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Gas Natural, Inc. (NYSEMKT: EGAS ) Q1 2016 Earnings Conference Call May 9, 2016 16:30 ET Executives Deborah Pawlowski – IR Gregory Osborne – President & CEO Jim Sprague – VP & CFO Kevin Degenstein – COO & Chief Compliance Officer Analysts Liam Burke – Wunderlich Securities John Bair – Ascend Wealth Advisors Operator Greetings, and welcome to the Gas Natural Inc. First Quarter 2016 Financial Results Conference Call. 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 conference over to Ms. Deborah Pawlowski of Investor Relations. Thank you. You may begin. Deborah Pawlowski Thank you, and good morning everyone. We welcome you to our 2016 first quarter earnings teleconference call. We certainly appreciate your time today and your interest in Gas Natural. Joining me on the call are Gregory Osborne, President and Chief Executive Officer; Vice President and Chief Financial Officer; Kevin Degenstein, our Chief Operating Officer and Chief Compliance Officer as well as Vince Parisi, Vice President and General Counsel. Gregory and Jim are going to review the quarter and year and also give an update on our outlook and strategic progress and then we will open it up for a question-and-answer session. You should have a copy of the financial results were released yesterday after market closed and if not you can access this on our company’s 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 our website or at sec.gov. I would also like to point out that during today’s call we will discuss some non-GAAP 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 to record of this GAAP. We have provided reconciliations as non-GAAP comparable GAAP measures on the table accompanying today’s earnings release. So with that, let me turn it over to you Gregory to begin. Gregory Osborne Thank you, Deb and good afternoon everyone. I appreciate your time today and your interest in Gas Natural. Our strategic and operational progress was matched by unfavorable record setting warm weather in most of our markets. In fact 71% of our gross margin decline was due to weather. Let me first highlight our strategic and operational progress. As you may know in February we announced a proposal to form a new organizational structure subject to regulatory approval that will line our eight regulated utility operations under one fully owned subsidiary. We believe this structure will create efficiencies, streamline regulatory processes while simplifying our financing arrangements and enhancing financial flexibility. In conjunction with this proposal we have reached agreement with lenders to refinance and consolidate our debt at the parent company level. As previously noted, the new $99 million debt facilities will replace our existing debt agreements and provide more balance to our capital structure placing closer to a 50-50 debt to equity ratio. We also expect the new credit arrangement will provide us with much greater flexibility. Secondly, the implementation of the final phase of our enterprise resource planning, or ERP, system is now complete. This has been a major undertaking and facilitates operational efficiency and scalability. Having divested of our non-core assets in 2015, we are focusing our energies and resources on the remaining four markets. North Carolina and Maine are underserved natural gas markets with higher growth potential and we’re leveraging our larger scale in Montana and Ohio. In the first quarter of 2016 we had an approximately 340 customers. On the regulatory front, stipulation and recommendation between Ohio utilities and Ohio commission staff related to a 2014 investigative audit of our Ohio utilities scheduled for hearing tomorrow, May 10. Our financial results were unfavorably affected by much warmer weather in the first three months of 2016 compared with the prior year although our markets are geographically diverse which typically mitigates the impact of unseasonably warm weather. In this winter, the weather was much warmer across all markets we serve. Looking ahead in all of our jurisdictions, we’ll be evaluating mechanisms that the fix components were service fee structure in order to reduce the impact of unfavorable weather conditions on our financial performance. Of course these mechanisms are subject to regulatory approval. Additionally, first quarter results from our main operations were unfavorably affected by the closure of two industrial facilities and the reduction in rates for third transportation customer. At the beginning of the second quarter we established a new dividend policy that enables greater capital investments for higher returns and positions us for the future dividend increases in line of our earnings growth. The new annual dividend rate is $0.30 per share or equal quarter payments of $7.50 per share. The dividend rate resulted in a pay ratio more in line with our peers. And it also sets our dividend at a sustainable level. The plan to grow dividend as its peer ratio as earnings grow in conjunction with the reduction of dividend from its previous annual rate of $0.54 per share, executive management and the board are taking reductions in the compensation for 2016. I will now turn over to Jim to fully review the financial details. Jim? Jim Sprague Thank you, Gregory, and good afternoon everyone. Thank you for joining us today. Our first quarter 2016 financial results reflect lower full service distribution through point, primarily due to warmer weather in all of our markets as Gregory mentioned. Consolidated revenue was down due to volume declines and lower gas prices. Gross margin was $14.7 million, down 16.5% from the prior year first quarter. The majority or 71% of the decline was due to lower volume attributable to warmer weathers in the prior year. The following factors also contributed to the gross margin decline. $517,000 due to two plant closures and the rate decline for our Kojan [ph] facility; and two, $376,000 from the sale of our Pennsylvania and Kentucky utilities last year. Consolidated operating expenses were $9.2 million, down 6% compared with the prior year quarter primarily as a result of reduced legal cost. Reflecting the decline in gross margin for lower weather dividend through put, consolidated net income for the quarter was $2.7 million or $0.26, down from $4.9 million or $0.46 per share in the 2015 first quarter. Adjusted EBITDA from continuing operations, a non-GAAP number was $7.7 million compared with $10.5 million in the 2015 first quarter. According to the balance sheet, we had $4 million of cash in March 31, 2016, up from $2.7 million at year end 2015. Notes payable and balance withdrawn against our line in credit were $52 million. Our refinance is expected in the latter half of the year after regulatory approval on our reorganization. It will provide us additional capital and greater borrowing capacity. Cash provided by operating activities increased $1.5 million to $9.4 million on lower working capital requirements as a result of warmer weather. Capital expenditures were $2.3 million. Our CapEx for 2016 is currently budgeted at approximately $4.5 million to $5 million. We are evaluating that budget now given the reduction in our dividend, the expected refinancing and the timing of unusual expenses. With that summary, let me turn the call back to Gregory. Gregory? Gregory Osborne Thank you, Jim. Our management team recently met for a strategic summit to advance our strategic growth plans. For the immediate future, our growth plans were focused on expanding our customer base and through put in each of our four utility markets. Across our current market footprint, we have steadily increased our customer base and we believe we can step that up out of the new proposed capital and financial structure currently under consideration by our regulators. Over the next several years, our plan is to drive Gas Natural’s return of equity to the high single digits were trailing by average of approximately 5%. Now let’s go over now for our line of questions. Question-and-Answer Session Operator Thank you. At this time we will be conducting the question-and-answer session. [Operator Instructions] The first question comes from Liam Burke of Wunderlich. Please go ahead. Liam Burke Thank you, good afternoon. I know you said record of favorable weather for the quarter, but could you give us a sense on both Maine and North Carolina properties on how the underlying economic outlook is going, especially in Maine where you saw some plant closures which exacerbated the weather situation? Gregory Osborne Liam, how are you doing today? Liam Burke Good, thanks, Greg. How are you? Gregory Osborne Good. Kevin, do you want to speak to the markets particularly in Maine and also North Carolina? Kevin Degenstein Yes, I’d love to. Good afternoon, and thank you for the question. I’ll start with Maine. It’s probably the best place because it’s where we’ve seen some paper mill loss and a power generating loss. But if you look at the potential going forward we’re quite optimistic with the Maine system. You really need two pieces to come in place, and that’s supply pipelines which our plan to come to that area which will drive down the market cost of natural gas which is higher than the NYMEX index and tends to be probably one of the higher markets in the country, and then the potential is you look further oil has been creeping back up, a little over $40 a barrel. It’s off its all-time low, and as the differential gets greater we tend to get more demand for services. We’re already starting to see an uptick from the bottom of demand for growth opportunities to convert on existing main and to run facilities to new customers. So we’re optimistic that ultimately the potential in Maine is there and that there is growth potential in those communities that we serve and that we can ultimately grow that market as we had planned and ultimately it will be a good utility that becomes a normal diverse customer group of utilities. When you look at North Carolina, we’ve also got opportunity there to continue the filling behind what we run. We’ve got very favorable rates there, propane tends to be higher and we’re in the process of looking at opportunities in the poultry market and looking at possibilities of assistance there based on subsidies and those types of things. So we see both those markets as real growth potential. Recognizing there was somewhat a glitch in Maine just based on pricing, but we see and we believe that will change. Liam Burke Great, thank you, Kevin. And this is just a point of clarification. You did say your CapEx budget is $4.5 million to $5 million this year? Gregory Osborne That is correct for the systems across the four organizations. Liam Burke Okay, great. Thank you very much. Gregory Osborne You’re welcome. Operator The next question comes from John Bair of Ascend Wealth Advisors. Please go ahead. John Bair Thank you. Good afternoon, gentlemen. First question was related to some recent announcements by Kinder Morgan about the failure to get necessary permit approvals to build some pipelines that would be delivering Marseilles [ph] gas to New England. And I’m wondering how that plays into your growth potential in Maine since that gas has got to go through those New York and Massachusetts to get up that way, so can you talk about that a little bit? Gregory Osborne Go ahead, Kevin. Kevin Degenstein Yes, this is Kevin. Ultimately, diversity is to find Maine is critical and we’d love to see that, and obviously we’re disappointed that any pipelines that can’t come from the lower 48 up into that area ’cause it provide this alternate supply. But we do recognize today that the Oagland [ph] market has softened. It’s not as high as it was a couple of years back when we had the extreme cold weather, and those prices are nudging down. As it stands today, if we don’t get pipelines from the lower 48, we are subject to Canadian gas and the Oagland [ph] market prices. But we do enhancing that market’s softening, and it’s not the prices it was a couple of years back. And we see ourselves trending towards being more competitive. However, yes, any pipelines coming from the lower 48 will be very much welcomed by anybody in the Northeast, not just gas. John Bair Politicians does seem to agree with you on that, but they’re denying the permit. So if I’m understanding it correctly then if we can’t get adequate supplies within the U.S. coming up that way you have access to Canadian gas coming across the border then? Is that a fair statement? Gregory Osborne That is correct. We have supplies from Canada. Really what supplies from the South does is give us a price advantage and hopefully lowers the price. But as it stands today, capacity into Canada is not limiting our growth potential. John Bair Okay, very good. Thank you. Operator [Operator Instructions] There are no more questions at this time. I’ll now turn the conference back over to Greg Osborne for any closing remarks. Gregory Osborne Thank you, Ben. In closing I’d like to thank you all for joining us this afternoon for our 2016 First Quarter Earnings Teleconference. I’d also like to thank all of our employees for their dedicated hard work and the 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 as we continue to execute our strategy to establish our business as a benchmark gas utility with greater earnings power. Thank you. Operator This concludes today’s conference call. Thank you for participating. You may now disconnect your lines. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited. 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