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Gas Natural’s (EGAS) CEO Gregory Osborne on Q3 2015 Results – Earnings Call Transcript

Gas Natural Inc (NYSEMKT: EGAS ) Q3 2015 Results Earnings Conference Call November 10, 2015, 1:00 pm ET Executives Deborah Pawlowski – Investor Relations, Chairman and Chief Executive Officer of Kei Advisors LLC Gregory Osborne – Chief Executive Officer, Director Jim Sprague – Chief Financial Officer, Vice President Analysts Operator Greetings and welcome to Gas Natural Inc. third quarter 2015 financial results conference call. At this time, all participants are in a listen-only mode. [Operator Instructions]. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Deborah Pawlowski, Investor Relations for Gas Natural. Thank you. You may begin. Deborah Pawlowski Thank you, Adam and good afternoon, everyone. I apologize for the delay on the call today having just telephone technical difficulties. And we are glad that you are here for our 2015 third quarter earnings conference call. I do have with me Gregory Osborne, our President and Chief Executive Officer, Jim Sprague, Vice President and Chief Financial Officer and Kevin Degenstein, our Chief Operating Officer as well as Vince Parisi, our General Counsel. So we are going to go through a quick review of the third quarter results. Gregory and Jim have some formal remarks. Unfortunately we are really short on time today as well. So we won’t be able to go into a Q&A. You are more than welcome to give me follow-up call if you have any other questions. I can be reached at 716-843-3908. You should have the financial results released after market closed yesterday, otherwise it can be found on our website at www.egas.net. So for the Safe Harbor statement, as you are aware, we may make some forward-looking statements on this call during the formal discussion. 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 on our earnings release as well as with other documents that are filed by the company with the Securities and Exchange Commission. These documents can be found on the company’s website as well or at sec.gov. So with that, I am going to turn the call over to Gregory to begin. Gregory? Gregory Osborne Thank you, Deb and good morning, everyone. I appreciate your time today and your interest in Gas Natural. It’s been another quarter of continue progress for us as we have made significant headway toward resolution of regulatory items and are moving toward completion of our asset rationalization program. Let me summarize some highlights for you. On the regulatory front, the stipulation and recommendation between Ohio utilities and the Commission Staff of the Public Utilities Commission of Ohio or PUCO was filed on October 30. All stipulations are subject to review and final approval by the Commission as is the case with this settlement. We believe this stipulation addresses the issues raised by last year’s investigative regulatory audit of Ohio utilities. We made excellent progress on our asset rationalization initiatives in the third quarter. As previously announced, on July 1, the first day of the quarter, we completed the sale of our Wyoming operations. The proceeds will approximate $17 million subject to closing adjustments and this sale resulted in a $3.4 million gain after-tax in the quarter. This is recorded in discontinued operations. We followed that sale with the announcement on August 5 that we reached an agreement to sell our Kentucky utility for just under $2 million subject to normal regulatory approval. Our Pennsylvania utility is also under agreement for sale. That divestiture is moving through the normal regulatory approval process and we expect to close it this quarter. Subsequent to the quarter-end, in October we sold our former corporate headquarters building for approximately $1.4 million monetizing another non-core asset. When the sales of our Kentucky and Pennsylvania utilities are closed, we would have completed our asset rationalization program. The divestment these non-core assets enables us to focus our energies and resources on our operations which have higher growth potential. In Montana and Ohio, we can leverage scale we the already have in those markets. North Carolina and Maine are both underserved markets where demand for natural gas is growing. Overall, we continue to grow our customer base with approximate 1,000 customers added in the third quarter, driven by increases in Ohio, North Carolina and Maine. And internally we are progressing with our SAP implementation. This will facilitate our access to data for decision making and provide consistency and productivity improvements across our utilities. There was still some noise in our financial results. So let me turn it over to Jim to review those details. Jim? Jim Sprague Thank you, Gregory and good afternoon, everyone. Thank you for joining us today. Our third quarter 2015 financial results reflect lower full service distribution throughput primarily due to warmer weather in most of our markets. Because of unusual expense items that impacted our results for the quarter, so we are going to present both GAAP and adjusted non-GAAP results. For the quarter, revenue decreased to $13.1 million, down $0.5 million on an 11% decline in full service distribution throughput. Let me break down the contributing factors by segment. Revenue from our natural gas operations segment decreased $1.2 million or 9% to $11.4 million. The primary driver of the decrease was lower prices paid for natural gas in Montana, North Carolina and Ohio. Since our cost of natural gas is a direct pass-through to our customers, it is neutral to gross margin. However, on a weighted average basis, the 17% decline in heating degree days and resulting lower full service distribution throughput has a direct impact on margins. Consolidated gross margin was $6.9 million in the quarter, down about 2%. In the natural gas operations segment, it was virtually unchanged as a $0.2 million downward adjustment of the sales volume used to calculate unbilled revenue in Ohio was almost entirely offset by a $0.2 million increase in gross margin in Maine attributable to higher transportation volume. Our consolidated operating expenses for the third quarter increased by $0.5 million compared with the prior quarter to $9.9 million. The increase was primarily due to a $0.4 million recurring asset impairment charge related to our former corporate headquarters building that we be sold in October as well as other nonrecurring professional service costs. Those costs were offset by a reduction in corporate expenses resulting from operational improvement initiatives. Adjusted EBITDA was $0.5 million, down just about $0.1 million from the third quarter of 2014. Loss from continuing operations on an adjusted non-GAAP basis was $1.4 million or $0.13 per share, compared with a loss of $1.2 million or $0.11 per share in last year’s third quarter. You can find reconciliation of GAAP to non-GAAP numbers in the news release. On a GAAP basis, loss from continuing operations was $2.3 million or $0.22 per share in the third quarter. Turning to the balance sheet. We had $3.9 million of cash at the end of the quarter, up from $1.6 million at the end of December. We expect to continue to grow our cash position as we move into the winter months. Upon final resolution number of our PUCO ratio, we plan to complete refinancing of our long-term debt, which does not come due until mid-2017. Subsequent to the end of the quarter, we obtained a $3 million short-term bridge loan. The helps with providing g additional liquidity until we get to higher cash flow of funds to ensure we can support our unusual expenses. Cash provided by operating activities of continuing operations was $12.2 million in the first nine months, up 42% over the prior period. This increase was primarily due to improvements in working capital management. Capital expenditures for the first nine months of 2015 were $8.3 million, down from $16.3 million in the first nine months of 2014. Currently we expect another $1.4 million in the fourth quarter of 2015. This year’s investments have been primarily focused on adding services to install Maine in order to systematically expand our customer base primarily in our growth territories. We have established a greater amount of discipline in our project selection and management processes, focusing our resources where we can effectively drive earnings. We are currently evaluating our plans for 2016, which will help determine the timing of the decline of these unusual costs so we can redirect cash to capital expenditures. With that summary, let me turn the call back to Gregory. Gregory? Gregory Osborne Thank you, Jim. We are executing our strategy to leverage our utility management operation and investment capabilities to capture greater market penetration and earn the highest level of turns where there are growth opportunities. I would like to thank you all for joining us for 2015 third quarter earnings teleconference. This is an exciting time for Gas Natural as we continue to execute our strategy to improve our earnings power. In closing, I would like to turn it back to Deb. Deborah Pawlowski So thank you again, everyone. And I apologize for our lack of time here today, but management is more than happy to entertain follow-up calls later this week. So if you give me a call, 716-843-3908, if you would like to schedule for a follow-up, I would be more than happy to accommodate. Thanks so much. Have a great day. Question-and-Answer Session Operator 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.) 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Insurance ETFs Shining Despite Dull Q3 Earnings

The Q3 earnings season hasn’t been all that encouraging for the financial sector as total earnings for 89.1% of the sector’s total market capitalization are up only 1.7% on 2.3% revenue decline. This is worse than Q2 and the four-quarter average earnings growth of 8.1% and 6.2%, respectively, on 0.8% and 1.3% revenue growth (read: Guide to the 7 Most Popular Financial ETFs ). Earnings surprises were also unimpressive with 53.7% of the companies beating earnings estimates and 42.7% of them beating on top lines. In particular, earnings from the insurance industry have been weaker with most players failing to beat or meet either our earnings or revenue estimates. MetLife (NYSE: MET ), Prudential Financial (NYSE: PRU ) and American International (NYSE: AIG ) missed our estimate on the earnings front while Chubb Corp (NYSE: CB ) an Aflac Inc. (NYSE: AFL ) lagged revenues. However, Travelers (NYSE: TRV ) and Allstate (NYSE: ALL ) surpassed our estimates on both the top and bottom lines. Insurance Earnings in Focus Earnings at one of the leading property and casualty insurer – Chubb – strongly outpaced our estimate by 20.30% and improved 9% from the year-ago quarter. However, revenues of $3.47 billion missed the Zacks Consensus Estimate of $3.51 billion. Another property and casualty insurer and an industry bellwether, Allstate , topped the Zacks Consensus Estimate by 20 cents with earnings of $1.52, which improved 9.3% from the year-ago quarter. Revenues rose 1% year over year to $9.03 billion and edged past the Zacks Consensus Estimate of $7.98 billion (see: all the Financial ETFs here ). Aflac , the seller of supplement health insurance, posted earnings per share of $1.56, beating our estimate by eight cents and improving 3.3% year over year. However, revenues declined 12.1% year over year to $5.00 billion and fell shy of our estimate of $5.11 billion. Earnings of $2.93 at personal property and casualty insurer, Travelers trumped the Zacks Consensus Estimate by 72 cents and improved 12.3% from the year-ago earnings. Revenues slid 1.3% year over year to $6.67 billion but surpassed our estimate of $6.63 billion. However, MetLife , the U.S. life insurer behemoth, reported disappointing earnings of 62 cents per share, lagging the Zacks Consensus Estimate of $1.47 and declining 62% from the year-ago earnings. However, revenues rose 0.3% year over year to $17.97 billion and were well ahead of our estimate of $17.47 billion. On the other hand, PRU , the second-largest U.S. life insurer, also missed our earnings estimate by three cents improved 9.1% year over year. Revenues declined 5.6% year over year to $11.1 billion but were on par with our estimate. The largest commercial insurer in the U.S. and Canada, AIG dampened investor’s mood with a huge earnings miss of 49.5% and year-over year decline of 56%. However, revenues of $13.16 billion came above our estimate of $13.06 billion. ETFs in Focus Despite unsatisfactory earnings, insurance ETFs have moved up from a one-month look buoyed up by speculations of an interest rate hike. This is because the sector is a clear beneficiary of a rising interest rate environment. Investors looking to gain exposure to this corner of the market segment in a diversified way may consider the following ETFs. SPDR S&P Insurance ETF (NYSEARCA: KIE ) This fund follows the S&P Insurance Select Industry Index and offers an equal weight exposure to 51 stocks, suggesting no concentration risk. None of the securities holds more than 2.28% of total assets. More than one-third of the portfolio is allocated to the property and casualty insurance sector while life & health insurance accounts for another one-fourth share. The ETF has managed $625 million in its asset base and trades in a moderate average daily volume of over 107,000 shares. The product has an expense ratio of 0.35% and gained nearly 4.6 over the past one month. It has a Zacks ETF Rank of 3 or ‘Hold’ rating with a Medium risk outlook. iShares U.S. Insurance ETF (NYSEARCA: IAK ) With AUM of $130.9 million, this product tracks the Dow Jones U.S. Select Insurance Index and charges 43 bps in annual fees. Volume is light, trading in roughly 29,000 shares per day. In total, the fund holds 63 securities in its basket with the largest allocation going to American International at 13.6%, closely followed by Metlife at 9.5%. Other firms hold less than 6.5% of assets. For an industry look, property & casualty insurance accounts for 42.2% share while life & health insurance and multiline insurance round off the top three with double-digit exposure each. IAK is up 6.5% from a one-month look and has a Zacks ETF Rank of 2 or ‘Buy’ rating with a Medium risk outlook. PowerShares KBW Insurance Portfolio ETF (NYSEARCA: KBWI ) This fund tracks the KBW Nasdaq Insurance Index and holds 23 securities in its basket. Each firm holds less than 9% share each with TRV, PRU and MET occupying the top three spots. While insurance makes up for 95% of the portfolio, consumer finance and banks take the remainder. The product has amassed about $14.4 million in AUM while volume is paltry at about 1,400 shares. The ETF charges an annual fee of 35 bps and added 6.5% in the trailing one-month period. It has a Zacks ETF Rank of 3 with a High risk outlook. Link to the original post on Zacks.com

Lipper Closed-End Fund Summary: October 2015

By Tom Roseen For the first month in seven equity and fixed income CEFs posted plus-side performance on average on both a NAV basis (+5.97% and +1.07%, respectively for October) and market basis (+7.50% and +3.41%). Year to date equity CEFs remained in the red for the fourth straight month, down 4.41%, while fixed income CEFs moved more solidly into the black, returning 1.54% on average on a NAV basis for the same period. For the month many of the major broad-based indices chalked up their best one-month return since October 2011, with the Dow Jones Industrial Average Price Only Index and the S&P 500 Composite Price Only Index returning 8.47% and 8.30%, respectively. Beleaguered Shanghai Price Only Composite and Xetra DAX posted a couple of the strongest returns in the global markets, returning 11.50% and 11.15%, respectively, for October as investors cheered easy-money news from both the Peoples Bank of China (PBOC) and the European Central Bank (ECB). Despite a weaker-than-expected jobs report at the beginning of the month, mixed economic data throughout the month, and a roller-coaster ride of corporate earnings reports, volatility-as measured by the CBOE Volatility Index (VIX)-fell 38% over the month to 15, remaining below the long-term average of 20. Investors appeared to shrug off a disappointing nonfarm payrolls report that showed the U.S. had added a lower-than-expected 142,000 jobs for September-below the consensus-expected 200,000-as investors perhaps realized the Federal Open Market Committee was probably not going to raise interest rates this year. As commodity prices rallied mid-month, the S&P 500 posted is strongest weekly gain for 2015. And while the Fed minutes’ discussing global risks kept the hawks in check, many felt the downside risk was on the mend. Ignoring a slight decline in industrial production for September, consumer sentiment rose in October for the first month in four. A surprise cut in interest rates by the PBOC, better-than expected earnings reports from a few heavyweight tech firms (Amazon (NASDAQ: AMZN ), Microsoft (NASDAQ: MSFT ), and Alphabet (NASDAQ: GOOG )), and hints from the ECB that further easing might be in the cards pushed stocks to a fourth consecutive week of plus-side performance and sent investors into risker assets for the month and out of some recently popular safe-haven plays. Battered energy stocks got a shot in the arm with the rise in commodity prices and on news the central bank in the second largest economy in the world had cut interest rates, sending Lipper’s domestic equity CEFs macro-group (+6.48%) to the top of the equity CEFs universe for the first month since August 2014. World equity CEFs (+5.46%) and mixed-asset CEFs (+5.03%) also fared well during the month. Treasury yields rose at all maturity levels along the curve after the Fed left the door open for possible rate increases later this year, with the largest increase witnessed in the six-month yield and the five-year yield, 15 bps each to 0.23% and 1.52%, respectively. For the first month in four all three fixed income CEF macro-groups posted plus-side returns, with world bond CEFs (+3.29%) leading the way, followed by domestic taxable bond CEFs (+1.19%) and municipal bond CEFs (+0.68%) as investors put some risk back in their portfolios. For October the median discount of all CEFs narrowed 157 bps to 9.58%-slightly worse than the 12-month moving average discount (9.50%). Equity CEFs’ median discount narrowed 91 bps to 11.29%, while fixed income CEFs’ median discount narrowed 160 bps to 8.41%. For the month 82% of all funds’ discounts or premiums improved, while 16% worsened.