Acquisitions

6 Months Ended

Jun. 30, 2013

Acquisitions [Abstract]

Acquisitions

Note 2 – Acquisitions

Acquisition of John D. Oil and Gas Marketing

On June 1, 2013, the Company and its wholly-owned Ohio subsidiary, GNR, completed the acquisition of substantially all of the assets and certain liabilities of JDOG Marketing, an Ohio company engaged in the marketing of natural gas. The Osborne Trust, of which Mr. Osborne is the sole trustee, is the majority owner of JDOG Marketing and Mr. Osborne is also the Chairman of the Board and Chief Executive Officer of Gas Natural. The Company believes the natural gas marketing business complements our existing natural gas distribution business in Ohio. In addition, we currently conduct natural gas marketing in Montana and Wyoming, which we believe allows us to integrate the Ohio marketing operations into Gas Natural with minimal increases in staff or overhead. Costs relate to this acquisition totaled $0.6 million and were expensed as incurred.

Pursuant to the terms of the purchase agreement, the consummation of the transaction depended upon the satisfaction or waiver of a number of certain customary closing conditions, the receipt of regulatory approvals and the consent of certain of Gas Natural’s lenders. In addition, the transaction was subject to the approval of Gas Natural’s shareholders, and the receipt of a fairness opinion by an independent investment banking firm. All of these conditions were satisfied and the acquisition was completed on June 1, 2013.

In accordance with U.S. GAAP, the consideration given, assets received and liabilities assumed by the Company have been recorded at their acquisition date fair value. These fair values are the Company’s initial best estimate based on preliminary information and could materially change once final valuations have been completed for the transaction.

Under the purchase agreement, Gas Natural paid to JDOG Marketing 256,926 shares of the Company’s common stock. These shares had an acquisition date fair value of $2,641,199. There were no underwriting discounts or commissions in connection with the issuance, as no underwriters were used to facilitate the acquisition. The shares were not registered under the Securities Act of 1933, as amended (the “Act”), in reliance on the exemption from registration provided by Section 4(2) of the Act.

In addition, the purchase agreement provides for contingent “earn-out” payments for a period of five years after the closing of the transaction if the acquired business achieves an annual EBITDA target in the amount of $810,432, which was JDOG Marketing’s EBITDA for the year ended December 31, 2011. If JDOG Marketing’s actual EBITDA for a certain year is less than the target EBITDA, then no earn-out payment will be due and payable for that particular period. If JDOG Marketing’s actual EBITDA for a certain year meets or exceeds the target EBITDA, then an earn-out payment in an amount equal to actual EBITDA divided by target EBITDA times $575,000 will have been earned for that year. Due to the earn-out structure, the maximum amount that could be earned over the five year period is unlimited. The earn-out payments, if any, will be paid annually in validly issued, fully paid and non-assessable shares of Gas Natural’s common stock. The share price to be used to determine the number of shares to be issued for any earn-out payment will be the average closing price of Gas Natural’s common stock for the 20 trading days preceding issuance of Gas Natural’s common stock for such earn-out payment. At the acquisition date, the Company has recorded an estimated liability of $1,475,000, of which $196,000 has been classified as current, as the fair value of this earn-out provision.

The Company applied the acquisition method to the business combination and valued each of the assets acquired (property, plant and equipment and customer relationships) and liabilities assumed (note payable and the earn-out liability) at fair value as of the acquisition date. The note payable was deemed to be recorded at fair value as of the acquisition date. The Company used the net book value of property, plant and equipment received as this closely approximates the fair value. The Company also recorded the fair value of the earn-out liability as the present value of estimated future earn-out payments as of the acquisition date. See Note 5 – Fair Value Measurements for details regarding this valuation. As a result of the purchase, $1,625,518 was allocated to goodwill. The results of JDOG Marketing are included in the marketing and production operations segment. The Company expects none of the goodwill to be deductible for tax purposes.

The estimated fair value of the assets acquired and liabilities assumed is reflected in the following table at the date of acquisition.

	Fair Value at June 1, 2013
Property, plant and equipment	$	21,600
Customer relationships		2,500,000
Goodwill		1,625,518
Total assets acquired		4,147,118
Current liabilities		207,322
Long-term liabilities		1,279,000
Notes Payable, less current portion		19,597
Total liabilities assumed		1,505,919
Net assets acquired	$	2,641,199

For the three months ended June 30, 2013, JDOG Marketing contributed $207,524 to the Company’s revenues and $30,767 to the Company’s net income.

The following unaudited pro forma information is provided to present a summary of the combined results of the Company’s operations with JDOG Marketing as if the acquisition had been completed as of the beginning of the reporting periods. Adjustments were made to eliminate any inter-company transactions in the pro forma periods.

	Three months ended June 30,						Six months ended June 30,
	2013			2012			2013		2012
Revenues	$	21,637,716		$	14,925,223		$	67,964,712	$	49,634,501
Net income (loss)	$	(223,130	)	$	(634,169	)	$	4,871,798	$	2,957,062
Basic and diluted earnings (loss) per share	$	(0.26	)	$	(0.78	)	$	0.58	$	0.36

Historically, the Company has been a party to transactions with JDOG Marketing for the purchase of natural gas and other transactions for immaterial amounts. In addition to these transactions, the Company also had a note receivable outstanding from JDOG Marketing included in the Notes receivable – related parties line items on the balance sheet and an operating lease agreement the cost of which was included in the Distribution, general, and administrative line of the statement of comprehensive income. Both of these relationships were effectively settled with the completion of the transaction. See Note 9 – Related Party Transactions for more information regarding these transactions.

Acquisition of 8500 Station Street

On March 5, 2013, the Company purchased the Matchworks Building in Mentor, Ohio from McKay Real Estate Corporation, Matchworks, LLC, and Nathan Properties, LLC (collectively, the “Sellers”) by and through Mark E. Dottore as Receiver in the United States District Court. The Company’s Ohio headquarters are located in the Matchworks Building and the Receiver gave the Company an opportunity to purchase the building. The Sellers are entities owned or controlled by Richard M. Osborne, the Company’s chairman and chief executive officer. The acquisition of the Matchworks Building was approved by the independent members of the Company’s board of directors. 8500 Station Street, a new subsidiary of Gas Natural, has been formed to operate the property. At March 31, 2013, the Company had not been able to gather the necessary information to determine the appropriate accounting treatment for the transaction. Therefore at that time, the Company had recorded the assets acquired under Other assets on its condensed consolidated balance sheet. Since then, the Company has gathered the necessary information regarding the transaction and has classified the transaction as an asset purchase. As such, the Company has recorded the land and building purchased as Property, plant and equipment on its condensed consolidated balance sheet at June 30, 2013 in the amounts of $244,859 and $1,607,915, respectively. These amounts were allocated based on the assets’ relative fair values.

Acquisition of Loring Pipeline lease and related property

On April 17, 2012, the Company entered into an agreement with United States Power Fund, L.P. (“USPF”) to place a bid at a public auction on certain assets that were being foreclosed upon by USPF (the “Agreement”). Those assets included various parcels of land as well as a leasehold interest in a pipeline corridor easement running from Searsport to Limestone, Maine. The assets were owned by Loring BioEnergy, LLC (“LBE”) and were being foreclosed upon by USPF due to LBE’s default on a loan that it had obtained from USPF. On June 4, 2012 the Company attended the public foreclosure auction and was the successful bidder with a bid of $4,500,000. The transaction closed on September 25, 2012. At that time, the Company issued 210,951 shares of common stock in addition to transferring the $2,250,000 of cash it had placed into escrow prior to the auction, to USPF. The lease agreement calls for lease payments of $300,000 per year for the next ten years, an annual service fee of $120,000 and a charge of $0.0125 per Mcf moved on the pipeline.

In accordance with U.S. GAAP, the assets acquired do not constitute a business and the Company has accounted for the transaction as a group of assets which included both fixed assets and leased fixed assets. The purchase price was allocated to the assets purchased based on the relative fair value of each asset (including the leased assets) to the total fair value of all the assets. Land, buildings, generators and equipment purchased totaled $605,352. Leased pipeline and leased pipeline easements acquired totaled $6,320,000. The Company has determined that the fixed asset lease is a capital lease because the present value of the lease payments, discounted at an appropriate discount rate, exceeded 90% of the fair market value of the assets. The lease obligation for the $300,000 per year was recorded at the present value of the minimum lease payments of $2,208,026.

Acquisition of Public Gas Company, Inc.

On April 1, 2012 the Company purchased 100% of the stock of PGC from Kentucky Energy Development, LLC for the original price of $1.6 million. PGC is a regulated natural gas distribution company serving approximately 1,600 customers in the State of Kentucky in the counties of Breathitt, Jackson, Johnson, Lawrence, Lee, Magoffin, Morgan and Wolf. The costs related to the transaction were $51,187 and were expensed during 2012. The Company completed the transaction as it provided the opportunity to expand its presence into Kentucky.

The Company applied the acquisition method to the business combination and valued each of the assets acquired (cash, accounts receivable, and property, plant and equipment) and liabilities assumed (accounts payable) at fair value as of the acquisition date. The cash, accounts receivable and accounts payable were deemed to be recorded at fair value as of the acquisition date. The Company determined the fair value of property, plant and equipment to be historical book value which is the rate base as PGC is a regulated natural gas distribution company and is required to report to the KPSC. The Company also recorded deferred taxes based on the timing difference related to depreciation. As a result of the purchase, $142,971 was allocated to goodwill. During 2012, this amount was adjusted to $283,425 resulting from adjustments to deferred income taxes and deferred gas cost existing at the time of acquisition. This is reported in the natural gas operations segment. The Company expects none of the goodwill to be deductible for tax purposes.

The estimated fair value of the assets acquired and liabilities assumed is reflected in the following table at the date of acquisition.

	Fair Value at April 1, 2012
Current assets	$	69,634
Property, plant and equipment		1,577,592
Goodwill		283,425
Total assets acquired		1,930,651
Current liabilities		184,770
Long-term liabilities		194,403
Total liabilities assumed		379,173
Net assets acquired	$	1,551,478