EGAS Gas Natural Inc. (OH) (delisted)

Gas Natural Inc. (NYSE MKT:EGAS) (the “Company”), a holding company operating local natural gas utilities serving approximately 70,000 customers in four states, reported financial results for its first quarter ended March 31, 2017.

First Quarter 2017 Summary

• Net income per share improved to $0.32 from $0.26 in the prior-year quarter
• Full service distribution throughput increased 13%, aided by the addition of approximately 300 new customers in the quarter
• Merger approval process with regulators remains on plan for second half 2017 closing

Mr. Gregory J. Osborne, Gas Natural’s President and Chief Executive Officer, commented, “We continue to focus on providing excellent service to our customers in all of our utility jurisdictions, resulting in growth in full service distribution and gross margin. Additionally, our ongoing focus on cost discipline has contributed to improved earnings.”

He added, “The regulatory approval process for our announced merger with First Reserve continues on plan. We expect completion of the transaction in the second half of 2017.”

         

First Quarter 2017 Operations Review

Three Months Ended (in thousands) March 31, 2017 2016 Revenue by segment: Natural Gas $ 35,919 $ 35,064 Marketing & Production   3,940   3,243 Consolidated $ 39,859 $ 38,307  

Revenue for the first quarter of 2017 increased approximately 4% over the prior-year quarter. Both of the Company’s operating segments contributed to the increase. The Natural Gas segment grew due to: 1) customer growth, primarily in Maine and Montana; 2) colder weather in certain of the Company’s markets, including Montana and Maine; 3) generally higher natural gas prices; and 4) the inclusion of cancellation fee revenue for a terminated long-term customer contract in Maine. The Marketing & Production segment recognized higher revenue due to increased volumes sold as a result of colder weather in its relevant markets.

     

Changes in Gross Margin(in thousands)

Three MonthsEnded

March 31, 2017 2016 Gross Margin $ 14,745   Utilities sold (17 ) Weather and other volume changes 479 New utility customers 249 Other changes   164   Natural Gas change   875   Lost marketing customer and pricing (85 ) Pricing and production volume   29   Marketing & Production change   (56 ) Consolidated gross margin change   819   2017 Gross Margin $ 15,564    

Gross margin for the first quarter of 2017 increased 6% compared with the prior-year quarter. The increase was primarily due to several factors: 1) higher volume due to increased usage and colder weather in the Company’s Montana and Maine markets, partially offset by warmer weather in its North Carolina and Ohio markets; 2) higher volume driven by customer growth; and 3) cancellation fee revenue with no associated cost, resulting from the termination of a long-term customer contract in Maine. Customer count grew by approximately 300 in the first quarter, compared with the end of 2016.

          Three Months Ended (in thousands) March 31, 2017 2016 Operating income by segment: Natural Gas $ 6,096 $ 5,517 Marketing & Production 49 83 Corporate & Other   (218 )   (103 ) Consolidated $ 5,927   $ 5,497     Non-GAAP Adjusted EBITDA* $ 8,432 $ 7,668  

*See the attached tables for important disclosures regarding the Company’s use of earnings before interest, taxes, depreciation, amortization, non-recurring expenses and discontinued operations (“Adjusted EBITDA”) as well as reconciliations of U.S. generally accepted accounting principles (”GAAP”) net income to non-GAAP Adjusted EBITDA for the 2017 and 2016 first quarters.

For the first quarter of 2017, operating income was $0.4 million higher than the prior-year quarter due to higher gross margin partially offset by higher operating expenses.

Within the Natural Gas segment, gross margin grew $0.9 million and operating expenses increased $0.3 million, contributing to a $0.6 million increase in operating income for the segment. The increase in operating expenses is primarily due to IT-related support costs, partially offset by cost reductions associated with lower legal and professional services as well as lower personnel related costs pertaining to this segment. The higher operating loss within the Corporate and Other segment was primarily due to higher legal and professional costs associated with the Company’s pending merger.

Adjusted EBITDA, a non-GAAP financial measure, was up approximately $0.8 million primarily due to higher operating income as well as higher non-cash costs. The Company believes that, when used in conjunction with measures prepared in accordance with GAAP, Adjusted EBITDA, which is a non-GAAP measure, helps in the understanding of its financial performance.

Balance Sheet and Cash Management

Cash and cash equivalents as of March 31, 2017 grew to $7.7 million from $6.5 million at December 31, 2016.

Cash provided by operating activities in the first quarter of 2017 was $10.9 million compared with $9.4 million in 2016 first quarter, with the increase primarily due to higher net income and lower working capital requirements.

Capital expenditures for the first quarter of 2017 were $2.0 million compared with $2.3 million in the prior-year quarter. Capital expenditures in the 2016 first quarter included approximately $0.5 million for the portion of the Company’s ERP system that was not financed under a lease agreement. The Company has budgeted $10 million for capital expenditures in 2017, with the majority focused on growth of its Natural Gas Operations segment, including construction activities to support expansion, maintenance and enhancements of its gas pipeline systems.

Cash used in financing activities was $8.4 million in the 2017 first quarter compared with $5.9 million in last year’s quarter. Debt repayment was the primary use of cash in both periods.

About Gas Natural Inc.

Gas Natural Inc., a holding company, distributes and sells natural gas to residential, commercial, and industrial customers. It distributes approximately 21 billion cubic feet of natural gas to roughly 70,000 customers through regulated utilities operating in Montana, Ohio, Maine and North Carolina. The Company’s other operations include intrastate pipeline, natural gas production, and natural gas marketing. The Company's Montana public utility was originally incorporated in 1909. Its strategy for growth is to expand throughput in its markets, while looking for acquisitions that are either adjacent to its existing utilities or in under-served markets. Further information is available on the Company’s website at www.egas.net.

Safe Harbor Regarding Forward-Looking Statements

The Company is including the following cautionary statement in this release to make applicable and to take advantage of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements made by, or on behalf of, Gas Natural Inc. Forward-looking statements are all statements other than statements of historical fact, including, without limitation, those that are identified by use of the words "anticipates," "estimates," "expects," "intends," "plans," "predicts," "believes" and similar expressions. Such statements are inherently subject to a variety of risks and uncertainties that could cause actual results to differ materially from those expressed. Factors that may affect forward-looking statements and the Company's business generally include, but are not limited to the Company's ability to successfully integrate the operations of the companies it has acquired and consummate additional acquisitions; the Company's continued ability to make or increase dividend payments; the Company's ability to implement its business plan, grow earnings and improve returns on investment; fluctuating energy commodity prices; the possibility that regulators may not permit the Company to pass through all of its increased costs to its customers; changes in the utility regulatory environment; wholesale and retail competition; the Company's ability to satisfy its debt obligations, including compliance with financial covenants; weather conditions; litigation risks; and various other matters, many of which are beyond the Company's control; the risk factors and cautionary statements made in the Company's public filings with the Securities and Exchange Commission; and other factors that the Company is currently unable to identify or quantify, but may exist in the future. Gas Natural Inc. expressly undertakes no obligation to update or revise any forward-looking statement contained herein to reflect any change in Gas Natural Inc.'s expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

FINANCIAL TABLES FOLLOW.

          Gas Natural Inc. and Subsidiaries Condensed Consolidated Statements of Income (Unaudited) (in thousands, except share and per share data)   Three Months Ended March 31, 2017 2016 REVENUE Natural gas operations $ 35,919 $ 35,064 Marketing and production   3,940     3,243   Total revenues 39,859 38,307   COST OF SALES Natural gas operations 20,602 20,622 Marketing and production   3,693     2,940   Total cost of sales   24,295     23,562     GROSS MARGIN 15,564 14,745   OPERATING EXPENSES Distribution, general, and administrative 6,039 5,927 Maintenance 270 264 Depreciation and amortization 2,055 1,957 Taxes other than income 1,148 1,080 Provision for doubtful accounts   125     20   Total operating expenses   9,637     9,248     OPERATING INCOME 5,927 5,497   Other income (loss), net 95 (402 ) Interest expense   (782 )   (753 ) Income before income taxes 5,240 4,342 Income tax expense   (1,890 )   (1,640 ) INCOME FROM CONTINUING OPERATIONS 3,350 2,702   Discontinued operations, net of income taxes   -     (23 )   NET INCOME $ 3,350   $ 2,679     Basic weighted average shares outstanding 10,518,062 10,506,877 Dilutive effect of restricted stock awards   1,151     654   Diluted weighted average shares outstanding   10,519,213     10,507,531     BASIC & DILUTED EARNINGS PER SHARE: Continuing operations $ 0.32 $ 0.26 Discontinued operations   -     -   Net income per share $ 0.32   $ 0.26     Dividends declared per common share $ 0.075   $ 0.075                 Gas Natural Inc. and Subsidiaries Condensed Consolidated Balance Sheets (Unaudited) (in thousands) March 31, December 31, 2017 2016  

ASSETS

CURRENT ASSETS Cash and cash equivalents $ 7,667 $ 6,463 Accounts receivable, less allowance for doubtful accounts of $575 and $385, respectively 10,114 11,093 Unbilled gas 4,957 7,256 Inventory Natural gas 283 3,380 Materials and supplies 2,255 2,065 Regulatory assets, current 3,628 3,131 Other current assets   1,992   2,423 Total current assets 30,896 35,811   PROPERTY, PLANT, & EQUIPMENT, NET 139,011 139,691   OTHER ASSETS Regulatory assets, non-current 909 1,032 Goodwill 15,872 15,872 Customer relationships, net of amortization 2,246 2,322 Other non-current assets   2,232   2,696 Total other assets   21,259   21,922 TOTAL ASSETS $ 191,166 $ 197,424             Gas Natural Inc. and Subsidiaries Condensed Consolidated Balance Sheets (Unaudited) (in thousands, except share and per share data) March 31, December 31, 2017 2016  

LIABILITIES AND CAPITALIZATION

CURRENT LIABILITIES Line of credit $ 6,650 $ 13,450 Accounts payable 7,724 10,055 Accrued liabilities 7,366 8,265 Capital lease liability, current 3,245 3,618 Other current liabilities   554   460

Total current liabilities

25,539 35,848   LONG-TERM LIABILITIES Deferred tax liability 13,813 11,917 Regulatory liability, non-current 1,458 1,417 Capital lease liability, non-current 2,313 2,780 Other long-term liabilities   3,115   3,113 Total long-term liabilities 20,699 19,227   NOTES PAYABLE 49,405 49,392   COMMITMENTS AND CONTINGENCIES   STOCKHOLDERS’ EQUITY

Preferred stock: $0.15 par value; 1,500,000 shares authorized,

 

 

no shares issued or outstanding

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-

Common stock: $0.15 par value; Authorized: 30,000,000 shares;

 

 

Issued and outstanding: 10,519,728 as of March 31, 2017 and

December 31, 2016, respectively

1,578

1,578

Capital in excess of par value 64,097 64,092 Retained earnings   29,848   27,287 Total stockholders’ equity   95,523   92,957 TOTAL CAPITALIZATION   144,928   142,349 TOTAL LIABILITIES AND CAPITALIZATION $ 191,166 $ 197,424             Gas Natural Inc. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited) (amounts in thousands)  

 

Three Months Ended March 31,

2017 2016 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 3,350 $ 2,679

Less loss from discontinued operations

  -     (23 ) Income from continuing operations 3,350 2,702

Adjustments to reconcile income from continuing operations tonet cash provided by operating activities:

Depreciation and amortization 2,055 1,957 Amortization of debt issuance costs 62 101 Provision for doubtful accounts 125 20 Amortization of deferred loss on sale-leaseback 282 170 Stock based compensation 5 34 Loss on sale of assets 2 529 Unrealized holding loss on contingent consideration - 24 Change in fair value of derivative financial instruments 143 (89 ) Deferred income taxes 1,890 1,627 Changes in assets and liabilities: Accounts receivable, including related parties 853 (420 ) Unbilled gas 2,299 2,217 Natural gas inventory 3,097 2,730 Accounts payable, including related parties (2,227 ) (896 ) Regulatory assets and liabilities (498 ) (1,431 ) Other assets 239 297 Other liabilities   (791 )   (200 ) Net cash provided by operating activities 10,886 9,372 CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures (1,951 ) (2,310 ) Proceeds from sale of fixed assets 110 2

Contributions in aid of construction

  588     120   Net cash used in investing activities (1,253 ) (2,188 ) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from lines of credit 4,650 5,800 Repayments of lines of credit (11,450 ) (4,400 ) Repayments of notes payable, including related parties - (6,633 ) Payments of capital lease obligations (840 ) (651 ) Debt issuance costs - (23 ) Dividends paid   (789 )   -   Net cash used in financing activities (8,429 ) (5,907 ) DISCONTINUED OPERATIONS Operating cash flows   -     (22 ) Net cash used in discontinued operations   -     (22 ) NET INCREASE IN CASH AND CASH EQUIVALENTS 1,204 1,255 Cash and cash equivalents, beginning of period   6,463     2,728   CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,667   $ 3,983              

Gas Natural Inc. and Subsidiaries

Natural Gas Operations

  Utility Throughput   Three Months Ended March 31, (in million cubic feet (MMcf)) 2017 2016   Full service distribution: Energy West Montana (MT) 1,627 1,267 Frontier Natural Gas (NC) 372 410 Bangor Gas (ME) 741 548 Ohio Companies (OH) 1,336 1,383 Total full service distribution 4,076 3,608   Transportation 3,548 3,232   Total volumes 7,624 6,840                             Heating Degree Days Three Months Ended Percent Colder (Warmer) March 31, 2017 Compared to Normal 2017 2016 Normal 2016   Great Falls, MT 3,059 3,424 2,716 11.93% 26.07% Bangor, ME 3,741 3,615 3,445 (3.37%) 4.93% Elkin, NC 2,076 1,802 2,129 (13.20%) (15.36%) OH weighted average 2,999 2,365 2,599 (21.14%) (9.00%) Total Weighted Average 3,046 2,929 2,704 (3.84%) 8.32%            

Gas Natural Inc. and Subsidiaries

Reconciliation of GAAP Net Income to Non-GAAP Adjusted Net Income(2)

  (in thousands, except per share amounts) Three Months Ended March 31, 2017 2016 GAAP net income $ 3,350 $ 2,679 Add back, pre-tax: Non-recurring legal, professional and settlement costs 226 85 Non-recurring regulatory and other expenses 65 - Loss on disposal of assets 64 531 Tax effect of non-GAAP continuing operations items(1) (132 ) (234 ) Discontinued operations   -     23   Non-GAAP Adjusted net income(2) $ 3,573   $ 3,084     Non-GAAP Adjusted net income per diluted share(2) $ 0.34   $ 0.30     (1)   Applies an effective tax rate of 37.0% and 38.1% to the non-GAAP pre-tax adjustments for the periods presented above, respectively, consistent with the actual effective tax rates for those periods excluding nonrecurring tax items.   (2)

Non-GAAP Financial Measures:

The Company believes that, when used in conjunction with GAAP measures, Adjusted Net Income and Adjusted EBITDA, or earnings before interest, taxes, depreciation, amortization, non-recurring charges and discontinued operations, which are non-GAAP measures, allow investors to view its performance in a manner similar to the methods used by management and provides additional insight into its operating results. Adjusted Net Income and Adjusted EBITDA are not calculated through the application of GAAP and are not the required form of disclosure by the Securities and Exchange Commission. As such, these measures should not be considered as a substitute for the GAAP measure of net income and, therefore, should not be used in isolation of, but in conjunction with, the GAAP measure. The use of any non-GAAP measure may produce results that vary from the GAAP measure and may not be comparable to a similarly defined non-GAAP measure used by other companies.          

Gas Natural Inc. and Subsidiaries

Reconciliation of GAAP Net Income to Non-GAAP Adjusted EBITDA(2)

  (in thousands) Three Months Ended March 31, 2017 2016 GAAP net income $ 3,350 $ 2,679 Add back: Net interest expense 782 753 Income tax expense 1,890 1,640 Depreciation and amortization 2,055 1,957 Non-recurring legal, professional and settlement costs 226 85 Non-recurring regulatory and other expenses 65 - Loss on disposal of assets 64 531 Discontinued operations   -   23 Non-GAAP Adjusted EBITDA(2) $ 8,432 $ 7,668   (2)  

Non-GAAP Financial Measures:

The Company believes that, when used in conjunction with GAAP measures, Adjusted Net Income and Adjusted EBITDA, or earnings before interest, taxes, depreciation, amortization, non-recurring charges and discontinued operations, which are non-GAAP measures, allow investors to view its performance in a manner similar to the methods used by management and provide additional insight into its operating results. Adjusted Net Income and Adjusted EBITDA are not calculated through the application of GAAP and are not the required form of disclosure by the Securities and Exchange Commission. As such, these measures should not be considered as a substitute for the GAAP measure of net income and, therefore, should not be used in isolation of, but in conjunction with, the GAAP measure. The use of any non-GAAP measure may produce results that vary from the GAAP measure and may not be comparable to a similarly defined non-GAAP measure used by other companies.  

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Gas Natural Inc.James E. Sprague, 216-202-1564Chief Financial Officerjsprague@egas.netorInvestor RelationsKei Advisors LLCDeborah K. Pawlowski, 716-843-3908dpawlowski@keiadvisors.comorKaren L. Howard, 716-843-3942khoward@keiadvisors.com