Gas Natural's (EGAS) CEO Gregory Osborne on Q2 2016 Results - Earnings Call Transcript

| About: Gas Natural (EGAS)

Gas Natural Inc. (NYSEMKT:EGAS)

Q2 2016 Earnings Conference Call

August 10, 2016 1:30 PM ET

Executives

Gregory Osborne - President & CEO

Jim Sprague - VP & CFO

Kevin Degenstein - COO & Chief Compliance Officer

Analysts

Liam Burke - Wunderlich Securities

Operator

Greetings, and welcome to the Gas Natural Inc. Second Quarter 2016 Financial Results. At this time all participants are in 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, Craig Mihalik [ph], Investor Relations for Gas Natural. Thank you, Mr. Mihalik [ph]. You may begin.

Unidentified Company Representative

Thank you, and good morning, everyone. Welcome to our 2016 second quarter teleconference call.

Joining me on the call today are Gregory Osborne, President and CEO; Jim Sprague, Vice President and CFO; Kevin Degenstein, our Chief Operating and Chief Compliance Officer; and Vince Parisi, our Vice President and General Counsel.

Gregory and Jim are going to review the quarter and first half results and also give you an update on our outlook and strategic progress. Then we will open up the line for question-and-answer session. You should have a copy of the financial results that were released yesterday, and if not, you can access it on our website at www.egas.net.

As you're aware, we may make some forward-looking statements on this call during the formal discussion as well as during the Q&A. These statements apply to future events that are subject to risks and uncertainties as well as other factors that could cause actual results to differ materially from what is stated on today's call. These risks 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.

I would also like to point out that during today's call, we will discuss some non­GAAP measures, which we believe will be useful in evaluating our performance. You should not consider the presentation of this additional information in isolation or as a substitute for results prepared in accordance with GAAP. We have provided reconciliations of comparable GAAP to non-GAAP measures in the tables accompanying today's earnings release.

With that, let me turn the call over to Gregory to begin.

Gregory Osborne

Thank you, Craig [ph], and good afternoon, everyone. I appreciate your time today and your interest in Gas Natural. The second quarter was a very productive one, highlighted by the growth in customers and leverage potential in our utility operations, resolution of certain regulatory items and the settlement regarding the proxy contest and many legal matters.

The increase in customers and some second quarter cooler weather drove a 21% increase in full service distribution throughput. Gross margin was up nicely as a result.

In the quarter, we received favorable outcomes on our two significant outstanding regulatory matters affecting our Ohio utilities. On June 2, we announced the Public Utilities Commission of Ohio, or PUCO, approve the stipulation settlement between our Ohio utilities and the Commission staff related to the investigative audit of the order in late 2013. That decision was filed out on June 20 by favorable rulings from the PUCO on multiple issues relating to the oral Natural Gas company transportation agreement, one of our Ohio utilities and the [indiscernible] pipeline.

These decisions bode very well for our future by reducing a significant time and expenses allocated to regulatory processes. In mid-July we reached a legal settlement in various actions for the company's former chairman and CEO. That puts many costly ongoing legal matters behind us and included the withdrawal of his committees’ nominees for our board and in the proxy contest begun in May.

Collectively, the resolution of these regulatory and legal matters greatly reduces the cost required to adjust them and enables management to fully focus on executing our growth strategy and increasing earnings power. We are advancing our refinancing and debt consolidation. Currently the restructuring of the organization necessary for the refinancing is progressing through the regulatory review and approval processes. We received a favorable ruling in North Carolina. The lenders are lined up and the agreements are near final form.

These actions will simplify our financing arrangements, reduce costs and increase our financial flexibility. We expect the process to be completed this fall. I also want to remind you that at the beginning of the second quarter, we instituted a new dividend policy. While it reduced the amount of the dividend, the result in the payout ratio more in line with our peers instead of quarterly dividend at a sustainable level.

The changes in dividend also supports greater capital investments for higher returns and positions us for the future dividend increases in line with earnings growth.

I'll now turn it over to Jim to more fully review the financial details. Jim?

Jim Sprague

Thank you, Gregory, and good afternoon, everyone. Thank you for joining us today. Our second quarter 2016 financial results reflect higher full-service distribution throughput, largely due to an increase in customers.

Consolidated revenue was up approximately 6% primarily from higher sales of gas by the marketing and production segment to the company's former Wyoming utility operation that was divested in 2015. Gross margin was up about $1 million or 13% over last year's second quarter. You may have seen in the news release that we provided a table noting the variances to our gross margin, which is primarily driven by new customers and a change in gas cost adjustments.

The $1.5 million increase in consolidated operating expenses included $2.1 million in atypical legal and professional fees, including settlement cost. We believe we have built a base structure to move forward and expect with the settlement in the resolution of regulatory matters and the execution of the refinancing this fall that operating expenses will decrease by the fourth quarter.

Consolidated net loss for the quarter was $1.7 million, or $0.16 per share, compared with a net loss of $1.5 million, or $0.14 per share, in the 2015 second quarter. Our non-GAAP adjusted net loss for the quarter was $746,000, or $0.07 per share, somewhat consistent with the prior year period, when excluding the number of atypical items from both periods. Non-GAAP adjusted net income for the 2016 first half of $2.2 million, excludes $1.2 million of atypical items. On an operational basis, the year-to-date decline in earnings reflects warmer-than-normal weather in the 2016 winter months across our market footprint.

Adjusted EBITDA from continuing operations, a non-GAAP number, was also similar year-over-year at $1.6 million.

Turning to the balance sheet. Our cash balance at the end of June was up from the sequential first quarter and prior year-end due to prudent cash management. Cash provided by operating activities for the first six months of this year increased by $3.2 million to $14.7 million, primarily due to improved working capital utilization from lower gas cost and warmer weather on a year-to-date basis.

Year-to-date capital expenditures were $4.1 million and included approximately $1.4 million from our new ERP system. We budgeted another $2.5 million to $3.5 million in capital expenditures for the remainder of the year to focus on growth of the Natural Gas operations segment through our ongoing construction activities to support expansion, maintenance and enhancements of our gas pipeline systems.

Notes payable on balances drawn against our line of credit were $53.8 billion. The refinancing of our debt is expected to be completed this fall, subject to regulatory approval, which will replace all of our existing debt arrangements.

With that summary, let me turn the call back to Gregory. Gregory?

Gregory Osborne

Thank you, Jim. Looking to the future, our near-term plans include increasing throughput and customers across our entire market footprint. Our strategy is to leverage the larger scale we have in our Montana and Ohio markets, while making investments to grow our business in North Carolina and Maine, which are underserved natural gas markets, offering excellent growth opportunities.

We're also stepping up our business development efforts in the Maine market to capitalize on our Loring pipeline asset and replace revenue loss from the closure of two industrial facilities and significant reduction in usage by a third transportation customer all in the paper industry. Notably, we are currently securing new customers that will help offset the loss of the paper industry facilities. While convergence are harder to come by when the oil prices are low, in the long-term we know that natural gas is a better alternative for heating and process applications.

Our Montana and Ohio utilities are evaluating the rate-making strategy. Given the experience of last winter, we believe the evaluating mechanisms, which are subject to regulatory approval, may consideration going forward. And we have a plan to achieve improved operational efficiencies using our new enterprise resource planning system which originally implemented companywide. We are excited to move the business forward with a more focused footprint in excellent geographic markets as well as significant improvements in operations, regulatory relationships and internal controls made by the current leadership team and the board of directors.

Operationally, we are in a good place for the changes implemented over the last couple of years, all contributing to ability to handle a higher level of growth. Financially the restructuring of our debt and corporate reorganization will put us in a stronger position to drive business and earnings growth.

Additionally, the recent resolution of our major regulatory and legal issues enables us to reduce spending and center our time and efforts on the future of Gas Natural. We are focused on growing the business and improving our financial performance position and believe we have the right strategy to do that.

Over the next several years, our plan is to drive Gas Natural’s return on equity to the high single-digits from its trailing five-year average of approximately 5%.

Now let's open up the line for questions.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen at this time we will be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from the line of Liam Burke with Wunderlich Securities. Please proceed with your question.

Liam Burke

Thank you. Good afternoon, Gregory.

Gregory Osborne

Good afternoon.

Liam Burke

Could you give us - you highlighted several things both in North Carolina and Maine, especially Maine you’ve got a lot going on there. But I guess with lower oil prices creating more price competition, the growth opportunity is still there the way they were laid maybe a year or two ago?

Gregory Osborne

Yes, I'll speak to that, and then Kevin, if you could add in. We are still seeing good amount of customers come online in the ‘15 as we are seeing here in 2016, the Algonquin City-Gates kind of stabilized to what it was in the past. There is new pipelines proposed coming in the area. So in the short-term, we are still getting customer base. We are focused obviously on the future in Bangor, understanding that oil prices won't be where they’re at I don't think for the long-term or forever. So the future is still bright for Bangor. We currently have, call it, 6,007 customers there. We feel potentially that still can be a 20,000 customer utility. So with that said, Kevin, do you want to add anything to that?

Kevin Degenstein

Yes, I think in today’s market recognize we’re still competitive and the opportunity we have today is filling with existing customers or customers off our existing Maine. And what they do today is aging equipment, aging appliances. They do convert to natural gas because it is competitive. They need to replace it anyway. It allows for conversion. And I think to Greg’s point is as the pipelines and gas becomes available, I think we'll have lower cost gas more towards the NYMEX price which will make us competitive. But we do today get equipment that's replaced because they like to replace, get rid of the tank and we are competitive with oil. We are a little less than oil. And so aging equipment and their aging appliances, we do replace on a regular basis.

Liam Burke

Great. Thanks, Kevin. Gregory, if we could step back for a second to bigger picture view of the world. But a lot of your distractions are going away. The litigation is behind you. The regulatory environment is a lot more benign. You'll be restructuring your debt. Your balance sheet will be stronger. Your cash flow has been great. You touched on the incremental CapEx on the gas pipeline, but could you sort of tick down where your priorities are to drive the growth here?

Gregory Osborne

Well, as you mentioned, we have relieved lot of legal, mostly all of legal and regulatory issues understanding what the finalization of recap and the re-org. The focus is on our organic growth. We have a lot of opportunity in Maine and North Carolina. We’ll have additional dry powder, if you will, CapEx dollars to put into those markets with the closing of the refinance. We have steady growth in Ohio. We still have some growth in Montana. So I think the real focus now is obviously to increase earnings and create additional value. So as we look ahead, the focus is on the organic growth.

I think there will be some additional opportunities for more growth as the oil price change in Maine, example running south and the Hampden are doing some opportunities there with some commercial customers in Maine, some opportunities as the prices come back with the development of pipeline in Ohio. So as I think we look forward in the future, it's all about growth and we are unique where most utilities maintain rate-base, we have the opportunities to grow and with the re-org and the refinance, it's going to position ourselves very nicely. And then Kevin feel free to add to that.

Kevin Degenstein

Yes, I think Gregg was right on point. Look at Loring Phase II to pick up commercials in Maine. We’ll continue to converter oil, especially as prices of oil - if it moves up and Natural Gas comes down with pipelines. We've got great opportunity for propane conversion in North Carolina.

Ohio actually has quite a bit of propane conversion down at the NEO [ph] territory. There is actually significant opportunity there that we’ve taken advantage of some of that including some places like Casefarm [ph].

And go Greg’s point, the maintain rate-base, we typically would spend about $8 million. I think we have the opportunity to exceed that and grow rate-base as we grow in these markets. And then of course in Montana whatever comes up, it's pretty traditional. We just hook them up. There is no real competition here. So as we have the small growth in Montana, we do pick those customers up.

Liam Burke

Great. Thank you, Greg. Thank you, Kevin.

Kevin Degenstein

Thank you.

Gregory Osborne

You’re welcome.

Operator

There are no further questions in queue. I'd like to hand the call back over to management for closing comments.

Gregory Osborne

Thank you, Doug. In closing, I'd like to thank you all for joining us this afternoon for 2016 second quarter earnings teleconference. I'd also like to thank all of our employees for dedicated hard work, commitment to Gas Natural's long-term success. Finally I'd like to thank our Board for their ongoing support and advice. This is an exciting time for Gas Natural. We continue to execute our strategy to establish our business to the benchmark gas utility with greater earnings power. Thank you.

Operator

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.

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