|
|
2007
|
|
|
|
(In thousands)
|
|
|
Operations (Discontinued operations)
|
|
|
|
|
Operating revenues
|
|
$
|
10,266
|
|
Propane purchased
|
|
|
6,906
|
|
|
|
|
|
|
Gross Margin
|
|
|
3,360
|
|
Operating expenses
|
|
|
2,104
|
|
|
|
|
|
|
Operating income
|
|
|
1,256
|
|
Other (income)
|
|
|
(51
|
)
|
|
|
|
|
|
Income before interest and taxes
|
|
|
1,307
|
|
Interest expense
|
|
|
333
|
|
|
|
|
|
|
Income before income taxes
|
|
|
974
|
|
Income tax (expense)
|
|
|
(378
|
)
|
|
|
|
|
|
Income from discontinued operations
|
|
|
596
|
|
|
|
|
|
|
Gain from disposal of operations
|
|
|
5,479
|
|
Income tax (expense)
|
|
|
(2,120
|
)
|
|
|
|
|
|
Net Income
|
|
$
|
3,955
|
|
|
|
|
|
|
The small Montana wholesale distribution of propane to our
affiliated utility, which was formerly reported in Propane
Operations, is now being reported in EWR.
|
|
3.
|
Acquisitions
and Extraordinary Gain
|
On October 1, 2007, the Company completed the acquisition
of Frontier Utilities, which operates a natural gas utility in
and around Elkin, North Carolina through its subsidiary,
Frontier Natural Gas. The purchase price was $4.5 million
in cash, plus adjustment for taxes and working capital,
resulting in a total purchase price of approximately
$4.9 million. On December 1, 2007, the Company
completed the acquisition of Penobscot Natural Gas for a
purchase price of approximately $226,000, plus adjustment for
working capital, resulting in a total purchase price of
approximately $434,000. Penobscot Natural Gas is the parent
company of Bangor Gas Company LLC, which operates a natural gas
utility in and around Bangor, Maine.
The results of operations for Frontier Utilities and Penobscot
Natural Gas have been included in the consolidated financial
statements since the dates of acquisition.
Under ASC 805, Business Combinations (formerly FAS 141),
the Company has recorded these stock acquisitions as if the net
assets of the targets were acquired. For income tax purposes,
the Company is permitted to succeed to the
operations of the acquired companies, whereby the Company may
continue to depreciate the assets at their historical tax cost
bases. As a result, the Company may continue to depreciate
approximately $82.0 million of capital assets using the
useful lives and rates employed by both Frontier Utilities and
Penobscot Natural Gas. This treatment results in a potential
future federal and state income tax benefit of approximately
$19.0 million over an estimated
24-year
period using applicable federal and state income tax rates.
Under Internal Revenue Code Section 382, our ability to
recognize tax deductions as a result of this tax benefit will be
limited during the first 5 years following the acquisitions.
F-32
ENERGY,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Following FASB ASC 740, Income Taxes, our balance sheet at
December 31, 2008 reflects a gross deferred tax asset of
approximately $19.0 million, offset by a valuation
allowance of approximately $7.5 million, resulting in a net
deferred tax asset associated with the acquisition of
approximately $11.5 million.
The excess of the net deferred tax assets received in the
transactions over the total purchase consideration has been
reflected in fiscal 2008 as an extraordinary gain of
approximately $6.8 million on the accompanying statement of
income in accordance with the provisions of ASC 805, Business
Combinations (formerly FAS 141).
During the year ended December 31, 2009, we conducted a
study of the deferred tax asset and valuation allowance, and
based on our updated earnings projections and more complete data
from the sellers tax returns, we determined that
$2.8 million of the valuation allowance related to federal
taxes is no longer needed but that the state portion should be
increased by $400,000. Accordingly, we reduced the valuation
allowance to approximately $5.1 million. In addition, we
increased the gross deferred tax asset to $19.1 million. As
a result, the net deferred tax asset increased to approximately
$14.0 million at December 31, 2009. Included in the
results of our Corporate and Other segment for the year ended
December 31, 2009 is the income tax benefit of
approximately $2.8 million related to the elimination of
the federal portion of the valuation allowance. An income tax
expense of $300,000 resulting from the increase in the state
portion of the valuation allowance partially offset by the
increase in the gross deferred tax asset is included in the
results of the Natural Gas Operations segment.
On November 2, 2009, we completed the acquisition of a
majority of the outstanding shares of Cut Bank Gas Company, a
natural gas utility serving Cut Bank, Montana. Pursuant to a
stock purchase agreement with the founders and controlling
shareholders of Cut Bank Gas, we acquired 83.16% for a purchase
price of $500,000 paid in shares of our common stock. We also
offered to purchase the remaining shares of Cut Bank Gas from
the shareholders that owned the other 16.84%, most of whom have
tendered their shares. The acquisition increased our customers
by approximately 1,500.
The acquisition of Cut Bank Gas Company is accounted for under
the purchase method of accounting. Under the purchase method of
accounting, the purchase price is allocated to the assets
acquired and liabilities assumed based on their estimated fair
values. The assets acquired and liabilities assumed are not
material to the financial position of the Company and the
results of operations from Cut Bank Gas are not material to our
Consolidated Statement of Income.
In order to provide a stable source of natural gas for a portion
of its requirements, EWR and EWD purchased ownership in two
natural gas production properties and three gathering systems
located in north central Montana. The purchases were made in May
2002 and March of 2003. The Company is depleting the cost of the
gas properties using the
units-of-production
method. As of December 31, 2009, management of the Company
estimated the net gas reserves at 2.3 Bcf (unaudited) and a
$2,940,000 net present value after applying a 10% discount
(unaudited), considering reserve estimates provided by an
independent reservoir engineer. The net book value of the gas
properties totals $1,746,982 and is included in the
Property, plant and equipment, net in the
accompanying consolidated financial statements.
Beginning in fiscal 2007, the Company engaged in a limited
drilling program of developmental wells on these existing
properties. As of December 31, 2008, this program was
complete. Five wells had been drilled and were capitalized as
part of the drilling program, with two wells finding production
and being tied in to the gathering system. The reserves from
these wells are included in the reserves listed above.
The wells are depleted based upon production at approximately
10% per year as of December 31, 2009. For the year ended
December 31, 2009, EWRs portion of the daily gas
production was approximately 412 Mcf per day, or
approximately 13.1% of EWRs present volume requirements.
F-33
ENERGY,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In March 2003, EWD acquired working interests in a group of
producing natural gas properties consisting of 47 wells and
a 75% ownership interest in a gathering system located in
northern Montana.
For the year ended December 31, 2009, EWDs portion of
the daily gas production was approximately 162 Mcf per day,
or approximately 5.1% of EWRs present volume requirements.
EWR and EWDs combined portion of the estimated daily gas
production from the reserves is approximately 574 Mcf, or
approximately 18.2% of our present volume requirements in our
Montana market. The wells are operated by an independent third
party operator who also has an ownership interest in the
properties. In 2002 and 2003 the Company entered into agreements
with the operator of the wells to purchase a portion of the
operators share of production. The production of the gas
reserves is not considered to be significant to the operations
of the Company as defined by FASB ASC 932, Extractive
Activities Oil and Gas.
Securities investments that the Company has the positive intent
and ability to hold to maturity are classified as
held-to-maturity
securities and recorded at amortized cost. 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 investments and other
assets on the balance sheet, with the change in fair value
during the period excluded from earnings and recorded net of tax
as a component of other comprehensive income.
The following is a summary of
available-for-sale
securities at December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
Investment
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
at Cost
|
|
|
Gains
|
|
|
Fair Value
|
|
|
Common Stock
|
|
$
|
4,172,899
|
|
|
$
|
238,272
|
|
|
$
|
4,411,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
Investment
|
|
|
Unrealized
|
|
|
Estimated
|
|
|
|
at Cost
|
|
|
Losses
|
|
|
Fair Value
|
|
|
Common Stock
|
|
$
|
3,895,476
|
|
|
$
|
(518,601
|
)
|
|
$
|
3,376,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2009 and 2008, unrealized gains on
available-for-sale
securities of $146,701 (net of $91,571 in taxes) and unrealized
losses on
available-for-sale
securities of $319,147 (net of $199,454 in taxes) were included
in accumulated other comprehensive income in the accompanying
Consolidated Balance Sheets. There were no unrealized gains or
losses during the 12 months ended June 30, 2008 and
2007.
|
|
6.
|
Fair
Value Measurements
|
Fair value is defined as the price that would be received to
sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date
(i.e., an exit price). Measuring fair value requires the use of
market data or assumptions that market participants would use in
pricing the asset or liability, including assumptions about risk
and the risks inherent in the inputs to the valuation technique.
These inputs can be readily observable, corroborated by market
data, or generally unobservable. Valuation techniques are
required to maximize the use of observable inputs and minimize
the use of unobservable inputs. Our management believes that we
are not exposed to significant interest or credit risk from
these financial instruments.
Valuation
Hierarchy
A fair value hierarchy that prioritizes the inputs used to
measure fair value, and requires fair value measurements to be
categorized based on the observability of those inputs has been
established by the applicable accounting guidance. The hierarchy
gives the highest priority to unadjusted quoted prices in active
F-34
ENERGY,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
markets for identical assets or liabilities (Level 1
inputs) and the lowest priority to unobservable inputs
(Level 3 inputs). The following table represents the
Companys fair value hierarchy for its financial assets
measured at fair value on a recurring basis as of
December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009
|
|
|
|
Level I
|
|
|
Level 2
|
|
|
Level 3
|
|
|
TOTAL
|
|
|
Available-for-sale
securities
|
|
|
4,411,171
|
|
|
|
|
|
|
|
|
|
|
|
4,411,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2008
|
|
|
|
Level I
|
|
|
Level 2
|
|
|
Level 3
|
|
|
TOTAL
|
|
|
Available-for-sale
securities
|
|
|
3,376,875
|
|
|
|
|
|
|
|
|
|
|
|
3,376,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,376,875
|
|
|
|
|
|
|
|
|
|
|
|
3,376,875
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.
|
Property,
Plant and Equipment
|
Property, plant and equipment consist of the following as of
December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Gas transmission and distribution facilities
|
|
$
|
56,346,112
|
|
|
$
|
49,359,031
|
|
Land
|
|
|
164,903
|
|
|
|
155,252
|
|
Buildings and leasehold improvements
|
|
|
2,967,108
|
|
|
|
2,945,258
|
|
Transportation equipment
|
|
|
1,985,805
|
|
|
|
1,622,798
|
|
Computer equipment
|
|
|
3,165,260
|
|
|
|
3,164,821
|
|
Other equipment
|
|
|
3,984,996
|
|
|
|
2,209,783
|
|
Construction
work-in-progress
|
|
|
2,639,507
|
|
|
|
2,494,646
|
|
Producing natural gas properties
|
|
|
3,911,404
|
|
|
|
5,009,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
75,165,095
|
|
|
|
66,960,821
|
|
Accumulated depreciation, depletion, and amortization
|
|
|
(33,961,427
|
)
|
|
|
(32,056,379
|
)
|
Total
|
|
$
|
41,203,668
|
|
|
$
|
34,904,442
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment includes contributions in aid of
construction of $1,677,549 and $1,418,460, at December 31,
2009 and 2008, respectively.
Deferred charges consist of the following as of
December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Regulatory asset for property tax
|
|
$
|
1,247,993
|
|
|
$
|
1,554,244
|
|
Regulatory asset for income taxes
|
|
|
452,646
|
|
|
|
452,646
|
|
Regulatory assets for deferred environmental remediation costs
|
|
|
22,042
|
|
|
|
114,960
|
|
Rate case costs
|
|
|
15,448
|
|
|
|
18,538
|
|
Unamortized debt issue costs
|
|
|
356,339
|
|
|
|
417,768
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,094,468
|
|
|
$
|
2,558,156
|
|
|
|
|
|
|
|
|
|
|
Regulatory assets will be recovered over a period of
approximately seven to twenty years.
F-35
ENERGY,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The regulatory asset for property tax is recovered in rates over
a ten-year period starting January 1, 2004. The income
taxes and environmental remediation costs earn a return equal to
that of the Companys rate base. No other assets listed
above earn a return or are recovered in the rate structure.
|
|
9.
|
Accrued
and Other Current Liabilities
|
Accrued and other current liabilities consist of the following
as of December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Property tax settlement current portion
|
|
$
|
242,120
|
|
|
$
|
235,772
|
|
Payable to employee benefit plans
|
|
|
81,045
|
|
|
|
57,617
|
|
Accrued vacation
|
|
|
55,416
|
|
|
|
464,153
|
|
Customer deposits
|
|
|
521,535
|
|
|
|
501,248
|
|
Accrued interest
|
|
|
31,900
|
|
|
|
4,897
|
|
Accrued taxes other than income
|
|
|
640,801
|
|
|
|
457,084
|
|
Deferred payments from levelized billing
|
|
|
2,176,671
|
|
|
|
2,075,860
|
|
Other regulatory liabilities
|
|
|
59,996
|
|
|
|
|
|
Other
|
|
|
785,399
|
|
|
|
1,150,817
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,594,883
|
|
|
$
|
4,947,448
|
|
|
|
|
|
|
|
|
|
|
|
|
10.
|
Other
Long-Term Liabilities
|
Other long-term liabilities consist of the following as of
December 31, 2009 and 2008:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
Asset retirement obligation
|
|
$
|
787,233
|
|
|
$
|
746,199
|
|
Customer advances for construction
|
|
|
800,250
|
|
|
|
824,955
|
|
Regulatory liability for income taxes
|
|
|
83,161
|
|
|
|
83,161
|
|
Regulatory liability for gas costs
|
|
|
131,443
|
|
|
|
|
|
Long-term notes payable
|
|
|
3,416
|
|
|
|
|
|
Property tax settlement
|
|
|
486,008
|
|
|
|
729,008
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,291,511
|
|
|
$
|
2,383,323
|
|
|
|
|
|
|
|
|
|
|
|
|
11.
|
Credit
Facilities and Long-Term Debt
|
On June 29, 2007, the Company replaced its existing credit
facility and long-term notes with a new $20,000,000 revolving
credit facility with Bank of America and $13,000,000 of
6.16% Senior unsecured notes. The prior Bank of America
credit facility had been secured, on an equal and ratable basis
with our previously outstanding long-term debt, by substantially
all of our assets.
Bank of America Line of Credit The new credit facility
includes an annual commitment fee equal to 0.20% of the unused
portion of the facility and interest on amounts outstanding at
the London Interbank Offered Rate, plus 120 to 145 basis
points, for interest periods selected by the Company.
For the year ended December 31, 2009, the weighted average
interest rate on the facility was 3.25% .
$13,000,000 6.16% Senior Unsecured Notes
On June 29, 2007, the Company authorized the sale of
$13,000,000 aggregate principal amount of its 6.16% Senior
Unsecured Notes, due June 29, 2017. The proceeds of these
notes were used to refinance our existing notes the
Series 1997 Notes, the Series 1993 Notes, and the
F-36
ENERGY,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Series 1992B Industrial Development Revenue Obligations.
With this refinancing, we expensed the remaining debt issue
costs of $991,000 in fiscal 2007, and incurred approximately
$463,000 in new debt issue costs to be amortized over the life
of the note using the effective interest method.
Series 1997 Notes Payable On
August 1, 1997, the Company issued $8,000,000 of
Series 1997 notes bearing interest at the rate of 7.5%,
payable semiannually on June 1 and December 1 of each year. All
principal amounts of the 1997 notes then outstanding, plus
accrued interest, were due and payable on June 1, 2012. At
our option, the notes could be redeemed at any time prior to
maturity, in whole or part, at 101% of face value if redeemed
before June 1, 2005, and at 100% of face value if redeemed
thereafter, plus accrued interest. On June 27, 2007, the
Company redeemed the notes under this issue at 100% of face
value plus accrued interest.
Series 1993 Notes Payable On
June 24, 1993, the Company issued $7,800,000 of
Series 1993 notes bearing interest at rates ranging from
6.20% to 7.60%, payable semiannually on June 1 and December 1 of
each year. The 1993 notes mature serially in increasing amounts
on June 1 of each year beginning in 1999 and extending to
June 1, 2013. At our option, the notes could be redeemed at
any time prior to maturity, in whole or part, at redemption
prices declining from 103% to 100% of face value, plus accrued
interest. On June 27, 2007, the Company redeemed the
Series 1993 notes at 100% of face value plus accrued
interest.
Series 1992B Industrial Development Revenue
Obligations On September 15, 1992, Cascade
County, Montana issued $1,800,000 of Series 1992B
Industrial Development Revenue Bonds (the 1992B
Bonds) bearing interest at rates ranging from 3.35% to
6.50%, and loaned the proceeds to the Company. The Company is
required to pay the loan, with interest, in amounts and on a
schedule to repay the 1992B Bonds. Interest is payable
semiannually on April 1 and October 1 of each year. The 1992B
Bonds began maturing serially in increasing amounts on
October 1, 1993, and continuing on each October 1
thereafter until October 1, 2012. At our option, 1992B
Bonds may be redeemed in whole or in part on any interest
payment date at redemption prices declining from 101% to 100% of
face value, plus accrued interest. On June 27, 2007, the
Company redeemed the 1992B Bonds at 100% of face value plus
accrued interest.
Term Loan In 2004, in addition to the
Series 1997 and 1993 Notes and the 1992B Bonds discussed
above, the Company had a revolving credit agreement with Bank of
America. In March 2004, the Company converted $8,000,000 of
existing revolving loans into a $6,000,000, five-year term loan
with principal payments of $33,333 each month and a $2,000,000
short-term loan. On May 26, 2005, the Company completed the
sale of 287,500 common shares at a price of $8.00 per share for
net proceeds of $2,202,956 after deducting $97,044 of issuance
expenses. $2,000,000 of the equity proceeds were immediately
used to pay off the $2,000,000 short-term loan. The remaining
balance of the $6,000,000 five-year term loan was paid in full
on April 2, 2007 with proceeds from the sale of the Arizona
propane assets.
Debt Covenants The Companys
6.16% Senior Unsecured Note and Bank of America credit
facility agreements contain various covenants, which include,
among others, limitations on total dividends and distributions
made in the immediately preceding
60-month
period to 75% of aggregate consolidated net income for such
period, restrictions on certain indebtedness, limitations on
asset sales, and maintenance of certain
debt-to-capital
and interest coverage ratios. At December 31, 2009, the
Company believes it was in compliance with the financial
covenants under its debt agreements.
|
|
12.
|
Employee
Benefit Plans
|
The Company has a defined contribution plan (the 401k
Plan) which covers substantially all of its employees. The
plan provides for an annual contribution of 3% of salaries, with
a discretionary contribution of up to an additional 3%. Total
contributions to the 401k Plan for the year ended
December 31, 2009, the six months ended December 31,
2008, and the years ended June 30, 2008 and 2007 were
$175,940, $170,766, $130,107 and $132,131, respectively.
The Company makes matching contributions in the form of Company
stock equal to 10% of each participants elective deferrals
in our 401k Plan. The Company contributed shares of our stock
valued at $29,770, $24,735, and $21,690 in the years ended
December 31, 2009, June 30, 2008 and 2007,
respectively. The Company contributed
F-37
ENERGY,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
shares of our stock valued at $17,493 during the six months
ended December 31, 2008. In addition, a portion of our 401k
Plan consists of an Employee Stock Ownership Plan
(ESOP) that covers most of our employees. The ESOP
receives contributions of our common stock from the Company each
year as determined by the Board of Directors. The contribution
is recorded based on the current market price of our common
stock. The Company made no contributions for the year ended
December 31, 2009, the six months ended December 31,
2008, or the fiscal years ended June 30, 2008 and 2007.
The Company has sponsored a defined postretirement health
benefit plan (the Retiree Health Plan) providing
health and life insurance benefits to eligible retirees. The
Plan pays eligible retirees (post-65 years of age) up to
$125 per month in lieu of contracting for health and life
insurance benefits. The amount of this payment is fixed and will
not increase with medical trends or inflation. In addition, our
Retiree Health Plan allows retirees between the ages of 60 and
65 and their spouses to remain on the same medical plan as
active employees by contributing 125% of the current COBRA rate
to retain this coverage. The amounts paid in excess of the
current COBRA rate is held in a VEBA trust account, and benefits
for this plan are paid from assets held in the VEBA Trust
account. During fiscal 2006, the Company discontinued
contributions and is no longer required to fund the Retiree
Health Plan. As of December 31, 2009, the value of plan
assets is $273,181. The assets remaining in the trust will be
used to fund the plan until these assets are exhausted.
Significant components of our deferred tax assets and
liabilities as of December 31, 2009 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
Current
|
|
|
Long-Term
|
|
|
Current
|
|
|
Long-Term
|
|
|
Deferred tax asset:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowances for doubtful accounts
|
|
$
|
84,150
|
|
|
$
|
|
|
|
$
|
79,323
|
|
|
$
|
|
|
Unamortized investment tax credit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17,502
|
)
|
Contributions in aid of construction
|
|
|
|
|
|
|
635,484
|
|
|
|
|
|
|
|
334,460
|
|
Property, plant, and equipment
|
|
|
|
|
|
|
8,652,601
|
|
|
|
|
|
|
|
8,858,733
|
|
Other nondeductible accruals
|
|
|
38,071
|
|
|
|
37,153
|
|
|
|
203,893
|
|
|
|
26,265
|
|
Recoverable purchase gas costs
|
|
|
487,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives
|
|
|
|
|
|
|
|
|
|
|
31,561
|
|
|
|
|
|
Deferred incentive and pension accrual
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,147
|
|
Unrealized (loss) gain on securities held for sale
|
|
|
(91,571
|
)
|
|
|
|
|
|
|
199,454
|
|
|
|
|
|
Net operating loss (NOL) carryforwards
|
|
|
|
|
|
|
3,243,317
|
|
|
|
|
|
|
|
3,660,736
|
|
Other
|
|
|
291,452
|
|
|
|
995,952
|
|
|
|
10,383
|
|
|
|
972,409
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
809,755
|
|
|
|
13,564,507
|
|
|
|
524,614
|
|
|
|
13,839,248
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recoverable purchase gas costs
|
|
|
246,819
|
|
|
|
|
|
|
|
418,575
|
|
|
|
|
|
Property tax liability
|
|
|
|
|
|
|
450,594
|
|
|
|
|
|
|
|
403,341
|
|
Covenant not to compete
|
|
|
|
|
|
|
113,545
|
|
|
|
|
|
|
|
36,010
|
|
Other
|
|
|
|
|
|
|
272,928
|
|
|
|
(119,914
|
)
|
|
|
236,701
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
246,819
|
|
|
|
837,067
|
|
|
|
298,661
|
|
|
|
676,052
|
|
Net deferred tax asset (liabilities)
|
|
|
562,936
|
|
|
|
12,727,440
|
|
|
|
225,953
|
|
|
|
13,163,196
|
|
Less valuation allowance
|
|
|
|
|
|
|
(5,176,470
|
)
|
|
|
|
|
|
|
(7,469,886
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset (liabilities)
|
|
$
|
562,936
|
|
|
$
|
7,550,970
|
|
|
$
|
225,953
|
|
|
$
|
5,693,310
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-38
ENERGY,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Income tax expense for the year ended December 31, 2009,
the six months ended December 31, 2008 and the years ended
June 30, 2008 and 2007 consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Six Months Ended
|
|
|
Years Ended,
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
Current income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
2,218,263
|
|
|
$
|
(120,435
|
)
|
|
$
|
1,058,405
|
|
|
$
|
957,135
|
|
State
|
|
|
392,196
|
|
|
|
(39,303
|
)
|
|
|
52,121
|
|
|
|
164,240
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current income taxes
|
|
|
2,610,459
|
|
|
|
(159,738
|
)
|
|
|
1,110,526
|
|
|
|
1,121,375
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(2,100,967
|
)
|
|
|
944,144
|
|
|
|
241,244
|
|
|
|
137,881
|
|
State
|
|
|
(461,188
|
)
|
|
|
152,582
|
|
|
|
1,980
|
|
|
|
34,470
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deferred income taxes
|
|
|
(2,562,155
|
)
|
|
|
1,096,726
|
|
|
|
243,224
|
|
|
|
172,351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income taxes before credits
|
|
|
48,304
|
|
|
|
936,988
|
|
|
|
1,353,750
|
|
|
|
1,293,726
|
|
Investment tax credit, net
|
|
|
(21,062
|
)
|
|
|
(10,531
|
)
|
|
|
(21,062
|
)
|
|
|
(21,062
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense
|
|
$
|
27,242
|
|
|
$
|
926,457
|
|
|
$
|
1,332,688
|
|
|
$
|
1,272,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense differs from the amount computed by applying
the federal statutory rate to pre-tax income for the following
reasons:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
Six Months Ended
|
|
|
Years Ended
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
Tax expense at statutory rate of 34%
|
|
$
|
2,327,565
|
|
|
$
|
708,913
|
|
|
$
|
1,578,981
|
|
|
$
|
1,200,249
|
|
State income tax, net of federal tax benefit
|
|
|
314,906
|
|
|
|
92,993
|
|
|
|
179,835
|
|
|
|
154,620
|
|
Amortization of deferred investment tax credits
|
|
|
(21,062
|
)
|
|
|
(10,531
|
)
|
|
|
(21,062
|
)
|
|
|
(21,062
|
)
|
Decrease in valuation allowance
|
|
|
(2,781,334
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
187,167
|
|
|
|
135,082
|
|
|
|
(405,066
|
)
|
|
|
(61,143
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
27,242
|
|
|
$
|
926,457
|
|
|
$
|
1,332,688
|
|
|
$
|
1,272,664
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax from discontinued operations was $0, $0, $0, and
$2,499,875 during the year ended December 31, 2009, the six
months ended December 31, 2008, and the fiscal years ended
June 30, 2008 and 2007, respectively. Other taxes include
true ups of prior years tax expense to the various tax
returns.
|
|
14.
|
Segments
of Operations
|
The following tables set forth summarized financial information
for the Companys natural gas operations, marketing and
production operations, pipeline operations, discontinued
(formerly propane) operations, and corporate and other
operations. The Company classifies its segments to provide
investors with the view of the business through
managements eyes. The Company primarily separates its
state regulated utility businesses from the non-regulated
marketing and production business and from the federally
regulated pipeline business. The Company has regulated utility
businesses in the states of Montana, Wyoming, North Carolina and
Maine and these businesses are aggregated together to form our
natural gas operations. Transactions between reportable segments
are accounted for on the accrual basis, and eliminated prior to
external financial reporting. Inter-company
F-39
ENERGY,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
eliminations between segments consist primarily of gas sales
from the marketing and production operations to the natural gas
operations, inter-company accounts receivable, accounts payable,
equity, and subsidiary investment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended
|
|
Natural Gas
|
|
|
|
|
|
Pipeline
|
|
|
Corporate and
|
|
|
|
|
|
|
|
December 31, 2009
|
|
Operations
|
|
|
EWR
|
|
|
Operations
|
|
|
Other
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Operating revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas operations
|
|
$
|
59,301,564
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(535,946
|
)
|
|
$
|
58,765,618
|
|
Marketing and wholesale
|
|
|
|
|
|
|
19,656,795
|
|
|
|
|
|
|
|
|
|
|
|
(7,417,889
|
)
|
|
|
12,238,906
|
|
Pipeline operations
|
|
|
|
|
|
|
|
|
|
|
449,757
|
|
|
|
|
|
|
|
|
|
|
|
449,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenue
|
|
|
59,301,564
|
|
|
|
19,656,795
|
|
|
|
449,757
|
|
|
|
|
|
|
|
(7,953,835
|
)
|
|
|
71,454,281
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas purchased
|
|
|
37,587,798
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(535,946
|
)
|
|
|
37,051,852
|
|
Gas and electric wholesale
|
|
|
|
|
|
|
17,065,582
|
|
|
|
|
|
|
|
|
|
|
|
(7,417,889
|
)
|
|
|
9,647,693
|
|
Distribution, general, and administrative
|
|
|
9,942,220
|
|
|
|
526,305
|
|
|
|
85,573
|
|
|
|
7,971
|
|
|
|
|
|
|
|
10,562,069
|
|
Maintenance
|
|
|
654,281
|
|
|
|
641
|
|
|
|
11,555
|
|
|
|
|
|
|
|
|
|
|
|
666,477
|
|
Depreciation and amortization
|
|
|
1,865,941
|
|
|
|
290,872
|
|
|
|
55,740
|
|
|
|
|
|
|
|
|
|
|
|
2,212,553
|
|
Taxes other than income
|
|
|
2,200,487
|
|
|
|
26,112
|
|
|
|
23,699
|
|
|
|
|
|
|
|
|
|
|
|
2,250,298
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
52,250,727
|
|
|
|
17,909,512
|
|
|
|
176,567
|
|
|
|
7,971
|
|
|
|
(7,953,835
|
)
|
|
|
62,390,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
7,050,837
|
|
|
|
1,747,283
|
|
|
|
273,190
|
|
|
|
(7,971
|
)
|
|
|
|
|
|
|
9,063,339
|
|
Other income (expense)
|
|
|
254,326
|
|
|
|
(686,771
|
)
|
|
|
|
|
|
|
(543,889
|
)
|
|
|
|
|
|
|
(976,334
|
)
|
Interest (expense)
|
|
|
(1,134,858
|
)
|
|
|
(89,151
|
)
|
|
|
(16,841
|
)
|
|
|
(376
|
)
|
|
|
|
|
|
|
(1,241,226
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
|
6,170,305
|
|
|
|
971,361
|
|
|
|
256,349
|
|
|
|
(552,236
|
)
|
|
|
|
|
|
|
6,845,779
|
|
Income taxes (expense)
|
|
|
(2,281,053
|
)
|
|
|
(413,017
|
)
|
|
|
(100,115
|
)
|
|
|
2,766,943
|
|
|
|
|
|
|
|
(27,242
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
3,889,252
|
|
|
$
|
558,344
|
|
|
$
|
156,234
|
|
|
$
|
2,214,707
|
|
|
$
|
|
|
|
$
|
6,818,537
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures and natural gas properties
|
|
$
|
8,648,035
|
|
|
$
|
191,608
|
|
|
$
|
|
|
|
$
|
14,367
|
|
|
$
|
|
|
|
$
|
8,854,010
|
|
Total assets
|
|
$
|
62,452,569
|
|
|
$
|
6,589,065
|
|
|
$
|
725,538
|
|
|
$
|
36,401,142
|
|
|
$
|
(27,542,632
|
)
|
|
$
|
78,625,682
|
|
Equity Method investments
|
|
$
|
|
|
|
$
|
784,363
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
784,363
|
|
Goodwill
|
|
$
|
1,056,771
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,056,771
|
|
F-40
ENERGY,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
Natural Gas
|
|
|
|
|
|
Pipeline
|
|
|
Corporate and
|
|
|
|
|
|
|
|
December 31, 2008
|
|
Operations
|
|
|
EWR
|
|
|
Operations
|
|
|
Other
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Operating revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas operations
|
|
$
|
29,158,035
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(317,912
|
)
|
|
$
|
28,840,123
|
|
Marketing and wholesale
|
|
|
|
|
|
|
14,623,793
|
|
|
|
|
|
|
|
|
|
|
|
(4,932,233
|
)
|
|
|
9,691,560
|
|
Pipeline operations
|
|
|
|
|
|
|
|
|
|
|
226,157
|
|
|
|
|
|
|
|
|
|
|
|
226,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenue
|
|
|
29,158,035
|
|
|
|
14,623,793
|
|
|
|
226,157
|
|
|
|
|
|
|
|
(5,250,145
|
)
|
|
|
38,757,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas purchased
|
|
|
19,777,820
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(317,912
|
)
|
|
|
19,459,908
|
|
Gas and electric wholesale
|
|
|
|
|
|
|
12,702,580
|
|
|
|
|
|
|
|
|
|
|
|
(4,932,233
|
)
|
|
|
7,770,347
|
|
Distribution, general, and administrative
|
|
|
5,460,205
|
|
|
|
205,087
|
|
|
|
52,114
|
|
|
|
|
|
|
|
|
|
|
|
5,717,406
|
|
Maintenance
|
|
|
317,112
|
|
|
|
40
|
|
|
|
2,646
|
|
|
|
|
|
|
|
|
|
|
|
319,798
|
|
Depreciation and amortization
|
|
|
841,405
|
|
|
|
152,767
|
|
|
|
29,209
|
|
|
|
|
|
|
|
|
|
|
|
1,023,381
|
|
Taxes other than income
|
|
|
1,260,475
|
|
|
|
11,155
|
|
|
|
12,927
|
|
|
|
|
|
|
|
|
|
|
|
1,284,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
27,657,017
|
|
|
|
13,071,629
|
|
|
|
96,896
|
|
|
|
|
|
|
|
(5,250,145
|
)
|
|
|
35,575,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
1,501,018
|
|
|
|
1,552,164
|
|
|
|
129,261
|
|
|
|
|
|
|
|
|
|
|
|
3,182,443
|
|
Other income
|
|
|
160,326
|
|
|
|
(36,516
|
)
|
|
|
94
|
|
|
|
(544,253
|
)
|
|
|
|
|
|
|
(420,349
|
)
|
Interest (expense)
|
|
|
(584,484
|
)
|
|
|
(83,300
|
)
|
|
|
(9,272
|
)
|
|
|
|
|
|
|
|
|
|
|
(677,056
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
1,076,860
|
|
|
|
1,432,348
|
|
|
|
120,083
|
|
|
|
(544,253
|
)
|
|
|
|
|
|
|
2,085,038
|
|
Income taxes (expense)
|
|
|
(518,933
|
)
|
|
|
(550,701
|
)
|
|
|
(45,943
|
)
|
|
|
189,120
|
|
|
|
|
|
|
|
(926,457
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
557,927
|
|
|
$
|
881,647
|
|
|
$
|
74,140
|
|
|
$
|
(355,133
|
)
|
|
$
|
|
|
|
$
|
1,158,581
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures and natural gas properties
|
|
$
|
4,465,480
|
|
|
$
|
68,700
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
4,534,180
|
|
Total assets
|
|
$
|
59,748,521
|
|
|
$
|
7,819,863
|
|
|
$
|
717,977
|
|
|
$
|
28,468,131
|
|
|
$
|
(20,935,527
|
)
|
|
$
|
75,818,965
|
|
Equity Method investments
|
|
$
|
|
|
|
$
|
1,081,423
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,081,423
|
|
F-41
ENERGY,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural Gas
|
|
|
|
|
|
Pipeline
|
|
|
Corporate and
|
|
|
|
|
|
|
|
Year Ended June 30, 2008
|
|
Operations
|
|
|
EWR
|
|
|
Operations
|
|
|
Other
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Operating revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas operations
|
|
$
|
60,093,090
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(754,094
|
)
|
|
$
|
59,338,996
|
|
Marketing and wholesale
|
|
|
|
|
|
|
29,395,960
|
|
|
|
|
|
|
|
|
|
|
|
(12,271,879
|
)
|
|
|
17,124,081
|
|
Pipeline operations
|
|
|
|
|
|
|
|
|
|
|
370,171
|
|
|
|
|
|
|
|
|
|
|
|
370,171
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenue
|
|
|
60,093,090
|
|
|
|
29,395,960
|
|
|
|
370,171
|
|
|
|
|
|
|
|
(13,025,973
|
)
|
|
|
76,833,248
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas purchased
|
|
|
42,091,491
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(754,094
|
)
|
|
|
41,337,397
|
|
Gas and electric wholesale
|
|
|
|
|
|
|
27,105,232
|
|
|
|
|
|
|
|
|
|
|
|
(12,271,879
|
)
|
|
|
14,833,353
|
|
Distribution, general, and administrative
|
|
|
9,710,294
|
|
|
|
370,374
|
|
|
|
140,087
|
|
|
|
441,123
|
|
|
|
|
|
|
|
10,661,878
|
|
Maintenance
|
|
|
641,211
|
|
|
|
1,094
|
|
|
|
8,248
|
|
|
|
|
|
|
|
|
|
|
|
650,553
|
|
Depreciation and amortization
|
|
|
1,566,359
|
|
|
|
242,551
|
|
|
|
56,384
|
|
|
|
|
|
|
|
|
|
|
|
1,865,294
|
|
Taxes other than income
|
|
|
2,035,403
|
|
|
|
16,704
|
|
|
|
28,037
|
|
|
|
|
|
|
|
|
|
|
|
2,080,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
56,044,758
|
|
|
|
27,735,955
|
|
|
|
232,756
|
|
|
|
441,123
|
|
|
|
(13,025,973
|
)
|
|
|
71,428,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
4,048,332
|
|
|
|
1,660,005
|
|
|
|
137,415
|
|
|
|
(441,123
|
)
|
|
|
|
|
|
|
5,404,629
|
|
Other income
|
|
|
245,487
|
|
|
|
578
|
|
|
|
17
|
|
|
|
69,697
|
|
|
|
|
|
|
|
315,779
|
|
Interest (expense)
|
|
|
(933,655
|
)
|
|
|
(124,827
|
)
|
|
|
(17,863
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,076,345
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
3,360,164
|
|
|
|
1,535,756
|
|
|
|
119,569
|
|
|
|
(371,426
|
)
|
|
|
|
|
|
|
4,644,063
|
|
Income taxes (expense)
|
|
|
(1,091,105
|
)
|
|
|
(343,646
|
)
|
|
|
(40,007
|
)
|
|
|
142,070
|
|
|
|
|
|
|
|
(1,332,688
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income before extraordinary item
|
|
|
2,269,059
|
|
|
|
1,192,110
|
|
|
|
79,562
|
|
|
|
(229,356
|
)
|
|
|
|
|
|
|
3,311,375
|
|
Extraordinary gain
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,819,182
|
|
|
|
|
|
|
|
6,819,182
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
2,269,059
|
|
|
$
|
1,192,110
|
|
|
$
|
79,562
|
|
|
$
|
6,589,826
|
|
|
$
|
|
|
|
$
|
10,130,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures and natural gas properties
|
|
$
|
3,578,307
|
|
|
$
|
250,091
|
|
|
$
|
41,434
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
3,869,832
|
|
Total assets
|
|
$
|
49,414,217
|
|
|
$
|
7,486,996
|
|
|
$
|
988,318
|
|
|
$
|
25,713,911
|
|
|
$
|
(25,226,352
|
)
|
|
$
|
58,377,090
|
|
Equity Method Investments
|
|
$
|
|
|
|
$
|
1,118,264
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,118,264
|
|
F-42
ENERGY,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural Gas
|
|
|
|
|
|
Pipeline
|
|
|
Discontinued
|
|
|
|
|
|
|
|
Year Ended June 30, 2007
|
|
Operations
|
|
|
EWR
|
|
|
Operations
|
|
|
Operations
|
|
|
Eliminations
|
|
|
Consolidated
|
|
|
Operating revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Natural gas operations
|
|
$
|
47,074,560
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(635,054
|
)
|
|
$
|
46,439,506
|
|
Marketing and wholesale
|
|
|
|
|
|
|
22,466,030
|
|
|
|
|
|
|
|
|
|
|
|
(9,920,671
|
)
|
|
|
12,545,359
|
|
Pipeline operations
|
|
|
|
|
|
|
|
|
|
|
388,175
|
|
|
|
|
|
|
|
|
|
|
|
388,175
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating revenue
|
|
|
47,074,560
|
|
|
|
22,466,030
|
|
|
|
388,175
|
|
|
|
|
|
|
|
(10,555,725
|
)
|
|
|
59,373,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gas purchased
|
|
|
34,177,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(635,054
|
)
|
|
|
33,541,993
|
|
Gas and electric wholesale
|
|
|
|
|
|
|
20,185,304
|
|
|
|
|
|
|
|
|
|
|
|
(9,920,671
|
)
|
|
|
10,264,633
|
|
Distribution, general, and administrative
|
|
|
5,676,195
|
|
|
|
315,279
|
|
|
|
206,055
|
|
|
|
|
|
|
|
|
|
|
|
6,197,529
|
|
Maintenance
|
|
|
563,912
|
|
|
|
297
|
|
|
|
2,474
|
|
|
|
|
|
|
|
|
|
|
|
566,683
|
|
Depreciation and amortization
|
|
|
1,414,003
|
|
|
|
222,110
|
|
|
|
56,373
|
|
|
|
|
|
|
|
|
|
|
|
1,692,486
|
|
Taxes other than income
|
|
|
1,652,661
|
|
|
|
20,529
|
|
|
|
23,746
|
|
|
|
|
|
|
|
|
|
|
|
1,696,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses
|
|
|
43,483,818
|
|
|
|
20,743,519
|
|
|
|
288,648
|
|
|
|
|
|
|
|
(10,555,725
|
)
|
|
|
53,960,260
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
|
3,590,742
|
|
|
|
1,722,511
|
|
|
|
99,527
|
|
|
|
|
|
|
|
|
|
|
|
5,412,780
|
|
Other income
|
|
|
228,515
|
|
|
|
1,592
|
|
|
|
11,412
|
|
|
|
|
|
|
|
|
|
|
|
241,519
|
|
Interest (expense)
|
|
|
(1,896,650
|
)
|
|
|
(185,365
|
)
|
|
|
(42,140
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,124,155
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
|
1,922,607
|
|
|
|
1,538,738
|
|
|
|
68,799
|
|
|
|
|
|
|
|
|
|
|
|
3,530,144
|
|
Income taxes (expense)
|
|
|
(653,130
|
)
|
|
|
(593,078
|
)
|
|
|
(26,456
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,272,664
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
1,269,477
|
|
|
|
945,660
|
|
|
|
42,343
|
|
|
|
|
|
|
|
|
|
|
|
2,257,480
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain from disposal of operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,479,166
|
|
|
|
|
|
|
|
5,479,166
|
|
Income from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
975,484
|
|
|
|
|
|
|
|
975,484
|
|
Income tax (expense)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,499,875
|
)
|
|
|
|
|
|
|
(2,499,875
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from discontinued operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,954,775
|
|
|
|
|
|
|
|
3,954,775
|
|
Net income
|
|
$
|
1,269,477
|
|
|
$
|
945,660
|
|
|
$
|
42,343
|
|
|
$
|
3,954,775
|
|
|
$
|
|
|
|
$
|
6,212,255
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures and natural gas properties
|
|
$
|
2,024,443
|
|
|
$
|
361,379
|
|
|
$
|
21,088
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
2,406,910
|
|
Total assets
|
|
$
|
38,260,280
|
|
|
$
|
5,882,390
|
|
|
$
|
1,003,145
|
|
|
$
|
|
|
|
$
|
6,436,001
|
|
|
$
|
51,581,816
|
|
Equity Method Investments
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
Our common stock trades on the NYSE Amex Equities (formerly
known as the American Stock Exchange) under the symbol
EGAS. On February 1, 2008, the Board of
Directors authorized a
3-for-2
stock split of the companys $0.15 par value common
stock. As a result of the split, 1,437,744 additional shares
were issued, and additional paid-in capital was reduced by
$215,619. All references in the accompanying financial
statements to the
F-43
ENERGY,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
number of common shares and per-share amounts for fiscal 2008
and 2007 have been restated to reflect the stock split.
Purchases
of Equity Securities by Our Company
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maximum Number of
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Shares That May Yet
|
|
|
|
|
|
|
|
|
|
Shares Purchased as
|
|
|
be Purchased Under
|
|
|
|
Total Shares
|
|
|
Average Price Paid
|
|
|
Part of Publicly
|
|
|
the Stock
|
|
Period
|
|
Purchased
|
|
|
per share
|
|
|
Announced Plans
|
|
|
Repurchase Plan
|
|
|
May 30, 2007 June 30, 2007
|
|
|
219,522
|
|
|
$
|
10.00
|
|
|
|
219,522
|
|
|
|
|
|
July 1, 2007 June 30, 2008
|
|
|
16,780
|
|
|
$
|
9.50
|
|
|
|
16,780
|
|
|
|
|
|
July 1, 2008 December 31, 2008
|
|
|
53,416
|
|
|
$
|
7.60
|
|
|
|
53,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
289,718
|
|
|
|
|
|
|
|
289,718
|
|
|
|
158,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All shares adjusted for 3-for-2 stock split effectuated February
1, 2008.
On February 13, 2007, our Board of Directors approved a
stock repurchase plan whereby the Company intends to buy back up
to 448,500 shares of the Companys common stock. We
began this stock buyback on May 30, 2007. The stock
repurchases included 217,500 shares from Mr. Mark
Grossi, one of our directors. During the six months ended
December 31, 2008, we repurchased 53,416 shares of
common stock. During the year ended December 31, 2009,
these shares were reissued for the purchase of Cut Bank Gas.
2002 Stock Option Plan The Energy West
Incorporated 2002 Stock Option Plan (the Option
Plan) provides for the issuance of up to
300,000 shares of our common stock to be issued to certain
key employees. As of December 31, 2009, there are 44,500
options outstanding and the maximum number of shares available
for future grants under this plan is 48,500 shares.
Additionally, our 1992 Stock Option Plan (the 1992 Option
Plan), which expired in September 2002, provided for the
issuance of up to 100,000 shares of our common stock
pursuant to options issuable to certain key employees. Under the
2002 Option Plan and the 1992 Option Plan (collectively,
the Option Plans), the option price may not be less
than 100% of the common stock fair market value on the date of
grant (in the event of incentive stock options, 100% of the fair
market value if the employee owns more than 10% of our
outstanding common stock). Pursuant to the Option Plans, the
options vest over four to five years and are exercisable over a
five to ten-year period from date of issuance. When the 1992
Option Plan expired in September 2002, 12,600 shares
remained unissued and were no longer available for issuance.
During fiscal year 2008, 54,375 stock options were exercised in
a noncash transaction for the exercise price of $333,988. As
part of the transaction, 37,500 shares were canceled and
returned to authorized/unissued stock at a value of $374,499.
These shares were accepted by the Company as total payment of
the exercise price and the employees share of related
payroll taxes.
Stock Option Disclosures The fair value of
each option grant is estimated on the date of grant using the
Black-Scholes option pricing model. See Note 1 for the
related pro forma disclosures. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes
option pricing.
A summary of the status of our stock option plans as of
December 31, 2009 and 2008, and June 30, 2008 and
2007, and changes during the six months and years ended on these
dates is presented below.
F-44
ENERGY,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Average
|
|
|
Intrinsic
|
|
|
|
Shares
|
|
|
Exercise Price
|
|
|
Value
|
|
|
Outstanding July 1, 2006
|
|
|
218,250
|
|
|
$
|
5.56
|
|
|
|
|
|
Granted
|
|
|
45,000
|
|
|
$
|
7.03
|
|
|
|
|
|
Exercised
|
|
|
(93,750
|
)
|
|
$
|
5.47
|
|
|
|
|
|
Expired
|
|
|
(4,500
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding June 30, 2007
|
|
|
165,000
|
|
|
$
|
5.98
|
|
|
|
|
|
Granted
|
|
|
30,000
|
|
|
$
|
6.59
|
|
|
|
|
|
Exercised
|
|
|
(109,500
|
)
|
|
$
|
3.82
|
|
|
|
|
|
Expired
|
|
|
(66,000
|
)
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding June 30, 2008
|
|
|
19,500
|
|
|
$
|
9.10
|
|
|
|
|
|
Granted
|
|
|
10,000
|
|
|
$
|
7.10
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
$
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2008
|
|
|
29,500
|
|
|
$
|
9.10
|
|
|
|
|
|
Granted
|
|
|
15,000
|
|
|
$
|
8.71
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
$
|
|
|
|
|
|
|
Expired
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding December 31, 2009
|
|
|
44,500
|
|
|
$
|
8.52
|
|
|
$
|
79,190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable December 31, 2009
|
|
|
23,750
|
|
|
$
|
9.14
|
|
|
$
|
27,550
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The weighted average fair value of options granted during the
year ended December 31, 2009, six months ended
December 31, 2008 and years ended June 30, 2008 and
2007 was $2.50, $2.52, $2.33, and $2.50, respectively. At
December 31, 2009, there was $40,356 of total unrecognized
compensation cost related to stock-based compensation. That cost
is expected to be recognized over a period of three years.
The following information applies to options outstanding at
December 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Remaining
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Contractual
|
|
|
|
|
|
Average
|
|
|
|
Exercise
|
|
|
Number
|
|
|
Exercise
|
|
|
Life
|
|
|
Number
|
|
|
Exercise
|
|
Grant Date
|
|
Price
|
|
|
Outstanding
|
|
|
Price
|
|
|
(Years)
|
|
|
Exercisable
|
|
|
Price
|
|
|
1/6/2006
|
|
$
|
6.35
|
|
|
|
4,500
|
|
|
$
|
6.35
|
|
|
|
1.01
|
|
|
|
|
|
|
$
|
6.35
|
|
12/1/2007
|
|
$
|
9.93
|
|
|
|
15,000
|
|
|
$
|
9.93
|
|
|
|
0.08
|
|
|
|
15,000
|
|
|
$
|
9.93
|
|
12/1/2008
|
|
$
|
7.10
|
|
|
|
10,000
|
|
|
$
|
7.10
|
|
|
|
8.92
|
|
|
|
5,000
|
|
|
$
|
7.10
|
|
6/3/2009
|
|
$
|
8.44
|
|
|
|
5,000
|
|
|
$
|
8.44
|
|
|
|
4.42
|
|
|
|
1,250
|
|
|
$
|
8.44
|
|
12/1/2009
|
|
$
|
8.85
|
|
|
|
10,000
|
|
|
$
|
8.85
|
|
|
|
9.92
|
|
|
|
2,500
|
|
|
$
|
8.85
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,500
|
|
|
|
|
|
|
|
|
|
|
|
23,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the year ended December 31, 2009, the six months ended
December 31, 2008, and the years ended June 30, 2008
and 2007, all stock options granted have an exercise price equal
to the fair market value of the Companys stock at the date
of grant.
F-45
ENERGY,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Termination of Preferred Stock Rights Agreement by Amendment
of Final Expiration Date Expiration of the Preferred
Stock Purchase Rights On April 23, 2007,
the Companys Board of Directors approved Amendment
No. 2 (Amendment No. 2) to the
Companys Preferred Stock Rights Agreement, dated
June 3, 2004, as previously amended by Amendment No. 1
thereto dated May 25, 2005 (the Rights
Agreement). Amendment No. 2 accelerates the Final
Expiration Date of the Rights Agreement so as to cause the
Rights Agreement, as well as the Preferred Stock Purchase Rights
(the Rights) defined by the Rights Agreement, to
expire, terminate and cease to exist at 5:00 p.m., New York
time (EST) on May 25, 2007. Amendment No. 2 became
effective April 24, 2007.
The Rights Agreement was designed and approved by the Board of
Directors to deter coercive tactics by an acquirer in connection
with any unsolicited attempt to acquire or take over the Company
in a manner or on terms not approved by the Board of Directors.
Under the Rights Agreement, any Acquiring Person (as
defined in the Rights Agreement) was generally precluded from
acquiring additional shares of common stock without becoming
subject to significant dilution as a result of triggering the
dilutive provisions of the Rights Agreement, commonly known as a
poison pill. Amendment No. 2 terminated the
Rights Agreement on May 25, 2007, thus permitting Acquiring
Persons after that date to acquire additional shares of Common
Stock of the Company without being subject to such dilution.
|
|
16.
|
Commitments
and Contingencies
|
Commitments In 2000, the Company entered into
a ten year transportation agreement with Northwestern Energy
that fixed the cost of pipeline and storage capacity. Based on
original contract prices, the minimum obligation under this
agreement at December 31, 2009 was $1,064,724 for the year
ending December 31, 2010.
The Companys operating unit, Bangor Gas Company, LLC
entered into an agreement with Maritimes and Northeast Pipeline
for the transportation and storage of natural gas. Future
obligations due to Maritimes and Northeast Pipeline consist of
the following:
|
|
|
|
|
Year ending December 31:
|
|
|
|
|
2010
|
|
|
500,874
|
|
2011
|
|
|
500,874
|
|
2012
|
|
|
500,874
|
|
2013
|
|
|
500,874
|
|
2014
|
|
|
500,874
|
|
Thereafter
|
|
|
1,592,474
|
|
|
|
|
|
|
Total
|
|
$
|
4,096,844
|
|
|
|
|
|
|
The Company also guarantees the gas supply obligations of its
subsidiaries for up to $7.0 million of amounts purchased.
Environmental Contingency The Company owns
property on which it operated a manufactured gas plant from 1909
to 1928. The site is currently used as an office facility for
Company field personnel and storage location for certain
equipment and materials. The coal gasification process utilized
in the plant resulted in the production of certain by-products
that have been classified by the federal government and the
State of Montana as hazardous to the environment.
In 1999, the Company received approval from the Montana
Department of Environmental Quality (MDEQ) for its
plan for remediation of soil contaminants. The Company has
completed its remediation of soil contaminants and in April 2002
received a closure letter from MDEQ approving the completion of
such remediation program.
The Company and its consultants continue to work with the MDEQ
relating to the remediation plan for water contaminants. The
MDEQ has established regulations that allow water contaminants
at a site to exceed standards if it is technically impracticable
to achieve them. Although the MDEQ has not established guidance
to attain a
F-46
ENERGY,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
technical waiver, the U.S. Environmental Protection Agency
(EPA) has developed such guidance. The EPA guidance
lists factors which render remediations technically
impracticable. The Company has filed a request for a waiver
respecting compliance with certain standards with the MDEQ. As
of December, 31, 2009 there has been no action on our waiver
request by the MDEQ.
At December 31, 2009, we had incurred cumulative costs of
approximately $2.1 million in connection with our
evaluation and remediation of the site. On May 30, 1995, we
received an order from the Montana Public Service Commission
(MPSC) allowing for recovery of the costs associated
with the evaluation and remediation of the site through a
surcharge on customer bills. As of December 31, 2009, we
had recovered approximately $2.1 million through such
surcharges. As of December 31, 2009, the cost remaining to
be recovered through the on-going rate is $22,000.
We are required to file with the MPSC every two years for
approval to continue the recovery of these costs through a
surcharge. During fiscal 2007, the MPSC approved the
continuation of the recovery of these costs with its order dated
May 15, 2007. During fiscal 2007, the MPSC approved the
continuation of the recovery of these costs with its order dated
May 15, 2007. Pursuant to this order, we filed an
application with the MPSC on June 30, 2009 for continued
recovery of these costs. On February 2, 2010 the MPSC
issued its order granting recovery through February 28,
2010, at which time the recovery will be complete and the
recovery surcharge extinguished.
Derivative Contingencies Among the risks
involved in natural gas marketing is the risk of nonperformance
by counterparties to contracts for purchase and sale of natural
gas. EWR is party to certain contracts for purchase or sale of
natural gas at fixed prices for fixed time periods. Some of
these contracts are recorded as derivatives, valued on a
mark-to-market
basis.
Litigation 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.
On February 21, 2008, a lawsuit captioned Shelby Gas
Association v. Energy West Resources, Inc.,
Case No. DV-08-008, was filed in the Ninth Judicial
District Court of Toole County, Montana. Shelby Gas Association
(Shelby) alleges a breach of contract by the
Companys subsidiary, EWR, to provide natural gas to
Shelby. The parties each filed cross motions for summary
judgment. The court heard oral arguments for the pending motions
on July 24, 2009. On September 9, 2009, the court
ruled that Shelby Gas Association can proceed with their case
for damages. The court also ruled that we can seek a setoff
against any damages awarded to Shelby in an amount equal to the
damages the Company has suffered as a result of Shelbys
alleged breach of contract. On March 24, 2010, the judge
handling the case granted the Companys motions in limine
regarding various aspects of damages which Shelby was seeking,
including disallowance of attorneys fees, punitive damages
and certain consequential damages. A trial has been set for
April 2010. The Company continues to believe that this lawsuit
is without merit and is vigorously defending itself.
In the Companys opinion, the outcome of these lawsuits,
including the Shelby litigation, will not have a material
adverse effect on the Companys financial condition, cash
flows or results of operations.
We are party to certain other legal proceedings in the normal
course of our business, that, in the opinion of management, are
not material to our business or financial condition. The Company
utilizes various risk management strategies, including
maintaining liability insurance against certain risks, employee
education and safety programs, and other processes intended to
reduce liability risk.
The Company reached agreement with the Montana Department of
Revenue (DOR) to settle personal property tax claims
for the years
1997-2002.
The settlement amount is being paid in ten annual installments
of $243,000 each, beginning November 30, 2003. The Company
has obtained rate relief that includes full recovery of the
property tax associated with the DOR settlement.
F-47
ENERGY,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Operating Leases The Company leases certain
properties including land, office buildings, and other equipment
under non-cancelable operating leases. The future minimum lease
payments on these leases are as follows:
|
|
|
|
|
Year ended:
|
|
|
|
|
December 31, 2010
|
|
|
229,083
|
|
December 31, 2011
|
|
|
144,675
|
|
December 31, 2012
|
|
|
89,926
|
|
December 31, 2013
|
|
|
85,947
|
|
December 31, 2014
|
|
|
85,151
|
|
Thereafter
|
|
|
122,681
|
|
|
|
|
|
|
|
|
$
|
757,463
|
|
|
|
|
|
|
Lease expense from continuing operations resulting from
operating leases for the year ended December 31, 2009, the
six months ended December 31, 2008 and the years ended
June 30, 2008 and 2007 totaled $238,869, $149,563, $233,947
and $90,624, respectively.
|
|
17.
|
Financial
Instruments and Risk Management
|
Management of Risks Related to Derivatives
The Company and its subsidiaries are subject to certain risks
related to changes in certain commodity prices and risks of
counterparty performance. The Company has established policies
and procedures to manage such risks. The Company has a Risk
Management Committee comprised of Company officers and
management to oversee our risk management program as defined in
its risk management policy. The purpose of the risk management
program is to minimize adverse impacts on earnings resulting
from volatility of energy prices, counterparty credit risks, and
other risks related to the energy commodity business.
In order to mitigate the risk of natural gas market price
volatility related to firm commitments to purchase or sell
natural gas or electricity, from time to time the Company and
its subsidiaries have entered into hedging arrangements. Such
arrangements may be used to protect profit margins on future
obligations to deliver gas at a fixed price, or to protect
against adverse effects of potential market price declines on
future obligations to purchase gas at fixed prices.
The Company accounts for certain of such purchases or sale
agreements in accordance with ASC 815, Derivatives and Hedging.
Such contracts are reflected in our financial statements as
derivative assets or derivative liabilities and valued at
fair value, determined as of the date of the balance
sheet. Fair value accounting treatment is also referred to as
mark-to-market
accounting.
Mark-to-market
accounting results in disparities between reported earnings and
realized cash flow, because changes in the derivative values are
reported in our Consolidated Statement of Income as an increase
or (decrease) in Revenues Gas and
Electric Wholesale without regard to whether
any cash payments have been made between the parties to the
contract. If such contracts are held to maturity, the cash flow
from the contracts and their hedges are realized over the life
of the contracts. ASC 815 requires that contracts for purchase
or sale at fixed prices and volumes must be valued at fair value
(under
mark-to-market
accounting) unless the contracts qualify for treatment as a
normal purchase or normal sale.
Quoted market prices for natural gas derivative contracts of the
Company and its subsidiaries are generally not available.
Therefore, to determine the fair value of natural gas derivative
contracts, the Company uses internally developed valuation
models that incorporate independently available current and
forecasted pricing information.
As of December 31, 2009, all of the Companys
contracts for purchase or sale at fixed prices and volumes
qualified for treatment as a normal purchase or a normal
sale.
F-48
ENERGY,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other than the item mentioned below, no significant events have
occurred subsequent to the Companys year end. Subsequent
events have been evaluated through the date these financial
statements were issued.
Acquisition of Ohio Gas Utilities by Mergers
As previously reported in our
Form 8-K
filed on January 11, 2010 with the SEC, on January 5,
2010 we completed the acquisition of Lightning Pipeline Company,
Inc. (Lightning Pipeline), Great Plains Natural Gas
Company (Great Plains), Brainard Gas Corp.
(BGC) and Great Plains Land Development Co., LTD.
(GPL, and collectively with Lightning Pipeline,
Great Plains and BGC, the Ohio Companies and each an
Ohio Company). Lightning Pipeline is the parent
company of Orwell Natural Gas Company (Orwell) and
Great Plains is the parent company of Northeast Ohio Natural Gas
Corp. (NEO). Orwell, NEO and BGC are natural gas
distribution companies that serve approximately 23,131 customers
in Northeastern Ohio and Western Pennsylvania. The acquisition
increased the Companys customers by more than 50%. GPL is
a real estate holding company whose primary asset is real estate
that is leased to NEO.
Merger Agreements As previously reported in
our
Form 8-K
filed on July 2, 2009 with the SEC, Energy West,
Incorporated, now a wholly-owned subsidiary of the Company
(Energy West), entered into an Agreement and Plan of
Merger (the Merger Agreement) on June 29, 2009
with Richard M. Osborne, as Trustee of the Richard M. Osborne
Trust (the RMO Trust), Rebecca Howell, Stephen M.
Rigo, Marty Whelan, and Thomas J. Smith (Messrs. Osborne,
Rigo, Whelan and Smith and Ms. Howell are hereinafter
collectively referred to as Shareholders), Lightning
Pipeline, Great Plains, BGC and three to-be-formed wholly-owned
Ohio subsidiary corporations of Energy West. On June 29,
2009, Energy West also entered into an Agreement and Plan of
Merger (together with the Merger Agreement, the Merger
Agreements) with GPL, the RMO Trust and a fourth
to-be-formed Ohio acquisition subsidiary (each acquisition
subsidiary hereinafter referred to as an Acquisition
Sub and collectively, as the Acquisition Subs)
of Energy West. Mr. Osborne is our chairman of the board
and chief executive officer, Mr. Smith is a director and
our chief financial officer, and Ms. Howell is our
corporate secretary. As previously reported in our
Form 8-K
filed on August 4, 2009 with the SEC, we completed on
August 3, 2009 a reorganization to implement a holding
company structure. The Company, as the new holding company,
became the successor issuer to Energy West, and Energy West
assigned its rights under the Merger Agreements to the Company.
Pursuant to the terms of the Merger Agreements, on
January 5, 2010, four separate mergers occurred whereby an
Acquisition Sub of Energy, Inc. merged with and into each Ohio
Company. The Ohio Companies survived the mergers, becoming four
separate wholly-owned subsidiaries of the Company. The
transactions contemplated by the Merger Agreements are referred
to herein as the Merger Transaction.
Merger Consideration Issuance of Shares
(unaudited) The final aggregate purchase price
for the Ohio Companies was $37.9 million, which consisted
of approximately $20.8 million in debt of the Ohio
Companies with the remainder of the purchase price paid in
unregistered shares of common stock of the Company. In
accordance with the Merger Agreements, on January 5, 2010,
the shares of common stock of Lightning Pipeline, Great Plains
and BGC and the membership units of GPL were converted into the
right to receive unregistered shares of common stock of the
Company (the Shares) in accordance with the
following calculation:
The total number of Shares the Shareholders received equaled the
total of $34,304,000 plus $3,565,339 (which was the number of
additional active customers of the Ohio Companies in excess of
20,900 at closing (23,131-20,900=2,231) multiplied by
$1,598.09), less $20,796,254 (which was the debt of the Ohio
Companies at closing), divided by $10.
Based on this calculation, we issued 1,707,308 Shares in
the aggregate. We issued Mr. Osborne, as trustee,
1,565,701 Shares, Mr. Smith 73,244 Shares and
Ms. Howell 19,532 Shares. After the closing of the
Merger Transaction on January 5, 2010, Mr. Osborne
owns 2,487,972 Shares, or 41.0% of the Company
Mr. Smith owns 86,744 Shares, or 1.4% of the Company
and Ms. Howell owns 19,532 Shares, or less than 1% of
the Company.
The acquisition of the Ohio Companies is being accounted for
under the purchase method of accounting. Under the purchase
method of accounting, the purchase price is allocated to the
assets acquired and liabilities
F-49
ENERGY,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
assumed based on their estimated fair values. For purposes of
measuring the estimated fair value of the assets acquired and
liabilities assumed as reflected in the unaudited pro forma
results of operations, an independent appraisal firm conducted a
valuation analysis as of date of acquisition, January 5,
2010. The following table summarizes the estimated fair values
of the assets acquired and liabilities assumed at the date of
acquisition (unaudited):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
Ohio
|
|
|
|
|
|
Lightning
|
|
|
|
|
|
|
Companies
|
|
|
Great Plains
|
|
|
Pipeline
|
|
|
Brainard
|
|
|
Current assets
|
|
$
|
11,628,876
|
|
|
$
|
7,391,188
|
|
|
$
|
4,093,241
|
|
|
$
|
144,447
|
|
Property and equipment
|
|
|
29,530,636
|
|
|
|
18,290,612
|
|
|
|
10,818,923
|
|
|
|
421,101
|
|
Deferred Tax Assets
|
|
|
199,700
|
|
|
|
|
|
|
|
162,499
|
|
|
|
37,201
|
|
Other Noncurrent assets
|
|
|
152,585
|
|
|
|
1,000
|
|
|
|
140,002
|
|
|
|
11,583
|
|
Customer Relationships
|
|
|
685,000
|
|
|
|
640,000
|
|
|
|
45,000
|
|
|
|
|
|
Goodwill
|
|
|
12,717,024
|
|
|
|
8,894,601
|
|
|
|
3,765,673
|
|
|
|
56,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets acquired
|
|
|
54,913,821
|
|
|
|
35,217,401
|
|
|
|
19,025,338
|
|
|
|
671,082
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
13,687,443
|
|
|
|
7,497,196
|
|
|
|
5,786,196
|
|
|
|
404,051
|
|
Asset Retirement Obligation
|
|
|
487,447
|
|
|
|
|
|
|
|
477,939
|
|
|
|
9,508
|
|
Deferred Tax Liability
|
|
|
2,869,592
|
|
|
|
1,405,340
|
|
|
|
1,393,119
|
|
|
|
71,133
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
17,044,482
|
|
|
|
8,902,536
|
|
|
|
7,657,254
|
|
|
|
484,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net assets acquired (unaudited):
|
|
$
|
37,869,339
|
|
|
$
|
26,314,865
|
|
|
$
|
11,368,084
|
|
|
$
|
186,390
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the total purchase price, approximately $12.7 million
has been allocated to goodwill. Goodwill represents the excess
of the purchase price of an acquired business over the fair
value of the underlying net tangible and intangible assets.
Goodwill is not amortized, rather, the goodwill will be tested
for impairment, at least annually, or more frequently if there
is an indication of impairment. The goodwill resulting from this
acquisition is not deductible for tax purposes.
Transaction costs related to the mergers totaled $871,634, and
are recorded on our Consolidated Statement of Income within the
other income (expense) line on the statement of income.
The following table summarizes unaudited pro forma results of
operations (in thousands) for the years ended December 31,
2009 and 2008 as if the acquisitions had occurred on
January 1, 2009 and January 1, 2008, respectively. The
unaudited pro forma results of operations are based on the
historical financial statements and related notes of each of the
Company and the Ohio Companies for the years ended December 31,
2009 and 2008, and contain adjustments to depreciation and
amortization for the effects of the purchase price allocation,
and to income tax expense to record income tax expense for the
Ohio Companies.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(In thousands)
|
|
|
Revenues
|
|
$
|
102,708
|
|
|
$
|
125,643
|
|
Operating income
|
|
|
11,918
|
|
|
|
9,289
|
|
Net income
|
|
|
8,403
|
|
|
|
4,587
|
|
Earnings per share basic
|
|
$
|
1.400
|
|
|
$
|
0.760
|
|
Earnings per share diluted
|
|
$
|
1.400
|
|
|
$
|
0.760
|
|
F-50
ENERGY,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The pro forma information is presented for informational
purposes only and is not necessarily indicative of the results
of operations that actually would have been achieved had the
acquisition been consummated as of that time, nor is it intended
to be a projection of future results.
The following is a discussion of the credit facilities and term
loans being assumed in connection with our acquisition of the
Ohio operations. This information is unaudited.
Citizens
Bank Credit Facility (Unaudited)
In connection with our acquisition of our Ohio operations, NEO,
Great Plains and GPL each entered modifications/amendments to
its credit facility with Citizens Bank (the Citizens
Credit Facility). The Citizens Credit Facility consists of
a revolving line of credit and term loan to NEO, and two other
term loans to Great Plains and GPL respectively. Each
amendment/modification was initially effective as of
December 1, 2009, but was later modified to be effective as
of January 5, 2010. Energy, Inc. guarantees each loan. Our
chairman and chief executive officer, Richard M. Osborne,
guarantees each loan both individually and as trustee of the RMO
Trust, and Great Plains guarantees NEOs revolving line of
credit and term loan as well as GPLs term note.
Long-term Debt $10.3 million 5.00% Senior
Secured Notes NEOs, Great Plains and
GPLs term loans with Citizens Bank are in the amounts of
$7.8 million, $2.4 million and $823,000 respectively.
Each term note has a maturity date of July 1, 2013 and
bears interest at an annual rate of 30-day LIBOR (Eurodollar)
plus 400 basis points with an interest rate floor of 5.00%
per annum. Currently, the interest rate is 5.00% per annum. The
term notes require monthly payments of approximately $63,000 in
the aggregate.
Line of Credit NEOs revolving credit
line with Citizens Bank has a maximum credit commitment of
$2.1 million. The revolving line bears interest at an
annual rate of 30-day LIBOR (Eurodollar) plus
400 basis points with an interest rate floor of
5.00% per annum. Currently, the interest rate is 5.00% per
annum. The revolving line requires monthly interest payments
with the principal due at maturity, November 30, 2010.
The Citizens Credit Facility requires Great Plains, GPL and NEO
to maintain a debt service coverage ratio of at least 1.25 to
1.0 measured quarterly on a rolling four quarter basis. The
Citizens Credit Facility also requires NEO, Great Plains and GPL
to maintain a minimum net worth, on a combined basis, equal to
the sum of $1,815,000 plus 100% of net income less the pro-rata
share of any dividend paid to Energy, Inc., measured on a
quarterly basis beginning with the quarter ended
December 31, 2009. The Citizens Credit Facility allows NEO,
Great Plains and GPL Ohio Companies a party thereto to pay
dividends to Energy, Inc. if those entities combined net
worth (as defined in the Citizens loan documents) after payment
of any dividends would not be less than $1,815,000 on a
consolidated basis as positively increased by 100% of net income
as of the end of each fiscal quarter and fiscal year.
At December 31, 2009, $2.1 million has been borrowed under the
revolving line of credit, $7.1 million under the NEO term loan,
$2.4 million under the Great Plains term loan and $813,000 under
the GPL term loan.
Huntington
Credit Facility (unaudited)
On December 31, 2009, Orwell entered into an amended and
restated short-term credit facility with The Huntington National
Bank, N.A. (the Huntington Credit Facility). The
Huntington Credit Facility amends and restates the previous
credit facility that matured on November 30, 2009. The loan
is secured by all of the assets of Orwell. The Huntington Credit
Facility is guaranteed by Energy, Inc., Lightning Pipeline, Mr.
Osborne individually and as Trustee of the RMO Trust, and
certain entities owned and controlled by Mr. Osborne.
Long-term Debt $4.6 Million Senior
Secured Note The Huntington Credit Facility includes
a $4.6 million term note that bears interest at an annual
rate of 30-day LIBOR (Eurodollar) plus 300 basis
points with LIBOR floor of 1% per annum. Currently, the
interest rate is 4.00% per annum. The term note requires monthly
payments of approximately $35,000 and matures on
November 29, 2010.
F-51
ENERGY,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Line of Credit The Huntington Credit Facility
also includes a $1.5 million line of credit. The credit line
bears interest at an annual rate of 30-day LIBOR (Eurodollar)
plus 300 basis points with LIBOR floor of 1% per annum.
Currently, the interest rate is 4.00% per annum. The credit line
requires monthly interest payments with the principal due at
maturity, November 29, 2010.
The Huntington Credit Facility requires Orwell to maintain a
fixed charge coverage ratio of at least 1 to 1 of EBITDA to the
sum of (i) scheduled principal payments on debt and capital
leases, plus (ii) interest expense, plus (iii) federal, state
and local income tax expense, plus (iv) dividends and
distributions, measured on a rolling four quarter basis. The
Huntington Credit Facility allows Orwell to pay dividends to
Energy, Inc. as long as the aggregate amount of all dividends,
distributions, redemptions and repurchases in any fiscal year do
not exceed 60% of net income (as defined in the Huntington
Credit Facility) of Orwell for each fiscal year. At December 31,
2009, $1.5 million has been borrowed under the credit line and
$4.3 million under the term note. The Huntington Credit Facility
is also secured by a pledge of $3.0 million in market value of
Energy, Inc. stock by the RMO Trust.
Combined
Term Loans and Credit Facilities (unaudited)
The $14.7 million of borrowings at December 31, 2009,
leaves our borrowing capacity at $5.3 million. Including
the amounts related to the Ohio companies, we have
$18.3 million of borrowings and borrowing capacity of
$5.3 million.
The total amount outstanding under all of our long term debt
obligations was approximately $13.0 million at
December 31, 2009, with none being due within one year.
Including the amounts related to the Ohio companies, the total
amount is approximately $27.6 million, with approximately
$5.1 million due within one year.
|
|
19.
|
Quarterly
Information (Unaudited)
|
Quarterly results (unaudited) for the year ended
December 31, 2009, the six months ended December 31,
2008 and the year ended June 30, 2008 are as follows (in
thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarters Ended
|
|
|
|
March 31,
|
|
|
June 30,
|
|
|
September 30,
|
|
|
December 31,
|
|
Year Ended December 31, 2009
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
2009
|
|
|
Revenues
|
|
$
|
31,334
|
|
|
$
|
12,238
|
|
|
$
|
8,326
|
|
|
$
|
19,556
|
|
Gross margin
|
|
$
|
7,774
|
|
|
$
|
5,248
|
|
|
$
|
4,190
|
|
|
$
|
7,543
|
|
Operating income
|
|
$
|
3,564
|
|
|
$
|
1,523
|
|
|
$
|
245
|
|
|
$
|
3,731
|
|
Income (loss) before extraordinary items
|
|
$
|
1,963
|
|
|
$
|
686
|
|
|
$
|
(172
|
)
|
|
$
|
4,342
|
|
Net income (loss)
|
|
$
|
1,963
|
|
|
$
|
686
|
|
|
$
|
(172
|
)
|
|
$
|
4,342
|
|
Basic earnings (loss) before extraordinary items per common share
|
|
$
|
0.46
|
|
|
$
|
0.16
|
|
|
$
|
(0.04
|
)
|
|
$
|
1.00
|
|
Basic earnings (loss) per common share extraordinary
gain
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share net income
|
|
$
|
0.46
|
|
|
$
|
0.16
|
|
|
$
|
(0.04
|
)
|
|
$
|
1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
$
|
0.46
|
|
|
$
|
0.16
|
|
|
$
|
(0.04
|
)
|
|
$
|
1.00
|
|
Diluted earnings (loss) per share extraordinary gain
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share net income
|
|
$
|
0.46
|
|
|
$
|
0.16
|
|
|
$
|
(0.04
|
)
|
|
$
|
1.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-52
ENERGY,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
For the Quarters Ended
|
|
|
|
September 30,
|
|
|
December 31,
|
|
Six Months Ended December 31, 2008
|
|
2008
|
|
|
2008
|
|
|
Revenues
|
|
$
|
13,987
|
|
|
$
|
24,771
|
|
Gross margin
|
|
$
|
4,544
|
|
|
$
|
6,984
|
|
Operating income
|
|
$
|
711
|
|
|
$
|
2,471
|
|
Income (loss) before extraordinary items
|
|
$
|
386
|
|
|
$
|
773
|
|
Extraordinary gain
|
|
$
|
0
|
|
|
$
|
0
|
|
Net income (loss)
|
|
$
|
386
|
|
|
$
|
773
|
|
Basic earnings (loss) before extraordinary items per common share
|
|
$
|
0.09
|
|
|
$
|
0.18
|
|
Basic earnings (loss) per common share extraordinary
gain
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share net income
|
|
$
|
0.09
|
|
|
$
|
0.18
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
$
|
0.09
|
|
|
$
|
0.18
|
|
Diluted earnings (loss) per share extraordinary gain
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share net income
|
|
$
|
0.09
|
|
|
$
|
0.18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarters Ended
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
Year Ended June 30, 2008
|
|
2007
|
|
|
2007
|
|
|
2008
|
|
|
2008
|
|
|
Revenues
|
|
$
|
6,951
|
|
|
$
|
20,171
|
|
|
$
|
30,878
|
|
|
$
|
18,833
|
|
Gross margin
|
|
$
|
2,675
|
|
|
$
|
5,742
|
|
|
$
|
7,639
|
|
|
$
|
4,606
|
|
Operating income
|
|
$
|
117
|
|
|
$
|
1,620
|
|
|
$
|
3,553
|
|
|
$
|
114
|
|
Income (loss) before extraordinary items
|
|
$
|
75
|
|
|
$
|
1,049
|
|
|
$
|
2,307
|
|
|
$
|
(120
|
)
|
Extraordinary gain
|
|
$
|
0
|
|
|
$
|
6,819
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Net income (loss)
|
|
$
|
75
|
|
|
$
|
7,868
|
|
|
$
|
2,307
|
|
|
$
|
(120
|
)
|
Basic earnings (loss) before extraordinary items per common share
|
|
$
|
0.02
|
|
|
$
|
0.24
|
|
|
$
|
0.53
|
|
|
$
|
(0.03
|
)
|
Basic earnings (loss) per common share extraordinary
gain
|
|
$
|
0.00
|
|
|
$
|
1.59
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share net income
|
|
$
|
0.02
|
|
|
$
|
1.83
|
|
|
$
|
0.53
|
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share
|
|
$
|
0.02
|
|
|
$
|
0.24
|
|
|
$
|
0.53
|
|
|
$
|
(0.03
|
)
|
Diluted earnings (loss) per share extraordinary gain
|
|
$
|
0.00
|
|
|
$
|
1.58
|
|
|
$
|
0.00
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share net income
|
|
$
|
0.02
|
|
|
$
|
1.83
|
|
|
$
|
0.53
|
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain revenue items have been restated from prior published
reports.
F-53
ENERGY,
INC. AND SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Quarters Ended
|
|
|
|
September 30,
|
|
|
December 31,
|
|
|
March 31,
|
|
|
June 30,
|
|
Year Ended June 30, 2007
|
|
2006
|
|
|
2006
|
|
|
2007
|
|
|
2007
|
|
|
Revenues
|
|
$
|
8,456
|
|
|
$
|
18,041
|
|
|
$
|
21,516
|
|
|
$
|
11,360
|
|
Gross margin
|
|
$
|
3,200
|
|
|
$
|
5,566
|
|
|
$
|
6,935
|
|
|
$
|
3,225
|
|
Operating income
|
|
$
|
326
|
|
|
$
|
2,121
|
|
|
$
|
2,358
|
|
|
$
|
606
|
|
Income (loss) before extraordinary items
|
|
$
|
4
|
|
|
$
|
1,113
|
|
|
$
|
1,293
|
|
|
$
|
(152
|
)
|
Extraordinary gain
|
|
$
|
(199
|
)
|
|
$
|
157
|
|
|
$
|
636
|
|
|
$
|
3,360
|
|
Net (loss) income
|
|
$
|
(195
|
)
|
|
$
|
1,270
|
|
|
$
|
1,929
|
|
|
$
|
3,208
|
|
Basic earnings (loss) per common share continuing
operations
|
|
$
|
0.00
|
|
|
$
|
0.25
|
|
|
$
|
0.29
|
|
|
$
|
(0.03
|
)
|
Basic (loss) earnings per common share discontinued
operations
|
|
$
|
(0.05
|
)
|
|
$
|
0.04
|
|
|
$
|
0.14
|
|
|
$
|
0.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share net income
|
|
$
|
(0.05
|
)
|
|
$
|
0.29
|
|
|
$
|
0.43
|
|
|
$
|
0.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share continuing
operations
|
|
$
|
0.00
|
|
|
$
|
0.25
|
|
|
$
|
0.28
|
|
|
$
|
(0.03
|
)
|
Diluted (loss) earnings per share discontinued
operations
|
|
$
|
(0.04
|
)
|
|
$
|
0.04
|
|
|
$
|
0.14
|
|
|
$
|
0.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted (loss) earnings per share net income
|
|
$
|
(0.04
|
)
|
|
$
|
0.29
|
|
|
$
|
0.42
|
|
|
$
|
0.72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain revenue items have been restated from prior published
reports.
F-54
We have not
authorized any dealer, salesperson or other person to give any
information or represent anything not contained in this
prospectus. You must not rely on any unauthorized information.
If anyone provides you with different or inconsistent
information, you should not rely on it. This prospectus does not
offer to sell any shares in any jurisdiction where it is
unlawful. The information in this prospectus is current as of
the respective dates of the documents containing the information.
PART II
INFORMATION
NOT REQUIRED IN THE PROSPECTUS
|
|
Item 13.
|
Other
Expenses of Issuance and Distribution
|
The following table sets forth costs and expenses payable by
Energy, Inc. in connection with the sale of common shares being
registered. We will not be seeking reimbursement from the
Selling Shareholder
|
|
|
|
|
SEC registration fee
|
|
$
|
2,413
|
|
FINRA filing fee(1)
|
|
|
3,884
|
|
NYSE Amex listing fee
|
|
|
34,500
|
|
Accounting fees and expenses(1)
|
|
|
35,000
|
|
Legal fees and expenses(2)
|
|
|
65,000
|
|
Printing and mailing expenses(1)
|
|
|
60,000
|
|
Miscellaneous(1)
|
|
|
25,000
|
|
|
|
|
|
|
Total(1)
|
|
|
225,000
|
|
|
|
|
|
|
|
|
|
(1) |
|
Estimated. |
|
(2) |
|
To be filed by amendment to the registration statement. |
|
|
Item 14.
|
Indemnification
of Directors and Officers.
|
Our articles of incorporation require us to indemnify our
directors and officers to the greatest extent permitted by law,
including advancement of funds reasonably required to defend
actions against our directors and officers. Our articles require
us to indemnify directors and officers whether or not they
continue to hold office at the time they incur expenses or
discharge liability.
Section 1701.13 of the Ohio General Corporation Law (the
OGCL) provides circumstances in which it is
permissible for Ohio corporations to indemnify their directors
and officers. Because our articles require us to indemnify
directors and officers to the maximum extent permissible under
the law, we must provide indemnification if those circumstances
exist. Those circumstances are as follows. First, directors and
officers must have met a standard of conduct requiring that they
acted:
|
|
|
|
|
with reasonable belief that their conduct was in our best
interests (or when not acting in an official capacity, at least
not opposed to our best interests), and
|
|
|
|
|
|
if the proceeding is criminal in nature, without reasonable
cause to believe their conduct was unlawful.
|
However, Section 1701.13 provides limits and prohibitions
on indemnification in derivative actions and other actions
brought by or in the right of the corporation:
|
|
|
|
|
limited to reasonable expenses incurred (as opposed to damages
owed by the director or officer for liability),
|
|
|
|
|
|
prohibited if the director or officer was adjudged liable to us
(unless the court determines, in view of all the circumstances,
that the person is fairly and reasonably entitled to
indemnity), and
|
|
|
|
|
|
prohibited with respect to directors if the only liability
asserted against the director is for loans or dividends or
distributions that are contrary to law or the articles of
incorporation.
|
Finally, our determination that indemnification is proper under
these requirements must be made by a majority vote of a quorum
of directors who are not party to the proceeding (or a committee
of directors if a quorum cannot be obtained), special legal
counsel or a shareholder vote (in which case shares held by the
director in question may not be voted).
II-1
Also, Ohio law and our articles require us to advance reasonable
expenses incurred by directors and officers who are parties to
proceedings if certain conditions are met. First, the director
or officer must furnish to us a written affirmation that he or
she believes, in good faith, that he or she met the required
standard of conduct and if ultimately found not to have met the
standard of conduct will repay the advancement. Second, we must
determine (with the facts then known) that indemnification would
not be precluded because of a failure to meet the standard of
conduct required for indemnification and that indemnification is
not otherwise precluded under the OGCL. The OGCL precludes
indemnification of a director where the only allegations against
the director are for loans or dividends or distributions that
are contrary to law or the articles of incorporation. Third, our
articles do not require that we advance expenses to an officer
in a proceeding by the Company on its own behalf. (Additionally,
our determination to advance expenses must be made in the same
manner as our determination that indemnification is permissible;
that is, it must be made by a quorum of disinterested directors,
special legal counsel or shareholders.)
The OGCL also provides circumstances in which it is mandatory
that we indemnify our directors and officers for reasonable
expenses incurred in connection with a proceeding regardless of
any contrary provision of our articles or other governing
documents. Where directors or officers are wholly successful on
the merits or otherwise, indemnification for reasonable expenses
incurred is required.
|
|
Item 15.
|
Recent
Sales of Unregistered Securities.
|
Acquisition
of Cut Bank Gas November 2, 2009
On November 2, 2009, we completed the acquisition of Cut
Bank Gas, a Montana gas distribution company. Under a stock
purchase agreement entered into by our wholly-owned subsidiary
Energy West and certain shareholders of Cut Bank Gas, namely,
Dan F. Whetstone, Pamela R. Lowry, Paula A. Poole, William J.
Junkermier and Roger W. Junkermier, Energy West purchased
7,511 shares of Cut Bank Gas. In payment of the purchase
price, we issued to those shareholders 56,900 shares of our
common stock, par value $0.15 per share, valued at $500,000. The
number of shares to be issued was determined in accordance with
the stock purchase agreement, which required reference to the
trading price of our common stock on the day prior to closing.
We were not obligated to register the shares under the terms of
the stock purchase agreement. The issuance of shares to the
sellers was made in reliance on Section 4(2) of the
Securities Act of 1933 for the offer and sale of securities not
involving a public offering. As a result of the transaction, Cut
Bank Gas became a subsidiary of Energy West.
Acquisition
of Orwell and NEO January 5, 2010
On January 5, 2010, we expanded into Ohio and Western
Pennsylvania by acquiring several utilities owned primarily by
our chairman and chief executive officer, Richard M. Osborne.
The acquisition was accomplished through two merger agreements
reviewed and discussed by a special committee of our board of
directors and approved by our board of directors. Through the
acquisition, we acquired Lightning Pipeline Company, Inc.
(Lightning Pipeline) and Great Plains Natural Gas Company (Great
Plains), which are the parent companies of Orwell Natural Gas
Company (Orwell) and Northeast Ohio Natural Gas Corp. (NEO)
respectively, and we also acquired Brainard Gas Corp. (Brainard)
and Great Plains Land Development Co., Ltd. (GPL).
Prior to the acquisition, Richard Osborne, as the sole trustee
of the Richard M. Osborne Trust UTA dated January 13,
1995, owned 90.3% of Lightning Pipeline, 90.3% of Great Plains,
100% of Brainard and 100% of GPL. In addition, Mr. Smith,
our chief financial officer, vice president and a director,
owned 5% of Lightning Pipeline and 5% of Great Plains, and
Rebecca Howell, our corporate secretary, owned 1.3% of Lightning
Pipeline and Great Plains. The remaining 3.7% of Lightning
Pipeline and Great Plains was owned by Marty Whelan and Stephen
M. Rigo.
The aggregate purchase price for the acquired Ohio companies was
$37.9 million, which consisted of approximately
$20.8 million in debt of the acquired companies with the
remainder of the purchase price paid in unregistered shares of
common stock of Gas Natural. In accordance with the merger
agreements, on January 5, 2010, all outstanding shares of
common stock of Lightning Pipeline, Great Plains and Brainard
and all membership
II-2
units of GPL were converted into the right to receive
unregistered shares of common stock of Gas Natural in accordance
with the following calculation:
The total number of shares the shareholders received equaled the
total of $34,304,000 plus $3,565,339 (which was the number of
additional active customers of the acquired Ohio companies in
excess of 20,900 at closing (23,131-20,900=2,231) multiplied by
$1,598.09), less $20,796,254 (which was the debt of the acquired
Ohio companies at closing), divided by $10.
Based on this calculation, we issued a total of
1,707,308 shares. We issued Richard Osborne, as trustee,
1,565,701 shares, Mr. Smith 73,244 shares and
Ms. Howell 19,532 shares. Based solely on the closing
price of our common stock of $10.19 on January 5, 2010, the
date the acquisition closed, the value of these shares was
approximately $17.4 million, and from those shares Richard
Osborne, Mr. Smith and Ms. Howell received shares
valued at approximately $15.9 million, $746,000 and
$199,000, respectively. Messrs. Whelan and Rigo received
36,622 and 12,209 shares, valued at approximately $373,000
and $125,000, respectively.
There were no underwriting discounts or commissions in
connection with the issuance, as no underwriters were used to
facilitate the mergers. The shares were not registered under the
Securities Act, as amended, in reliance on the exemption from
registration provided by Section 4(2) of the Securities Act.
(a) Exhibits.
The exhibits to the registration statement required by
Item 601 of
Regulation S-K
are listed in the exhibit index on
page II-6.
(b) Financial Statement Schedules:
Schedule
II
Valuation and Qualifying Accounts
Gas Natural Inc.
December 31, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
Charged to
|
|
|
Write-Offs
|
|
|
Balance
|
|
|
|
Beginning
|
|
|
Costs &
|
|
|
Net of
|
|
|
at End of
|
|
Description
|
|
of Period
|
|
|
Expenses
|
|
|
Recoveries
|
|
|
Period
|
|
|
Allowance for bad debts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, 2007
|
|
$
|
121,453
|
|
|
$
|
210,956
|
|
|
$
|
(268,355)
|
|
|
$
|
65,054
|
|
Year Ended June 30, 2008
|
|
$
|
64,054
|
|
|
$
|
174,531
|
|
|
$
|
(102,186)
|
|
|
$
|
136,399
|
|
Six Months Ended December 31, 2008
|
|
$
|
136,399
|
|
|
$
|
58,085
|
|
|
$
|
13,458
|
|
|
$
|
207,942
|
|
Year Ended December 31, 2009
|
|
$
|
207,942
|
|
|
$
|
139,512
|
|
|
$
|
(114,122)
|
|
|
$
|
233,332
|
|
All other schedules are omitted because they are not applicable
or the required information is shown in the financial statements
or notes thereto.
The undersigned registrant hereby undertakes:
(1) Insofar as indemnification for liabilities arising
under the Securities Act of 1933 may be permitted to directors,
officers and controlling persons of the registrant pursuant to
the foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter
has been settled
II-3
by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be
governed by the final adjudication of such issue.
(2) For purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of
prospectus filed as part of this registration statement in
reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to
Rule 424(b)(1) or (4) or 497(h) under the Securities
Act shall be deemed to be part of this registration statement as
of the time it was declared effective.
(3) For the purposes of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Mentor, State of Ohio, on
July 14, 2010.
Gas Natural
Inc.
Thomas J. Smith
Chief Financial Officer and Director
(Principal Financial Officer)
(Principal Accounting Officer)
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons
in the capacities and on the dates indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
/s/ Kevin
J. Degenstein*
Kevin
J. Degenstein
|
|
Chief Operating Officer and President
|
|
July 14, 2010
|
|
|
|
|
|
/s/ Thomas
J. Smith
Thomas
J. Smith
|
|
Chief Financial Officer and Director
(Principal Financial Officer)
(Principal Accounting Officer)
|
|
July 14, 2010
|
|
|
|
|
|
/s/ W.E.
Argo*
W.E.
Argo
|
|
Director
|
|
July 14, 2010
|
|
|
|
|
|
/s/ Gregory
D. Osborne*
Gregory
D. Osborne
|
|
Director
|
|
July 14, 2010
|
|
|
|
|
|
/s/ Richard
M. Osborne*
Richard
M. Osborne
|
|
Chief Executive Officer, Chairman of the Board and Director
(Principal Executive Officer)
|
|
July 14, 2010
|
|
|
|
|
|
/s/ James
R. Smail*
James
R. Smail
|
|
Director
|
|
July 14, 2010
|
|
|
|
|
|
/s/ Michael
T. Victor*
Michael
T. Victor
|
|
Director
|
|
July 14, 2010
|
|
|
|
|
|
|
|
*By:
|
|
/s/ Thomas
J. Smith
Thomas
J. Smith
Attorney in Fact
|
|
|
|
|
II-4
EXHIBIT INDEX
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
1
|
.1**
|
|
Underwriting Agreement
dated ,
2010, by and among Janney Montgomery Scott LLC (as
Representative of the underwriters named in Schedule I
thereto), Gas Natural Inc. and Richard M. Osborne, Trustee.
|
|
2
|
.1
|
|
Agreement and Plan of Merger, dated June 29, 2009, by and
among Energy West, Incorporated, Various Acquisition
Subsidiaries, Lightning Pipeline Co., Inc., Great Plains Natural
Gas Company, Brainard Gas Corp., Richard M. Osborne, Trustee,
Rebecca Howell, Stephen G. Rigo, Marty Whelan and Thomas J.
Smith. Exhibit 10.2 to Energy, Inc.s current report
on
Form 8-K
dated June 26, 2009 and filed July 2, 2009 with the
Securities and Exchange Commission is incorporated herein by
reference.
|
|
2
|
.2
|
|
Agreement and Plan of Merger, dated June 29, 2009, by and
among Energy West, Incorporated, an Acquisition Subsidiary,
Great Plains Land Development Company, LTD. and Richard M.
Osborne, Trustee. Exhibit 10.3 to Energy, Inc.s
current report on
Form 8-K
filed July 2, 2009 with the Securities and Exchange
Commission is incorporated herein by reference.
|
|
2
|
.3
|
|
Agreement and Plan of Merger by and among Energy Inc., Energy
West, Incorporated and Energy West Merger Sub, Inc., dated
August 3, 2009. Exhibit 2.1 to Energy, Inc.s
current report on
Form 8-K
filed August 4, 2009 with the Securities and Exchange
Commission is incorporated herein by reference.
|
|
2
|
.4
|
|
Assignment and Assumption Agreement, dated December 30,
2009, by and between Energy West, Incorporated and Energy, Inc.
Exhibit 2.3 to the Registrants Current Report on
Form 8-K
dated January 5, 2010 filed January 11, 2010 with the
Securities and Exchange Commission and is incorporated herein by
reference.
|
|
2
|
.5
|
|
Assignment and Assumption Agreement, dated December 30,
2009, by and between Energy West, Incorporated and Energy, Inc.
Exhibit 2.4 to the Registrants Current Report on
Form 8-K
dated January 5, 2010 filed January 11, 2010 with the
Securities and Exchange Commission and is incorporated herein by
reference.
|
|
2
|
.6
|
|
First Amendment to Agreement and Plan of Merger, dated as of
January 5, 2010, by and among Richard M. Osborne, Trustee,
Rebecca Howell, Stephen G. Rigo, Marty Whelan and Thomas J.
Smith, Lightning Pipeline Co., Inc., Great Plains Natural Gas
Company, and Brainard Gas Corp., Lightning Pipeline Acquisition
Inc., Great Plains Acquisition Inc. and Brainard Acquisition
Inc. and Energy, Inc. Exhibit 2.5 to the Registrants
Current Report on
Form 8-K
dated January 5, 2010 filed January 11, 2010 with the
Securities and Exchange Commission and is incorporated herein by
reference.
|
|
2
|
.7
|
|
First Amendment to Agreement and Plan of Merger, dated as of
January 5, 2010, by and among Richard M. Osborne, Trustee,
Great Plains Land Development Company, LTD. and GPL Acquisition
LLC and Energy, Inc. Exhibit 2.6 to the Registrants
Current Report on
Form 8-K
dated January 5, 2010 filed January 11, 2010 with the
Securities and Exchange Commission and is incorporated herein by
reference.
|
|
2
|
.8*
|
|
Agreement and Plan of Merger dated July 6, 2010 by and
between Energy, Inc. and Gas Natural Inc.
|
|
3
|
.1*
|
|
Articles of Incorporation of the Registrant.
|
|
3
|
.2*
|
|
Bylaws of the Registrant.
|
|
5
|
.1*
|
|
Form of Opinion of Kohrman Jackson & Krantz P.L.L.
|
|
10
|
.1
|
|
Satisfaction and Discharge of Indenture dated June 22,
2007, between the Registrant and HSBC Bank USA, National
Association, as Successor Trustee for the Series 1997
Notes. Filed as Exhibit 10.1 to the Registrants
Current Report on
Form 8-K
filed July 5, 2007 with the Securities and Exchange
Commission and is incorporated herein by reference.
|
|
10
|
.2
|
|
Satisfaction and Discharge of Indenture dated June 22,
2007, between the Registrant and US Bank National Association,
as Successor Trustee for the Series 1993 Notes.
Exhibit 10.2 to the Registrants Current Report on
Form 8-K
filed July 5, 2007 with the Securities and Exchange
Commission and is incorporated herein by reference.
|
|
10
|
.3
|
|
Discharge of Obligor under Indenture dated June 22, 2007,
between the Registrant and HSBC Bank USA, National Association,
as Successor Trustee for the
Series 1992-B
Bonds. Exhibit 10.3 to the Registrants Current Report
on
Form 8-K
filed July 5, 2007 with the Securities and Exchange
Commission and is incorporated herein by reference.
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.4
|
|
Note Purchase Agreement dated June 29, 2007, between the
Registrant and various Purchasers relating to 6.16% Senior
Unsecured Notes due June 29, 2017. Exhibit 10.4 to the
Registrants Current Report on
Form 8-K
filed July 5, 2007 with the Securities and Exchange
Commission and is incorporated herein by reference.
|
|
10
|
.5
|
|
Credit Agreement dated as of June 29, 2007, by and among
the Registrant and various financial institutions and LaSalle
Bank National Association. Exhibit 10.5 to the
Registrants Current Report on
Form 8-K
filed July 5, 2007 with the Securities and Exchange
Commission and is incorporated herein by reference.
|
|
10
|
.6
|
|
Amendment dated October 22, 2007 to the Credit Agreement
among the Registrant, various financial institutions and LaSalle
Bank National Association, as agent. Exhibit 10.1 to the
Registrants Current Report on
Form 8-K
dated October 22, 2007 filed with the Securities and
Exchange Commission and is and incorporated herein by reference.
|
|
10
|
.7
|
|
Energy, Inc. 2002 Stock Option Plan. Filed as Appendix A to
the Registrants Proxy Statement on Schedule 14A,
filed on October 30, 2002, and incorporated herein by
reference.
|
|
10
|
.8
|
|
First Amendment to Energy West Incorporated 2002 Stock Option
Plan, filed as Exhibit 10.8 to the Registrants
Transition Report on
10-K/T for
the transition period ended December 31, 2008 and
incorporated herein by reference.
|
|
10
|
.9
|
|
Employee Stock Ownership Plan Trust Agreement. Filed as
Exhibit 10.2 to Registration Statement on
Form S-1
(File
No. 33-1672)
and incorporated herein by reference.
|
|
10
|
.10
|
|
Management Incentive Plan. Filed as Exhibit 10.12 to the
Registrants Annual Report on
Form 10-K/A
for the year ended June 30, 1996, filed on July 8,
1997, and incorporated herein by reference.
|
|
10
|
.11
|
|
Energy West Senior Management Incentive Plan. Filed as
Exhibit 10.19 to the Registrants Annual Report on
Form 10-K
for the year ended June 30, 2002, filed on
September 30, 2002, and incorporated herein by reference.
|
|
10
|
.12
|
|
Energy West Incorporated Deferred Compensation Plan for
Directors. Filed as Exhibit 10.20 to the Registrants
Annual Report on
Form 10-K
for the year ended June 30, 2002, filed on
September 30, 2002, and incorporated herein by reference.
|
|
10
|
.13
|
|
Amended and Restated Energy West Incorporated Deferred
Compensation Plan for Directors, filed as Exhibit 10.13 to
the Registrants Transition Report on
10-K/T for
the transition period ended December 31, 2008 and
incorporated herein by reference.
|
|
10
|
.14
|
|
Amended and Restated Operating Agreement of Kykuit Resources,
LLC, dated October 24, 2007. Exhibit 10.6 to the
Registrants Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2007 and filed with the
Securities and Exchange Commission is incorporated herein by
reference.
|
|
10
|
.15
|
|
First Amendment to Amended and Restated Operating Agreement of
Kykuit Resources, LLC, dated December 17, 2007.
Exhibit 10.2 to the Registrants Quarterly Report on
Form 10-Q
for the quarter ended December 31, 2007 and filed with the
Securities and Exchange Commission is incorporated herein by
reference.
|
|
10
|
.16
|
|
Stock Purchase Agreement dated January 30, 2007 between the
Registrant and Sempra Energy. Exhibit 10.1 to the
Registrants Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2007 and filed with the
Securities and Exchange Commission is incorporated herein by
reference.
|
|
10
|
.17
|
|
Amendment No. 1 to Stock Purchase Agreement dated
April 11, 2007 between the Registrant and Sempra Energy.
Exhibit 10.2 to the Registrants Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2007 and filed with the
Securities and Exchange Commission is incorporated herein by
reference.
|
|
10
|
.18
|
|
Amendment No. 2 to Stock Purchase Agreement dated
August 7, 2007 between the Registrant and Sempra Energy.
Exhibit 10.3 to the Registrants Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2007 and filed with the
Securities and Exchange Commission is incorporated herein by
reference.
|
|
10
|
.19
|
|
Amendment No. 3 to Stock Purchase Agreement, dated
November 28, 2007, by and between the Registrant and Sempra
Energy. Exhibit 10.1 to the Registrants Quarterly
Report on
Form 10-Q
for the quarter ended December 31, 2007 and filed with the
Securities and Exchange Commission is incorporated herein by
reference.
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.20
|
|
Stock Purchase Agreement dated January 30, 2007 between the
Registrant and Sempra Energy. Exhibit 10.4 to the
Registrants Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2007 and filed with the
Securities and Exchange Commission is incorporated herein by
reference.
|
|
10
|
.21
|
|
Amendment Number 1 to Stock Purchase Agreement dated
August 2, 2007 between the Registrant and Sempra Energy.
Exhibit 10.5 to the Registrants Quarterly Report on
Form 10-Q
for the quarter ended September 30, 2007 and filed with the
Securities and Exchange Commission is incorporated herein by
reference.
|
|
10
|
.22
|
|
Stock Purchase Agreement dated December 18, 2007 between
the Registrant, Dan F. Whetstone, Pamela R. Lowry, Paula A.
Poole, William J. Junkermier and Roger W. Junkermier.
Exhibit 10.1 to the Registrants Current Report on
Form 8-K
dated December 17, 2007 and filed with the Securities and
Exchange Commission is incorporated herein by reference.
|
|
10
|
.23
|
|
First Amendment to Stock Purchase Agreement dated as of
November 11, 2008, between Dan F. Whetstone, Pamela R.
Lowry, Paula A. Poole, William J. Junkermier, Roger W.
Junkermier and Energy, Inc. Exhibit 10.1 to the
Registrants Current Report on
Form 8-K
dated November 11, 2008 and filed with the Securities and
Exchange Commission is incorporated herein by reference.
|
|
10
|
.24
|
|
Non-Competition and Non-Disclosure Agreement dated
December 18, 2007 between the Registrant and Daniel F.
Whetstone. Exhibit 10.2 to the Registrants Current
Report on
Form 8-K
dated December 17, 2007 and filed with the Securities and
Exchange Commission is incorporated herein by reference.
|
|
10
|
.25
|
|
Lease Agreement dated February 25, 2008 between OsAir, Inc.
and Energy West, Incorporated. Exhibit 10.1 to the
Registrants Current Report on
Form 8-K
dated February 25, 2008 and filed with the Securities and
Exchange Commission is incorporated herein by reference.
|
|
10
|
.26
|
|
Gas Sales Agreement dated as of July 1, 2008 between John
D. Oil & Gas Marketing Co., LLC, Northeast Ohio
Natural Gas Corp., Orwell Natural Gas Company and Brainard Gas
Corp. Exhibit 10.25 to the Registrants Annual Report
on 10-K for
the year ended June 30, 2008 and filed with the Securities
and Exchange Commission is incorporated herein by reference.
|
|
10
|
.27
|
|
Natural Gas Transportation Service Agreement dated as of
July 1, 2008 between Orwell-Trumbull Pipeline Co., LLC,
Orwell Natural Gas Company and Brainard Gas Corp.
Exhibit 10.26 to the Registrants Annual Report on
10-K for the
year ended June 30, 2008 and filed with the Securities and
Exchange Commission is incorporated herein by reference.
|
|
10
|
.28
|
|
Transportation Service Agreement dated as of July 1, 2008
between Cobra Pipeline Co., Ltd., Northeast Ohio Natural Gas
Company, Orwell Natural Gas Company and Brainard Gas Corp.
Exhibit 10.27 to the Registrants Annual Report on
10-K for the
year ended June 30, 2008 and filed with the Securities and
Exchange Commission is incorporated herein by reference.
|
|
10
|
.29
|
|
First Amendment dated July 1, 2008 to the Orwell-Trumbull
Pipeline Co., LLC Operations Agreement between Orwell Natural
Gas Company and Orwell-Trumbull Pipeline Co., LLC.
Exhibit 10.28 to the Registrants Annual Report on
10-K for the
year ended June 30, 2008 and filed with the Securities and
Exchange Commission is incorporated herein by reference.
|
|
10
|
.30
|
|
Orwell-Trumbull Pipeline Co., LLC Operations Agreement dated
January 1, 2008 between Orwell Natural Gas Company and
Orwell-Trumbull Pipeline Co., LLC. Exhibit 10.29 to the
Registrants Annual Report on
10-K for the
year ended June 30, 2008 and filed with the Securities and
Exchange Commission is incorporated herein by reference.
|
|
10
|
.31
|
|
Triple Net Lease Agreement dated as of July 1, 2008 between
Station Street Partners, LLC and Orwell Natural Gas Company.
Exhibit 10.30 to the Registrants Annual Report on
10-K for the
year ended June 30, 2008 and filed with the Securities and
Exchange Commission is incorporated herein by reference.
|
|
10
|
.32
|
|
Triple Net Lease Agreement dated as of July 1, 2008 between
OsAir, Inc. and Orwell Natural Gas Company. Exhibit 10.31
to the Registrants Annual Report on
10-K for the
year ended June 30, 2008 and filed with the Securities and
Exchange Commission is incorporated herein by reference.
|
|
10
|
.33
|
|
Triple Net Lease Agreement dated as of July 1, 2008 between
Richard M. Osborne, Trustee and Orwell Natural Gas Company.
Exhibit 10.32 to the Registrants Annual Report on
10-K for the
year ended June 30, 2008 and filed with the Securities and
Exchange Commission is incorporated herein by reference.
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.34
|
|
Triple Net Lease Agreement dated as of July 1, 2008 between
OsAir, Inc. and Northeast Ohio Natural Gas Company.
Exhibit 10.33 to the Registrants Annual Report on
10-K for the
year ended June 30, 2008 and filed with the Securities and
Exchange Commission is incorporated herein by reference.
|
|
10
|
.35
|
|
Stock purchase agreement dated September 12, 2008, between
Energy, Inc., and Richard M. Osborne, trustee, Rebecca Howell,
Stephen G. Rigo, Marty Whelan, and Thomas J. Smith.
Exhibit 10.1 to the registrants current report on
Form 8-K
dated September 17, 2008 and filed with the Securities and
Exchange Commission is incorporated herein by reference.
|
|
10
|
.36
|
|
Termination of Stock Purchase Agreement, dated June 26,
2009, by and among Richard M. Osborne, Trustee, Rebecca Howell,
Stephen G. Rigo, Marty Whelan and Thomas J. Smith and Energy
West, Incorporated. Exhibit 10.1 to the Registrants
Current Report on
10-K for
dated June 26, 2009 and filed with the Securities and
Exchange Commission is incorporated herein by reference.
|
|
10
|
.37
|
|
Employment Agreement dated August 25, 2006 between Energy,
Inc. and Kevin J. Degenstein, filed as Exhibit 10.1 to the
Registrants Current Report on
Form 8-K
dated September 18, 2006 and incorporated herein by
reference.
|
|
10
|
.38
|
|
First Amendment to Employment Agreement dated as of
December 31, 2008, between Energy, Inc. and Kevin J.
Degenstein, filed as Exhibit 10.39 to the Registrants
Transition Report on
10-K/T for
the transition period ended December 31, 2008 and
incorporated herein by reference.
|
|
10
|
.39
|
|
Employment Agreement dated April 13, 2007 between Energy,
Inc. and David C. Shipley, filed as Exhibit 10.40 to the
Registrants Transition Report on
10-K/T for
the transition period ended December 31, 2008 and
incorporated herein by reference.
|
|
10
|
.40
|
|
Asset Management Agreement, dated January 3, 2010, by and
between Orwell Natural Gas Company and John D. Oil and Gas
Marketing Company, LLC, filed as Exhibit 10.1 to the
Registrants Current Report on
Form 8-K
dated January 5, 2010 and filed with the Securities and
Exchange Commission January 11, 2010 and is incorporated
herein by reference.
|
|
10
|
.41
|
|
Asset Management Agreement, dated January 3, 2010, by and
between Northeast Ohio Natural Gas and John D. Oil and Gas
Marketing Company, LLC. Exhibit 10.2 to the
Registrants Current Report on
Form 8-K
dated January 5, 2010 and filed January 11, 2010 with
the Securities and Exchange Commission and is incorporated
herein by reference.
|
|
10
|
.42
|
|
Appointment of Natural Gas Agent, dated January 3, 2010, by
and between Northeast Ohio Natural Gas Company, Orwell Natural
Gas Company, Brainard Gas Corp. and John D. Oil and Gas
Marketing Company, LLC. Exhibit 10.3 to the
Registrants Current Report on
Form 8-K
dated January 5, 2010 and filed January 11, 2010 with
the Securities and Exchange Commission and is incorporated
herein by reference.
|
|
10
|
.43
|
|
Demand Promissory Note, dated December 1, 2008, to Richard
M. Osborne, Trustee from Lightning Pipeline Company, Inc.
Exhibit 10.8 to Energy, Inc.s current report on
Form 8-K
filed July 2, 2009 with the Securities and Exchange
Commission is incorporated herein by reference.
|
|
10
|
.44
|
|
Amended and Restated Promissory Note, dated January 3,
2010, to Richard M. Osborne, Trustee from Lightning Pipeline
Company, Inc. Exhibit 10.5(a) to the Registrants
Current Report on
Form 8-K
dated January 5, 2010 and filed January 11, 2010 with
the Securities and Exchange Commission and is incorporated
herein by reference.
|
|
10
|
.45
|
|
Demand Cognovit Note, dated August 6, 2008, to Richard M.
Osborne from Brainard Gas Corp. Exhibit 10.5(b) to the
Registrants Current Report on
Form 8-K
dated January 5, 2010 and filed with the Securities and
Exchange Commission January 11, 2010 and is incorporated
herein by reference.
|
|
10
|
.46
|
|
Gas Sales Agreement dated as of July 1, 2008 between John
D. Oil & Gas Marketing Co., LLC, Northeast Ohio
Natural Gas Corp., Orwell Natural Gas Company and Brainard Gas
Corp. Exhibit 10.25 to the Registrants Annual Report
on 10-K for
the year ended June 30, 2008 filed September 30, 2008
with the Securities and Exchange Commission is incorporated
herein by reference.
|
|
10
|
.47
|
|
Electronic Metering Service and Operation Agreement, as of
April 15, 2009, by and between Orwell Trumbull Pipeline,
LTD. and Orwell Natural Gas Co., incorporated by reference to
Exhibit 10.4 to Energy, Inc.s current report on
Form 8-K
as filed July 2, 2009 with the Securities and Exchange
Commission is incorporated herein by reference.
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.48
|
|
Electronic Metering Service and Operation Agreement, as of
April 15, 2009, by and between COBRA Pipeline Company, LTD.
and Brainard Gas Corporation. Exhibit 10.5 to Energy,
Inc.s current report on
Form 8-K
filed July 2, 2009 with the Securities and Exchange
Commission is incorporated herein by reference.
|
|
10
|
.49
|
|
Electronic Metering Service and Operation Agreement, as of
April 15, 2009, by and between COBRA Pipeline Company, LTD.
and Northeast Ohio Natural Gas Corporation. Exhibit 10.6 to
Energy, Inc.s current report on
Form 8-K
filed July 2, 2009 with the Securities and Exchange
Commission is incorporated herein by reference.
|
|
10
|
.50
|
|
Electronic Metering Service and Operation Agreement, as of
April 15, 2009, by and between COBRA Pipeline Company, LTD.
and Orwell Natural Gas Co. Exhibit 10.7 to Energy,
Inc.s current report on
Form 8-K
filed July 2, 2009 with the Securities and Exchange
Commission is incorporated herein by reference.
|
|
10
|
.51
|
|
Credit Agreement, dated July 3, 2008, by and between
Northeast Ohio Natural Gas Corp., as borrower and Citizens Bank,
as lender. Exhibit 10.20 to the Registrants Current
Report on
Form 8-K
dated January 5, 2010 and filed January 11, 2010 with
the Securities and Exchange Commission is incorporated herein by
reference.
|
|
10
|
.52
|
|
Revolving Note, dated July 3, 2008, by Northeast Ohio
Natural Gas Corp., as maker, to Citizens Bank, as holder.
Exhibit 10.21 to the Registrants Current Report on
Form 8-K
dated January 5, 2010 and filed January 11, 2010 with
the Securities and Exchange Commission is incorporated herein by
reference.
|
|
10
|
.53
|
|
Term Note, dated July 3, 2008, by Northeast Ohio Natural
Gas Corp., as maker, to Citizens Bank, as holder.
Exhibit 10.22 to the Registrants Current Report on
Form 8-K
dated January 5, 2010 and filed January 11, 2010 with
the Securities and Exchange Commission is incorporated herein by
reference.
|
|
10
|
.54
|
|
Security Agreement, dated July 3, 2008, by Northeast Ohio
Natural Gas Corp. in favor of Citizens Bank. Exhibit 10.23
to the Registrants Current Report on
Form 8-K
dated January 5, 2010 and filed January 11, 2010 with
the Securities and Exchange Commission is incorporated herein by
reference.
|
|
10
|
.55
|
|
Guaranty, dated July 3, 2008, by Great Plains Natural Gas
Company in favor of Citizens Bank with respect to Northeast Ohio
Natural Gas Corp. as borrower. Exhibit 10.24(a) to the
Registrants Current Report on
Form 8-K
dated January 5, 2010 and filed January 11, 2010 with
the Securities and Exchange Commission is incorporated herein by
reference.
|
|
10
|
.56
|
|
Guaranty, dated July 3, 2008, by Richard M. Osborne,
individually, in favor of Citizens Bank with respect to
Northeast Ohio Natural Gas Corp. as borrower, filed as
Exhibit 10.24(b) to the Registrants Current Report on
Form 8-K
dated January 5, 2010 and incorporated herein by reference.
|
|
10
|
.57
|
|
Guaranty, dated July 3, 2008, by Richard M. Osborne,
Trustee UTA January 13, 1995, in favor of Citizens Bank
with respect to Northeast Ohio Natural Gas Corp. as borrower.
Exhibit 10.24©
to the Registrants Current Report on
Form 8-K
dated January 5, 2010 and filed January 11, 2010 with
the Securities and Exchange Commission is incorporated herein by
reference.
|
|
10
|
.58
|
|
Credit Agreement, dated July 3, 2008, by and between Great
Plains Natural Gas Company, as borrower, and Citizens Bank, as
lender. Exhibit 10.25 to the Registrants Current
Report on
Form 8-K
dated January 5, 2010 and filed January 11, 2010 with
the Securities and Exchange Commission is incorporated herein by
reference.
|
|
10
|
.59
|
|
Term Note, dated July 3, 2008, by Great Plains Natural Gas
Company, as maker, to Citizens Bank, as holder, filed as
Exhibit 10.26 to the Registrants Current Report on
Form 8-K
dated January 5, 2010 and incorporated herein by reference.
|
|
10
|
.60
|
|
Security Agreement, dated July 3, 2008, by Great Plains
Natural Gas Company in favor of Citizens Bank.
Exhibit 10.27 to the Registrants Current Report on
Form 8-K
dated January 5, 2010 and filed January 11, 2010 with
the Securities and Exchange Commission is incorporated herein by
reference.
|
|
10
|
.61
|
|
Guaranty, dated July 3, 2008, by Richard M. Osborne,
individually, in favor of Citizens Bank with respect to Great
Plains Natural Gas Company as borrower. Exhibit 10.28(a) to
the Registrants Current Report on
Form 8-K
dated January 5, 2010 and filed January 11, 2010 with
the Securities and Exchange Commission is incorporated herein by
reference.
|
|
10
|
.62
|
|
Guaranty, dated July 3, 2008, by Richard M. Osborne,
Trustee UTA January 13, 1995, in favor of Citizens Bank
with respect to Great Plains Natural Gas Company as borrower.
Exhibit 10.28(b) to the Registrants Current Report on
Form 8-K
dated January 5, 2010 and filed January 11, 2010 with
the Securities and Exchange Commission is incorporated herein by
reference.
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.63
|
|
Credit Agreement, dated July 3, 2008, by and between Great
Plains Land Development Co., LTD., as borrower and Citizens
Bank, N.A., as lender. Exhibit 10.29 to the
Registrants Current Report on
Form 8-K
dated January 5, 2010 and filed January 11, 2010 with
the Securities and Exchange Commission is incorporated herein by
reference.
|
|
10
|
.64
|
|
Term Note, dated July 3, 2008, by Great Plains Land
Development Co., LTD., as maker, to Citizens Bank, N.A. as
holder. Exhibit 10.30 to the Registrants Current
Report on
Form 8-K
dated January 5, 2010 and filed January 11, 2010 with
the Securities and Exchange Commission is incorporated herein by
reference.
|
|
10
|
.65
|
|
Security Agreement, dated July 3, 2008, by Great Plains
Land Development Co., LTD. in favor of Citizens Bank.
Exhibit 10.31 to the Registrants Current Report on
Form 8-K
dated January 5, 2010 and filed January 11, 2010 with
the Securities and Exchange Commission is incorporated herein by
reference.
|
|
10
|
.66
|
|
Guaranty, dated July 3, 2008, by Great Plains Natural Gas
Company in favor of Citizens Bank with respect to Great Plains
Land Development Co., LTD. as borrower. Exhibit 10.32(a) to
the Registrants Current Report on
Form 8-K
dated January 5, 2010 and filed January 11, 2010 with
the Securities and Exchange Commission is incorporated herein by
reference.
|
|
10
|
.67
|
|
Guaranty, dated July 3, 2008, by Richard M. Osborne,
individually, in favor of Citizens Bank with respect to Great
Plains Land Development Co., LTD. as borrower.
Exhibit 10.32(b) to the Registrants Current Report on
Form 8-K
dated January 5, 2010 and filed January 11, 2010 with
the Securities and Exchange Commission is incorporated herein by
reference.
|
|
10
|
.68
|
|
Guaranty, dated July 3, 2008, by Richard M. Osborne,
Trustee UTA January 13, 1995, in favor of Citizens Bank
with respect to Great Plains Land Development Co., LTD. as
borrower.
Exhibit 10.32©
to the Registrants Current Report on
Form 8-K
dated January 5, 2010 and filed January 11, 2010 with
the Securities and Exchange Commission is incorporated herein by
reference.
|
|
10
|
.69
|
|
Loan Modification Agreement, effective as of December 1,
2009, by and among Northeast Ohio Natural Gas Corp., as
borrower, and Richard M. Osborne, individually, Richard M.
Osborne, Trustee UTA January 13, 1995, and Great Plains
Natural Gas Company, each as guarantors, and Citizens Bank.
Exhibit 10.33 to the Registrants Current Report on
Form 8-K
dated January 5, 2010 and filed January 11, 2010 with
the Securities and Exchange Commission is incorporated herein by
reference.
|
|
10
|
.70
|
|
Loan Modification Agreement, effective as of December 1,
2009, by and among Great Plains Natural Gas Company, as
borrower, and Richard M. Osborne, individually, and Richard M.
Osborne, Trustee UTA January 13, 1995, each as guarantors,
and Citizens Bank. Exhibit 10.34 to the Registrants
Current Report on
Form 8-K
dated January 5, 2010 and filed January 11, 2010 with
the Securities and Exchange Commission is incorporated herein by
reference.
|
|
10
|
.71
|
|
Loan Modification Agreement, effective as of December 1,
2009, by and among Great Plains Land Development Co., LTD., as
borrower, and Richard M. Osborne, individually, Richard M.
Osborne, Trustee UTA January 13, 1995, and Great Plains
Natural Gas Company, each as guarantors, and Citizens Bank.
Exhibit 10.35 to the Registrants Current Report on
Form 8-K
dated January 5, 2010 and filed January 11, 2010 with
the Securities and Exchange Commission is incorporated herein by
reference.
|
|
10
|
.72
|
|
Guaranty, dated January 5, 2010, by Energy, Inc. in favor
of Citizens Bank with respect to Northeast Ohio Natural Gas
Corp. as borrower. Exhibit 10.36 to the Registrants
Current Report on
Form 8-K
dated January 5, 2010 and filed January 11, 2010 with
the Securities and Exchange Commission is incorporated herein by
reference.
|
|
10
|
.73
|
|
Guaranty, dated January 5, 2010, by Energy, Inc. in favor
of Citizens Bank with respect to Great Plains Natural Gas
Company as borrower. Exhibit 10.37 to the Registrants
Current Report on
Form 8-K
dated January 5, 2010 and filed January 11, 2010 with
the Securities and Exchange Commission is incorporated herein by
reference.
|
|
10
|
.74
|
|
Guaranty, dated January 5, 2010, by Energy, Inc. in favor
of Citizens Bank with respect to Great Plains Land Development
Co., LTD. as borrower. Exhibit 10.38 to the
Registrants Current Report on
Form 8-K
dated January 5, 2010 and filed January 11, 2010 with
the Securities and Exchange Commission is incorporated herein by
reference.
|
|
|
|
|
|
Exhibit
|
|
|
Number
|
|
Description
|
|
|
10
|
.75
|
|
Amended and Restated Loan Agreement, dated December 31,
2009, by and among Orwell Natural Gas Company, as borrower, and
ONG Marketing, Inc., Lightning Pipeline Company, Inc., Lightning
Pipeline Company II, Inc., and Richard M. Osborne, individually,
as guarantors, and The Huntington National Bank, N.A., as
lender. Exhibit 10.39 to the Registrants Current
Report on
Form 8-K
dated January 5, 2010 and filed January 11, 2010 with
the Securities and Exchange Commission is incorporated herein by
reference.
|
|
10
|
.76
|
|
Amended and Restated Security Agreement, dated December 31,
2009, by Orwell Natural Gas Company in favor of The Huntington
National Bank, N.A. Exhibit 10.40 to the Registrants
Current Report on
Form 8-K
dated January 5, 2010 and filed January 11, 2010 with
the Securities and Exchange Commission is incorporated herein by
reference.
|
|
10
|
.77
|
|
Note Modification Agreement (Line of Credit Note), dated
December 31, 2009, by and between Orwell Natural Gas
Company as borrower and The Huntington National Bank, N.A., as
lender. Exhibit 10.41 to the Registrants Current
Report on
Form 8-K
dated January 5, 2010 and filed January 11, 2010 with
the Securities and Exchange Commission is incorporated herein by
reference.
|
|
10
|
.78
|
|
Note Modification Agreement (Term Note), dated December 31,
2009, by and between Orwell Natural Gas Company as borrower and
The Huntington National Bank, N.A., as lender.
Exhibit 10.42 to the Registrants Current Report on
Form 8-K
dated January 5, 2010 and filed January 11, 2010 with
the Securities and Exchange Commission is incorporated herein by
reference.
|
|
10
|
.79
|
|
Amended and Restated Continuing Agreement of Guaranty and
Suretyship, dated December 31, 2009, by ONG Marketing,
Inc., Lightning Pipeline Company, Inc., Lightning Pipeline
Company II, Inc., Richard M. Osborne, individually, as
guarantors, in favor of The Huntington National Bank, N.A.
Exhibit 10.43 to the Registrants Current Report on
Form 8-K
dated January 5, 2010 and filed January 11, 2010 with
the Securities and Exchange Commission is incorporated herein by
reference.
|
|
10
|
.80
|
|
Form of Continuing Agreement of Guaranty and Suretyship, dated
January 12, 2010, by Energy, Inc. in favor of The
Huntington National Bank, N.A. Exhibit 10.44 to the
Registrants Current Report on
Form 8-K
dated January 5, 2010 and filed January 11, 2010 with
the Securities and Exchange Commission is incorporated herein by
reference.
|
|
21
|
|
|
Company Subsidiaries. Exhibit 21 to the Registrants
Registration Statement on Form
S-1 filed
with the Securities and Exchange Commission June 29, 2010
is incorporated herein by reference.
|
|
23
|
.1***
|
|
Consent of Hein & Associates LLP.
|
|
23
|
.2**
|
|
Consent of Kohrman Jackson & Krantz P.L.L. (included
in Exhibit 5.1)
|
|
24
|
***
|
|
Power of Attorney (included in Signature page).
|
|
|
|
|
|
Management agreement or compensatory plan or arrangement |
|
* |
|
Filed herewith |
|
** |
|
To be filed by amendment to the registration statement |