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Gas Natural Inc. (NYSEMKT:EGAS)

Q1 2014 Results Earnings Conference Call

May 16, 2014 10:00 AM ET

Executives

Gregory Osborne - President and CEO

Jim Sprague - VP and Chief Financial Officer

Analysts

Liam Burke - Janney Capital Markets

John Bair - Ascend Wealth Advisors

James Pappas - JCP Investment Management

Operator

Greetings and welcome to the Gas Natural First Quarter 2014 Earnings Conference Call. At this time, all the participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. (Operator Instructions). As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host Mr. [Alex Hamilton] with Investor Relations. Thank you Mr. Hamilton. You may begin.

Unidentified Company Representative

Thank you Jenna, and good morning everyone. Welcome to our first quarter 2014 earnings teleconference call. We appreciate your interest in Gas Natural. On the call with me today, I have Gregory Osborne, President and Chief Executive Officer; and Jim Sprague, Vice President and Chief Financial Officer.

I want to be assured that you also have a news that was announced on Wednesday afternoon is that our Board appointed Gregory as our Chief Executive Officer, in addition to his previous role as our President. The Board believes that he has demonstrated his readiness for the role based on his vision and the leadership demonstrated over his past six months as President. I also want to mention that this is Jim’s first call as our CFO having joined us officially at the beginning of this month.

You may know that he has been somewhat transitioning into the role since we announced his pending appointment in December. Gregory and Jim will review the first quarter results and also give an update on the company’s outlook and strategic progress. You should have a copy of the financial results that were released yesterday afternoon and if not you access it at the company’s website www.ewsc.com before Gregory and Jim get started I want to bring your attention to our Safe Harbor which is shown on page three of our release.

As you are aware we may make forward-looking statements during the formal discussion as well as during the Q&A. These statements imply to future events that are subject to risks and uncertainties as well as other factors that could cause actual results to differ from what is stated in today’s call. These risk and uncertainties and other factors are provided in the earnings release as well as with other documents filed by the company with the Securities and Exchange Commission. These documents can be found on the company’s website or at sec.gov. With that let me turn it over to you Gregory.

Gregory Osborne

Thank you, Alex. Good morning everyone and thank you for joining us today. It continues to be an exciting time for Gas Natural I am pleased to have an opportunity to summarize our 2014 first quarter results and our strategy with you. But before I get into that I want to start by publicly extending a warm welcome to Jim. Now that he is fully on Board. As a new senior management team we are energized by the opportunities that lie ahead for Gas Natural to realize the company’s potential and continue on our growth strategy.

With respect to our first quarter of 2014, we reported record revenue of $65 million and record net income of $5 million among the $0.48 per share. Those results demonstrate that our growth strategy is working as we bring the benefits of cost effective and clean natural gas to a growing number of customers across seven states. We continue to lay new pipe and maintain our infrastructure to enable that growth.

Our nearly 300 employees are aligned with that strategy and work hard every day to provide safe and reliable service to our customers. As a reminder, our most significant opportunities for growth continue to be in the markets of North Carolina and Maine where natural gas penetration is less than about 30% and to more moderate degree in Ohio where the economy is driving new investments and businesses and homes.

As you may know, we have a lot going on in Maine. We are working on Phase 2 of our Loring pipeline project which involves preparing 30 miles of pipe for activation. And we are prepping a first phase for our customers there to go on line and including our anchor customer Lincoln Paper and Tissue, we expect to go on line in the fourth quarter of this year.

In North Carolina, we continue to execute on our go plan. We have completed our 10 mile pipeline extension to Blake’s Chicken City, the largest poultry farmer in North Carolina. Additionally we have started to extend the line to [Deluxe] tobacco farmer in Warren County. This progress and what we deem our emerging markets made in North Carolina is exciting. We expect the additional investments made will increase our customer count in those markets by more than 20% this year.

Investments in Ohio continue to be focused on customer growth and our development pipeline to increase our distribution capabilities and strengthen our midstream opportunities in Utica Shale. We expect to add over 1,000 customers this year in Ohio.

Complement to our organic growth investments, we have been very actively seeking and evaluating potential bolt-on acquisitions, smaller utilities where we can accelerate growth in our current services areas will be ideal complements to our existing utilities.

In addition to our dynamic culture to drive revenue growth, we have been making significant changes with our support departments, improving our internal control environment, enhancing our relationships with the regulatory commissions in our various jurisdictions and upgrading our overall [governance].

My vision for Gas Natural over the next year is to continue our transformation, increase our transparency and position us for future growth. Clearly, we're busy, we're excited and we're moving in the right direction.

With that I'll turn it over to Jim to summarize our financial results. Jim?

Jim Sprague

Thank you Gregory and good morning everyone. Thank you for joining us today. As Gregory mentioned, we had a strong start to our 2014 year. As you might imagine that harsh winter certainly had an impact on natural gas usage.

Our revenue for the first quarter grew by nearly 50% to $65 million with increases realized in all our geographic markets. Revenues from our natural gas operations in Maine, North Carolina and Ohio improved by $16.1 million, due to the increased natural gas prices passed on to customers, continued customer growth and colder weather. We realized $4 million of revenue growth in Montana and Wyoming driven by higher prices for natural gas passed through to customers as well as colder weather.

As you may know, increases in our cost of natural gas are direct pass-through [without] offering opportunity for margin expansion.

Our consolidated gross margin grew by 13% to $18.8 million in the first quarter of 2014, compared with $16.6 million in the prior year, driven by our growing customer base.

Our operating expenses grew about 25% over the prior quarter to $10.1 million, reflecting our commitment to increasing the implementation of greater controls and enhanced infrastructure. It should be noted that approximately $600,000 of those costs are deemed to be non-recurring in nature.

Operating income grew to $8.9 million and our net income grew to a record $5 million. On a diluted earnings per share basis that amounts to $0.48. At the end of the quarter, we have $11.1 million of cash and cash equivalents as well as $404,000 of marketable securities. At the end of 2013, we have $13.1 million of cash and $406,000 of marketable securities.

Our notes payable at March 31, 2014, amounted to $43.6 million or 43% of equity compared with our 2013 year-end ratio of 45%. Our capital expenditures for the quarter amounted to $5.7 million compared with $5.1 million during the first quarter of 2013. For the full year, we have to meet our CapEx to be between $60 million and $70 million focused on the growth of our natural gas operations.

We conduct ongoing construction activities in all of our utility service areas to support expansion, maintenance, and enhancement of our gas pipeline systems. We're actively expanding our systems in North Carolina and Maine to meet the high customer interest in natural gas service in those two emerging market areas.

And with that, let's open the line for questions.

Question-and-Answer Session

Operator

Thank you. We will now be conducting the question-and-answer session. (Operator Instructions). Our first question today comes from the line of Liam Burke with Janney Capital Markets. Go ahead with your question please.

Liam Burke - Janney Capital Markets

Thank you. Good morning, Gregory, good morning Jim.

Gregory Osborne

Good morning.

Jim Sprague

Good morning.

Liam Burke - Janney Capital Markets

Gregory, have any local governments and municipalities approached you about providing incentives to accelerate the buildout for natural gas facilities? There is an obvious incentives for their residents to get access to less expensive natural gas vis-à-vis propane or heating oil, has anybody come up to you or have you been approached with that kind of opportunity?

Gregory Osborne

We have been approached but for cognizant of that, we actually approached out our commissions, I have actually approached out benefits of myself talking about the [abandoned] of natural gas. We have 200 years of reserves in this country. The price has been stable. So, we’re aware of it. I think there should be incentives out there for more expansion, expansions like in areas of North Carolina and Maine where there is less than 30% penetration of the natural gas. So we’re cognizant of it and we’ll definitely keep the talks going with government official that commissions try to expand for growth in areas that don’t have pipelines.

Liam Burke - Janney Capital Markets

Great, thank you. And the price of the utilities have had better run here. In terms of your acquisitions, are you seeing prices come up on potential acquisitions?

Gregory Osborne

We have, we’re still seeing some pretty big multiple of EBITDA currently in the market anywhere from 10, 11 those are high multiples. At that point it is accretive to the shareholder you really have to evaluate your numbers pretty closely when you are paying 10 times plus EBITDA for an acquisition. So we are more focused on the bolt-on acquisitions, you can tend to pay a little more [seeking a] bolt-on acquisition near our current service area. So we are at seven states, we’re looking for those bolt-ons, that low hanging fruit similar to what we did in Maine and North Carolina throughout those systems. So currently that’s kind of our acquisition strategy at the current moment.

Liam Burke - Janney Capital Markets

Great thank you Gregory.

Gregory Osborne

You are welcome.

Operator

Our next question comes from the line of Mike [Backes] with Wunderlich Securities. Go ahead with your question please.

Unidentified Analyst

Good morning guys.

Gregory Osborne

Good morning, Mike.

Unidentified Analyst

Just wanted to follow up on Liam’s question on M&A, you mentioned that these bolt-on acquisitions they will be adjacent to where you are already out might be easier to do economically. Can you talk to us a obviously about which types of regions you are seeing these opportunities, are you seeing any in your western territories or would it primarily be back east?

Gregory Osborne

We are looking all over I really can’t speak to what we are looking at and we are at that. So opportunities throughout the country we have over 20 [LECs] in Ohio for example. So we are always looking for opportunities to expand in Ohio and actually all our markets. So the opportunity presents itself good bolt-on acquisition like we did at Cut Bank in Montana, obviously our emerging markets again our North Carolina and Maine with a lot of the opportunity to expand in North Carolina and Maine. So that’s a focus to look across the board over our service territories in Effective states and what makes more sense what’s going to happen more shareholder value and what can we tackle realistically and bring and integrate into our systems.

Unidentified Analyst

All right, and you mentioned in your prepared remarks that you have been pretty active in considering these types of deals. Like when you say active does that imply that, you are actively approaching these other companies or is that more a matter of the adjacent utilities putting themselves up for sale and actively seeking a buyer and that’s how you come to consider them?

Gregory Osborne

We may have an M&A and we look at our opportunities. So whether it’s approaching current utility or keep (inaudible) floor our potential utilities out for sale on our services areas, so we are always looking. So with opportunities out there if an opportunity present themselves and we feel create shareholder we will do a transaction.

Unidentified Analyst

Sure, all right. And then if we could talk a little bit about your professional services expense in the quarter. Can you give us a little bit more color on how long you expect those expenses to recur, was those specifically the expenses that you believe are non-recurring or will they persist as long as you need that consulting service for your regulatory relationships?

Jim Sprague

Mike, this is Jim. Related to the professional service expenses, we're in the midst of several actions as you know and we had some cost as it relates to some of the shareholder actions that were brought against the company last year. The non-recurring of nature of those is, is that we had a retention that we had $250,000 in that, and about that is covered by the insurance company. So, we incurred those in the first quarter. So that's a non-recurring item.

We have also incurred some legal costs related to a rate case in May that is due to close probably at the end of Q2, first part of Q3, so those will be non-recurring.

And as far as any other general outside services, there are some that we've engaged with consulting firm to assist us with implementing enhanced internal controls to bring us up to 404(b) requirements due to our accelerated status this year as well as our coastal compliance. So, that fee is going to be non-recurring. We look for that to finalize at the end of July, first part of August this year.

From a general standpoint of our professional services, we're looking to -- with this whole transformation, there has been a lot of partnering we've had to do. So, we're looking for that to continue probably through the end of this calendar year, but one of the charges I was given is to tighten the belt and see where we can make sure that we can make best use of our cash than rather be putting it in the ground and paying professional services. So, I think that gives you kind of a flavor where we're at on the professional service front.

Unidentified Analyst

Perfect, alright. Thank you very much.

Jim Sprague

Thank you.

Operator

Our next question comes from the line of John Bair with Ascend Wealth Advisors. Go ahead with your question please.

John Bair - Ascend Wealth Advisors

Thank you. Good morning Greg and Jim.

Gregory Osborne

Good morning, John.

Jim Sprague

Good morning, John.

John Bair - Ascend Wealth Advisors

I’ve got two questions for you. With your ongoing infrastructure build out, what are you seeing in the way of any cost pressures whether it's regarding materials, the pipe and labor?

Gregory Osborne

We have very experienced in different states, we have always kept crews in Ohio, Maine, North Carolina. That's important when you’re in the growth strategy that we're doing and we have a go plan and adding customers like we are every year. So we've been protected by having all crews from a labor standpoint. And costs, I haven't seen any cost pressures or anything out of the norm from a material standpoint. So we have good procedures in place from an ordering and purchase standpoint; we try to buy in bulk to save us some costs and overall, the process is going smoothly.

John Bair - Ascend Wealth Advisors

So you do have your own dedicated crews to do your build-outs, you're not have an issue there. Is that my understanding right?

Gregory Osborne

We do have some work, but we're able to keep crews and even in winter we have maintenance uprights and other practice that we do. So, we’re keeping busy. And we have found at least in certain markets it’s difficult to control those labor costs and have those employees in your crews.

John Bair - Ascend Wealth Advisors

Absolutely. And my second question is, interesting that your comments about signing up chicken farm and a tobacco farmer. I would imagine that those types of commercial opportunities would be quite available in Ohio. Could you speak to whether you have some of those in place or are you looking at that as a kind of as a target market?

Gregory Osborne

We haven’t seen so much tobacco or the…

John Bair - Ascend Wealth Advisors

Like where there is agricultural opportunities.

Gregory Osborne

Sure. We haven’t seen so much the tobacco or poultry in Ohio per say but that’s been our main focus and niche in North Carolina. So we also focused on some grain dryers in Ohio. So absolutely, we’re looking across the board from an agricultural standpoint. And that’s a great customer base and a lot of it’s summer load, which is great. So it’s not just winter load, so create some revenues in the summer months which is always good.

John Bair - Ascend Wealth Advisors

Very good. Thank you very much.

Gregory Osborne

Thank you.

Operator

Our next question comes from the line of James Pappas with JCP Investment Management. Go ahead with your question please.

James Pappas - JCP Investment Management

Gregory and Jim, good morning.

Gregory Osborne

Jim, how are you?

James Pappas - JCP Investment Management

Good. Two quick ones, one I noticed the $7.7 million recovery refundable cost of gas purchases, it might be a quarterly timing thing but I was just hoping you could talk a little bit to that?

Jim Sprague

Yes James, this is Jim. As you can imagine, during the winter there were severe price pressures that were played because of the increased gas usage in all our markets, particularly Maine and North Carolina experienced some severe price bites. As a result, we went to each of the Maine and North Carolina commissions at the end of the February to ask for an additional rider to be able to recover some of those additional charges, both Maine and North Carolina approved those and are allowing us to collect those overages over the next 12 month period. Of course as of the end of March, we had only started that process, so quite a bit of that $7 million increase as you in the Q is related to those markets.

James Pappas - JCP Investment Management

Got you. And so you will collect those over the next 12 months?

Jim Sprague

That’s what we expect, yes.

James Pappas - JCP Investment Management

Got you, great. And then the second one, the 16 million to 17 million in CapEx, could you maybe dive in a little bit more and talk a little bit about where you like to see those allocated to?

Jim Sprague

Well each of our utilities as we do every year, as we look at our OpEx and CapEx budget and we look to allocate those dollars available and depending on the utilities and the weather structure of course, the weather allowances and so forth, some have moved more towards their projects than others. Our biggest project is up in North Carolina or in Maine right now, the Loring looking to service the [town of Lincoln] and Lincoln Paper. I don’t have the numbers directly in front of me here, but the allocation of CapEx dollars are mostly in Maine of North Carolina, I would say a majority.

James Pappas - JCP Investment Management

Got you. Okay, great. Thanks guys.

Jim Sprague

You are welcome.

Gregory Osborne

Thank you.

Operator

There are no other questions in the queue. So I’d like to turn the program back over to Mr. Osborne.

Gregory Osborne

Thank you, Jenna. To close, I would like to thank you all for joining us this morning on our 2014 first quarter earnings teleconference. I also want to take a minute to thank our team of hardworking individuals for servicing our customers every day ensuring the availability of safe and reliable and natural gas executing on our growth strategy. We have a lot of positive things going on and hope you share my excitement. We look forward to updating you on our progress on our second quarter 2014 results in August. Thank you and I hope you have a great day.

Operator

Thank you. This will conclude our teleconference. You may disconnect your lines at this time. We thank you for your participation. Have a great day.

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