Attached files
file | filename |
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EX-32 - EX-32 - Gas Natural Inc. | l42759exv32.htm |
EX-31.2 - EX-31.2 - Gas Natural Inc. | l42759exv31w2.htm |
EX-31.1 - EX-31.1 - Gas Natural Inc. | l42759exv31w1.htm |
EXCEL - IDEA: XBRL DOCUMENT - Gas Natural Inc. | Financial_Report.xls |
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 June 30, 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 (State or other jurisdiction of incorporation or organization) |
27-3003768 (I.R.S. Employer Identification No.) |
|
1 First Avenue South Great Falls, Montana (Address of principal executive office) |
59401 (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 þ 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 August 9, 2011 was
8,152,426 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 June
30, 2011.
GAS NATURAL INC.
INDEX TO FORM 10-Q
INDEX TO FORM 10-Q
Page No. | ||||||||
F-1 | ||||||||
F-3 | ||||||||
F-4 | ||||||||
F-5 | ||||||||
F-7 | ||||||||
3 | ||||||||
16 | ||||||||
17 | ||||||||
17 | ||||||||
18 | ||||||||
19 | ||||||||
EX-31.1 | ||||||||
EX-31.2 | ||||||||
EX-32 | ||||||||
EX-101 INSTANCE DOCUMENT | ||||||||
EX-101 SCHEMA DOCUMENT | ||||||||
EX-101 CALCULATION LINKBASE DOCUMENT | ||||||||
EX-101 LABELS LINKBASE DOCUMENT | ||||||||
EX-101 PRESENTATION LINKBASE DOCUMENT | ||||||||
EX-101 DEFINITION LINKBASE DOCUMENT |
2
Table of Contents
Gas Natural Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
June 30, 2011 and December 31, 2010 (Unaudited)
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
ASSETS |
||||||||
CURRENT ASSETS |
||||||||
Cash and cash equivalents |
$ | 13,132,727 | $ | 13,026,585 | ||||
Marketable securities |
306,238 | 274,950 | ||||||
Accounts receivable |
||||||||
Trade, less allowance for doubtful accounts of $282,350
and $354,719, respectively |
4,539,514 | 9,593,840 | ||||||
Related parties |
485,132 | 559,384 | ||||||
Unbilled gas |
1,322,371 | 5,724,346 | ||||||
Note receivable related parties, current portion |
9,905 | 9,565 | ||||||
Inventory |
||||||||
Natural gas and propane |
3,834,779 | 5,876,710 | ||||||
Materials and supplies |
2,309,597 | 1,414,367 | ||||||
Prepaid income taxes |
1,646,751 | 1,601,798 | ||||||
Prepayments and other |
399,729 | 912,959 | ||||||
Recoverable cost of gas purchases |
2,264,070 | 2,628,824 | ||||||
Deferred tax asset |
102,695 | 114,362 | ||||||
Total current assets |
30,353,508 | 41,737,690 | ||||||
PROPERTY, PLANT AND EQUIPMENT, net |
84,465,865 | 76,134,401 | ||||||
OTHER ASSETS |
||||||||
Notes receivable related parties, less current portion |
40,626 | 45,665 | ||||||
Deferred tax assets, less current portion |
| 1,804,264 | ||||||
Regulatory assets |
||||||||
Property taxes |
731,830 | 873,197 | ||||||
Income taxes |
452,645 | 452,645 | ||||||
Rate case costs |
126,759 | 64,271 | ||||||
Debt issuance costs |
900,067 | 485,244 | ||||||
Goodwill |
14,607,952 | 14,607,952 | ||||||
Customer relationships |
650,750 | 662,167 | ||||||
Investment in unconsolidated affiliate |
860,665 | 644,358 | ||||||
Restricted cash |
4,351,914 | | ||||||
Other assets |
213,043 | 216,082 | ||||||
Total other assets |
22,936,251 | 19,855,845 | ||||||
TOTAL ASSETS |
$ | 137,755,624 | $ | 137,727,936 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-1
Table of Contents
Gas Natural Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
June 30, 2011 and December 31, 2010 (Unaudited)
Condensed Consolidated Balance Sheets
June 30, 2011 and December 31, 2010 (Unaudited)
June 30, | December 31, | |||||||
2011 | 2010 | |||||||
LIABILITIES AND CAPITALIZATION |
||||||||
CURRENT LIABILITIES |
||||||||
Checks in excess of amounts on deposit |
$ | 366,259 | $ | 532,145 | ||||
Line of credit |
11,840,000 | 18,149,999 | ||||||
Accounts payable |
||||||||
Trade |
5,529,372 | 9,200,297 | ||||||
Related parties |
187,987 | 417,543 | ||||||
Notes payable, current portion |
| 910,917 | ||||||
Notes payable related parties, current portion |
| 49,361 | ||||||
Accrued liabilities |
||||||||
Taxes other than income |
2,429,805 | 2,961,853 | ||||||
Vacation |
167,518 | 86,194 | ||||||
Employee benefit plans |
216,620 | 103,257 | ||||||
Interest |
91,156 | 29,810 | ||||||
Deferred payments received from levelized billing |
1,307,894 | 2,916,408 | ||||||
Customer deposits |
678,143 | 679,237 | ||||||
Property tax settlement, current portion |
242,120 | 242,120 | ||||||
Related parties |
13,894 | 413,399 | ||||||
Other current liabilities |
283,304 | 1,020,733 | ||||||
Overrecovered gas purchases |
2,865,388 | 1,203,191 | ||||||
Total current liabilities |
26,219,460 | 38,916,464 | ||||||
LONG-TERM LIABILITIES |
||||||||
Deferred investment tax credits |
186,910 | 197,441 | ||||||
Deferred tax liability |
916,795 | | ||||||
Asset retirement obligation |
1,616,280 | 1,546,867 | ||||||
Customer advances for construction |
895,456 | 949,434 | ||||||
Regulatory liability for income taxes |
83,161 | 83,161 | ||||||
Regulatory liability for gas costs |
70,199 | 131,443 | ||||||
Property tax settlement, less current portion |
243,008 | 243,008 | ||||||
Total long-term liabilities |
4,011,809 | 3,151,354 | ||||||
NOTES PAYABLE, less current portion |
31,334,000 | 21,958,616 | ||||||
COMMITMENTS AND CONTINGENCIES (see Note 11) |
||||||||
STOCKHOLDERS EQUITY |
||||||||
Preferred stock; $0.15 par value, 1,500,000 shares authorized,
no shares outstanding |
| | ||||||
Common stock; $0.15 par value, 15,000,000 shares authorized,
8,152,051 and 8,149,801 shares outstanding, respectively |
1,222,808 | 1,222,470 | ||||||
Capital in excess of par value |
41,944,672 | 41,910,067 | ||||||
Accumulated other comprehensive income |
66,211 | 46,590 | ||||||
Retained earnings |
32,956,664 | 30,522,375 | ||||||
Total stockholders equity |
76,190,355 | 73,701,502 | ||||||
TOTAL CAPITALIZATION |
107,524,355 | 95,660,118 | ||||||
TOTAL LIABILITIES AND CAPITALIZATION |
$ | 137,755,624 | $ | 137,727,936 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-2
Table of Contents
Gas Natural Inc. and Subsidiaries
Condensed Consolidated Statements of Income
Three and Six Months Ended June 30, 2011 and 2010 (Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
REVENUES |
||||||||||||||||
Natural gas operations |
$ | 17,095,262 | $ | 14,682,109 | $ | 55,314,845 | $ | 46,188,269 | ||||||||
Marketing and production |
1,475,665 | 1,868,009 | 3,301,167 | 4,986,332 | ||||||||||||
Pipeline operations |
102,061 | 106,355 | 208,385 | 214,957 | ||||||||||||
Total revenues |
18,672,988 | 16,656,473 | 58,824,397 | 51,389,558 | ||||||||||||
COST OF SALES |
||||||||||||||||
Gas purchased |
9,575,592 | 7,919,762 | 34,292,500 | 27,540,576 | ||||||||||||
Marketing and production |
1,208,379 | 1,462,808 | 2,607,786 | 4,054,219 | ||||||||||||
Total cost of sales |
10,783,971 | 9,382,570 | 36,900,286 | 31,594,795 | ||||||||||||
GROSS MARGIN |
7,889,017 | 7,273,903 | 21,924,111 | 19,794,763 | ||||||||||||
OPERATING EXPENSES |
||||||||||||||||
Distribution, general, and administrative |
4,629,976 | 4,363,496 | 9,287,296 | 8,268,405 | ||||||||||||
Maintenance |
271,965 | 245,153 | 557,192 | 536,482 | ||||||||||||
Depreciation and amortization |
1,068,470 | 1,015,817 | 2,103,547 | 1,965,279 | ||||||||||||
Accretion |
34,803 | 29,745 | 69,413 | 58,845 | ||||||||||||
Taxes other than income |
892,981 | 752,952 | 1,746,946 | 1,759,235 | ||||||||||||
Total operating expenses |
6,898,195 | 6,407,163 | 13,764,394 | 12,588,246 | ||||||||||||
OPERATING INCOME |
990,822 | 866,740 | 8,159,717 | 7,206,517 | ||||||||||||
LOSS FROM UNCONSOLIDATED AFFILIATE |
(20,194 | ) | (12,108 | ) | (83,151 | ) | (32,122 | ) | ||||||||
OTHER INCOME, net |
116,108 | 360,336 | 231,788 | 128,935 | ||||||||||||
INTEREST EXPENSE |
(492,674 | ) | (528,972 | ) | (905,853 | ) | (1,121,756 | ) | ||||||||
INCOME FROM OPERATIONS BEFORE
INCOME TAXES |
594,062 | 685,996 | 7,402,501 | 6,181,574 | ||||||||||||
INCOME TAX EXPENSE |
(233,724 | ) | (220,214 | ) | (2,767,409 | ) | (2,052,850 | ) | ||||||||
NET INCOME |
$ | 360,338 | $ | 465,782 | $ | 4,635,092 | $ | 4,128,724 | ||||||||
EARNINGS PER SHARE BASIC |
$ | 0.04 | $ | 0.08 | $ | 0.57 | $ | 0.68 | ||||||||
EARNINGS PER SHARE DILUTED |
$ | 0.04 | $ | 0.08 | $ | 0.57 | $ | 0.68 | ||||||||
WEIGHTED AVERAGE DIVIDENDS DECLARED
PER COMMON SHARE |
$ | 0.135 | $ | 0.135 | $ | 0.270 | $ | 0.270 | ||||||||
WEIGHTED AVERAGE SHARES
OUTSTANDING BASIC |
8,151,359 | 6,071,538 | 8,150,802 | 6,071,538 | ||||||||||||
WEIGHTED AVERAGE SHARES
OUTSTANDING DILUTED |
8,159,825 | 6,080,617 | 8,158,955 | 6,079,527 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-3
Table of Contents
Gas Natural Inc. and Subsidiaries
Condensed Consolidated Statements of Changes in Stockholders Equity
Six Months Ended June 30, 2011 and 2010 (Unaudited)
Accumulated | ||||||||||||||||||||||||||||
Capital In | Other | |||||||||||||||||||||||||||
Common | Common | Excess Of | Comprehensive | Noncontrolling | 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 |
| | | | | 4,128,724 | 4,128,724 | |||||||||||||||||||||
Net unrealized loss on available
for sale securities |
| | | (83,995 | ) | | | (83,995 | ) | |||||||||||||||||||
Stock issued for services |
3,374 | 507 | 35,749 | | | | 36,256 | |||||||||||||||||||||
Stock option expense |
| | 9,406 | | | | 9,406 | |||||||||||||||||||||
Acquisition of Ohio Companies |
1,707,308 | 256,096 | 16,816,988 | | | | 17,073,084 | |||||||||||||||||||||
Purchase remaining share in Cut |
||||||||||||||||||||||||||||
Bank Gas Company |
| | | | (100,989 | ) | | (100,989 | ) | |||||||||||||||||||
Dividends declared |
| | | | | (1,639,219 | ) | (1,639,219 | ) | |||||||||||||||||||
BALANCE AT JUNE 30, 2010 |
6,072,551 | $ | 910,883 | $ | 23,376,994 | $ | 62,706 | $ | | $ | 30,760,492 | $ | 55,111,075 | |||||||||||||||
BALANCE AT DECEMBER 31, 2010 |
8,149,801 | $ | 1,222,470 | $ | 41,910,067 | $ | 46,590 | $ | | $ | 30,522,375 | $ | 73,701,502 | |||||||||||||||
Net income |
| | | | | 4,635,092 | 4,635,092 | |||||||||||||||||||||
Net unrealized gain on available
for sale securities |
| | | 19,621 | | | 19,621 | |||||||||||||||||||||
Stock issued for services |
2,250 | 338 | 25,012 | | | | 25,350 | |||||||||||||||||||||
Stock option expense |
| | 9,593 | | | | 9,593 | |||||||||||||||||||||
Dividends declared |
| | | | | (2,200,803 | ) | (2,200,803 | ) | |||||||||||||||||||
BALANCE AT JUNE 30, 2011 |
8,152,051 | $ | 1,222,808 | $ | 41,944,672 | $ | 66,211 | $ | | $ | 32,956,664 | $ | 76,190,355 | |||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-4
Table of Contents
Gas Natural Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2011 and 2010 (Unaudited)
2011 | 2010 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES |
||||||||
Net income |
$ | 4,635,092 | $ | 4,128,724 | ||||
Adjustments to reconcile net income to net cash provided
by operating activities |
||||||||
Depreciation and amortization |
2,103,547 | 1,965,279 | ||||||
Accretion |
69,413 | 58,845 | ||||||
Amortization of debt issuance costs |
68,667 | 63,396 | ||||||
Stock based compensation |
34,943 | 45,662 | ||||||
Gain on sale of marketable securities |
| (109,144 | ) | |||||
Loss on sale of assets |
39,685 | | ||||||
Loss from unconsolidated affiliate |
83,151 | 32,122 | ||||||
Investment tax credit |
(10,531 | ) | (10,531 | ) | ||||
Deferred income taxes |
2,721,060 | 492,520 | ||||||
Changes in assets and liabilities |
||||||||
Accounts receivable, including related parties |
5,128,578 | 9,244,965 | ||||||
Unbilled gas |
4,401,975 | 1,686,956 | ||||||
Natural gas and propane inventory |
2,041,931 | 1,893,096 | ||||||
Accounts payable, including related parties |
(4,397,430 | ) | (3,297,878 | ) | ||||
Recoverable/refundable cost of gas purchases |
2,026,951 | (2,030,733 | ) | |||||
Prepayments and other |
513,230 | (550,691 | ) | |||||
Other assets |
(847,241 | ) | (323,130 | ) | ||||
Other current liabilities |
(3,097,367 | ) | (3,568,424 | ) | ||||
Net cash provided by operating activities |
15,515,654 | 9,721,034 | ||||||
CASH FLOWS FROM INVESTING ACTIVITIES |
||||||||
Capital expenditures |
(10,279,331 | ) | (2,190,624 | ) | ||||
Proceeds from sale of fixed assets |
19,900 | | ||||||
Proceeds from sale of marketable securities |
| 2,353,878 | ||||||
Proceeds from related party note receivable |
4,699 | | ||||||
Purchase of Cut Bank shares and Kidron Investment |
| (206,067 | ) | |||||
Cash acquired in acquisition |
| 144,203 | ||||||
Restricted cash |
(3,403,078 | ) | | |||||
Investment in unconsolidated affiliate |
(303,600 | ) | (52,500 | ) | ||||
Customer advances for construction |
72,082 | 34,196 | ||||||
Contributions in aid of construction |
7,735 | 19,837 | ||||||
Net cash (used in) provided by investing activities |
(13,881,593 | ) | 102,923 | |||||
CASH FLOWS FROM FINANCING ACTIVITIES |
||||||||
Proceeds from lines of credit |
11,200,000 | 21,850,000 | ||||||
Repayment on lines of credit |
(17,509,999 | ) | (26,552,098 | ) | ||||
Proceeds from notes payable |
18,334,000 | | ||||||
Repayments of notes payable |
(9,869,533 | ) | (996,796 | ) | ||||
Repayments of related party notes payable |
(49,361 | ) | | |||||
Debt issuance costs |
(483,488 | ) | | |||||
Restricted cash |
(948,836 | ) | | |||||
Dividends paid |
(2,200,702 | ) | (1,639,066 | ) | ||||
Net cash used in financing activities |
(1,527,919 | ) | (7,337,960 | ) | ||||
NET INCREASE IN CASH AND CASH EQUIVALENTS |
106,142 | 2,485,997 | ||||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD |
13,026,585 | 2,752,168 | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD |
$ | 13,132,727 | $ | 5,238,165 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-5
Table of Contents
Gas Natural Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2011 and 2010 (Unaudited)
Condensed Consolidated Statements of Cash Flows
Six Months Ended June 30, 2011 and 2010 (Unaudited)
2011 | 2010 | |||||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
||||||||
Cash paid for interest |
$ | 822,174 | $ | 1,003,733 | ||||
Cash paid for income taxes |
91,303 | 180,000 | ||||||
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND
FINANCING ACTIVITIES |
||||||||
Shares issued to purchase Ohio Companies |
| 17,073,084 | ||||||
Capital expenditures included in accounts payable |
496,384 | 226,358 | ||||||
Capitalized interest |
3,444 | 2,997 | ||||||
Accrued dividends |
366,842 | 273,265 |
The accompanying notes are an integral part of these condensed consolidated financial statements.
F-6
Table of Contents
GAS NATURAL INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED 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 the parent company of multiple entities that are natural gas utility companies with
operations in Montana, Wyoming, North Carolina and Maine. Lightning Pipeline is the parent company
of multiple entities that are natural gas utility companies with operations in Ohio and
Pennsylvania. Great Plains is the parent company of an entity that is a natural gas utility
company with operations in Ohio. Brainard is a natural gas utility company 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
F-7
Table of Contents
GAS NATURAL INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
GAAP 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 six month period ended June 30, 2011 are not necessarily indicative of
the results that may be expected for future fiscal periods. Events occurring subsequent to June 30,
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 development of the allowances for doubtful accounts, unbilled
gas, asset retirement obligations, and 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, 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 cash 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 credit 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 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.
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GAS NATURAL INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Companys bad debt expense for the three and six months ended June 30, 2011 was $34,194 and
$79,177, respectively. Bad debt expense for the three and six months ended June 30, 2010 was
$35,090 and $79,342, respectively.
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.
The PUCO provided the primary audit findings during the fourth quarter of 2010, taking the position
that 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. The Company is currently reviewing
the primary findings with the PUCO.
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 as interest expense over
the term of the related debt. The unamortized balance of debt issuance costs was $900,067 and
$485,244 as of June 30, 2011 and December 31, 2010, respectively, including the costs related to
refinancing the debt in Ohio. Amortization expense was $57,621 and $68,667 for the three and six
months ended June 30, 2011, respectively. Amortization expense was $49,533 and $63,396 for the
three and six months ended June 30, 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 or acquired. 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 June 30, 2011 and
December 31, 2010, the Company has recorded a net asset of $262,417 and $297,617, and a related
liability of $1,616,280 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 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 equal to a percent of the asset cost according
to the following table:
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GAS NATURAL INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 six months
ended June 30:
2011 | 2010 | |||||||
Balance, beginning of period |
$ | 1,546,867 | $ | 787,233 | ||||
Liabilities incurred or acquired |
| 647,446 | ||||||
Liabilities settled |
| | ||||||
Accretion expense |
69,413 | 58,845 | ||||||
Balance, end of period |
$ | 1,616,280 | $ | 1,493,524 | ||||
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 liabilities for such revenues collected subject to refund are established.
Comprehensive Income
Comprehensive income includes net income and other comprehensive income, which for the Company is
primarily comprised of unrealized holding gains or losses on available-for-sale securities that are
excluded from the statement of operations in computing net loss and reported separately in
shareholders equity. Comprehensive income and its components are as follows:
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Net Income |
$ | 360,338 | $ | 465,782 | $ | 4,635,092 | $ | 4,128,724 | ||||||||
Other comprehensive income |
||||||||||||||||
Change in unrealized gain/(loss) on
available-for-sale securities, net of tax |
855 | 83,052 | 19,621 | (83,995 | ) | |||||||||||
Comprehensive Income |
$ | 361,193 | $ | 548,834 | $ | 4,654,713 | $ | 4,044,729 | ||||||||
Other comprehensive income for the three and six months ended June 30, 2011 is reported net of
tax of $518 and $11,667, respectively. Other comprehensive income for the three and six months
ended June 30, 2010 is reported net of tax of $51,904 and ($52,534), 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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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three months ended June 30, | Six months ended June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Weighted average number of common shares outstanding
used in the basic earnings per common share calculations |
8,151,359 | 6,071,538 | 8,150,802 | 6,071,538 | ||||||||||||
Dilutive effect of stock options |
8,466 | 9,079 | 8,153 | 7,989 | ||||||||||||
Weighted average number of common shares outstanding
adjusted for effect of dilutive options |
8,159,825 | 6,080,617 | 8,158,955 | 6,079,527 | ||||||||||||
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
In January 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
In January 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. 2011-04, Amendments to Achieve Common Fair Value Measurements and Disclosure Requirements
in US GAAP and IFRSs
In May 2011, the FASB issued ASU 2011-04, which changes the wording used to describe many of the
requirements in US GAAP for measuring fair value and for disclosing information about fair value
measurements. Currently, the guidance is anticipated to be effective for interim and annual periods
beginning after December 15, 2011; early application is not permitted. This ASU is not expected to
have a material impact on the accompanying financial statements.
ASU No. 2011-05, Presentation of Comprehensive Income
In June 2011, the FASB issued ASU 2011-05, which is intended to improve the comparability,
consistency, and transparency of financial reporting and to increase the prominence of items
reported in other comprehensive income. To increase the prominence of items reported in other
comprehensive income and to facilitate convergence of US GAAP and IFRS, the FASB eliminated the
option to present components of other comprehensive income as part of the statement of changes in
stockholders equity. The ASU requires all non-owner changes in stockholders equity be presented
either in a single continuous statement of comprehensive income or in
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GAS NATURAL INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
two separate but consecutive statements. This ASU is expected to change the presentation of other
comprehensive income in the accompanying financial statements. However, this ASU does not change
the calculation of the other comprehensive income. Currently, the guidance is anticipated to be
effective for fiscal years, and interim periods within those years, beginning after December 15,
2011; early adoption is permitted. The Company does not expect to implement this ASU prior to the
required date.
Note 2 Acquisitions
On January 5, 2010, the Company completed the acquisition of Lightning Pipeline, Great Plains,
Brainard 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%.
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 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 |
$ | 11,475,898 | $ | 7,343,434 | $ | 4,012,842 | $ | 119,625 | ||||||||
Property and equipment |
29,530,634 | 18,290,609 | 10,818,924 | 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 |
55,472,070 | 35,387,944 | 19,340,310 | 743,819 | ||||||||||||
Current liabilities |
13,836,120 | 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 |
17,602,731 | 9,073,079 | 7,972,226 | 557,429 | ||||||||||||
Net assets acquired |
$ | 37,869,339 | $ | 26,314,865 | $ | 11,368,084 | $ | 186,390 | ||||||||
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GAS NATURAL INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 $10,978 and $136,346 for the three and six months ended June 30, 2010, respectively, 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.
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 Ohio Companies. 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 Company does not currently
have definitive plans for the Kentucky assets.
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-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 June 30, 2011 or December 31, 2010.
The following is a summary of available-for-sale securities at:
June 30, 2011 | ||||||||||||
Investment | Unrealized | Estimated | ||||||||||
at cost | Gains | Fair Value | ||||||||||
Common Stock |
$ | 199,500 | $ | 106,738 | $ | 306,238 | ||||||
December 31, 2010 | ||||||||||||
Investment | Unrealized | Estimated | ||||||||||
at cost | Gains | Fair Value | ||||||||||
Common Stock |
$ | 199,500 | $ | 75,450 | $ | 274,950 | ||||||
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GAS NATURAL INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Unrealized gains on available-for-sale securities of $66,211 and $46,590, respectively (net of
$40,527 and $28,860 in taxes) was included in accumulated other comprehensive income in the
accompanying balance sheets at June 30, 2011 and December 31, 2010, respectively.
The gross realized gains are summarized below:
Gross | ||||||||||||
Three Months Ended | Sales | Realized | ||||||||||
June 30, | Proceeds | Cost | Gains | |||||||||
2011 |
$ | | $ | | $ | | ||||||
2010 |
$ | 2,051,981 | $ | 1,969,446 | $ | 82,535 |
Gross | ||||||||||||
Six Months Ended | Sales | Realized | ||||||||||
June 30, | Proceeds | Cost | Gains | |||||||||
2011 |
$ | | $ | | $ | | ||||||
2010 |
$ | 2,353,878 | $ | 2,244,734 | $ | 109,144 |
As of June 30, 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. 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).
The following tables represent the Companys fair value hierarchy for its financial assets measured
at fair value on a recurring basis as of:
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2011 | ||||||||||||||||
Level 1 | Level 2 | Level 3 | TOTAL | |||||||||||||
Available-for-sale securities |
$ | 306,238 | | | $ | 306,238 | ||||||||||
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 with the Bank of America 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 (the Bank of America Credit Facility). For the three
months ended June 30, 2011 and 2010, the weighted average interest rate on the facility was 1.76%
and 2.06%, respectively, resulting in $45,005 and $37,504 of interest expense, respectively. For
the six months ended June 30, 2011 and 2010, the weighted average interest rate on the facility was
1.71% and 2.50%, respectively, resulting in $101,209 and $119,388 of interest expense,
respectively. The balance on the revolving credit facility was $11,840,000 and $18,149,999 at June
30, 2011 and December 31, 2010, respectively.
The $11.8 million of borrowings as of June 30, 2011, leaves the remaining borrowing capacity on the
line of credit at $8.2 million.
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 Senior Unsecured Notes). 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 notes.
Interest expense was $200,200 and $400,400 for the three and six months ended June 30, 2011 and
2010, respectively.
Citizens Bank
In connection with the acquisition of the Ohio Companies, NEO and Great Plains 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 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. Mr. Osborne guaranteed each loan both individually and as
trustee of the Richard M. Osborne Trust, and Great Plains guaranteed NEOs revolving line of credit
and term loans.
The Ohio Companies had term loans with Citizens Bank in the aggregate amount of $11.3 million.
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 and six
months ended June 30, 2011 the weighted average interest rate on the term loans was 5%, resulting
in $38,117 and $156,022 of interest expense, respectively. For the three and six months ended
June 30, 2010 the weighted average interest rate on the term loans was 5%, resulting in $128,696
and $233,680 of interest expense, respectively.
NEOs revolving credit line with Citizens Bank matured on November 29, 2010 and was repaid and
extinguished at that time. For the three and six months ended June 30, 2010, the weighted average
interest rate on the revolving credit line was 5%, resulting in $26,833 and $53,236 of interest
expense, respectively.
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NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The term loans were paid off on May 3, 2011 resulting in no outstanding balance at June 30, 2011.
At December 31, 2010, $9.6 million had been borrowed under the term loans.
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 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 and six months ended June 30, 2010, the weighted average interest rate on the term
note was 4% resulting in $42,639 and $88,208 of interest expense, respectively. The weighted
average interest rate on the credit line was 4% resulting in $15,158 and $31,273 of interest
expense, respectively.
SunLife Assurance Company of Canada
On May 2, 2011, the Company and its Ohio subsidiaries, NEO, Orwell and Brainard (together the
Issuers), issued $15.3 million of 5.38% Senior Secured Guaranteed Fixed Rate Notes due June 1,
2017 (Fixed Rate Note). Additionally, Great Plains issued $3.0 million of 4.12% Senior Secured
Guaranteed Floating Rate Notes due May 3, 2014 (Floating Rate Note). Both notes were placed with
SunLife Assurance Company of Canada (SunLife). Approximately $636,000 was incurred related to
the debt issuance which was capitalized and are being amortized over the life of the notes.
The Fixed Rate 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 Securities and Exchange Commission
(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 NPA 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 Floating Rate 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 NPA as filed with
the SEC on Form 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 NPA that is substantially the
same as the NPA released on November 2, 2010. Prepayment of this note prior to maturity is at par.
The use of proceeds for both notes extinguished existing amortizing bank debt and other existing
indebtedness, funded $3.4 million for the 2011 capital program for Orwell and NEO, established two
debt service reserve accounts, and replenished the Companys treasuries for the previously
announced repayment of maturing bank debt and transaction expenses. The capital program funds and
debt service reserve accounts are in interest bearing accounts and included in restricted cash.
Payments for both notes prior to maturity are interest-only.
For the three and six months ended June 30, 2011, the weighted average interest rate on the Fixed
Rate Note was 5.38% resulting in $137,495 of interest expense. The Floating Rate Note pays
interest quarterly and the first payment is not due until August 2011 and therefore no interest
expense was incurred during the three and six months ended June 30, 2011.
Debt Covenants
The Companys Bank of America Credit Facility and the Senior Unsecured Notes 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.
F-16
Table of Contents
GAS NATURAL INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Fixed Rate Note and the Floating Rate Note 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 Company believes it was in compliance with the financial covenants under its debt agreements.
The following table shows the future minimum payments on the credit facilities and long-term debt
for the years ended June 30:
2012 |
$ | | ||
2013 |
| |||
2014 |
3,000,000 | |||
2015 |
| |||
2016 |
| |||
Thereafter |
28,334,000 | |||
Total |
$ | 31,334,000 | ||
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 June 30, 2011 and December 31, 2010, there are 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 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.
F-17
Table of Contents
GAS NATURAL INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 June 30, 2010 |
29,500 | $ | 7.81 | $ | 90,110 | |||||||
Exerciseable June 30, 2010 |
10,000 | $ | 7.87 | $ | 29,875 | |||||||
Weighted | Aggregate | |||||||||||
Number of | Average | Intrinsic | ||||||||||
Shares | Exercise Price | Value | ||||||||||
Outstanding December 31, 2010 |
39,500 | $ | 8.52 | |||||||||
Granted |
| $ | | |||||||||
Exercised |
| $ | | |||||||||
Expired |
(4,500 | ) | $ | 9.93 | ||||||||
Outstanding June 30, 2011 |
35,000 | $ | 8.66 | $ | 62,038 | |||||||
Exerciseable June 30, 2011 |
18,750 | $ | 8.24 | $ | 101,050 | |||||||
As of June 30, 2011 and December 31, 2010, there was $12,636 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 June 30, 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 | 7.42 | 7,500 | $7.10 | ||||||
6/3/2009 | $8.44 | 5,000 | $8.44 | 2.93 | 3,750 | $8.44 | ||||||
12/1/2009 | $8.85 | 10,000 | $8.85 | 8.42 | 5,000 | $8.85 | ||||||
12/1/2010 | $10.15 | 10,000 | $10.15 | 9.42 | 2,500 | $10.15 | ||||||
35,000 | 18,750 | |||||||||||
F-18
Table of Contents
GAS NATURAL INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
During the three and six months ended June 30, 2011, the Company recorded $5,677 and $9,593,
respectively ($3,548 and $6,003, 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. During the three and six months ended
June 30, 2010, the Company recorded $4,702 and $9,406, respectively ($2,915 and $5.832,
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.
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 for the three and six
months ended June 30, 2011, was $100,109 and $211,442, respectively. The expense related to the
401k Plan for the three and six months ended June 30, 2010, was $90,970 and $158,320, 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 $11,249 and $23,205 for the three and six months ended June 30, 2011, respectively. The
Company contributed shares of common stock valued at $14,562 and $20,682 for the three and six
months ended June 30, 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 and six months ended June 30, 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 June 30, 2011 and December 31, 2010, the value of plan assets was $202,496 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 position differs from the amount computed by applying the federal statutory rate to
pre-tax income or loss as demonstrated in the table below:
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
Income tax from continuing operations: |
||||||||||||||||
Tax expense at statutory rate of 34% |
$ | 201,981 | $ | 233,238 | $ | 2,516,851 | $ | 2,101,735 | ||||||||
State income tax, net of federal tax expense |
20,905 | (4,980 | ) | 260,487 | (44,878 | ) | ||||||||||
Amortization of deferred investment tax
credits |
(5,266 | ) | (5,265 | ) | (10,532 | ) | (5,265 | ) | ||||||||
Other |
16,104 | (2,779 | ) | 603 | 1,258 | |||||||||||
Total income tax expense |
$ | 233,724 | $ | 220,214 | $ | 2,767,409 | $ | 2,052,850 | ||||||||
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 June 30, 2011 and December 31, 2010.
The tax years after 2005 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.
F-19
Table of Contents
GAS NATURAL INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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 had
a maturity date of January 3, 2014 and bore interest at 6.0% annually. On May 3, 2011, the Company
repaid the second note in full, including all interest accrued to date, using the SunLife proceeds.
As of June 30, 2011 and December 31, 2010, the second note had a balance of $0 and $52,578, which
included $0 and $3,217 of accrued interest, respectively. Interest expense incurred related to
both loans was $132 and $529, respectively, for the three and six months ended June 30, 2011.
Interest expense incurred related to both loans was $30,104 and $77,653, respectively, for the
three and six months ended June 30, 2010.
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 $50,531 and $55,230 (of which, $9,905 and $9,565
is due within one year) as of June 30, 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 and $6,600 for the three and six
months ended June 30, 2011, respectively, which is included in the Natural Gas Purchased column
below. Lease expense resulting from this agreement was $3,300 and $7,827 for the three and six
months ended June 30, 2010, respectively, which is included in the Natural Gas Purchased column
below. The balance due at June 30, 2011 and December 31, 2010 was $2,200 and $0, respectively, to
John D. Oil and Gas Marketing related to these lease payments.
Accounts Receivable and Accounts Payable
The table below details amounts due from and due to related parties, including companies owned or
controlled by Mr. Osborne, at June 30, 2011 and December 30, 2010, respectively:
Accounts Receivable | Accounts Payable | |||||||||||||||
June 30, 2011 | December 31, 2010 | June 30, 2011 | December 31, 2010 | |||||||||||||
John D. Oil and Gas
Marketing |
$ | 3,282 | $ | 42,938 | $ | 75,270 | $ | 247,430 | ||||||||
Cobra Pipeline |
929 | 22,071 | 250 | 84,597 | ||||||||||||
Orwell Trumbell Pipeline |
126,540 | 120,975 | | 77,325 | ||||||||||||
Great Plains Exploration |
125,080 | 148,252 | | | ||||||||||||
Big Oats Pipeline Supply |
1,543 | 863 | 99,467 | 4,723 | ||||||||||||
Kykuit Resources |
97,264 | 97,154 | | | ||||||||||||
Sleepy Hollow |
112,163 | 100,640 | | | ||||||||||||
Other |
18,331 | 26,491 | 13,000 | 3,468 | ||||||||||||
Total |
$ | 485,132 | $ | 559,384 | $ | 187,987 | $ | 417,543 | ||||||||
F-20
Table of Contents
GAS NATURAL INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The table below details transactions with related parties, including companies owned or controlled
by Mr. Osborne, for the three months ended June 30, 2011:
Three Months Ended June 30, 2011 | ||||||||||||||||||||
Pipeline and | Rent, Supplies | Management | ||||||||||||||||||
Natural Gas | Construction | Consulting, and | Natural Gas | and Other | ||||||||||||||||
Purchased | Purchases | and Other Purchases | Sold | Sales | ||||||||||||||||
John D. Oil and Gas
Marketing |
$ | 954,623 | $ | | $ | 1,646 | $ | | $ | 3,282 | ||||||||||
Cobra Pipeline |
64,176 | 68,767 | 452 | | 929 | |||||||||||||||
Orwell Trumbell Pipeline |
55,656 | | 638 | 386 | 850 | |||||||||||||||
Great Plains Exploration |
554,728 | 111,750 | | 1,242 | 3,854 | |||||||||||||||
Big Oats Pipeline Supply |
| 89,886 | 270,140 | 539 | 1,000 | |||||||||||||||
Kykuit Resources |
| | | | 110 | |||||||||||||||
Sleepy Hollow |
| | | | 5,318 | |||||||||||||||
Other |
| | 42,257 | 9,073 | 1,308 | |||||||||||||||
TOTAL |
$ | 1,629,183 | $ | 270,403 | $ | 315,133 | $ | 11,240 | $ | 16,651 | ||||||||||
The table below details transactions with related parties, including companies owned or controlled
by Mr. Osborne, for the three months ended June 30, 2010:
Three Months Ended June 30, 2010 | ||||||||||||||||||||
Pipeline and | Rent, Supplies | Management | ||||||||||||||||||
Natural Gas | Construction | Consulting, and | Natural Gas | and Other | ||||||||||||||||
Purchased | Purchases | and Other Purchases | Sold | Sales | ||||||||||||||||
John D. Oil and Gas
Marketing |
$ | 1,033,792 | $ | | $ | | $ | | $ | | ||||||||||
Cobra Pipeline |
82,601 | | 50,863 | | 7,819 | |||||||||||||||
Orwell Trumbell Pipeline |
104,388 | | 430 | | | |||||||||||||||
Great Plains Exploration |
3,783 | | | 945,550 | 1,888 | |||||||||||||||
Big Oats Pipeline Supply |
| 41,382 | 105,620 | 273 | 1,505 | |||||||||||||||
Kykuit Resources |
| | | | 4,813 | |||||||||||||||
Sleepy Hollow |
| | | | 17,937 | |||||||||||||||
Other |
| 8,400 | 43,849 | 10,135 | 16,509 | |||||||||||||||
TOTAL |
$ | 1,224,564 | $ | 49,782 | $ | 200,762 | $ | 955,958 | $ | 50,471 | ||||||||||
F-21
Table of Contents
GAS NATURAL INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The table below details transactions with related parties, including companies owned or controlled
by Mr. Osborne, for the six months ended June 30, 2011:
Six Months Ended June 30, 2011 | ||||||||||||||||||||
Pipeline and | Rent, Supplies | Management | ||||||||||||||||||
Natural Gas | Construction | Consulting, and | Natural Gas | and Other | ||||||||||||||||
Purchased | Purchases | and Other Purchases | Sold | Sales | ||||||||||||||||
John D. Oil and Gas Marketing |
$ | 2,426,724 | $ | | $ | 1,772 | $ | | $ | 6,564 | ||||||||||
Cobra Pipeline |
243,779 | 68,767 | 452 | | 1,056 | |||||||||||||||
Orwell Trumbell Pipeline |
276,174 | | 49,718 | 1,757 | 5,565 | |||||||||||||||
Great Plains Exploration |
573,871 | 197,430 | 150 | 2,484 | 12,836 | |||||||||||||||
Big Oats Pipeline Supply |
| 256,668 | 409,012 | 2,712 | 1,000 | |||||||||||||||
Kykuit Resources |
| | 39,600 | | 110 | |||||||||||||||
Sleepy Hollow |
| | | | 11,523 | |||||||||||||||
Other |
| | 97,873 | 50,313 | 3,057 | |||||||||||||||
TOTAL |
$ | 3,520,548 | $ | 522,865 | $ | 598,577 | $ | 57,266 | $ | 41,711 | ||||||||||
The table below details transactions with related parties, including companies owned or
controlled by Mr. Osborne, for the six months ended June 30, 2010:
Six Months Ended June 30, 2010 | ||||||||||||||||||||
Pipeline and | Rent, Supplies | Management | ||||||||||||||||||
Natural Gas | Construction | Consulting, and | Natural Gas | and Other | ||||||||||||||||
Purchased | Purchases | and Other Purchases | Sold | Sales | ||||||||||||||||
John D. Oil and Gas Marketing |
$ | 2,404,756 | $ | | $ | 127 | $ | 49,824 | $ | | ||||||||||
Cobra Pipeline |
237,451 | 83,010 | 107,447 | | 21,044 | |||||||||||||||
Orwell Trumbell Pipeline |
303,527 | | 430 | | | |||||||||||||||
Great Plains Exploration |
20,649 | | 1,953,052 | 2,345 | ||||||||||||||||
Big Oats Pipeline Supply |
| 87,224 | 221,423 | 2,267 | | |||||||||||||||
Kykuit Resources |
| | | | 10,559 | |||||||||||||||
Sleepy Hollow |
| | | | 54,506 | |||||||||||||||
Other |
| 42,600 | 246,348 | 58,367 | 120,274 | |||||||||||||||
TOTAL |
$ | 2,966,383 | $ | 212,834 | $ | 575,775 | $ | 2,063,510 | $ | 208,728 | ||||||||||
The Company also accrued a liability of $13,894 and $413,399, respectively, due to companies
controlled by Mr. Osborne for natural gas used through June 30, 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.
Note
10 Segments of Operations
The following tables set forth summarized financial information for the Companys natural gas,
marketing and production, pipeline, 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:
F-22
Table of Contents
GAS NATURAL INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended June 30, 2011
Marketing | ||||||||||||||||||||||||
Natural Gas | and | Pipeline | Corporate and | |||||||||||||||||||||
Operations | Production | Operations | Other | Eliminations | Consolidated | |||||||||||||||||||
OPERATING REVENUES |
||||||||||||||||||||||||
Natural gas operations |
$ | 17,176,027 | $ | | $ | | $ | 816,049 | $ | (896,814 | ) | $ | 17,095,262 | |||||||||||
Marketing and production |
| 3,209,966 | | | (1,734,301 | ) | 1,475,665 | |||||||||||||||||
Pipeline operations |
| | 102,061 | | | 102,061 | ||||||||||||||||||
Total operating revenue |
17,176,027 | 3,209,966 | 102,061 | 816,049 | (2,631,115 | ) | 18,672,988 | |||||||||||||||||
COST OF SALES |
||||||||||||||||||||||||
Gas purchased |
9,656,357 | | | 816,049 | (896,814 | ) | 9,575,592 | |||||||||||||||||
Marketing and production |
| 2,942,680 | | | (1,734,301 | ) | 1,208,379 | |||||||||||||||||
Total cost of sales |
9,656,357 | 2,942,680 | | 816,049 | (2,631,115 | ) | 10,783,971 | |||||||||||||||||
GROSS MARGIN |
$ | 7,519,670 | $ | 267,286 | $ | 102,061 | $ | | $ | | $ | 7,889,017 | ||||||||||||
OPERATING INCOME (LOSS) |
$ | 902,183 | $ | 79,627 | $ | 48,396 | $ | (39,384 | ) | $ | | $ | 990,822 | |||||||||||
NET INCOME (LOSS) |
$ | 359,742 | $ | 23,625 | $ | 27,752 | $ | (50,781 | ) | $ | | $ | 360,338 | |||||||||||
Three Months Ended June 30, 2010
Marketing | ||||||||||||||||||||||||
Natural Gas | and | Pipeline | Corporate and | |||||||||||||||||||||
Operations | Production | Operations | Other | Eliminations | Consolidated | |||||||||||||||||||
OPERATING REVENUE |
||||||||||||||||||||||||
Natural gas operations |
$ | 14,760,696 | $ | | $ | | $ | | $ | (78,587 | ) | $ | 14,682,109 | |||||||||||
Marketing and production |
| 3,704,869 | | | (1,836,860 | ) | 1,868,009 | |||||||||||||||||
Pipeline operations |
| | 106,355 | | | 106,355 | ||||||||||||||||||
Total operating revenue |
14,760,696 | 3,704,869 | 106,355 | | (1,915,447 | ) | 16,656,473 | |||||||||||||||||
COST OF SALES |
||||||||||||||||||||||||
Gas purchased |
7,998,349 | | | | (78,587 | ) | 7,919,762 | |||||||||||||||||
Marketing and production |
| 3,299,668 | | | (1,836,860 | ) | 1,462,808 | |||||||||||||||||
Total cost of sales |
7,998,349 | 3,299,668 | | | (1,915,447 | ) | 9,382,570 | |||||||||||||||||
GROSS MARGIN |
$ | 6,762,347 | $ | 405,201 | $ | 106,355 | $ | | $ | | $ | 7,273,903 | ||||||||||||
OPERATING INCOME (LOSS) |
$ | 632,599 | $ | 207,305 | $ | 35,679 | $ | (8,843 | ) | $ | | $ | 866,740 | |||||||||||
NET INCOME |
$ | 247,979 | $ | 113,145 | $ | 24,485 | $ | 80,173 | $ | | $ | 465,782 | ||||||||||||
F-23
Table of Contents
GAS NATURAL INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Six Months Ended June 30, 2011
Marketing | ||||||||||||||||||||||||
Natural Gas | and | Pipeline | Corporate and | |||||||||||||||||||||
Operations | Production | Operations | Other | Eliminations | Consolidated | |||||||||||||||||||
OPERATING REVENUES |
||||||||||||||||||||||||
Natural gas operations |
$ | 55,485,920 | $ | | $ | | $ | 816,049 | $ | (987,124 | ) | $ | 55,314,845 | |||||||||||
Marketing and production |
| 7,550,218 | | | (4,249,051 | ) | 3,301,167 | |||||||||||||||||
Pipeline operations |
| | 208,385 | | | 208,385 | ||||||||||||||||||
Total operating revenue |
55,485,920 | 7,550,218 | 208,385 | 816,049 | (5,236,175 | ) | 58,824,397 | |||||||||||||||||
COST OF SALES |
||||||||||||||||||||||||
Gas purchased |
34,463,575 | | | 816,049 | (987,124 | ) | 34,292,500 | |||||||||||||||||
Marketing and production |
| 6,856,837 | | | (4,249,051 | ) | 2,607,786 | |||||||||||||||||
Total cost of sales |
34,463,575 | 6,856,837 | | 816,049 | (5,236,175 | ) | 36,900,286 | |||||||||||||||||
GROSS MARGIN |
$ | 21,022,345 | $ | 693,381 | $ | 208,385 | $ | | $ | | $ | 21,924,111 | ||||||||||||
OPERATING INCOME (LOSS) |
$ | 7,789,050 | $ | 306,225 | $ | 112,396 | $ | (47,954 | ) | $ | | $ | 8,159,717 | |||||||||||
NET INCOME (LOSS) |
$ | 4,618,867 | $ | 109,407 | $ | 64,554 | $ | (157,736 | ) | $ | | $ | 4,635,092 | |||||||||||
Total assets |
$ | 118,582,518 | $ | 3,929,493 | $ | 636,991 | $ | 71,829,841 | $ | (57,223,219 | ) | $ | 137,755,624 | |||||||||||
Goodwill |
$ | 14,607,952 | $ | | $ | | $ | | $ | | $ | 14,607,952 |
Six Months Ended June 30, 2010
Marketing | ||||||||||||||||||||||||
Natural Gas | and | Pipeline | Corporate and | |||||||||||||||||||||
Operations | Production | Operations | Other | Eliminations | Consolidated | |||||||||||||||||||
OPERATING REVENUES |
||||||||||||||||||||||||
Natural gas operations |
$ | 46,345,465 | $ | | $ | | $ | | $ | (157,196 | ) | $ | 46,188,269 | |||||||||||
Marketing and production |
| 9,188,180 | | | (4,201,848 | ) | 4,986,332 | |||||||||||||||||
Pipeline operations |
| | 214,957 | | | 214,957 | ||||||||||||||||||
Total operating revenue |
46,345,465 | 9,188,180 | 214,957 | | (4,359,044 | ) | 51,389,558 | |||||||||||||||||
COST OF SALES |
||||||||||||||||||||||||
Gas purchased |
27,697,772 | | | | (157,196 | ) | 27,540,576 | |||||||||||||||||
Marketing and production |
| 8,256,067 | | | (4,201,848 | ) | 4,054,219 | |||||||||||||||||
Total cost of sales |
27,697,772 | 8,256,067 | | | (4,359,044 | ) | 31,594,795 | |||||||||||||||||
GROSS MARGIN |
$ | 18,647,693 | $ | 932,113 | $ | 214,957 | $ | | $ | | $ | 19,794,763 | ||||||||||||
OPERATING INCOME (LOSS) |
$ | 6,561,089 | $ | 557,461 | $ | 99,331 | $ | (11,364 | ) | $ | | $ | 7,206,517 | |||||||||||
NET INCOME |
$ | 3,979,274 | $ | 34,195 | $ | 60,720 | $ | 54,535 | $ | | $ | 4,128,724 | ||||||||||||
Total assets |
$ | 106,298,682 | $ | 4,737,608 | $ | 755,112 | $ | 58,037,889 | $ | (51,845,781 | ) | $ | 117,983,510 | |||||||||||
Goodwill |
$ | 13,813,626 | $ | | $ | | $ | | $ | | $ | 13,813,626 | ||||||||||||
F-24
Table of Contents
GAS NATURAL INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note
11 Commitments and Contingencies
Legal Proceedings
From time to time, the Company is involved in lawsuits that have arisen in the ordinary course of
business. The Company is contesting each of these lawsuits vigorously and believes it has defenses
to the allegations that have been made.
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.
At June 30, 2011 and December 31, 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
On August 1, 2011 the Company purchased the assets of Independence Oil & LP Gas, Inc. (Independence
Oil) for $1.6 million. Independence Oil delivered heating oil, liquid propane, and kerosene to
approximately 4,500 customers from its offices in West Jefferson, North Carolina and Independence,
Virginia. The Company plans to continue service to the current customers in addition to expanding
to other customers in each of the regions. Due to the timing of the transaction, the Company is
still reviewing the documentation to evaluate if the purchase is required to be accounted for a
business combination under ASC 805.
F-25
Table of Contents
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 92% and 94% of our revenues in the three and six months ended June 30, 2011 were
derived from our utility operations.
For the quarter, our net income was $360,000 compared to $466,000 in 2010, a decrease of 23%. Net
income for the six months ended June 30, 2011 was approximately $4.6 million compared with
approximately $4.1 million for the same period in 2010, an increase of $500,000 or 12%.
In our natural gas segment, increased sales volumes driven by continued customer growth and colder
weather in the majority of our service areas lead to the results for both the three months and six
months ended June 30, 2011. For the quarter ended June 30, 2011, earnings from natural gas
operations increased to $360,000 from $248,000 in the same quarter of 2010, an increase of $112,000
or 45%. Net income for the six months ended June 30, 2011 was approximately $4.6 million compared
with net income of approximately $4.0 million in the same period of 2010, an increase of $600,000
or 15%.
In our marketing and production segment, lower sales volumes due to the widening of the unfavorable
differential between the AECO and CIG Rockies natural gas indices and lower production from our
natural gas wells caused lower gross margin in the second quarter of 2011 than in the second
quarter of 2010. This led to a decline of 79% in earnings for the quarter to net income of $24,000
from net income of $113,000 for the same period in 2010. Earnings for the six months ended June
30, 2011 increased by 221% to $109,000 from $34,000 in the 2010 period. The decrease in gross
margin from lower sales and production volumes in 2011 was offset by an expense of $440,000
included in the six months ended June 30, 2010 related to the conclusion of the lawsuit with Shelby
Gas Association.
Our pipeline operations segment returned net income of $28,000 for the three months ended June 30,
2011 compared to $24,000 for 2010 and $65,000 for the six months ended June 30, 2011 compared with
$61,000 for the same period in 2010.
Our corporate and other operations segment incurred a net loss of $51,000 for the three months
ended June 30, 2011 compared to net income of $80,000 for the 2010 period. For the six months
ended June 30, 2011, the net loss was $158,000 compared to net income of $55,000 for the same
period of 2010. Both of the 2010 periods included dividends and gains on the sale of marketable
securities that did not occur in the 2011 periods.
3
Table of Contents
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.
RESULTS OF CONSOLIDATED OPERATIONS
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 Condensed
Consolidated Financial Statements as of June 30, 2011 and for the three and six month periods ended
June 30, 2011. Results of operations for interim periods are not necessarily indicative of results
to be attained for any future period.
Three Months Ended June 30, 2011 Compared with Three Months Ended June 30, 2010
Net Income Our net income for the three months ended June 30, 2011 was $360,000 or $0.04
per diluted share, compared to net income of $466,000 or $0.08 per diluted share for the three
months ended June 30, 2010, a decrease of $106,000. Net income from our natural gas operations
increased by $112,000, 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 $24,000 in the three months ended June 30, 2011, a decrease of
$89,000 from the income of $113,000 for the same period in 2010 due to lower revenues and gross
margin as explained below. Our corporate and other segment incurred a net loss of $51,000 in the
three months ended June 30, 2011 compared to net income of $80,000 in 2010, a difference of
$131,000. The 2010 period included dividends and gains on the sale of marketable securities that
did not occur in 2011. 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.
Revenues Our revenues for the three months ended June 30, 2011 were approximately $18.7
million compared to approximately $16.7 million for the three months ended June 30, 2010. This
$2.0 million increase was primarily attributable to: (1) a natural gas revenue increase of $2.4
million due to increased customers and colder weather in the majority of the markets we serve,
partly offset by (2) a decrease in our marketing and production operations revenue of $392,000
caused by lower sales due to the widening of the unfavorable differential between the AECO and CIG
Rockies natural gas indices and production from our natural gas wells.
Gross Margin Gross margin was approximately $7.9 million in the three months ended June 30,
2011 compared to approximately $7.3 million in the three months ended June 30, 2010, an increase of
$600,000. Our natural gas operations margins increased $757,000, due to the increased customers
and colder weather. Gross margin from our marketing and production operations decreased $137,000,
due to reduction in sales and the lower volumes produced.
Operating Expenses Expenses other than cost of sales increased by $500,000 to approximately
$6.9 million in the three months ended June 30, 2011 from approximately $6.4 million in the three
months ended June 30, 2010. The increase is due to increases in administrative expenses including
salaries and professional services, increases in depreciation due to the increases in capital
expenditures, and increases in taxes other than income due primarily to timing differences in the
expense portion of the Ohio Companies gross receipts tax.
Other Income, net Other income decreased by $244,000 to income of $116,000 in the three
months ended June 30, 2011 from income of $360,000 in the three months ended June 30, 2010 as a
result of the following: (1) other income from natural gas operations decreased by $171,000 due
primarily to decreased revenue from service sales; and (2) our corporate and other segment posted
other expense of $16,000 in 2011 compared to other income in 2010 of $57,000, resulting in an
increase in costs of $73,000.
Interest Expense Interest expense decreased by $36,000 to $493,000 in the three months
ended June 30, 2011 from $529,000 in the three months ended June 30, 2010. The Ohio Companies
repaid a portion of their debt in November 2010. The Ohio Companies did not enter into new
financing arrangements until May 2011 resulting in less average debt outstanding in the three
months ended June 30, 2011 which resulted in lower interest expense.
Income Tax Expense Income tax expense increased by $14,000 to $234,000 in the three months
ended June 30, 2011 from $220,000 in the three months ended June 30, 2010. The three months ended
June 30, 2010 included an income tax benefit due to a change in the effective state tax rate for
2010 related to the acquisition of the Ohio Companies.
4
Table of Contents
Six Months Ended June 30, 2011 Compared with Six Months Ended June 30, 2010
Net Income Our net income for the six months ended June 30, 2011 was approximately $4.6
million or $0.57 per diluted share, compared to net income of approximately $4.1 million or $0.68
per diluted share for the six months ended June 30, 2010, an increase of $500,000. 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 $109,000 in the six months ended
June 30, 2011, an increase of $75,000 from income of $34,000 for the same period in 2010 due to
lower revenues and gross margin as explained below. Offsetting these improvements is the net loss
from our corporate and other segment of $158,000 compared to net income of $55,000 in 2010, a
difference of $213,000. The 2010 period included dividends and gains on the sale of marketable
securities that did not occur in 2011. 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.
Revenues Our revenues for the six months ended June 30, 2011 were approximately $58.8
million compared to approximately $51.4 million for the six months ended June 30, 2010. This $7.4
million increase was primarily attributable to: (1) a natural gas revenue increase of $9.1 million
due to increased customers and colder weather in the majority of the markets we serve, partly
offset by (2) a decrease in our marketing and production operations revenue of $1.7 million caused
by a reduction in sales due to the widening of the unfavorable differential between the AECO and
CIG Rockies natural gas indices and lower production volumes from our natural gas wells.
Gross Margin Gross margin was approximately $21.9 million in the six months ended June 30,
2011 compared to approximately $19.8 million in the six months ended June 30, 2010, an increase of
$2.1 million. Our natural gas operations margins increased $2.4 million, due to the increased
customers and colder weather. Gross margin from our marketing and production operations decreased
$239,000, due to the reduced sales and the lower prices received and lower volumes produced from
our natural gas wells.
Operating Expenses Expenses other than cost of sales increased by $1.2 million to
approximately $13.8 million in the six months ended June 30, 2011 from approximately $12.6 million
in the six months ended June 30, 2010. The increase is due to increases in administrative expenses
including salaries, professional services and vehicle fuel, and increases in depreciation due to
the increases in capital expenditures.
Other Income, net Other income increased by $103,000 to income of $232,000 in the six
months ended June 30, 2011 from income of $129,000 in the six months ended June 30, 2010 as a
result of the following: (1) the 2010 period included expense from the conclusion of the lawsuit
with Shelby Gas Association of $440,000; (2) other income from natural gas operations decreased by
$148,000 due primarily to decreased revenue from service sales; and (3) our corporate and other
segment posted other expense of $96,000 in 2011 compared to other income in 2010 of $93,000,
resulting in an increase in costs of $189,000.
Interest Expense Interest expense decreased by $216,000 to approximately $906,000 in the
six months ended June 30, 2011 from approximately $1.1 million in the six months ended June 30,
2010. The Ohio Companies repaid a portion of their debt in November 2010. The Ohio Companies did
not enter into new financing arrangements until May 2011 resulting in less average debt outstanding
in the six months ended June 30, 2011 which resulted in lower interest expense.
Income Tax Expense Income tax expense increased by $715,000 to approximately $2.8 million
in the six months ended June 30, 2011 from approximately $2.1 million in the six months ended June
30, 2010. The six months ended June 30, 2010 included an income tax benefit of $286,000 due to a
change in the effective state tax rate for 2010 related to the acquisition of the Ohio Companies.
The remaining increase is due primarily to the increase in pre-tax income in 2011 compared to 2010.
5
Table of Contents
Net Income by Segment and Service Area
The components of net income for 2011 and 2010 are:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
($ in thousands) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Natural Gas Operations |
||||||||||||||||
Energy West Montana (MT) |
$ | 283 | $ | 119 | $ | 1,147 | $ | 1,050 | ||||||||
Energy West Wyoming (WY) |
(2 | ) | (13 | ) | 313 | 244 | ||||||||||
Frontier Natural Gas (NC) |
262 | 333 | 925 | 977 | ||||||||||||
Bangor Gas (ME) |
274 | 280 | 1,142 | 771 | ||||||||||||
Ohio Companies (OH) |
(457 | ) | (471 | ) | 1,092 | 937 | ||||||||||
Total Natural Gas Operations |
$ | 360 | $ | 248 | $ | 4,619 | $ | 3,979 | ||||||||
Marketing & Production Operations |
24 | 113 | 109 | 34 | ||||||||||||
Pipeline Operations |
27 | 25 | 65 | 61 | ||||||||||||
411 | 386 | 4,793 | 4,074 | |||||||||||||
Corporate & Other |
(51 | ) | 80 | (158 | ) | 55 | ||||||||||
Consolidated Net Income |
$ | 360 | $ | 466 | $ | 4,635 | $ | 4,129 | ||||||||
The following highlights our results by operating segments:
NATURAL GAS OPERATIONS
NATURAL GAS OPERATIONS
Income Statement
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
($ in thousands) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Natural Gas Operations |
||||||||||||||||
Operating revenues |
$ | 17,095 | $ | 14,682 | $ | 55,315 | $ | 46,188 | ||||||||
Gas Purchased |
9,576 | 7,920 | 34,293 | 27,540 | ||||||||||||
Gross Margin |
7,519 | 6,762 | 21,022 | 18,648 | ||||||||||||
Operating expenses |
6,617 | 6,129 | 13,233 | 12,087 | ||||||||||||
Operating income |
902 | 633 | 7,789 | 6,561 | ||||||||||||
Other income |
132 | 303 | 328 | 476 | ||||||||||||
Income
before interest and taxes |
1,034 | 936 | 8,117 | 7,037 | ||||||||||||
Interest (expense) |
(467 | ) | (509 | ) | (854 | ) | (1,078 | ) | ||||||||
Income
before income taxes |
567 | 427 | 7,263 | 5,959 | ||||||||||||
Income tax (expense) |
(207 | ) | (179 | ) | (2,644 | ) | (1,980 | ) | ||||||||
Net Income |
$ | 360 | $ | 248 | $ | 4,619 | $ | 3,979 | ||||||||
6
Table of Contents
Operating Revenues
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
($ in thousands) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Full Service Distribution
Revenues |
||||||||||||||||
Residential |
$ | 7,207 | $ | 6,313 | $ | 25,811 | $ | 21,927 | ||||||||
Commercial |
7,250 | 5,892 | 23,311 | 18,441 | ||||||||||||
Industrial |
262 | 205 | 487 | 410 | ||||||||||||
Other |
43 | 88 | 79 | 216 | ||||||||||||
Total full service distribution |
14,762 | 12,498 | 49,688 | 40,994 | ||||||||||||
Transportation |
2,045 | 1,896 | 5,052 | 4,619 | ||||||||||||
Bucksport |
288 | 288 | 575 | 575 | ||||||||||||
Total operating revenues |
$ | 17,095 | $ | 14,682 | $ | 55,315 | $ | 46,188 | ||||||||
Utility Throughput
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
(in million cubic feet (MMcf)) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Full Service Distribution |
||||||||||||||||
Residential |
737 | 654 | 2,899 | 2,492 | ||||||||||||
Commercial |
882 | 667 | 2,829 | 2,267 | ||||||||||||
Industrial |
44 | 37 | 84 | 82 | ||||||||||||
Total full service |
1,663 | 1,358 | 5,812 | 4,841 | ||||||||||||
Transportation |
1,883 | 1,684 | 4,568 | 3,730 | ||||||||||||
Bucksport |
2,988 | 3,341 | 6,789 | 7,089 | ||||||||||||
Total Volumes |
6,534 | 6,383 | 17,169 | 15,660 | ||||||||||||
Degree Days
Three Months Ended | Percent (Warmer) Colder | |||||||||||||||||||
June 30, | 2011 Compared to | |||||||||||||||||||
Normal | 2011 | 2010 | Normal | 2010 | ||||||||||||||||
Great Falls, MT |
1,225 | 1,498 | 1,414 | 22.29 | % | 5.94 | % | |||||||||||||
Cody, WY |
1,072 | 1,408 | 1,269 | 31.34 | % | 10.95 | % | |||||||||||||
Bangor, ME |
1,072 | 1,052 | 804 | (1.87 | %) | 30.85 | % | |||||||||||||
Elkin, NC |
337 | 318 | 163 | (5.64 | %) | 95.09 | % | |||||||||||||
Youngstown, OH |
862 | 711 | 503 | (17.52 | %) | 41.35 | % |
7
Table of Contents
Six Months Ended | Percent (Warmer) Colder | |||||||||||||||||||
June 30, | 2011 Compared to | |||||||||||||||||||
Normal | 2011 | 2010 | Normal | 2010 | ||||||||||||||||
Great Falls, MT |
4,449 | 5,160 | 4,335 | 15.98 | % | 19.03 | % | |||||||||||||
Cody, WY |
4,102 | 4,685 | 4,348 | 14.21 | % | 7.75 | % | |||||||||||||
Bangor, ME |
4,807 | 4,860 | 3,905 | 1.10 | % | 24.46 | % | |||||||||||||
Elkin, NC |
2,454 | 2,414 | 2,276 | (1.63 | %) | 6.06 | % | |||||||||||||
Youngstown, OH |
4,121 | 4,019 | 3,474 | (2.48 | %) | 15.69 | % |
Three Months Ended June 30, 2011 Compared with Three Months Ended June 30, 2010
Revenues and Gross Margin
Operating revenues for the three months ended June 30, 2011 increased to approximately $17.1
million from approximately $14.7 million in the three months ended June 30, 2010. This $2.4
million increase is the result of the following factors:
1) | Revenue from our Montana and Wyoming markets increased $728,000 on a volume increase of 61 MMcf in the three months ended June 30, 2011 compared to the three months ended June, 2010, due to colder than normal weather. |
2) | Revenue from our Maine and North Carolina markets increased by approximately $651,000 on a volume increase from full service and transportation customers of 160 MMcf in 2011 compared to 2010, caused by increased customer count in both markets and colder weather in our Maine market in the 2011 period. |
3) | Revenues from our Ohio market increased $1.0 million on a volume increase of 283 MMcf, due to colder weather in 2011 than in 2010. |
Gas purchases in natural gas operations increased to approximately $9.6 million for the three
months ended June 30, 2011 from approximately $7.9 million for the three months ended June 30,
2010. The increase of $1.7 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 various public utility commissions in the jurisdictions in which we operate. Our gas costs are
subject to periodic audits and prudency reviews in all of these jurisdictions.
Gross margin increased to approximately $7.5 million for the three months ended June 30, 2011 from
approximately $6.8 million for the three months ended June 30, 2010, an increase of $757,000. The
increase in customers and cold weather discussed above are the primary drivers of the increase.
Montana and Wyoming accounted for $149,000 of the increase, Maine and North Carolina for $288,000
and Ohio for $320,000.
Earnings
The Natural Gas Operations segments earnings for the three months ended June 30, 2011 were
$360,000, or $.044 per diluted share, compared to earnings of $248,000 or $.041 per diluted share
for the three months ended June 30, 2010.
Operating expenses increased by $500,000 to approximately $6.6 million for the three months ended
June 30, 2011 from approximately $6.1 million for the three months ended June 30, 2010. The
increase is due to increases in administrative expenses including salaries and professional
services, increases in depreciation due to the increases in capital expenditures, and increases in
taxes other than income due primarily to timing differences in the expense portion of the Ohio Companies
gross receipts tax.
Other Income decreased by $171,000 to $132,000 for the three months ended June 30, 2011 from
$303,000 for the three months ended June 30, 2010 due primarily to decreased revenue from service
sales in our Montana and Ohio markets.
Interest expense decreased by $42,000 to $467,000 for the three months ended June 30, 2011 from
$509,000 for the three months ended June 30, 2010. The Ohio Companies had less average debt
outstanding in the three months ended June 30, 2011 because the debt that was repaid in November
2010 was not refinanced until May 2, 2011, resulting in lower interest expense.
Income tax expense increased by $28,000 to approximately $207,000 in the three months ended June
30, 2011 compared with approximately $179,000 in the three months ended June 30, 2010, due
primarily to the increase in pre-tax income in 2011 compared to 2010.
8
Table of Contents
Six Months Ended June 30, 2011 Compared with Six Months Ended June 30, 2010
Revenues and Gross Margin
Operating revenues for the six months ended June 30, 2011 increased to approximately $55.3 million
from approximately $46.2 million in the six months ended June 30, 2010. This $9.1 million increase
is the result of the following factors:
1) | Revenue from our Montana and Wyoming markets increased $3.3 million on a volume increase of 445 MMcf in the six months ended June 30, 2011 compared to the six months ended June, 2010, due to colder than normal weather throughout the six months. | ||
2) | Revenue from our Maine and North Carolina markets increased by approximately $2.2 million on a volume increase from full service and transportation customers of 400 MMcf in 2011 compared to 2010, caused by increased customer count in both markets and colder weather in our Maine market in the 2011 period. | ||
3) | Revenues from our Ohio markets increased $3.6 million on a volume increase of 964 MMcf, due to colder weather in 2011 than in 2010. |
Gas purchases in natural gas operations increased to approximately $34.3 million for the six months
ended June 30, 2011 from approximately $27.5 million for the six months ended June 30, 2010. The
increase of $6.8 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 various
public utility commissions in the jurisdictions in which we operate. Our gas costs are subject to
periodic audits and prudency reviews in all of these jurisdictions.
Gross margin increased to approximately $21.0 million for the six months ended June 30, 2011 from
approximately $18.6 million for the six months ended June 30, 2010, an increase of $2.4 million.
The increased customer count and cold weather discussed above are the primary drivers of the
increase. Montana and Wyoming accounted for $519,000 of the increase, Maine and North Carolina
$1.0 million and Ohio $807,000.
Earnings
The Natural Gas Operations segments earnings for the six months ended June 30, 2011 were
approximately $4.6 million, or $0.566 per diluted share, compared to earnings of approximately $4.0
million or $0.655 per diluted share for the six months ended June 30, 2010.
Operating expenses increased by $1.1 million to approximately $13.2 million for the six months
ended June 30, 2011 from approximately $12.1 million for the six months ended June 30, 2010. The
increase is due to increases in administrative expenses including salaries, professional services
and vehicle fuel, and increases in depreciation due to the increases in capital expenditures,
offset slightly by a decrease in taxes other than income.
Other Income decreased by $148,000 to $328,000 for the six months ended June 30, 2011 from $476,000
for the six months ended June 30, 2010 due primarily to decreased revenue from service sales in our
Montana and Ohio markets.
Interest expense decreased by $224,000 to approximately $854,000 for the six months ended June 30,
2011 from approximately $1.1 million for the six months ended June 30, 2010. The Ohio Companies
had less average debt outstanding in the six months ended June 30, 2011 because the debt that was
repaid in November 2010 was not refinanced until May 2, 2011, resulting in lower interest expense.
Income tax expense increased by $663,000 to approximately $2.6 million in the six months ended June
30, 2011 compared with approximately $2.0 million in the six months ended June 30, 2010. The six
months ended June 30, 2010 included an income tax benefit of $180,000 due to a change in the
effective state tax rate for 2010 related to the acquisition of the Ohio Companies. The remaining
increase is due primarily to the increase in pre-tax income in 2011 compared to 2010.
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MARKETING AND PRODUCTION OPERATIONS (EWR)
Income Statement
Three Months Ended | Six Months Ended | |||||||||||||||
June 30, | June 30, | |||||||||||||||
($ in thousands) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Energy West Resources |
||||||||||||||||
Operating revenues |
$ | 1,476 | $ | 1,868 | $ | 3,301 | $ | 4,986 | ||||||||
Gas Purchased |
1,208 | 1,463 | 2,608 | 4,054 | ||||||||||||
Gross Margin |
268 | 405 | 693 | 932 | ||||||||||||
Operating expenses |
188 | 198 | 387 | 375 | ||||||||||||
Operating income |
80 | 207 | 306 | 557 | ||||||||||||
Other expense |
(20 | ) | (12 | ) | (83 | ) | (472 | ) | ||||||||
Income before interest and taxes |
60 | 195 | 223 | 85 | ||||||||||||
Interest (expense) |
(22 | ) | (15 | ) | (45 | ) | (34 | ) | ||||||||
Income before income taxes |
38 | 180 | 178 | 51 | ||||||||||||
Income tax (expense) benefit |
(14 | ) | (67 | ) | (69 | ) | (17 | ) | ||||||||
Net Income |
$ | 24 | $ | 113 | $ | 109 | $ | 34 | ||||||||
Three Months Ended June 30, 2011 Compared with Three Months Ended June 30, 2010
Revenues and Gross Margin
Revenues decreased $392,000 to approximately $1.5 million for the three months ended June 30, 2011
from approximately $1.9 million for the three months ended June 30, 2010. $368,000 of this
decrease is caused by the widening of the unfavorable differential between the AECO and CIG Rockies
natural gas indexes, leading to lower sales in our marketing operation. Production revenues
decreased by $24,000 due to lower volumes produced and a lower price received for these volumes.
Gross margin decreased $137,000 to $268,000 in the three months ended June 30, 2011 from $405,000
in the three months ended June 30, 2010. Gross margin from our marketing operation decreased by
$125,000, due to the lower sales volumes, and decreased $12,000 from our gas production.
Earnings
The Marketing and Production segments earnings in the three months ended June 30, 2011 were
$24,000 or $0.003 per diluted share, compared to income of $113,000 or $0.019 per diluted share in
the three months ended June 30, 2010.
Our operating expenses decreased $10,000, to $188,000 in the three months ended June 30, 2011 from
$198,000 in the three months ended June 30, 2010.
The loss from unconsolidated affiliate increased $8,000 to $20,000 in the three months ended June
30, 2011 from $12,000 in the three months ended June 30, 2010.
Income tax expense decreased approximately $53,000 to $14,000 in the three months ended June 30,
2011 from $67,000 in the three months ended June 30, 2010. The decrease is due to the decrease in
pre-tax income in 2011 compared to 2010.
Six Months Ended June 30, 2011 Compared with Six Months Ended June 30, 2010
Revenues and Gross Margin
Revenues decreased $1.7 million to approximately $3.3 million for the six months ended June 30,
2011 from approximately $5.0 million for the six months ended June 30, 2010. $1.5 million is
caused by the widening of the unfavorable differential between the AECO and CIG Rockies natural gas
indexes, leading to lower sales in our marketing operation. Production revenues decreased by
$147,000 due to lower volumes produced and a lower price received for these volumes.
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Gross margin decreased $239,000 to approximately $693,000 in the six months ended June 30,
2011 from approximately $932,000 in the six months ended June 30, 2010. Gross margin from our
marketing operation decreased $152,000 due to lower sales volumes and gross margin from gas
production decreased by $86,000.
Earnings
The Marketing and Production segments earnings in the six months ended June 30, 2011 were $109,000
or $0.013 per diluted share, compared to income of $34,000 or $0.006 per diluted share in the six
months ended June 30, 2010.
Our operating expenses increased $12,000, to $387,000 in the six months ended June 30, 2011 from
$375,000 in the six months ended June 30, 2010.
The loss from unconsolidated affiliate increased $51,000 to $83,000 in the six months ended June
30, 2011, from $32,000 in the six months ended June 30, 2010.
Other expense was zero in the six months ended June 30, 2011. The six months ended June 30, 2010
included an expense of $440,000 related to the conclusion of the lawsuit with Shelby Gas
Association.
Income tax expense increased $52,000 to an expense of $69,000 in the six months ended June 30, 2011
from expense of $17,000 in the six months ended June 30, 2010. The increase is due to the increase
in pre-tax income in 2011 compared to 2010.
PIPELINE OPERATIONS
Income Statement
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
($ in thousands) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Pipeline Operations |
||||||||||||||||
Operating revenues |
$ | 102 | $ | 106 | $ | 208 | $ | 215 | ||||||||
Gas Purchased |
| | | | ||||||||||||
Gross Margin |
102 | 106 | 208 | 215 | ||||||||||||
Operating expenses |
54 | 71 | 96 | 116 | ||||||||||||
Operating income |
48 | 35 | 112 | 99 | ||||||||||||
Other income |
| | | | ||||||||||||
Income
before interest and taxes |
48 | 35 | 112 | 99 | ||||||||||||
Interest (expense) |
(3 | ) | (5 | ) | (7 | ) | (9 | ) | ||||||||
Income before income taxes |
45 | 30 | 105 | 90 | ||||||||||||
Income tax (expense) |
(17 | ) | (6 | ) | (40 | ) | (29 | ) | ||||||||
Net Income |
$ | 28 | $ | 24 | $ | 65 | $ | 61 | ||||||||
Three Months Ended June 30, 2011 Compared with Three Months Ended June 30, 2010
Net income in the three months ended June 30, 2011 was $28,000 compared to $24,000 in the
three months ended June 30, 2010. The overall impact of the results of our pipeline operations was
not material to our results of consolidated operations.
Six Months Ended June 30, 2011 Compared with Six Months Ended June 30, 2010
Net income in the six months ended June 30, 2011 was $65,000 compared to $61,000 in the six
months ended June 30, 2010. The overall impact of the results of our pipeline operations was not
material to our results of consolidated operations.
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Corporate and Other Operations
Our Corporate and Other reporting segment is intended primarily to encompass the results of
corporate acquisitions and other equity transactions, as well as certain other income and expense
items associated with Gas Naturals holding company functions. Therefore, it does not have standard
revenues, gas purchase costs, or gross margin.
Income Statement
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||||||
($ in thousands) | 2011 | 2010 | 2011 | 2010 | ||||||||||||
Corporate and Other |
||||||||||||||||
Operating revenues |
$ | | $ | | $ | | $ | | ||||||||
Gas Purchased |
| | | | ||||||||||||
Gross Margin |
| | | | ||||||||||||
Operating expenses |
39 | 9 | 48 | 11 | ||||||||||||
Operating loss |
(39 | ) | (9 | ) | (48 | ) | (11 | ) | ||||||||
Other (expense) income |
(16 | ) | 57 | (96 | ) | 93 | ||||||||||
Income before interest and taxes |
(55 | ) | 48 | (144 | ) | 82 | ||||||||||
Interest expense |
| | | | ||||||||||||
Income (Loss) before income taxes |
(55 | ) | 48 | (144 | ) | 82 | ||||||||||
Income tax benefit (expense) |
4 | 32 | (14 | ) | (27 | ) | ||||||||||
Net Loss |
$ | (51 | ) | $ | 80 | $ | (158 | ) | $ | 55 | ||||||
Three Months Ended June 30, 2011 Compared with Three Months Ended June 30, 2010
Results of corporate and other operations for the three months ended June 30, 2011 include
administrative costs of $39,000, costs related to acquisition activities of $18,000, offset by
interest income of $2,000 and income tax benefit of $4,000, for a net loss of $51,000.
Results of corporate and other operations for the three months ended June 30, 2010 include
dividends from marketable securities of $39,000, interest income of $2,000, and gains on the sale
of marketable equity securities of $82,000 offset by administrative costs of $9,000, and costs
related to acquisition activities of $66,000. After the related
income tax benefit of $32,000, the result is net income of $80,000.
Six Months Ended June 30, 2011 Compared with Six Months Ended June 30, 2010
Results of corporate and other operations for the six months ended June 30, 2011 include
administrative costs of $48,000, costs related to acquisition activities of $102,000, and income
tax expense of $14,000, offset by interest income of approximately $6,000, for a net loss of
$158,000.
Results of corporate and other operations for the six months ended June 30, 2010 included
dividends from marketable securities of approximately $118,000, interest income of $4,000, and
gains on the sale of marketable equity securities of $82,000, offset by administrative costs of
$11,000, costs related to acquisition activities of $112,000, and the
related income tax expense of $27,000, resulting in net income of $55,000.
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 $11.8 million and $18.1 million at June 30, 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.
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We made capital expenditures for continuing operations of $10.3 million and $2.2 million for
the six months ended June 30, 2011 and 2010, respectively, including $3.3 million related to the
Spelman Pipeline acquisition in April 2011. 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 $31.3 million and $22.9 million at June 30, 2011 and December 31, 2010, respectively, including the amount due within one year.
Cash increased slightly to $13.1 million at June 30, 2011, compared with $13.0 million at December
31, 2010.
For the Six Months Ended June 30, | ||||||||
2011 | 2010 | |||||||
Cash provided by operating activities |
$ | 15,515,654 | $ | 9,721,034 | ||||
Cash (used in) provided by investing activities |
(13,881,593 | ) | 102,923 | |||||
Cash used in financing activities |
(1,527,919 | ) | (7,337,960 | ) | ||||
Increase in cash |
$ | 106,142 | $ | 2,485,997 | ||||
OPERATING CASH FLOW
For the six months ended June 30, 2011, cash provided by operating activities increased $5.8
million as compared to the six months ended June 30, 2010. Major items affecting the use of cash
included a decrease in accounts receivable collections of $4.1 million, a $4.1million increase in
collections of recoverable costs of gas, a $2.7 million increase in unbilled revenue, a $2.2
million increase in net deferred tax assets, and a $1.1 million increase in prepayments.
INVESTING CASH FLOW
For the six months ended June 30, 2011, cash used in investing activities increased by $14.0
million as compared to the six months ended June 30, 2010, primarily due to increased construction
expenditures of $8.1 million, including expenditures of $3.3 million in 2011 for the acquisition of
Spelman Pipeline. Other major changes include expenditures in 2011 for setting up restricted cash
funds of $3.4 million, and a decrease in the proceeds from sale of marketable securities of $2.4
million. The restricted cash funds were created at the direction of the PUCO and are set aside for
capital expenditures by the Ohio Companies in 2011.
Capital Expenditures
Our capital expenditures for continuing operations totaled $10.3 million and $2.2 million for the
six months ended June 30, 2011 and 2010, respectively, including $3.3 million related to the
Spelman Pipeline acquisition in April 2011. We finance our capital expenditures on an interim
basis by the use of our operating cash flow and use of the Bank of America revolving line of
credit.
The majority of our capital spending is focused on the growth of our Natural Gas Operations
segment. We conduct ongoing construction activities in all of our utility service areas in order
to support expansion, maintenance, and enhancement of our gas pipeline systems. We are actively
expanding our systems in North Carolina and Maine to meet the high customer interest in natural gas
service in those two service areas.
Estimated Capital Expenditures
The table below details our capital expenditures for the six months ended June 30, 2011 and 2010
and provides an estimate of future cash requirements for capital expenditures:
Remaining Cash | ||||||||||||
Six Months ended June 30, | Requirements through | |||||||||||
($ in thousands) | 2011 | 2010 | December 31, 2011 | |||||||||
Natural Gas Operations |
$ | 10,273 | $ | 2,191 | $ | 7,922 | ||||||
Marketing and Production |
| | | |||||||||
Pipeline Operations |
| | 114 | |||||||||
Corporate and Other |
6 | | 87 | |||||||||
Total Capital Expenditures |
$ | 10,279 | $ | 2,191 | $ | 8,123 | ||||||
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FINANCING CASH FLOW
For the six months ended June 30, 2011, cash used in financing activities decreased by $5.8 million
as compared with the six months ended June 30, 2010. The closing of the SunLife transaction
increased proceeds from long term debt by $18.3 million, along with a corresponding increase in
repayments of notes payable to pay off existing debt of $8.9 million. The SunLife transaction
required debt service reserve accounts to be created in the amount of $950,000 to cover one year of
interest payments. Other items include an increase of $483,000 in debt issuance costs a $562,000 increase in dividends paid as a result of the
secondary offering in November 2010 and a decrease in the net line of credit proceeds of $1.6
million.
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 $11.8 million and $18.1 million at June 30, 2011 and
December 31, 2010, respectively. 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 $31.3 million and $22.9 million at June 30, 2011, and
December 31, 2010, respectively, including the amount due within one year.
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 our Ohio Companies.
In November 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 Companies, 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 November 2010. 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 November of 2010, including accrued interest.
Citizens Bank Term Loans
In connection with the acquisition of the Ohio Companies, NEO and Great Plains 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 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. Mr. Osborne guaranteed each loan both individually and as
trustee of the Richard M. Osborne Trust, and Great Plains guaranteed NEOs revolving line of credit
and term loans.
The Ohio Companies had term loans with Citizens Bank in the aggregate amount of $11.3 million.
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 and six
months ended June 30, 2011 the weighted average interest rate on the term loans was 5%, resulting
in $38,117 and $156,022 of interest expense, respectively. For the three and six months ended
June 30, 2010 the weighted average interest rate on the term loans was 5%, resulting in $128,696
and $233,680 of interest expense, respectively.
The term loans were paid off on May 3, 2011.
The following discussion describes our credit facilities as of June 30, 2011, after the repayment
of the Citizens debt and completion of the SunLife financing.
SunLife Assurance Company of Canada
On May 2, 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 (Fixed Rate Note). Additionally, Great Plains issued $3.0 million of 4.12% Senior Secured Guaranteed Floating Rate Notes due May 3, 2014 (Floating Rate
Note). Both notes were placed
14
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with SunLife Assurance Company of Canada (SunLife). Approximately
$636,000 was incurred related to the debt issuance which was capitalized and are being amortized
over the life of the note.
The Fixed Rate 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 Securities and Exchange
Commission (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 NPA 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 Floating Rate 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 NPA as filed with
the SEC on Form 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 NPA that is substantially the
same as the NPA released on November 2, 2010. Prepayment of this note prior to maturity is at par.
The use of proceeds for both notes extinguished existing amortizing bank debt and other existing
indebtedness, funded $3.4 million for the 2011 capital program for Orwell and NEO, established two
debt service reserve accounts, and replenished the Companys treasuries for the previously
announced repayment of maturing bank debt and transaction expenses. The capital program funds and
debt service reserve accounts are in interest bearing accounts and included in restricted cash.
Payments for both notes prior to maturity are interest-only.
For the three and six months ended June 30, 2011, the weighted average interest rate on the Fixed
Rate Note was 5.38% resulting in $137,495 of interest expense. The Floating Rate Note pays
interest quarterly and the first payment is not due until August 2011 and therefore no interest
expense was incurred during the three and six months ended June 30, 2011.
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.
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 us.
The following tables represent borrowings under the Bank of America revolving line of credit for
each of the three and six months ended June 30, 2011 and 2010.
Quarter Ended June 30, 2011 |
||||
Minimum borrowing |
$ | 8,390,000 | ||
Maximum borrowing |
$ | 11,840,000 | ||
Average borrowing |
$ | 9,909,560 | ||
Quarter Ended June 30, 2010 |
||||
Minimum borrowing |
$ | 5,197,903 | ||
Maximum borrowing |
$ | 14,447,903 | ||
Average borrowing |
$ | 7,457,673 | ||
Six Months Ended June 30, 2011 |
||||
Minimum borrowing |
$ | 8,390,000 | ||
Maximum borrowing |
$ | 18,150,000 | ||
Average borrowing |
$ | 11,879,116 | ||
Six Months Ended June 30, 2010 |
||||
Minimum borrowing |
$ | 3,000,000 | ||
Maximum borrowing |
$ | 14,650,000 | ||
Average borrowing |
$ | 7,886,261 |
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At June 30, 2011 and December 31, 2010, we had $11.8 million and $18.1 million of borrowings
under the $20.0 million Bank of America revolving line of credit. For the three months ended June
30, 2011 and 2010, the weighted average interest rate on the facility was 1.76% and 2.06%,
respectively, resulting in $45,005 and $37,504 of interest expense, respectively. For the six
months ended June 30, 2011 and 2010, the weighted average interest rate on the facility was 1.71%
and 2.50%, respectively, resulting in $101,209 and $119,388 of interest expense, 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 Senior Unsecured Notes). 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 notes.
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.
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 $31.3 million at
June 30, 2011, with none being 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
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 Disclosure 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
Condensed 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 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.
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Item 4. Controls And Procedures
Evaluation of Disclosure Controls and Procedures
As of June 30, 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 June 30, 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*
|
Certification of Principal Executive Officer and Principal 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 | ||||
August 12, 2011 | Chief Financial Officer (principal financial officer and principal accounting officer) |
|||
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