Gas Natural, Inc.
Second Quarter 2016 Earnings Call
August 10, 2016
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. If anyone should require Operator assistance during the
conference, please press star, zero on your telephone keypad. As a reminder, this conference
is being recorded.
I would now like to turn the conference over to your host, Craig Mychajluk, Investor Relations for
Gas Natural. Thank you, Mr. Mychajluk. You may begin.
Craig Mychajluk: 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; and then, we will open up the line for a questionand-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 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 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, 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 that the Public Utilities
Commission of Ohio, or PUCO, approved 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 followed up on June 20 by favorable rulings from the PUCO on multiple issues
related to the Orwell Natural Gas company transportation agreement, one of our Ohio utilities,
and the Orwell Trumble pipeline. These decisions bode very well for our future by reducing the
significant time and expenses allocated to regulatory processes.
In mid-July, we reached a legal settlement in various actions with 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 in the proxy contest begun in May.
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Gas Natural, Inc.
Second Quarter 2016 Earnings Call
August 10, 2016
Collectively, the resolution of these regulatory and legal matters greatly reduces the cost
required to address 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 our
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 is a payout ratio more in
line with our peers with a quarterly dividend at a sustainable level. The change in dividend also
supports greater capital investments for higher returns and positions us for 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 costs. 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 a 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 costs and warmer weather on a yearto-date basis.
Year-to-date capital expenditures were $4.1 million and included approximately $1.4 million for
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
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Gas Natural, Inc.
Second Quarter 2016 Earnings Call
August 10, 2016
ongoing construction activities to support expansion, maintenance and enhancements of our
gas pipeline systems.
Notes payable and balances drawn against our line of credit were $53.8 million. 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 lost 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 conversions are harder to come by
when 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, merit consideration going forward.

We have a plan to achieve improved operational efficiencies using our new Enterprise
Resource Planning system which we recently 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, with the changes implemented over the last couple of
years all contributing to our 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.
Operator: Thank you. Ladies and gentlemen, at this time, we will be conducting a questionand-answer session. If you would like to ask a question, you may press star, one on your
telephone keypad. A confirmation tone will indicate your line is in the question queue. You may
press star, two if you would like to remove your question from the queue. For participants using
speaker equipment, it may be necessary to pick-up your handset before pressing the star key.
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Gas Natural, Inc.
Second Quarter 2016 Earnings Call
August 10, 2016
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: You highlighted several things, both in North Carolina and Maine, especially
Maine as you’ve got a lot going on there. With lower oil prices creating more price competition,
are the growth opportunities still there the way they were laid out 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 a good amount of customers come online since 2015 as we are seeing here in 2016.
The Algonquin City-Gates pricing stabilized compared to what it was in the past. There are new
proposed pipelines coming into the area. In the short-term, we are still getting customer base.
Obviously, we are focused on the future in Bangor, understanding that oil prices won't be where
they are for the long-term or forever, so the future is still bright for Bangor. We currently have
over 6,000 customers there. We feel that, potentially, that can still be a 20,000 customer utility.
With that said, Kevin, do you want to add anything to that?
Kevin Degenstein: Yes, I think in today’s market, we recognize we’re still competitive and the
best opportunity we have today is to fill in with customers off our existing Maine. What they do
today with aging equipment and aging appliances is, they convert to natural gas, because it is
competitive. They need to replace it anyway and it allows for conversion.
To Greg’s point, as the pipelines and gas become available, I think we'll have lower cost gas,
more towards the NYMEX price, which will make us competitive. Today, we do still get
customers from equipment that's being replaced, because they like to get rid of the tank and we
are competitive with oil. We are a little less than oil, and so, with aging equipment and aging
appliances, we do replace on a regular basis.
Liam Burke: Great. Thanks, Kevin. Gregory, if we could step back for a second. It’s a 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
cap ex on the gas pipeline, but could you tick down where your priorities are to drive the growth?
Gregory Osborne: Well, as you mentioned, we have relieved mostly all of the legal and
regulatory issues. Understanding with the finalization of the re-cap 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, cap ex 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 to increase earnings and create additional value, so as we look ahead, the
focus is on the organic growth.
There will be some additional opportunities for more growth as the oil prices change in Maine.
For example, running south into Hampden, Maine and we will be looking to capitalize on some
opportunities there with some larger commercial customers. There will be further opportunities
as the prices come back with the Spelman pipeline in Ohio. So, as 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 us
very nicely.
Kevin, feel free to add to that.
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Gas Natural, Inc.
Second Quarter 2016 Earnings Call
August 10, 2016
Kevin Degenstein: Yes, I think Greg was right on point. We look at Loring Phase II to pick up
additional commercial customers in Maine. We’ll continue to convert oil, especially if oil prices
move up and natural gas comes down with pipelines.
We have great opportunity for propane conversion in North Carolina. Ohio actually has quite a
bit of propane conversion down in the NEO territory. There is actually significant opportunity
there, and we’ve taken advantage of some of that, including some places like Case Farm.
And to Greg’s point, to 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 is pretty traditional. We just hook them up.
There is no real competition there, so as we have small growth in Montana, we do pick those
customers up.
Liam Burke: Great. Thank you, Greg. Thank you, Kevin.
Kevin Degenstein: Thank you.
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 our 2016 second quarter earnings teleconference call. I'd also like to thank all of
our employees for their dedicated hard work and 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: 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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