Note 2 - Significant Accounting Policies

Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States. These principles are set by the FASB to ensure the consistent reporting of the Company’s financial condition, results of operations and cash flows. References to GAAP issued by the FASB in these footnotes are to the FASB Accounting Standards Codification, sometimes referred to as the Codification or ASC.

Principles of Consolidation

The consolidated financial statements include the accounts and transactions of the Company and its wholly-owned subsidiaries as well as the proportionate share of assets, liabilities, revenues, and expenses of certain producing natural gas properties. All intercompany transactions and balances have been eliminated.

Reclassifications

Certain reclassifications of prior year reported amounts have been made for comparative purposes. Such reclassifications are not considered material and had no effect on net income.

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 determining amounts for the Company’s allowances for doubtful accounts, unbilled gas, asset retirement obligations, contingent consideration liability, loss contingencies, 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.

The Company makes acquisitions which involve combining the assets and liabilities of the acquired company with our Company. The assets and liabilities acquired are reported at their fair value at the date of acquisition. Measuring this fair value may require the use of estimates.

Such estimates could change in the near term and could significantly impact the Company’s results of operations and financial position.

Fair Value Measurements

For assets and liabilities measured at fair value, fair value is 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. 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.

Leases

Leases are categorized as either operating or capital leases at inception. Operating lease costs are recognized on a straight-line basis over the term of the lease. For capital leases, an asset and a corresponding liability are established for the present value at the beginning of the lease term of minimum lease payments during the lease term, excluding any executory costs. If the present value of the minimum lease payments exceeds the fair value of the leased property at lease inception, the amount measured initially as the asset and obligation shall be the fair value. The capital lease obligation is amortized over the life of the lease.

For build-to-suit leases, the Company evaluates its level of risk during the asset’s construction or development period. If the Company determines that it bears substantially all of the risk during this period, it establishes an asset and liability for the total project costs with the liability reduced by any project costs paid directly by the Company. Once the build-to-suit asset is complete, the Company assesses whether the arrangement qualifies for sales recognition under the sale-leaseback accounting guidance. If the lease meets the criteria to qualify as a sales-lease back transaction, then the asset and liability are removed from the Company’s consolidated balance sheet. If it does not meet the criteria to qualify as a sale-leaseback transaction, then the asset and liability remain on the Company's consolidated balance sheet and the transaction is treated as a financing.

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.

Stock-Based Compensation

The Company accounts for stock-based compensation arrangements by recognizing compensation costs for all stock-based awards over the respective service period for employee services received in exchange for an award of equity or equity-based compensation. The compensation cost is based on the fair value of the award on the date it was granted.

Income Taxes

The Company files its income tax returns on a consolidated basis. Rate-regulated operations record cumulative increases in deferred taxes as income taxes recoverable from customers. The Company uses the deferral method to account for investment tax credits as required by regulatory commissions. Deferred income taxes are determined using the asset and liability method, under which deferred tax assets and liabilities are measured based upon the temporary differences between the financial statement and income tax bases of assets and liabilities, using current tax rates.

Tax positions must meet a more-likely-than-not recognition threshold to be recognized. The Company has no unrecognized tax benefits that would have a material impact to the Company’s financial statements for any open tax years. No adjustments were recognized for uncertain tax positions for the years ended December 31, 2014, 2013 and 2012.

The Company recognizes interest and penalties related to unrecognized tax benefits in operating expense. As of December 31, 2014 and 2013, there were no unrecognized tax benefits nor interest or penalties accrued related to unrecognized tax benefits. For the years ended December 31, 2014, 2013, and 2012, the Company did not recognize interest or penalties.

The Company, or one or more of its subsidiaries, files income tax returns in the U.S. federal jurisdiction and various state jurisdictions. The tax years after 2010 for federal and state returns remain open to examination by the major taxing jurisdictions in which we operate.

Comprehensive Income

Comprehensive income includes net income and other comprehensive income (loss), which for the Company is primarily comprised of unrealized holding gains or losses on available-for-sale securities. These gains or losses are excluded from the computing of net income and reported separately in shareholders’ equity as Accumulated other comprehensive income.

Earnings per Share

Basic earnings per share are computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect the potential dilution from the exercise or conversion of outstanding stock options and restricted stock awards into common stock.

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.

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 Consolidated 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 recorded in the accompanying Consolidated Statement of Comprehensive Income.

Receivables

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 management’s 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.

At December 31, 2013, included in the accounts receivable, trade line item on the accompanying Consolidated Balance Sheet was $1,059,224, net of allowance for doubtful accounts of $1,421,000, due from a large industrial customer in bankruptcy proceedings. The Company believed that it had an administrative claim for the unreserved portion and that it was likely to collect the amount. In June 2014, the bankruptcy court denied the Company’s administrative claim on the customer. The Company’s claim is now considered that of an unsecured creditor and as such the Company believes that it is unlikely that it will collect any of the previously unreserved amounts. As a result, the Company has written-off the remaining balance of the receivable. This receivable was related to the Company’s Marketing & Production operating segment. The impact of the amount written-off is reflected in the Provision for doubtful accounts line of the Company’s Consolidated Statement of Comprehensive Income. Total write-offs of receivables for the years ended December 31, 2014, 2013, and 2012 were $2,717,844, $161,674, and $213,855, respectively.

Two of the Company’s utilities in Ohio, Orwell and 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 PUCO and the rate per Mcf is adjusted as necessary.

Natural Gas Inventory

Natural gas inventory is stated at the lower of weighted average cost or net realizable value except for Energy West Montana – Great Falls, which is stated at the rate approved by the MPSC, which includes transportation and storage costs.

Recoverable/Refundable Costs of Gas Purchases

The Company accounts for purchased gas costs in accordance with procedures authorized by the utility commissions in the states in which it operates. Purchased gas costs that are different from those provided for in present rates, and approved by the respective commission, are accumulated and recovered or credited through future rate changes. The 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.

Property, Plant and Equipment

Property, plant and equipment are recorded at original cost when placed in service. Depreciation and amortization on assets are generally recorded on a straight-line basis over the estimated useful lives. These assets are depreciated and amortized over three to forty years.

EWR owns an interest in certain producing natural gas reserves on properties located in northern Montana. EWD also owns an interest in certain natural gas producing properties located in northern Montana. The Company is depleting these reserves using the units-of-production method. The production activities are being accounted for using the successful efforts method. The Company is not the operator of any of the natural gas producing wells on these properties and the Company is not regarded as having significant oil- and gas-producing activities as defined by ASC 932 - Extractive Activities – Oil and Gas. Therefore, the disclosures defined in ASC 932 have been omitted.

Contributions in Aid of and Advances Received for Construction

Contributions in aid of construction are contributions received from customers for construction that are not refundable and are amortized over the life of the assets. Customer advances for construction includes advances received from customers for construction that are to be refunded wholly or in part.

Goodwill and Other Intangible Assets

Goodwill represents the excess of the purchase price over the fair value of identifiable net tangible and intangible assets acquired in a business combination. Goodwill is not amortized, rather, the goodwill is required to be tested for impairment annually, which the Company performs in the fourth quarter, or if events or changes in circumstances indicate that goodwill may be impaired. The Company tests for goodwill impairment using a two-step approach. A recoverability test at the reporting unit level must be performed during the first step. If the asset is not recoverable, the second step calculates the impairment loss, if any.

The Company recognizes an acquired intangible apart from goodwill whenever the intangible arises from contractual or other legal rights, or whenever it can be separated or divided from the acquired entity and sold, transferred, licensed, rented or exchanged, either individually or in combination with a related contract, asset or liability. Such intangibles are amortized on a straight-line basis over their estimated useful lives unless the estimated useful life is determined to be indefinite. Accumulated amortization for customer relationships was approximately $557,500 and $254,667 at December 31, 2014 and 2013, respectively. Amortization expense for customer relationships for the years ended December 31, 2014, 2013, and 2012 was $302,833, $186,167 and $22,833. The following table shows the Company’s estimated amortization related to its intangible assets over the next five years.

Estimated intangible asset amortization expense for the years ended December 31,

2015	$	302,833
2016		302,833
2017		302,833
2018		302,833
2019		302,833

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 amortized as interest expense over the term of the related debt.

Investment in Unconsolidated Affiliate

For equity investments in which the Company does not control the investee, but can exert significant influence over the financial and operating policies of the investees, the Company uses the equity method of accounting. Under this accounting treatment, the Company’s share of the investee’s underlying net income or loss is recorded as non-operating income on the Company’s Consolidated Statement of Comprehensive Income with a corresponding increase or decrease in the investment account. Distributions received from the investment reduce the Company’s investment balance.

Impairment of Long-Lived Assets

The Company evaluates its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets or intangibles may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment loss to be recognized is measured as the amount by which the carrying value of the assets exceeds their fair value. As of December 31, 2014 and 2013, management does not consider the value of any of its long-lived assets to be impaired.

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 in the accompanying Consolidated Balance Sheets. The Company amortizes this amount added to property, plant, and equipment. The accretion of the asset retirement liability is allocated to operating expense using a systematic and rational method.

Derivatives and Hedging Activities

ASC 815 - Derivatives and Hedging requires companies to recognize all of its derivative instruments as either assets or liabilities in the statement of financial position at fair value. The accounting for changes in the fair value of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging relationship and further, on the type of hedging relationship. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation. For derivative instruments not designated as hedging instruments, the gain or loss is recognized in the statement of financial performance during the current period.

The Company is exposed to certain risks relating to its ongoing business operations. The primary risk managed by using derivative instruments is commodity price risk related to natural gas. Forward contracts and commodity price swaps with fixed pricing are entered into by the Company to protect profit margins on future obligations to deliver gas at fixed prices or to protect its regulated utility customers from possible adverse price fluctuations in the market. These forward contracts usually qualify as a “normal purchase” or “normal sale” and are exempt from derivative accounting treatment. The Company’s commodity price swaps do not meet any of the exemption criteria under ASC 815 and are accounted for as derivatives. At December 31, 2014, none of the Company’s derivatives were accounted for as hedging instruments.

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU 2014-09 Revenue from Contracts with Customers, which supersedes nearly all existing revenue recognition guidance under U.S. GAAP. The core principle of ASU 2014-09 is to recognize revenues when promised goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. ASU 2014-09 defines a five step process to achieve this core principle and, in doing so, more judgment and estimates may be required within the revenue recognition process than are required under existing U.S. GAAP. This pronouncement is effective for annual reporting periods beginning after December 15, 2016 and is to be applied using one of two retrospective application methods, with early application not permitted. The Company is currently evaluating the impact of the pending adoption of ASU 2014-09 on the consolidated financial statements.

In April 2014, the FASB issued ASU 2014-08 Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, which amends the prior guidance of the reclassification of components of an entity to discontinued operations under U.S. GAAP. Under the amended guidance, a disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has or will have a major effect on an entity’s operations and financial results. The amendment also removes requirements relating to the cessation of operations, cash flows and significant continuing involvement with the discontinued component. This pronouncement is effective for annual and interim periods beginning after December 15, 2014 with early adoption permitted. This update is to be applied prospectively on components classified as held for sale after the adoption date. The Company has chosen to early adopt ASU 2014-08 effective September 30, 2014.