Attached files
file | filename |
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EX-31.1 - EX-31.1 - Gas Natural Inc. | l42679exv31w1.htm |
EX-32.2 - EX-32.2 - Gas Natural Inc. | l42679exv32w2.htm |
EX-32.1 - EX-32.1 - Gas Natural Inc. | l42679exv32w1.htm |
EX-31.2 - EX-31.2 - Gas Natural Inc. | l42679exv31w2.htm |
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
þ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2011
or
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________
Commission file number 001-34585
GAS NATURAL INC.
(Exact name of registrant as specified in its charter)
Ohio | 27-3003768 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) |
1 First Avenue South | ||
Great Falls, Montana | 59401 | |
(Address of principal executive office) | (Zip Code) |
Registrants telephone number, including area code: (800) 570-5688
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for
such shorter period that the registrant was required to submit and post such files. Yes o
No 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 definition of large accelerated
filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.
Large accelerated filer o | Accelerated filer o | Non-accelerated filer o | Smaller Reporting Company þ | |||
(Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Act). Yes o No þ
The number of shares outstanding of the registrants common stock as of May 5, 2011 was 8,151,301
shares.
As used in this Form 10-Q, the terms Company, Gas Natural, Registrant, we, us and
our mean Gas Natural Inc. and its consolidated subsidiaries as a whole, unless the context
indicates otherwise. Except as otherwise stated, the information is this Form 10-Q is as of March
31, 2011.
GAS NATURAL INC.
INDEX TO FORM 10-Q
INDEX TO FORM 10-Q
i
Table of Contents
PART I FINANCIAL INFORMATION
ITEM 1 FINANCIAL STATEMENTS.
GAS NATURAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Unaudited)
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
ASSETS |
||||||||
Current Assets: |
||||||||
Cash and cash equivalents |
$ | 13,104,237 | $ | 13,026,585 | ||||
Marketable securities |
304,875 | 274,950 | ||||||
Accounts receivable |
||||||||
Trade, less allowance for doubtful accounts of
$326,534 and $354,719, respectively |
9,477,385 | 9,593,840 | ||||||
Related parties |
479,255 | 559,384 | ||||||
Unbilled gas |
4,031,852 | 5,724,346 | ||||||
Note receivable related parties current portion |
9,733 | 9,565 | ||||||
Inventory |
||||||||
Natural gas and propane |
1,102,216 | 5,876,710 | ||||||
Materials and supplies |
1,693,767 | 1,414,367 | ||||||
Prepaid income taxes |
| 1,601,798 | ||||||
Prepayments and other |
706,587 | 912,959 | ||||||
Recoverable cost of gas purchases |
1,020,653 | 2,628,824 | ||||||
Deferred tax asset |
103,203 | 114,362 | ||||||
Total current assets |
32,033,763 | 41,737,690 | ||||||
Property, Plant and Equipment, Net |
77,856,138 | 76,134,401 | ||||||
Other Assets |
||||||||
Note receivable related parties, less current portion |
43,167 | 45,665 | ||||||
Deferred tax assets less current portion |
1,804,264 | 1,804,264 | ||||||
Regulatory assets |
||||||||
Property taxes |
802,513 | 873,197 | ||||||
Income taxes |
452,645 | 452,645 | ||||||
Rate case costs |
79,107 | 64,271 | ||||||
Debt issuance costs |
474,199 | 485,244 | ||||||
Goodwill |
14,607,952 | 14,607,952 | ||||||
Customer relationships |
656,458 | 662,167 | ||||||
Investment in unconsolidated affiliate |
748,859 | 640,216 | ||||||
Other assets |
218,399 | 220,224 | ||||||
Total other assets |
19,887,563 | 19,855,845 | ||||||
TOTAL ASSETS |
$ | 129,777,464 | $ | 137,727,936 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial
statements.
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Table of Contents
GAS NATURAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS, CONTINUED (Unaudited)
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
LIABILITIES AND CAPITALIZATION |
||||||||
Current Liabilities: |
||||||||
Checks in excess of amounts on deposit |
$ | 401,287 | $ | 532,145 | ||||
Line of credit |
11,000,000 | 18,149,999 | ||||||
Accounts payable |
||||||||
Trade |
7,864,061 | 9,200,297 | ||||||
Related parties |
213,488 | 417,543 | ||||||
Notes payable, current portion |
878,996 | 910,917 | ||||||
Notes payable related parties, current portion |
49,361 | 49,361 | ||||||
Accrued liabilities |
||||||||
Income taxes |
884,811 | | ||||||
Taxes other than income |
2,541,294 | 2,961,853 | ||||||
Deferred payments from levelized billing |
1,521,137 | 2,916,408 | ||||||
Property tax settlement current portion |
242,120 | 242,120 | ||||||
Related parties |
391,599 | 413,399 | ||||||
Other current liabilities |
1,612,730 | 1,919,231 | ||||||
Overrecovered gas purchases |
412,977 | 1,203,191 | ||||||
Total current liabilities |
28,013,861 | 38,916,464 | ||||||
Long Term Liabilities: |
||||||||
Deferred investment tax credits |
192,176 | 197,441 | ||||||
Asset retirement obligation |
1,581,477 | 1,546,867 | ||||||
Customer advances for construction |
938,517 | 949,434 | ||||||
Regulatory liability for income taxes |
83,161 | 83,161 | ||||||
Regulatory liability for gas costs |
76,514 | 131,443 | ||||||
Property tax settlement, less current portion |
243,008 | 243,008 | ||||||
Total |
3,114,853 | 3,151,354 | ||||||
Notes Payable, Less Current Portion |
21,737,708 | 21,958,616 | ||||||
Commitments and Contingencies (see note 11) |
| | ||||||
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,
8,150,926 and 8,149,801 shares outstanding
at March 31, 2011, and December 31, 2010, respectively |
1,222,639 | 1,222,470 | ||||||
Capital in excess of par value |
41,926,227 | 41,910,067 | ||||||
Accumulated other comprehensive income |
65,356 | 46,590 | ||||||
Retained earnings |
33,696,820 | 30,522,375 | ||||||
Total stockholders equity |
76,911,042 | 73,701,502 | ||||||
TOTAL CAPITALIZATION |
98,648,750 | 95,660,118 | ||||||
TOTAL LIABILITIES AND CAPITALIZATION |
$ | 129,777,464 | $ | 137,727,936 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial
statements.
F-2
Table of Contents
GAS NATURAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
REVENUES: |
||||||||
Natural gas operations |
$ | 38,219,583 | $ | 31,506,160 | ||||
Marketing and production |
1,825,502 | 3,118,323 | ||||||
Pipeline operations |
106,324 | 108,602 | ||||||
Total revenues |
40,151,409 | 34,733,085 | ||||||
COST OF SALES: |
||||||||
Gas purchased |
24,716,908 | 19,620,814 | ||||||
Marketing and production |
1,399,407 | 2,591,411 | ||||||
Total cost of sales |
26,116,315 | 22,212,225 | ||||||
GROSS MARGIN |
14,035,094 | 12,520,860 | ||||||
OPERATING EXPENSES |
||||||||
Distribution, general, and administrative |
4,657,320 | 3,904,909 | ||||||
Maintenance |
285,227 | 291,329 | ||||||
Depreciation and amortization |
1,035,077 | 949,462 | ||||||
Accretion |
34,610 | 29,100 | ||||||
Taxes other than income |
853,965 | 1,006,283 | ||||||
Total operating expenses |
6,866,199 | 6,181,083 | ||||||
OPERATING INCOME |
7,168,895 | 6,339,777 | ||||||
LOSS FROM UNCONSOLIDATED AFFILIATE |
(62,957 | ) | (20,014 | ) | ||||
OTHER INCOME (EXPENSE) |
115,680 | (231,401 | ) | |||||
INTEREST EXPENSE |
(413,179 | ) | (592,784 | ) | ||||
INCOME FROM OPERATIONS BEFORE INCOME TAXES |
6,808,439 | 5,495,578 | ||||||
INCOME TAX EXPENSE |
(2,533,685 | ) | (1,832,636 | ) | ||||
NET INCOME |
$ | 4,274,754 | $ | 3,662,942 | ||||
EARNINGS PER SHARE BASIC |
$ | 0.52 | $ | 0.61 | ||||
EARNINGS PER SHARE DILUTED |
$ | 0.52 | $ | 0.61 | ||||
WEIGHTED AVERAGE DIVIDENDS DECLARED PER
COMMON SHARE |
$ | 0.14 | $ | 0.14 | ||||
WEIGHTED AVERAGE SHARES OUTSTANDING BASIC |
8,150,239 | 5,973,851 | ||||||
WEIGHTED AVERAGE SHARES OUTSTANDING DILUTED |
8,158,079 | 5,980,627 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F-3
Table of Contents
GAS NATURAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY AND COMPREHENSIVE INCOME (Unaudited)
Capital In | Other | Non- | ||||||||||||||||||||||||||
Common | Excess Of | Comprehensive | Controlling | Retained | ||||||||||||||||||||||||
Shares | Stock | Par Value | Income (Loss) | Interest | Earnings | Total | ||||||||||||||||||||||
BALANCE AT DECEMBER 31, 2009 |
4,361,869 | $ | 654,280 | $ | 6,514,851 | $ | 146,701 | $ | 100,989 | $ | 28,270,987 | $ | 35,687,808 | |||||||||||||||
Net income |
| | | | | 3,662,942 | 3,662,942 | |||||||||||||||||||||
Net unrealized losses
on available for sale securities |
| | | (167,047 | ) | | | (167,047 | ) | |||||||||||||||||||
Stock based compensation |
1,726 | 259 | 21,915 | | | | 22,174 | |||||||||||||||||||||
Acquisition of Ohio Companies |
1,707,308 | 256,096 | 16,816,988 | | | | 17,073,084 | |||||||||||||||||||||
Purchase of remaining shares
in Cut Bank Gas Company |
| | | | (100,989 | ) | | (100,989 | ) | |||||||||||||||||||
Dividends declared |
| | | | | (819,491 | ) | (819,491 | ) | |||||||||||||||||||
BALANCE AT MARCH 31, 2010 |
6,070,903 | $ | 910,635 | $ | 23,353,754 | $ | (20,346 | ) | $ | | $ | 31,114,438 | $ | 55,358,481 | ||||||||||||||
BALANCE AT DECEMBER 31, 2010 |
8,149,801 | $ | 1,222,470 | $ | 41,910,067 | $ | 46,590 | $ | | $ | 30,522,375 | $ | 73,701,502 | |||||||||||||||
Net income |
| | | | | 4,274,754 | 4,274,754 | |||||||||||||||||||||
Net unrealized gains
on available for sale securities |
| | | 18,766 | | | 18,766 | |||||||||||||||||||||
Stock based compensation |
1,125 | 169 | 16,160 | | | | 16,329 | |||||||||||||||||||||
Dividends declared |
| | | | | (1,100,309 | ) | (1,100,309 | ) | |||||||||||||||||||
BALANCE AT MARCH 31, 2011 |
8,150,926 | $ | 1,222,639 | $ | 41,926,227 | $ | 65,356 | $ | | $ | 33,696,820 | $ | 76,911,042 | |||||||||||||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F-4
Table of Contents
GAS NATURAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
Net income |
$ | 4,274,754 | $ | 3,662,942 | ||||
Adjustments to reconcile net income to
net cash provided by operating activities: |
||||||||
Depreciation and amortization |
1,035,077 | 949,462 | ||||||
Accretion expense |
34,610 | 29,100 | ||||||
Stock-based compensation |
16,329 | 22,174 | ||||||
Gain on sale of marketable securities |
| (26,609 | ) | |||||
Loss on sale of fixed assets |
6,948 | | ||||||
Loss from unconsolidated affiliate |
62,957 | 20,014 | ||||||
Investment tax credit |
(5,265 | ) | (5,265 | ) | ||||
Deferred income taxes |
| 1,510,504 | ||||||
Changes in assets and liabilities: |
||||||||
Accounts receivable, including related parties |
196,584 | 5,932,813 | ||||||
Unbilled gas |
1,692,493 | (339,831 | ) | |||||
Natural gas and propane inventories |
4,774,494 | 4,653,044 | ||||||
Accounts payable, including related parties |
(1,639,066 | ) | (2,681,235 | ) | ||||
Recoverable/refundable cost of gas purchases |
817,957 | (2,701,968 | ) | |||||
Prepayments and other |
206,372 | 105,608 | ||||||
Other assets |
1,384,764 | (5,482 | ) | |||||
Other liabilities |
(1,314,320 | ) | (1,240,797 | ) | ||||
Net cash provided by operating activities |
11,544,688 | 9,884,474 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
Construction expenditures |
(2,811,832 | ) | (1,133,127 | ) | ||||
Proceeds from sale of marketable securities |
| 301,897 | ||||||
Proceeds from sale of fixed assets |
4,000 | | ||||||
Proceeds from related party note |
2,329 | 2,329 | ||||||
Purchase of Cut Bank shares |
| (97,667 | ) | |||||
Cash acquired in acquisitions |
| 144,203 | ||||||
Investment in unconsolidated affiliate |
(132,000 | ) | (52,500 | ) | ||||
Other investments |
(10,183 | ) | | |||||
Customer advances for construction |
(10,917 | ) | 56,899 | |||||
Contributions in aid of construction |
(5,362 | ) | 24,813 | |||||
Net cash used in investing activities |
(2,963,965 | ) | (753,153 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
Proceeds from lines of credit |
2,500,000 | 3,700,000 | ||||||
Repayments of lines of credit |
(9,650,000 | ) | (10,752,098 | ) | ||||
Repayments of long-term debt |
(252,796 | ) | (234,229 | ) | ||||
Repayments of other short-term borrowings |
| (444,808 | ) | |||||
Dividends paid |
(1,100,275 | ) | (819,444 | ) | ||||
Net cash used in financing activities |
(8,503,071 | ) | (8,550,579 | ) | ||||
NET INCREASE IN CASH AND CASH EQUIVALENTS |
77,652 | 580,742 | ||||||
CASH AND CASH EQUIVALENTS: |
||||||||
Beginning of period |
13,026,585 | 2,752,168 | ||||||
End of period |
$ | 13,104,237 | $ | 3,332,910 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
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Table of Contents
GAS NATURAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
Three Months Ended | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
||||||||
Cash paid for interest |
$ | 275,200 | $ | 174,188 | ||||
Cash paid for income taxes |
$ | 52,303 | $ | 50,000 | ||||
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES |
||||||||
Shares issued to purchase Ohio Companies |
$ | | $ | 17,073,084 | ||||
Construction expenditures included in accounts payable |
$ | 119,778 | $ | 200,286 | ||||
Capitalized interest |
$ | 1,423 | $ | 1,777 | ||||
Accrued dividends |
$ | 366,775 | $ | 273,191 | ||||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
F-6
Table of Contents
GAS NATURAL INC AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1 Summary of Business and Significant Accounting Policies
Nature of Business
Gas Natural Inc. is the parent company of Energy West, Incorporated (Energy West), Lightning
Pipeline Company, Inc. (Lightning Pipeline), Great Plains Natural Gas Company (Great Plains),
Brainard Gas Corp. (Brainard), and Gas Natural Service Company, LLC (the Service Company).
Energy West is a natural gas utility with operations in Montana, Wyoming, North Carolina and Maine.
Lightning Pipeline is a natural gas utility with operations in Ohio and Pennsylvania. Great
Plains and Brainard are natural gas utilities with operations in Ohio. The Service Company manages
gas procurement, transportation and storage for Brainard and subsidiaries of Lightning Pipeline and
Great Plains. The Company was originally incorporated in Montana in 1909. The Company currently
has four reporting segments:
| Natural Gas Operations | Annually distribute approximately 30 billion cubic feet of natural gas to approximately 63,500 customers through regulated utilities operating in Montana, Wyoming, Maine, North Carolina, Ohio and Pennsylvania. The Maine and North Carolina operations were acquired in 2007, while Cut Bank Gas in Montana was added in November 2009 and the Ohio and Pennsylvania operations were acquired in January 2010. | ||||
| Marketing and Production Operations | Annually market approximately 1.3 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 the subsidiary, Energy West Resources, Inc. (EWR). EWR owns an average 48% gross working interest (an average 42% net revenue interest) in 160 natural gas producing wells and gas gathering assets. The production holds approximately 20,000 acres of lease rights on state lands in Montana. | ||||
| Pipeline Operations | The Shoshone interstate and Glacier gathering natural gas pipelines located in Montana and Wyoming are owned through the subsidiary Energy West Development, Inc. (EWD). Certain natural gas producing wells owned by EWD are being managed and reported under the marketing and production operations. | ||||
| Corporate and Other | Corporate and other encompasses the results of corporate acquisitions and other equity transactions. Included in corporate and other are costs associated with business development and acquisitions, dividend income and recognized gains from the sale of marketable securities. |
Basis of Presentation
The accompanying condensed balance sheet as of December 31, 2010, which has been derived from
audited financial statements, and the unaudited interim condensed financial statements of Gas
Natural 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.
The Company follows accounting standards set by the Financial Accounting Standards Board (FASB).
The FASB sets generally accepted accounting principles (GAAP) to ensure the consistent reporting
of the Companys 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
F-7
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issued by the FASB in these footnotes are to the FASB Accounting Standards Codification, sometimes
referred to as the Codification or ASC.
Operating results for the three month period ended March 31, 2011 are not necessarily indicative of
the results that may be expected for future fiscal periods. Events occurring subsequent to March
31, 2011 have been evaluated as to their potential impact to the financial statements through the
date of issuance. These 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, 2010.
Effects of Regulation
The Company follows the provisions of ASC 980, Regulated Operations, and the accompanying financial
statements reflect the effects of the different rate-making principles followed by the various
jurisdictions 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 rate-making process
in a period different from the period in which the costs would be charged to expense by an
unregulated enterprise. When this occurs, costs are deferred as assets in the balance sheet
(regulatory assets) and recorded as expenses in the periods when those same amounts are reflected
in rates. Additionally, regulators can impose liabilities upon a regulated company for amounts
previously collected from customers and for amounts that are expected to be refunded to customers
which are recorded as liabilities in the balance sheet (regulatory liabilities).
Use of Estimates
The preparation of financial statements in conformity with 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, and in the determination of depreciable lives of utility
plant. The deferred tax asset and valuation allowance require a significant amount of judgment and
are significant estimates. The estimates are based on projected future tax deductions, future
taxable income, estimated limitations under the Internal Revenue Code, an estimated valuation
allowance, and other assumptions.
Such estimates could change in the near term and could significantly impact the Companys results
of operations and financial position.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of three months or
less, at the date of acquisition, to be cash equivalents. The Company maintains, at various
financial institutions, cash and equivalents which may exceed federally insurable limits and which
may, at times, significantly exceed balance sheet amounts.
Receivables
The accounts receivable are generated from sales and delivery of natural gas as measured by inputs
from meter reading devices. Trade accounts receivable are carried at the expected net realizable
value. There is risk associated with the collection of these receivables. As such, a provision
is recorded for the receivables considered to be uncollectible. The provision is based on
managements assessment of the collectability of specific customer accounts, the aging of the
accounts receivable and historical write-off amounts. The underlying assumptions used for the
provision can change from period to period and the provision could potentially cause a negative
material impact to the income statement and working capital.
Two of the Companys utilities in Ohio, Orwell Natural Gas Company (Orwell) and Northeast Ohio
Natural Gas Corp. (NEO) collect from their customers through rates an amount per Mcf billed to
provide an allowance for doubtful accounts. As accounts are identified as uncollectible, they are
written off against this allowance for doubtful accounts with no income statement impact. In
effect, all bad debt expense is funded by the customer base. The total amount collected from
customers and the amounts written off are reviewed annually by the Public Utility Commission of
Ohio (PUCO) and the rate per Mcf is adjusted as necessary.
The Companys bad debt expense for the three months ended March 31, 2011 and 2010 was $44,983 and
$44,252, respectively.
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Recoverable/Refundable Costs of Gas Purchases
The Company accounts for purchased gas costs in accordance with procedures authorized by the
Montana Public Service Commission (MPSC), the Wyoming Public Service Commission (WPSC), the
North Carolina Utilities Commission (NCUC), the Maine Public Utilities Commission (MPUC), the
PUCO and the Pennsylvania Public Utility Commission (PaPUC). Purchased gas costs that are
different from those provided for in present rates, and approved by the respective commission, are
accumulated and recovered or credited through future rate changes. The gas cost recoveries are
monitored closely by the regulatory commissions in all of the states in which the Company operates
and are subject to periodic audits or other review processes.
During the year ended December 31, 2010, the PUCO conducted audits of NEO and Orwell of the rates
as filed from September 2007 through August 2009 and January 2008 through June 2010, respectively.
As of March 31, 2011, the PUCO had not completed the audits of NEO and Orwell. The PUCO did
provide the preliminary audit findings noting NEO had not included approximately $1,050,000 of
costs and Orwell included an excess of approximately $1,100,000 of costs in the filings under
audit.
In accordance with ASC 980, Regulated Operations, the Company recorded an adjustment of $1,050,000
and ($1,100,000) during the year ended December 31, 2010 for NEO and Orwell, respectively. When
the PUCO concludes each audit, if the amounts are different than initially recorded, the Company
will record an additional adjustment.
Regulatory Assets
The regulatory asset for property tax is recovered in rates over a ten-year period starting January
1, 2004. The income taxes earn a return equal to that of the Companys rate base. The rate case
costs do not earn a return. Regulatory assets will be recovered over a period of approximately
three to twenty years.
Debt Issuance Costs
Debt issuance costs are fees and other direct incremental costs incurred by the Company in
obtaining debt financing and are recognized as assets and are amortized using straight-line
amortization as interest expense over the term of the related debt. The unamortized balance of
debt issuance costs was $474,199 and $485,244 as of March 31, 2011 and December 31, 2010,
respectively, including the costs related to refinancing the debt in Ohio. The amortization expense
was $11,046 and $13,863 for the three months ended March 31, 2011 and 2010, respectively.
Asset Retirement Obligations
The Company records the fair value of a liability for an asset retirement obligation (ARO) 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 balance sheets. The Company amortizes 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 March 31, 2011 and December
31, 2010, the Company has recorded a net asset of $162,503 and $172,909, and a related liability of
$1,581,477 and $1,546,867, respectively.
The Company, excluding Orwell and Brainard, 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.
As a result of regulatory action by the PUCO related to prior audits, Orwell and Brainard accrue
towards an estimated liability for removing gas mains, meter and regulator station equipment and
service lines at the end of their useful lives. The liability is to be equal to a percent of the
asset cost according to the following table:
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Percent of Asset Cost | ||||||||
Orwell | Brainard | |||||||
Mains |
15 | % | 20 | % | ||||
Meter/regulator stations |
10 | % | 10 | % | ||||
Service lines |
75 | % | 75 | % |
The Company has no assets legally restricted for purposes of settling its asset retirement
obligations. The schedule below is a reconciliation of the Companys liability for the three
months ended March 31:
2011 | 2010 | |||||||
Balance, beginning of period |
$ | 1,546,867 | $ | 787,233 | ||||
Liabilities incurred or acquired |
| 487,445 | ||||||
Liabilities settled |
| | ||||||
Accretion expense |
34,610 | 29,100 | ||||||
Balance, end of period |
$ | 1,581,477 | $ | 1,303,778 | ||||
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.
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 | ||||||||
March 31, | ||||||||
2011 | 2010 | |||||||
Net income |
$ | 4,274,754 | $ | 3,662,942 | ||||
Other comprehensive income |
||||||||
Change in unrealized gain on available-for-sale securities, net of tax |
18,766 | (167,047 | ) | |||||
Comprehensive income |
$ | 4,293,520 | $ | 3,495,895 | ||||
Other comprehensive income is reported net of tax of $11,159 and ($104,439) as of March 31, 2011
and 2010, respectively.
Earnings Per Share
Net income per common share is computed by both the basic method, which uses the weighted average
number of common shares outstanding, and the diluted method, which includes the dilutive common
shares from stock options and other dilutive securities, as calculated using the treasury stock
method.
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Three months ended March 31, | ||||||||
2011 | 2010 | |||||||
Weighted average number of common shares outstanding
used in the basic earnings per common share calculations |
8,150,239 | 5,973,851 | ||||||
Dilutive effect of stock options |
7,840 | 6,776 | ||||||
Weighted average number of common shares outstanding
adjusted for the effect of dilutive options |
8,158,079 | 5,980,627 | ||||||
Reclassifications
Certain reclassifications of prior year reported amounts have been made for comparative purposes.
Such reclassifications had no effect on income.
Recently Adopted Accounting Pronouncements
ASU No. 2010-28, Intangibles Goodwill and Other (Topic 350) When to Perform Step 2 of the
Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts
On January 1, 2011, the Company adopted new authoritative guidance under this ASU, which modifies
Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts.
For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test
if it is more likely than not that a goodwill impairment exists. In determining whether it is more
likely than not that a goodwill impairment exists, an entity should consider whether there are any
adverse qualitative factors indicating that an impairment may exist such as if an event occurs or
circumstances change that would more likely than not reduce the fair value of a reporting unit
below its carrying amount. The adoption of this guidance did not have a material impact on the
accompanying financial statements.
ASU No. 2010-29, Business Combinations (Topic 805) Disclosure of Supplementary Pro Forma
Information for Business Combinations
On January 1, 2011, the Company adopted new authoritative guidance under this ASU, which provides
clarification regarding the acquisition date that should be used for reporting pro forma financial
information disclosures required by Topic 805 when comparative financial statements are presented.
This ASU also requires entities to provide a description of the nature and amount of material,
nonrecurring pro forma adjustments that are directly attributable to the business combination. The
adoption of this guidance did not have a material impact on the accompanying financial statements.
Recently Issued Accounting Pronouncements
ASU No. 2011-01, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings
in Update No. 2010-20
In January 2011, the FASB issued ASU 2011-01, which temporarily delays the effective date of the
disclosures about troubled debt restructurings in ASU 2010-20. The delay is intended to allow the
FASB time to complete its deliberations on what constitutes a troubled debt restructuring. The
effective date of the new disclosures about troubled debt restructurings for public entities and
the guidance for determining what constitutes a troubled debt restructuring will then be
coordinated. Currently, that guidance is anticipated to be effective for interim and annual
periods ending after June 15, 2011. This ASU is not expected to have a material impact on the
accompanying financial statements.
Note 2 Acquisitions
On January 5, 2010, the Company completed the acquisition of Lightning Pipeline, Great Plains,
Brainard and Great Plains Land Development Co., LTD. (GPL) and collectively with Lightning
Pipeline, Great Plains and Brainard, the Ohio Companies and each an Ohio Company. Lightning
Pipeline is the parent company of Orwell and Great Plains is the parent company of NEO. Orwell, NEO
and Brainard are natural gas distribution companies that serve approximately 24,000 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.
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Table of Contents
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
Brainard 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, the Company issued 1,707,308 Shares in the aggregate. The Company issued
Richard M. Osborne (Mr. Osborne), as trustee, 1,565,701 Shares, Thomas J. Smith (Mr. Smith)
73,244 Shares and Rebecca Howell (Ms. Howell) 19,532 Shares. Mr. Osborne is chairman of the board
and chief executive officer, Mr. Smith is a director and the chief financial officer, and Ms.
Howell is the corporate secretary of the Company. 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 was 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 estimated fair value of the assets
acquired and liabilities assumed is reflected in the following table at the date of acquisition.
Total | ||||||||||||||||
Ohio | Lightning | |||||||||||||||
Companies | Great Plains | Pipeline | Brainard | |||||||||||||
Current assets |
$ | 11,475,899 | $ | 7,343,431 | $ | 4,012,843 | $ | 119,625 | ||||||||
Property and equipment |
29,530,636 | 18,290,612 | 10,818,923 | 421,101 | ||||||||||||
Deferred tax assets |
76,772 | | 11,535 | 65,237 | ||||||||||||
Other noncurrent assets |
152,585 | 1,000 | 140,002 | 11,583 | ||||||||||||
Customer relationships |
685,000 | 640,000 | 45,000 | | ||||||||||||
Goodwill |
13,551,181 | 9,112,901 | 4,312,007 | 126,273 | ||||||||||||
Total assets acquired |
55,472,073 | 35,387,944 | 19,340,310 | 743,819 | ||||||||||||
Current liabilities |
13,836,123 | 7,589,554 | 5,842,518 | 404,051 | ||||||||||||
Asset retirement obligation |
487,447 | | 477,939 | 9,508 | ||||||||||||
Deferred tax liability |
3,279,164 | 1,483,525 | 1,651,769 | 143,870 | ||||||||||||
Total liabilities assumed |
17,602,734 | 9,073,079 | 7,972,226 | 557,429 | ||||||||||||
Net assets acquired: |
$ | 37,869,339 | $ | 26,314,865 | $ | 11,368,084 | $ | 186,390 | ||||||||
Approximately $13.6 million of the total purchase price was allocated to goodwill. None of the
goodwill is expected to be deductible for tax purposes. Transaction costs related to the mergers
totaled $125,368 for the three months ended March 31, 2010, and are recorded in the accompanying
statements of income within the other income (expense).
The results of operations for the Ohio Companies for the period from January 1, 2010 to January 4,
2010 were not material.
Note 3 Marketable Securities
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
bought expressly for the purpose of selling in the near term are classified as trading securities
and are measured at fair value with unrealized gains and losses reported in earnings. Securities
investments not classified as either held-to-maturity or trading securities are classified as
available-for-sale securities. Available-for-
F-12
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sale securities are recorded at fair value in marketable securities in the accompanying
balance sheets, with the change in fair value during the period excluded from earnings and recorded
net of tax as a component of other comprehensive income. Realized gains and losses, and declines
in value judged to be other than temporary, are in the accompanying statements of income. The
Company did not hold any held-to-maturity or trading securities as of March 31, 2011 or December
31, 2010.
The following is a summary of available-for-sale securities at:
March 31, 2011 | ||||||||||||
Investment | Unrealized | Estimated | ||||||||||
at cost | Gains | Fair Value | ||||||||||
Common Stock |
$ | 199,500 | $ | 105,375 | $ | 304,875 | ||||||
December 31, 2010 | ||||||||||||
Investment | Unrealized | Estimated | ||||||||||
at cost | Gains | Fair Value | ||||||||||
Common Stock |
$ | 199,500 | $ | 75,450 | $ | 274,950 | ||||||
Unrealized gain on available-for-sale securities of $65,356, and $46,590 (net of $40,019 and
$28,860 in taxes), was included in accumulated other comprehensive income in the accompanying
unaudited balance sheets at March 31, 2011, and December 31, 2010, respectively.
The gross realized gains are summarized below:
Gross | ||||||||||||
Three Months Ended | Sales | Realized | ||||||||||
March 31, | Proceeds | Cost | Gains | |||||||||
2011 |
$ | | $ | | $ | | ||||||
2010 |
$ | 301,897 | $ | 275,288 | $ | 26,609 |
As of March 31, 2011 and December 31, 2010, the Company did not hold any securities in an
unrealized loss position.
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 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.
Note 4 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).
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Table of Contents
The following tables represent the Companys fair value hierarchy for its financial assets measured
at fair value on a recurring basis as of:
March 31, 2011 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | TOTAL | |||||||||||||
Available-for-sale securities |
$ | 304,875 | | | $ | 304,875 | ||||||||||
December 31, 2010 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | TOTAL | |||||||||||||
Available-for-sale securities |
$ | 274,950 | | | $ | 274,950 | ||||||||||
Note 5 Credit Facilities and Long-Term Debt
Bank of America
Energy West has a $20,000,000 revolving credit facility that includes an annual commitment fee
equal to 0.20% of the unused portion of the facility and interest on amounts outstanding at the
monthly London Interbank Offered Rate (LIBOR) plus 120 to 145 basis points for interest periods
selected by Energy West. For the three months ended March 31, 2011 and 2010, the weighted average
interest rate on the facility was 1.64% and 3.20%, respectively, resulting in $56,780 and $83,354
of interest expense, respectively. The balance on the revolving credit facility was $11,000,000 and
$18,149,999 at March 31, 2011 and December 31, 2010, respectively.
Senior Unsecured Notes
On June 29, 2007, Energy West 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
existing notes. Approximately $463,000 was incurred related to the debt issuance which was
capitalized and are being amortized over the life of the note using the effective interest method.
Interest expense was $200,200 for the three months ended March 31, 2011 and 2010.
Citizens Bank
In connection with the acquisition of the Ohio Companies, NEO, Great Plains and GPL each entered
modifications/amendments to its credit facility with Citizens Bank (the Citizens Credit
Facility). The Citizens Credit Facility consisted 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 Inc. guarantees each loan. Mr. 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.
NEOs, Great Plains and GPLs term loans with Citizens Bank were in the amounts of $7.8 million,
$2.65 million and $892,000 respectively. Each term note had a maturity date of July 1, 2013 and
bore interest at an annual rate of 30-day LIBOR plus 400 basis points with an interest rate floor
of 5.00% per annum. For the three months ended March 31, 2011 and 2010, the weighted average
interest rate on the term loans was 5% and 4.17%, respectively, resulting in $118,727 and $103,029
of interest expense, respectively. These loans were paid off on May 3, 2011.
NEOs revolving credit line with Citizens Bank matured on November 29, 2010 and was repaid and
extinguished at that time. For the three months ended March 31, 2010, the weighted average interest
rate on the revolving credit line was 5%, resulting in $26,403 of interest expense.
At March 31, 2011 and December 31, 2010, $6.4 million and $6.6 million had been borrowed under the
NEO term loan, $2.2 million and $2.2 million under the Great Plains term loan, and $738,000 and
$753,000 under the GPL term loan, respectively.
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Table of Contents
Huntington Bank
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 amended and restated the previous credit facility that matured on November 30, 2009. The
loan was secured by all of the assets of Orwell. The Huntington Credit Facility was guaranteed by
Gas Natural Inc., Lightning Pipeline, Mr. Osborne individually and as Trustee of the RMO Trust, and
certain entities owned and controlled by Mr. Osborne. The Huntington Credit Facility was also
secured by a pledge of $3.0 million in market value of Gas Natural Inc. stock by the RMO Trust.
The Huntington Line of Credit and Term Loan both had a maturity date of November 28, 2010. Orwell
repaid and extinguished these debt obligations at that time.
For the three months ended March 31, 2010, the weighted average interest rate on the term note was
4%, resulting in $45,568 of interest expense. The weighted average interest rate on the credit line
was 4%, resulting in $16,115 of interest expense.
Combined Term Loans and Credit Facilities
The $11.0 million of borrowings at March 31, 2011, leaves the borrowing capacity on our line of
credit at $9.0 million.
The total amount outstanding under the Energy West long term debt obligations was approximately
$13.0 million at March 31, 2011, with none being due within one year. Including the amounts related
to the Ohio Companies, the total amount is approximately $22.6 million, with approximately $879,000
due within one year.
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.
The Citizens Credit Facility, which was paid off on May 3, 2011 required a minimum 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 required a minimum tangible net worth 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
allowed the payment of dividends to Gas Natural Inc. if the net worth (as defined in the Citizens
loan documents) after payment of any dividends was not less than $1,815,000 as positively increased
by 100% of net income as of the end of each fiscal quarter and fiscal year.
The Company believes it was in compliance with the financial covenants under its debt agreements.
Notes payable consists of the following:
March 31, | December 31, | |||||||
2011 | 2010 | |||||||
Bank of America Senior unsecured notes |
$ | 13,000,000 | $ | 13,000,000 | ||||
Auto and equipment loans various lenders |
256,993 | 320,079 | ||||||
Citizens Bank Term Loan Great Plains Land Development |
737,956 | 752,917 | ||||||
Citizens Bank Term Loan Great Plains Natural Gas |
2,187,490 | 2,231,835 | ||||||
Citizens Bank Term Loan Northeast Ohio |
6,434,265 | 6,564,702 | ||||||
Less: Current portion |
(878,996 | ) | (910,917 | ) | ||||
Total |
$ | 21,737,708 | $ | 21,958,616 | ||||
The following table shows the future minimum payments on the credit facilities and long-term
debt for the years ended March 31:
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Table of Contents
2012 |
$ | 878,996 | ||
2013 |
867,811 | |||
2014 |
7,861,132 | |||
2015 |
5,425 | |||
2016 |
3,340 | |||
Thereafter |
13,000,000 | |||
Total |
$ | 22,616,704 | ||
On May 3, 2011, the Company and its Ohio subsidiaries, NEO, Orwell and Brainard, (together
the Issuers), issued $15.334 million of 5.38% Senior Secured Guaranteed Fixed Rate Notes due June
1, 2017. Additionally, Great Plains issued $3.0 million of 4.12% Senior Secured Guaranteed
Floating Rate Notes due May 3, 2014. Both notes were placed with SunLife Assurance Company of
Canada.
The first note, in the amount of $15.334 million, is a joint obligation of the Issuers, and is
being guaranteed by the Company, Lightning Pipeline, and Great Plains (together with the Issuers,
the Fixed Rate Obligors). This note received approval from the PUCO on March 30, 2011. The note
is governed by a Note Purchase Agreement (NPA) as filed with the SEC on Form 8-K on November 2,
2010. Concurrent with the funding and closing of this transaction, which occurred on May 3, 2011,
the Fixed Rate Obligors signed an amended Note Purchase Agreement that is substantially the same as
the NPA released on November 2, 2010. Prepayment of this note prior to maturity is subject to a 50
basis point make- whole premium.
The second note in the amount of $3.0 million, is an obligation of Great Plains and is guaranteed
by the Company (together, the Floating Rate Obligors). The note is priced at a fixed spread of
385 basis points over three month Libor. Pricing for this note will reset on a quarterly basis to
the then current yield of three month Libor. The note is governed by a Note Purchase Agreement as
filed with the Securities and Exchange Commission (SEC) Form on 8-K on November 2, 2010.
Concurrent with the funding of this transaction, which occurred on May 3, 2011, the Floating Rate
Obligors signed an amended Note Purchase Agreement that is substantially the same as the NPA
released on November 2, 2010. Prepayment of this note prior to maturity is at par.
Payments for both notes prior to maturity are interest-only.
The notes carry a 60% debt-to-capitalization financial covenant on a consolidated basis for Ohio,
as well as, a 2.0x Interest Coverage test based on a trailing twelve-month basis. Additional
covenants customary for asset sales and purchases, additional indebtedness, dividends, change of
control and other matters are also included.
The use of proceeds for both notes are to repay and extinguish existing amortizing bank debt and
other existing indebtedness, fund $3.4 million for the 2011 capital program for Orwell and NEO,
establish two debt service reserve accounts, replenish the Companys treasuries for the previously
announced repayment of maturing bank debt, and transaction expenses.
Note 6 Stockholders Equity
2002 Stock Option Plan
The Energy West Incorporated 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, 2011 and December 31, 2010, there were 35,000 and 39,500 options
outstanding, respectively. The maximum number of shares available for future grants under this
plan is 58,000 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.
The fair value of each option grant is estimated on the date of grant using the Black-Scholes
option pricing model.
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Table of Contents
A summary of the status of the stock option plans as follows:
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 | |||||||
Exerciseable March 31, 2010 |
8,750 | $ | 7.79 | $ | 20,812 | |||||||
Weighted | Aggregate | |||||||||||
Number of | Average | Intrinsic | ||||||||||
Shares | Exercise Price | Value | ||||||||||
Outstanding December 31, 2010 |
39,500 | $ | 8.40 | |||||||||
Granted |
| $ | | |||||||||
Exercised |
| $ | | |||||||||
Expired |
(4,500 | ) | $ | 6.34 | ||||||||
Outstanding March 31, 2011 |
35,000 | $ | 8.66 | $ | 61,300 | |||||||
Exerciseable March 31, 2011 |
17,500 | $ | 8.22 | $ | 107,350 | |||||||
As of March 31, 2011 and December 31, 2010, there was $35,653 and $31,824 of total
unrecognized compensation cost related to stock-based compensation, respectively. That cost is
expected to be recognized over a period of three years.
The following information applies to options outstanding at March 31, 2011:
Weighted | ||||||||||||||||||||||||
Average | ||||||||||||||||||||||||
Weighted | Remaining | Weighted | ||||||||||||||||||||||
Average | Contractual | Average | ||||||||||||||||||||||
Grant | Exercise | Number | Exercise | Life | Number | Exercise | ||||||||||||||||||
Date | Price | Outstanding | Price | (Years) | Exercisable | Price | ||||||||||||||||||
12/1/2008 |
$ | 7.10 | 10,000 | $ | 7.10 | 7.67 | 7,500 | $ | 7.10 | |||||||||||||||
6/3/2009 |
$ | 8.44 | 5,000 | $ | 8.44 | 3.18 | 2,500 | $ | 8.44 | |||||||||||||||
12/1/2009 |
$ | 8.85 | 10,000 | $ | 8.85 | 8.67 | 5,000 | $ | 8.85 | |||||||||||||||
12/1/2010 |
$ | 10.15 | 10,000 | $ | 10.15 | 9.67 | 2,500 | $ | 10.15 | |||||||||||||||
35,000 | 17,500 | |||||||||||||||||||||||
During the three months ended March 31, 2011 and 2010, the Company recorded $3,916 and $4,703,
respectively ($2,894 and $2,456, respectively, 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.
F-17
Table of Contents
Note 7 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%. The expense related to the 401k Plan during the three
months ended March 31, 2011 and 2010 was $111,333 and $67,350, respectively.
The Company makes matching contributions in the form of Company common stock equal to 10% of each
participants elective deferrals in the 401k Plan. The Company contributed shares of common stock
valued at $11,957 and $6,120 for the three months ended March 31, 2011 and 2010, respectively. In
addition, a portion of the 401k Plan consists of an Employee Stock Ownership Plan (ESOP) that
covers most employees. The ESOP receives contributions of 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 the Companys common stock. The Company made no contributions for the three months ended
March 31, 2011 and 2010.
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, the 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. The Company discontinued contributions in 2006 and is no longer required to fund
the Retiree Health Plan. As of March 31, 2011 and December 31, 2010, the value of plan assets was $208,937 and $212,678, respectively. The
assets remaining in the trust will be used to fund the plan until these assets are exhausted.
Note 8 Income Taxes
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, | ||||||||
2011 | 2010 | |||||||
Income tax from continuing operations: |
||||||||
Tax expense at statutory rate of 34% |
$ | 2,314,869 | $ | 1,868,497 | ||||
State income tax expense, net of federal tax expense |
223,954 | 76,640 | ||||||
Amortization of deferred investment tax credits |
(5,265 | ) | (5,265 | ) | ||||
Other |
127 | (107,236 | ) | |||||
Total income tax expense |
$ | 2,533,685 | $ | 1,832,636 | ||||
The Company recognizes interest accrued related to unrecognized tax positions in interest
expense and penalties in operating expense. No interest and penalties related to unrecognized tax
positions were accrued at March 31, 2011 and December 31, 2010.
The tax
years 2006 and later 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 Related Party Transactions
The Company is party to certain agreements and transactions with Mr. Osborne, or companies owned or
controlled by Mr. Osborne.
Notes Payable
The Company had two notes payable to Mr. Osborne. The first note was payable on demand and bore
interest at a rate equal to the prime rate as published by Key Bank. On December 1, 2010, the
Company repaid the first note in full, including all interest accrued to date. The second note has
a maturity date of January 3, 2014 and bears interest at 6.0% annually. As of March 31, 2011 and
December 31, 2010, the second note had a balance of $52,975 and $52,578, which included $3,614 and
$3,217 of accrued interest,
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respectively. Interest expense incurred related to both loans was $397
and $47,645, respectively, for the three months ended March 31, 2011 and 2010. On May 3, 2011, the
Company repaid the second note in full, including all interest accrued to date.
Note Receivable
The Company has a note receivable from John D. Oil and Gas Marketing, a company controlled by Mr.
Osborne, with a maturity date of December 31, 2016 and an annual interest rate of 7.0% relating to
funds loaned to John D. Oil and Gas Marketing to finance the acquisition of a gas pipeline. The
balance due from John D. Oil and Gas Marketing was $52,900 and $55,230 (of which, $9,733 and $9,565
is due within one year) as of March 31, 2011 and December 31, 2010, respectively. The Company has
a corresponding agreement to lease the pipeline from John D. Oil and Gas Marketing through December
31, 2016. Lease expense resulting from this agreement was $3,300 for the three months ended March
31, 2011 and 2010, which is included in the Natural Gas Purchased column below. There was no
balance due at March 31, 2011 and December 31, 2010 to John D. Oil and Gas Marketing related to
these lease payments.
Accounts Payable
The table below details amounts due to related parties, including companies owned or controlled by
Mr. Osborne, at March 31, 2011 and transactions with the related parties for the three months ended
March 31, 2011:
Rent, Supplies, | ||||||||||||||||
Accounts | Natural Gas | Pipeline and | Consulting, and | |||||||||||||
Payable | Purchased | Construction Supplies | Other Services | |||||||||||||
John D. Oil and Gas Marketing |
$ | 89,080 | $ | 1,472,102 | $ | | $ | 127 | ||||||||
Cobra Pipeline |
15,990 | 179,603 | | | ||||||||||||
Orwell Trumbell Pipeline |
56,929 | 220,517 | | 49,080 | ||||||||||||
Great Plains Exploration |
150 | 19,143 | 85,680 | 150 | ||||||||||||
Big Oats Pipeline Supply |
11,739 | | 166,782 | 138,872 | ||||||||||||
Kykuit Resources |
39,600 | | | 39,600 | ||||||||||||
Other |
| | | 55,616 |
The Company also accrued a liability of $391,599 and $413,399, respectively, due to companies
controlled by Mr. Osborne for natural gas used through March 31, 2011 and December 31, 2010 that is
not yet invoiced. The related expense is included in the gas purchased line item in the
accompanying statements of income. These amounts will be trued up to the actual invoices when
received in future periods.
Accounts Receivable
The table below details amounts due from related parties, including companies owned or controlled
by Mr. Osborne, at March 31, 2011 and transactions with the related parties for the three months
ended March 31, 2011:
Accounts | Natural Gas | Management and | ||||||||||
Receivable | Sold | Other Services | ||||||||||
John D. Oil and Gas Marketing |
$ | 1,094 | $ | | $ | 3,282 | ||||||
Cobra Pipeline |
| | 128 | |||||||||
Orwell Trumbell Pipeline |
125,978 | 1,370 | 4,715 | |||||||||
Great Plains Exploration |
123,195 | 3,538 | 8,981 | |||||||||
Big Oats Pipeline Supply |
1,191 | 2,173 | | |||||||||
Kykuit Resources |
97,154 | | | |||||||||
Sleepy Hollow |
106,845 | | 6,205 | |||||||||
Other |
23,798 | 41,240 | 1,749 |
Note 10 Segments of Operations
The following tables set forth summarized financial information for the Companys natural gas,
marketing and production, pipeline,
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and corporate and other operations. The Company classifies its
segments to provide investors with a 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, Maine, Ohio, and Pennsylvania
and these businesses are aggregated together to form the natural gas operations. Transactions
between reportable segments are accounted for on the accrual basis, and eliminated prior to
external financial reporting. Inter-company 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:
Three Months Ended March 31, 2011
Marketing | ||||||||||||||||||||||||
Natural Gas | and | Pipeline | Corporate | |||||||||||||||||||||
Operations | Production | Operations | and Other | Eliminations | Consolidated | |||||||||||||||||||
OPERATING REVENUES: |
||||||||||||||||||||||||
Natural gas operations |
$ | 38,309,893 | $ | | $ | | $ | | $ | (90,310 | ) | $ | 38,219,583 | |||||||||||
Marketing and Production |
| 4,340,252 | | | (2,514,750 | ) | 1,825,502 | |||||||||||||||||
Pipeline operations |
| | 106,324 | | | 106,324 | ||||||||||||||||||
Total operating revenue |
38,309,893 | 4,340,252 | 106,324 | | (2,605,060 | ) | 40,151,409 | |||||||||||||||||
COST OF SALES: |
||||||||||||||||||||||||
Gas purchased |
24,807,218 | | | | (90,310 | ) | 24,716,908 | |||||||||||||||||
Marketing and production |
| 3,914,157 | | | (2,514,750 | ) | 1,399,407 | |||||||||||||||||
Total Cost of Sales |
24,807,218 | 3,914,157 | | | (2,605,060 | ) | 26,116,315 | |||||||||||||||||
GROSS MARGIN |
$ | 13,502,675 | $ | 426,095 | $ | 106,324 | $ | | $ | | $ | 14,035,094 | ||||||||||||
OPERATING INCOME: |
$ | 6,886,867 | $ | 226,598 | $ | 64,000 | $ | (8,570 | ) | $ | | $ | 7,168,895 | |||||||||||
NET INCOME |
$ | 4,259,125 | $ | 85,782 | $ | 36,802 | $ | (106,955 | ) | $ | | $ | 4,274,754 | |||||||||||
Total Assets |
110,806,862 | 5,238,233 | 721,458 | 77,360,028 | (64,349,117 | ) | $ | 129,777,464 | ||||||||||||||||
Goodwill |
14,607,952 | | | | | $ | 14,607,952 |
Three Months Ended March 31, 2010
Marketing | ||||||||||||||||||||||||
Natural Gas | and | Pipeline | Corporate | |||||||||||||||||||||
Operations | Production | Operations | and 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 | |||||||||||||||||
Marketing and production |
| 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 | 63,249,099 | (58,543,369 | ) | $ | 118,056,853 | ||||||||||||||||
Goodwill |
13,813,626 | | | | | $ | 13,813,626 |
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Table of Contents
Note 11 Commitments and Contingencies
Legal Proceedings
From time to time, the Company is involved in certain 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 12 Financial Instruments and Risk Management
Management of Risks Related to Fixed Contracts
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, from time to time the Company and its subsidiaries have entered into
fixed contracts. 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 these contracts in accordance with ASC 815, Derivatives and Hedging. In
accordance with ASC 815, such contracts are reflected in the balance sheet as assets or liabilities
and valued at fair value, determined as of the balance sheet date. 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. The changes in the derivative values
are reported in the income statement as an increase or (decrease) in revenues without regard to
whether any cash payments have been made between the parties to the contract. ASC 815 specifies
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.
For the three months ended March 31, 2011 and 2010, all of the Companys fixed contracts for
purchase or sale at fixed prices and volumes qualified for treatment as a normal purchase or
normal sale.
Note 13 Subsequent Events
Acquisition of Spelman Pipeline
On April 8, 2011 the Companys indirect subsidiary, Spelman Pipeline Holdings, LLC (Spelman), a
subsidiary of Lightning Pipeline, completed the acquisition of dormant refined products pipeline
assets from Marathon Petroleum Company LP. The cash purchase price for the assets was $3.34
million.
The acquired assets include pipelines and rights-of-way located in Ohio and Kentucky. In Ohio, the
assets include more than 140 miles of pipeline spanning almost a third of the state from Marion to
Youngstown. Other Ohio assets are located in metropolitan and south suburban Cleveland. The
Kentucky assets include more than 60 miles of right-of-way in the area surrounding and to the south
of Louisville.
Spelman intends to recondition and convert the Ohio pipelines to transport natural gas to new
markets where natural gas service is currently not available, as well as to connect to markets
served by the Companys Ohio utilities. The Company expects to fund $2.4 million of capital
expenditures in 2011 to convert the existing facilities to natural gas. The expenditures include
reestablishment and clearing of rights-of-way, pigging and pressure test of the line, replacement
of some existing pipe, connect to supply sources and establishment of interconnections to
customers. The current assets are cathodically protected and reside in a protective nitrogen bath.
Spelman expects to file an application known as a First Filing to establish intrastate
transportation rates with the PUCO. Should the Commission find that the rates proposed by the
Company are not unjust and unreasonable, it may approve the rates without a hearing. Spelman
expects to begin delivering gas during the fourth quarter of 2011.
Future plans include extending the lines to participate in the transportation of Utica and
Marcellus Shale production. The Companys plans for the Kentucky assets are uncertain.
F-21
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ITEM 2 MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
This quarterly report on Form 10-Q contains various forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended (the Exchange Act), which represent our expectations or beliefs
concerning future events. Forward-looking statements generally include words such as anticipates,
believes, expects, planned, scheduled or similar expressions and statements concerning our
operating capital requirements, utilization of tax benefits, recovery of property tax payments, our
environmental remediation plans, and similar statements that are not historical are forward-looking
statements that involve risks and uncertainties. Although we believe these forward-looking
statements are based on reasonable assumptions, statements made regarding future results are
subject to a number of assumptions, uncertainties and risks that could cause future results to be
materially different from the results stated or implied in this document.
Such forward-looking statements, as well as other oral and written forward-looking statements made
by or on behalf of us from time to time, including statements contained in filings with the SEC and
our reports to shareholders, involve known and unknown risks and other factors that may cause our
companys actual results in future periods to differ materially from those expressed in any
forward-looking statements. See Risk Factors in our Annual Report on Form 10-K for the fiscal
year ended December 31, 2010 filed with the SEC. Any such forward looking statement is qualified by
reference to these risk factors. We caution that these risk factors are not exclusive. We do not
undertake to update any forward looking statements that may be made from time to time by or on
behalf of us except as required by law.
OVERVIEW
Gas Natural is a natural gas company, primarily operating local distribution companies in six
states and serving approximately 63,500 customers. Our natural gas utility subsidiaries are 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). Our operations
also include production and marketing of natural gas and gas pipeline transmission and gathering.
Approximately 95% of our revenues in the three months ended March 31, 2011 were derived from our
utility operations.
Increased sales volumes in our natural gas segment driven by continued customer growth magnified by
colder weather in the majority of our service areas lead to our results for the three months ended
March 31, 2011. Our earnings increased to $4.3 million from net income of $3.7 million in the
three months ended March 31, 2010, an increase of $600,000 or 16%.
In our marketing and production segment, lower sales volumes in our Wyoming market and lower
volumes produced from our gas production operation caused lower gross margin in the first quarter
of 2011 than in the first quarter of 2010. Offsetting this is the expense included in the first
quarter of 2010 related to the conclusion of the lawsuit with Shelby Gas Association of $441,000.
The net result is an increase in net income of $165,000 to net income of $86,000 in the three
months ended March 31, 2011 from a net loss of $79,000 in the three months ended March 31, 2010.
Our pipeline operations segment returned net income of $37,000 for the three months ended March 31,
2011 compared to $36,000 for 2010. Our Corporate and other operations incurred a net loss of
$107,000 for the three months ended March 31, 2011 compared to a net loss of $26,000 for the same
period in 2010.
Company Structure
On July 9, 2010, we reincorporated from Montana to Ohio. The reincorporation effected a change in
the legal domicile of the Company and other changes of a legal nature, but did not result in any
change in our business, our management personnel, our operations or the location of our facilities.
The effect of the reincorporation is described in greater detail in our proxy statement for the
June 30, 2010 annual meeting of shareholders. As part of the reincorporation, we changed our name
to Gas Natural Inc.
QUARTERLY RESULTS OF CONSOLIDATED OPERATIONS
Quarter Ended March 31, 2011 Compared with Quarter Ended March 31, 2010
The following discussion of our financial condition and results of operations should be read in
conjunction with the unaudited 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, 2010. The following gives effect to the unaudited Consolidated
1
Table of Contents
Financial Statements as of March 31, 2011 and for the three month period ended March 31, 2011.
Results of operations for interim periods are not necessarily indicative of results to be attained
for any future period.
Net Income Our net income for the three months ended March 31, 2011 was $4.3 million or
$0.52 per diluted share, compared to net income of approximately $3.7 million or $0.61 per diluted
share for the three months ended March 31, 2010, an increase of $600,000. Our secondary public
offering in November 2010 resulted in 2.075 million additional shares outstanding and leads to the
dilutive effect on the per share amounts in 2011 compared to 2010. Net income from our natural gas
operations increased by $600,000, due primarily to customer growth and colder weather in most of
our service territories, which led to increased revenues and gross margin. Our gas marketing and
production operation returned net income of $86,000 in the three months ended March 31, 2011, an
increase of $165,000 from the loss of $79,000 for the same period in 2010. Offsetting these
improvements is the net loss from our corporate and other segment of $107,000 compared to a net
loss of $26,000 in 2010, a difference of $81,000.
Revenues Our revenues for the three months ended March 31, 2011were approximately $40.2
million compared to $34.7 million for the three months ended March 31, 2010. This $5.5 million
increase was primarily attributable to: (1) a natural gas revenue increase of $6.7 million due to
colder weather and increased sales volumes in the majority of the markets we serve, partly offset
by (2) a decrease in our marketing and production operations revenue of $1.3 million due primarily
to lower sales volumes in our Wyoming market and lower volumes produced from our production
operation.
Gross Margin Gross margin was approximately $14.0 million in the three months ended March
31, 2011 compared to approximately $12.5 million in the three months ended March 31, 2010, an
increase of $1.5 million. Our natural gas operations margins increased $1.6 million, due to the
cold weather and increased sales volumes. Gross margin from our marketing and production
operations decreased $101,000, due to lower volumes produced and lower prices received.
Operating Expenses Expenses other than cost of sales increased by $685,000 to
approximately $6.9 million in the three months ended March 31, 2011 from approximately $6.2 million
in the three months ended March 31, 2010. The increase is due to increases in administrative
expenses including salaries and professional services, and increases in depreciation due to the
increases in capital expenditures, offset partially by a decrease in taxes other than income.
Other Income (Expense) , including Loss From Unconsolidated Affiliate Other income
increased by $304,000 to income of $53,000 in the three months ended March 31, 2011 from expense of
$251,000 in the three months ended March 31, 2010 as a result of the following: (1) other income
from natural gas operations increased by $22,000; (2) the 2010 period included $441,000 of expenses
from the conclusion of the lawsuit with Shelby Gas Association; (3) the loss from investment in
unconsolidated affiliate, which is our investment in Kyuit, increased by $43,000 and (4) our
Corporate and Other segment posted other expense of $80,000 in 2011 compared to other income in
2010 of $36,000, resulting in an increase in costs of $116,000.
Interest Expense Interest expense decreased by $180,000 to $413,000 in the three months
ended March 31, 2011 from $593,000 in the three months ended March 31, 2010. The Ohio Companies
had less debt outstanding in the three months ended March 31, 2011 because of the debt that was
repaid in November 2010, resulting in lower interest expense.
Income Tax Expense Income tax expense increased by approximately $700,000 to approximately
$2.5 million in the three months ended March 31, 2011 from $1.8 million in the three months ended
March 31, 2010. The three months ended March 31, 2010 included an income tax benefit of $190,000
from an adjustment to true up the deferred tax balances for a change in the effective tax rate for
2010. The remaining increase is due primarily to the increase in pre-tax income in 2011 compared
to 2010.
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Table of Contents
Net Income by Segment and Service Area
The components of net income for 2011 and 2010 are:
Three Months Ended March 31, | ||||||||
($ in thousands) | 2011 | 2010 | ||||||
Natural Gas Operations |
||||||||
Energy West Montana (MT) |
$ | 864 | $ | 932 | ||||
Energy West Wyoming (WY) |
315 | 258 | ||||||
Frontier Natural Gas (NC) |
663 | 644 | ||||||
Bangor Gas (ME) |
868 | 491 | ||||||
Ohio Companies (OH) |
1,549 | 1,407 | ||||||
Total Natural Gas Operations |
$ | 4,259 | $ | 3,732 | ||||
Marketing & Production Operations |
86 | (79 | ) | |||||
Pipeline Operations |
37 | 36 | ||||||
4,382 | 3,689 | |||||||
Corporate & Other |
(107 | ) | (26 | ) | ||||
Consolidated Net Income |
$ | 4,275 | $ | 3,663 | ||||
The following highlights our results by operating segments:
NATURAL GAS OPERATIONS
Income Statement
Three Months Ended March 31, | ||||||||
($ in thousands) | 2011 | 2010 | ||||||
Natural Gas Operations |
||||||||
Operating revenues |
$ | 38,220 | $ | 31,506 | ||||
Gas Purchased |
24,717 | 19,621 | ||||||
Gross Margin |
13,503 | 11,885 | ||||||
Operating expenses |
6,616 | 5,957 | ||||||
Operating income |
6,887 | 5,928 | ||||||
Other income |
195 | 173 | ||||||
Income before interest and taxes |
7,082 | 6,101 | ||||||
Interest (expense) |
(387 | ) | (568 | ) | ||||
Income before income taxes |
6,695 | 5,533 | ||||||
Income tax (expense) |
(2,436 | ) | (1,801 | ) | ||||
Net Income |
$ | 4,259 | $ | 3,732 | ||||
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Table of Contents
Operating Revenues
Three Months Ended March 31, | ||||||||
($ in thousands) | 2011 | 2010 | ||||||
Full Service Distribution Revenues |
||||||||
Residential |
$ | 18,603 | $ | 15,612 | ||||
Commercial |
16,062 | 12,549 | ||||||
Industrial |
224 | 205 | ||||||
Other |
36 | 128 | ||||||
Total full service distribution |
34,925 | 28,494 | ||||||
Transportation |
3,007 | 2,724 | ||||||
Bucksport |
288 | 288 | ||||||
Total operating revenues |
$ | 38,220 | $ | 31,506 | ||||
Utility Throughput
Three Months Ended March 31, | ||||||||
(in million cubic feet (MMcf)) | 2011 | 2010 | ||||||
Full Service Distribution |
||||||||
Residential |
2,164 | 1,837 | ||||||
Commercial |
1,950 | 1,599 | ||||||
Industrial |
40 | 45 | ||||||
Total full service |
4,154 | 3,481 | ||||||
Transportation |
2,684 | 2,046 | ||||||
Bucksport |
3,801 | 3,749 | ||||||
Total Volumes |
10,639 | 9,276 | ||||||
Degree Days
Three Months Ended | Percent (Warmer) Colder | |||||||||||||||||||
March 31, | 2011 Compared to | |||||||||||||||||||
Normal | 2011 | 2010 | Normal | 2010 | ||||||||||||||||
Great Falls, MT |
3,224 | 3,662 | 2,921 | 13.59 | % | 25.37 | % | |||||||||||||
Cody, WY |
3,030 | 3,277 | 3,079 | 8.15 | % | 6.43 | % | |||||||||||||
Bangor, ME |
3,735 | 3,808 | 3,101 | 1.95 | % | 22.80 | % | |||||||||||||
Elkin, NC |
2,117 | 2,096 | 2,113 | (0.99 | %) | (0.80 | %) | |||||||||||||
Youngstown, OH |
3,259 | 3,308 | 2,971 | 1.50 | % | 11.34 | % |
Quarter Ended March 31, 2011 Compared with Quarter Ended March 31, 2010
Revenues and Gross Margin
Operating revenues for the three months ended March 31, 2011 increased to approximately $38.2
million from approximately $31.5 million in the three months ended March 31, 2010. This $6.7
million increase is the result of three factors :
4
Table of Contents
1) | Revenue from our Montana and Wyoming markets increased $2.6 million on a volume increase of 386 MMcf in the three months ended March 31, 2011 compared to the three months ended March 31, 2010, due to colder than normal weather throughout the three months. | ||
2) | Revenue from our Maine and North Carolina markets increased by approximately $1.5 million on a volume increase of 294 MMcf in 2011 compared to 2010, due primarily to increased customer count and colder weather in our Maine market in the 2011 period. | ||
3) | Revenues from the Ohio Companies increased $2.6 million on a volume increase of 682 MMcf, due to colder weather in 2011 than in 2010 and increases in sales volumes to a customer whose rates are not based on volumes. |
Gas purchases in natural gas operations increased to approximately $24.7 million for the three
months ended March 31, 2011 from approximately $19.6 million for the three months ended March 31,
2010. The increase of $5.1 million is due primarily to the increase in sales volumes discussed
above. Our gas costs are passed on dollar for dollar to our customers under tariffs regulated by
the Public Utility Commissions in the jurisdictions in which we operate. Our gas costs are subject
to periodic audits and prudency review in all of these jurisdictions.
Gross margin increased to approximately $13.5 million for the three months ended March 31, 2011
from approximately $11.9 million for the three months ended March 31, 2010, an increase of $1.6
million. The cold weather and increased sales discussed above are the primary drivers of the
increase. Montana and Wyoming accounted for $371,000 of the increase, Maine and North Carolina
$760,000 and the Ohio Companies $487,000.
Earnings
The Natural Gas Operations segments earnings for the three months ended March 31, 2011 were $4.3
million, or $0.52 per diluted share, compared to earnings of $3.7 million or $0.62 per diluted
share for the three months ended March 31, 2010.
Operating expenses increased by $659,000 to approximately $6.6 million for the three months ended
March 31, 2011 from approximately $6.0 million for the three months ended March 31, 2010. The
increase is due to increases in administrative expenses including salaries and professional
services, and increases in depreciation due to the increases in capital expenditures, offset
partially by a decrease in taxes other than income.
Other Income increased by $22,000 to $195,000 for the three months ended March 31, 2011 from
$173,000 for the three months ended March 31, 2010.
Interest expense decreased by $181,000 to $387,000 for the three months ended March 31, 2011 from
$568,000 for the three months ended March 31, 2010. The Ohio Companies had less debt outstanding
in the three months ended March 31, 2011 because of the debt that was repaid in November 2010,
resulting in lower interest expense.
Income tax expense increased by $634,000 to approximately $2.4 million in the three months ended
March 31, 2011 compared with approximately $1.8 million in the three months ended March 31, 2010.
The three months ended March 31, 2010 included an income tax benefit of $190,000 from an adjustment
to true up the deferred tax balances for a change in the effective tax rate for 2010. The
remaining increase is due primarily to the increase in pre-tax income in 2011 compared to 2010.
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MARKETING AND PRODUCTION OPERATIONS (EWR)
Income Statement
Three Months Ended, | ||||||||
($ in thousands) | 2011 | 2010 | ||||||
Energy West Resources |
||||||||
Operating revenues |
$ | 1,825 | $ | 3,118 | ||||
Gas Purchased |
1,399 | 2,591 | ||||||
Gross Margin |
426 | 527 | ||||||
Operating expenses |
199 | 177 | ||||||
Operating income |
227 | 350 | ||||||
Other expense |
(63 | ) | (460 | ) | ||||
Income before interest and taxes |
164 | (110 | ) | |||||
Interest (expense) |
(23 | ) | (20 | ) | ||||
Income before income taxes |
141 | (130 | ) | |||||
Income tax (expense) benefit |
(55 | ) | 51 | |||||
Net Income |
$ | 86 | $ | (79 | ) | |||
Quarter Ended March 31, 2011 Compared with Quarter Ended March 31, 2010
Revenues and Gross Margin
Revenues decreased approximately $1.3 million to $1.8 million for the three months ended March 31,
2011 from approximately $3.1 million for the three months ended March 31, 2010. $1.2 million of
this decrease is due primarily to lower sales volumes in our Wyoming market and a lower overall
price for volumes sold. Production revenues decreased by $100,000 due to lower volumes produced
and a lower price received for these volumes.
Gross margin decreased $101,000 to approximately $426,000 in the three months ended March 31, 2011
from approximately $527,000 in the three months ended March 31, 2010. Gross margin from retail
gas decreased by $27,000 due to the lower sales volumes and gross margin from gas production
decreased by $74,000.
Earnings
The Marketing and Production segments earnings in the three months ended March 31, 2011 were
$86,000 or $0.01 per diluted share, up from the loss of $79,000 or ($0.01) per diluted share in the
three months ended March 31, 2010.
Our operating expenses increased approximately $22,000, to $199,000 in the three months ended March
31, 2011 from $177,000 in the three months ended March 31, 2010, due primarily to increased
salaries and professional services expenses in the three months ended March 31, 2011.
Other expense totaled $63,000 in the three months ended March 31, 2011, and is directly related to
the loss incurred on our equity investment in Kykuit. This compares to expense of $460,000 in the
three months ended March 31, 2010, which is caused by expense related to the conclusion of the
lawsuit with Shelby Gas Association of $441,000 and a loss on our equity investment in Kykuit of
$194,000.
Income tax expense increased approximately $106,000 to an expense of $55,000 in the three months
ended March 31, 2011 from a benefit of $51,000 in the three months ended March 31, 2010. The
increase is due to the change to pre-tax income of $141,000 in 2011 from the pre-tax loss of
$130,000 in 2010.
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PIPELINE OPERATIONS
Income Statement
Three Months Ended March 31, | ||||||||
($ in thousands) | 2011 | 2010 | ||||||
Pipeline Operations |
||||||||
Operating revenues |
$ | 106 | $ | 109 | ||||
Gas Purchased |
| | ||||||
Gross Margin |
106 | 109 | ||||||
Operating expenses |
42 | 45 | ||||||
Operating income |
64 | 64 | ||||||
Other income |
| | ||||||
Income before interest and taxes |
64 | 64 | ||||||
Interest (expense) |
(3 | ) | (5 | ) | ||||
Income before income taxes |
61 | 59 | ||||||
Income tax (expense) |
(24 | ) | (23 | ) | ||||
Net Income |
$ | 37 | $ | 36 | ||||
Quarter Ended March 31, 2011 Compared with Quarter Ended March 31, 2010
Net income stayed flat at approximately $37,000 in the three months ended March 31, 2011
compared to approximately $36,000 in the three months ended March 31, 2010. The overall impact of
the results of our pipeline operations was not material to our results of consolidated operations.
CORPORATE AND OTHER OPERATIONS
Income Statement
Three Months Ended March 31, | ||||||||
($ in thousands) | 2011 | 2010 | ||||||
Corporate and Other |
||||||||
Operating revenues |
$ | | $ | | ||||
Gas Purchased |
| |||||||
Gross Margin |
| | ||||||
Operating expenses |
9 | 3 | ||||||
Operating loss |
(9 | ) | (3 | ) | ||||
Other (expense) income |
(80 | ) | 36 | |||||
(Loss) Income before interest and taxes |
(89 | ) | 33 | |||||
Interest expense |
| | ||||||
(Loss) Income before income taxes |
(89 | ) | 33 | |||||
Income tax benefit (expense) |
(18 | ) | (59 | ) | ||||
Net Loss |
$ | (107 | ) | $ | (26 | ) | ||
Quarter Ended March 31, 2011 Compared with Quarter Ended March 31, 2010
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
revenues, gas purchase costs, or gross margin.
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Results of corporate and other operations for the three months ended March 31, 2011 include
administrative costs of $9,000, costs related to acquisition activities of $83,000,and income tax
expense of $18,000, offset by interest income of approximately $3,000, for a net loss of
approximately $107,000.
Results of corporate and other operations for the three months ended March 31, 2010 include
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.
Sources and Uses of Cash
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 $11.0 million and $18.1 million at March 31, 2011 and December 31,
2010, respectively. This change in our cash position is due to the withdrawal of our gas storage
inventory to furnish a portion of our gas supply needs and the seasonal increase in cash inflow
from the winter heating season, causing cash to be available to pay down the line of credit.
We made capital expenditures for continuing operations of $2.8 million and $1.1 million for the
quarters ended March 31, 2011 and 2010, 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 $22.6 million and $22.9 million at March 31, 2011 and December 31, 2010, respectively.
Cash increased slightly to $13.1 million at March 31, 2011, compared with $13.0 million at December
31, 2010.
For the Quarter Ended March 31, | ||||||||
2011 | 2010 | |||||||
Cash provided by operating activities |
$ | 11,545,000 | $ | 9,884,000 | ||||
Cash used in investing activities |
(2,964,000 | ) | (753,000 | ) | ||||
Cash used in financing activities |
(8,503,000 | ) | (8,550,000 | ) | ||||
(Decrease) Increase in cash |
$ | 78,000 | $ | 581,000 | ||||
OPERATING CASH FLOW
For the quarter ended March 31, 2011, cash provided by operating activities increased $1.7
million as compared to the quarter ended March 31, 2010. Items affecting the use of cash included
a decrease in accounts receivable collections of $5.7 million, a $3.5 million increase in
collections of recoverable costs of gas, a $2.0 million decrease in unbilled revenue, a $1.5
million increase in net deferred tax assets, and decreased amounts paid for other assets and
liabilities of $1.3 million. Other changes to cash resulted from a decrease
in amounts paid on accounts payable of $1.0 million, an increase in net income of $600,000, a
decrease in amounts paid for gas supply of $100,000, a $100,000 increase in depreciation expense,
and a $100,000 decrease in prepayments.
INVESTING CASH FLOW
For the quarter ended March 31, 2011, cash used in investing activities increased by $2.2
million as compared to the quarter ended March 31, 2010, primarily due to increased construction
expenditures of $1.7 million. Other changes include a $302,000 decrease in proceeds from the sale
of marketable securities, a $144,000 decrease in cash acquired in acquisitions, a $98,000 decrease
in purchases of noncontrolling interests, an $80,000 increase in investments in our unconsolidated
affiliate, and a $68,000 decrease in customer advances for construction.
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Capital Expenditures
Our capital expenditures for continuing operations totaled $2.8 million and $1.1 million for
the quarters ended March 31, 2011 and 2010, respectively. We finance our capital expenditures on
an interim basis by the use of our operating cash flow and use of the Bank of America revolving
line of credit.
The majority of our capital spending is focused on the growth of our Natural Gas Operations
segment. We conduct ongoing construction activities in all of our utility service areas in order
to support expansion, maintenance, and enhancement of our gas pipeline systems. We are actively
expanding our systems in North Carolina and Maine to meet the high customer interest in natural gas
service in those two service areas.
Estimated Capital Expenditures
The table below details our capital expenditures for the three months ended March 31, 2011 and
2010 and provides an estimate of future cash requirements for capital expenditures:
Estimated Future | ||||||||||||
Quarter ended March 31, | Cash Requirements | |||||||||||
($ in thousands) | 2011 | 2010 | 2011 | |||||||||
Natural Gas Operations |
$ | 2,807 | $ | 1,133 | $ | 12,123 | ||||||
Marketing and Production |
| | | |||||||||
Pipeline Operations |
| | 114 | |||||||||
Corporate and Other |
5 | | 88 | |||||||||
Total Capital Expenditures |
$ | 2,812 | $ | 1,133 | $ | 12,325 | ||||||
FINANCING CASH FLOW
For the quarter ended March 31, 2011, cash used in financing activities decreased by $47,000
as compared with the quarter ended March 31, 2010. The primary reason for this is a decrease in
repayments of other short-term borrowings of $445,000, partially offset by a $281,000 increase in
dividends paid as a result of the secondary offering in November 2010. Additionally, net line of
credit proceeds decreased by $98,000, while payments on long-term debt increased by $19,000.
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. 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 $11.0 million and $18.1 million at March 31, 2011 and
December 31, 2010, respectively. In addition to cash flow from operations, 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 $22.6 and
$22.9 million at March 31, 2011, and December 31, 2010, respectively.
Secondary Public Offering
In November 2010, Gas Natural completed a 2.415 million share secondary public offering. Of these
shares, 340,000 were selling shareholder shares and 2.075 million were primary shares. The primary
shares sold by Gas Natural include a full exercise of the over-allotment option. Gas Natural did
not receive any of the proceeds from the selling shareholder shares. Net proceeds to Gas Natural
were approximately $19.0 million after sales concessions, underwriting expenses, and deal expenses.
The primary uses of proceeds are for investment in utility operations as we continue to expand our
organic footprint. Additionally, proceeds were used to repay debt of the Ohio utilities.
In December 2010, NEO repaid upon maturity the Citizens Bank Line of Credit in the amount of $2.1
million and Orwell repaid upon maturity the, Huntington Bank Line of Credit in the amount of $1.5
million and the Huntington Bank Term Loan in the amount of $4.1 million. These notes were secured
by all assets of the Ohio utilities, as well as a personal guarantee from our chairman and CEO.
These three instruments matured at the end of November 2010. These notes were repaid and
extinguished with no ability to redraw at this time. In addition to these notes that had a pending
maturity date, a related party demand note was also repaid in December 2010.
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Lightning Pipeline
Company, the intermediate holding company for Orwell, had a $2.0 million unsecured demand note
payable with our chairman, which was repaid in December of 2010, including accrued interest.
SunLife Senior Secured Notes
On May 3, 2011, the Company and its Ohio subsidiaries, NEO, Orwell and Brainard, (together the
Issuers), issued $15.334 million of 5.38% Senior Secured Guaranteed Fixed Rate Notes due June 1,
2017. Additionally, Great Plains issued $3.0 million of 4.12% Senior Secured Guaranteed Floating
Rate Notes due May 3, 2014. Both notes were placed with SunLife Assurance Company of Canada.
The first note, in the amount of $15.334 million, is a joint obligation of the Issuers, and is
guaranteed by the Company, Lightning Pipeline, and Great Plains (together with the Issuers, the
Fixed Rate Obligors). This note received approval from the PUCO on March 30, 2011. The note is
governed by a Note Purchase Agreement (NPA) as filed with the SEC on Form 8-K on November 2,
2010. Concurrent with the funding and closing of this transaction, which occurred on May 3, 2011,
the Fixed Rate Obligors signed an amended Note Purchase Agreement that is substantially the same as
the NPA released on November 2, 2010. Prepayment of this note prior to maturity is subject to a 50
basis point make- whole premium.
The second note in the amount of $3.0 million, is an obligation of Great Plains and is guaranteed
by the Company (together, the Floating Rate Obligors). The note is priced at a fixed spread of
385 basis points over three month London Interbank Offered Rate (LIBOR). Pricing for this note
will reset on a quarterly basis to the then current yield of three month Libor. The note is
governed by a Note Purchase Agreement as filed with the SEC Form on 8-K on November 2, 2010.
Concurrent with the funding of this transaction, which occurred on May 3, 2011, the Floating Rate
Obligors signed an amended Note Purchase Agreement that is substantially the same as the NPA
released on November 2, 2010. Prepayment of this note prior to maturity is at par.
Payments for both notes prior to maturity are interest-only.
The notes carry a 60% debt-to-capitalization financial covenant on a consolidated basis for Ohio,
as well as, a 2.0x interest coverage test based on a trailing twelve-month basis. Additional
covenants customary for asset sales and purchases, additional indebtedness, dividends, change of
control and other matters are also included.
The use of proceeds for both notes are to repay and extinguish existing amortizing bank debt and
other existing indebtedness, fund $3.4 million for the 2011 capital program for Orwell and NEO,
establish two debt service reserve accounts, replenish the Companys treasuries for the previously
announced repayment of maturing bank debt, and transaction expenses.
The following discussion describes our credit facilities as of March 31, 2011, prior to the
repayment of the Citizens debt and completion of the SunLife financing.
Bank of America
On June 29, 2007, Energy West established a 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 amount. 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 LIBOR, 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 quarters ended March 31, 2011 and 2010.
Quarter Ended March 31, 2011 |
||||
Minimum borrowing |
$ | 9,700,000 | ||
Maximum borrowing |
$ | 18,150,000 | ||
Average borrowing |
$ | 13,852,000 | ||
Quarter Ended March 31, 2010 |
||||
Minimum borrowing |
$ | 7,298,000 | ||
Maximum borrowing |
$ | 14,650,000 | ||
Average borrowing |
$ | 10,218,000 |
Senior Unsecured Notes
On June 29, 2007, Energy West 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
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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. 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 March 31, 2011 and December 31, 2010, we had $11.0 million and $18.1 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 years ended March 31, 2011 and 2010 had a daily weighted average interest
rate of 1.64% and 3.20% per annum, respectively.
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.
Citizens Bank Credit Facility and Term Loans
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 guaranteed each loan. Our chairman and chief executive officer, Richard M. Osborne,
guaranteed 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. The line of credit was
repaid in December 2010.
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, $2.65 million and $892,000
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. At March 31, 2011, the interest rate was 5.00% per annum. The term notes require monthly
payments of approximately $63,000 in the aggregate.
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 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 Gas Natural 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 March 31, 2011 and December 31, 2010, $6.4 million and $6.6 million had been borrowed under the
NEO term loan, $2.2 million and $2.2 million under the Great Plains term loan, and $738,000 and
$753,000 under the GPL term loan, respectively.
Combined Term Loans and Credit Facilities
The $11.0 million of borrowings at March 31, 2011, leaves our borrowing capacity at $9.0 million.
Including the amounts related to the Ohio Companies, we had $11.0 million of borrowings and
borrowing capacity of $9.0 million. As discussed above, this level of borrowings is due primarily
to increases in our capital expenditures due to expansion in our North Carolina and Maine markets,
and the acquisition of the Ohio Companies.
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 $22.6 million at
March 31, 2011, with approximately $879,000 due within one year.
We believe we are in compliance with the financial covenants under our debt agreements or have
received waivers for any defaults.
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OFF-BALANCE SHEET ARRANGEMENTS
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, revenues or expenses, results of operations, liquidity, capital expenditures
or capital resources that is material to investors.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are subject to certain market risks, including commodity price risk (i.e., natural gas 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 our
Consolidated Financial Statements for a description of our accounting policies and other
information related to these financial instruments.
Commodity Price Risk
We seek to protect ourself against natural gas price fluctuations by limiting the aggregate level
of net open positions that are exposed to market price changes. We manage such open positions with
policies that are 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 although revenues and cost of sales are impacted by changes in natural gas
prices, our margin is not significantly impacted by these changes.
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 the 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 counter-party may default due to circumstances relating directly to it,
but also the risk that a counterparty may default due to circumstances that 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.
ITEM 4 -CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
As of March 31, 2011, we evaluated the effectiveness of the design and operation of our disclosure
controls and procedures as defined in Rule 13a-15(e) of the Securities Exchange Act of 1934, as
amended. The evaluation was carried out under the supervision of and with the participation of our
management, including our principal executive officer and principal financial officer. Based upon
this evaluation, our chief executive officer and chief financial officer each concluded that our
disclosure controls and procedures were effective as of March 31, 2011.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during our last fiscal
quarter that have materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
PART II OTHER INFORMATION
ITEM 1 LEGAL PROCEEDINGS
From time to time, we are involved in lawsuits that have arisen in the ordinary course of
business. We are contesting each of these lawsuits vigorously and believe we have defenses to the
allegations that have been made.
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ITEM 6 EXHIBITS
Exhibit Number | Description | |
31.1*
|
Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
31.2*
|
Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. | |
32.1*
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. | |
32.2*
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
* | Filed or furnished herewith. |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
Gas Natural Inc. |
||||
/s/ Thomas J. Smith | ||||
Thomas J. Smith | ||||
May 11, 2011 | Chief Financial Officer (principal financial officer and principal accounting officer) |
|||
14