RGC Resources, Inc. — Form 10-Q Summary
Business Context and Reporting Period
RGC Resources is an energy services company primarily engaged in the regulated sale and distribution of natural gas through Roanoke Gas Company, serving approximately 59,200 customers in and around Roanoke, Virginia. The filing covers the three and six months ended March 31, 2013, the company’s fiscal second quarter and first six months of fiscal 2013. Results are highly seasonal and are affected by winter weather.
Key Financial Metrics
| Metric | Three Months Ended March 31, 2013 | Three Months Ended March 31, 2012 | Six Months Ended March 31, 2013 | Six Months Ended March 31, 2012 |
|---|---|---|---|---|
| Total operating revenues | $24.2 million | $21.3 million | $42.9 million | $39.8 million |
| Gross margin | $9.6 million | $9.1 million | $17.5 million | $17.2 million |
| Operating income | $4.8 million | $4.5 million | $7.8 million | $7.9 million |
| Net income | $2.7 million | $2.5 million | $4.3 million | $4.3 million |
| Basic diluted EPS | $0.57 / $0.57 | $0.54 / $0.53 | $0.91 / $0.91 | $0.93 / $0.93 |
| Operating cash flow | Not presented for the quarter | $12.3 million | $13.2 million |
- Three-month gross margin was approximately 39.6% of revenue versus 42.8% in the prior-year quarter. Six-month gross margin was approximately 40.8% versus 43.3%.
- Three-month operating margin was approximately 19.9%; six-month operating margin was approximately 18.1%.
- Cash and cash equivalents were $12.2 million at March 31, 2013, compared with $8.9 million at September 30, 2012.
- Total debt was $28.0 million, consisting of a $15.0 million note payable and $13.0 million of long-term debt. The company had no outstanding balance under its line of credit at March 31, 2013.
- The company generated $12.3 million of operating cash flow, used $4.4 million for capital expenditures and other investing activities, and used $4.6 million in financing activities. Ending cash increased by $3.3 million.
- Capital expenditures were $4.4 million for the six-month period, primarily for the pipeline renewal program.
- Stockholders’ equity was $49.6 million at March 31, 2013, and management reported capitalization of approximately 64% equity and 36% debt.
Material Changes Versus the Prior Comparable Period
- Second-quarter revenue increased 14%, while net income increased $215,400, or approximately 9%, primarily because of colder weather, higher delivered volumes and the non-gas rate increase.
- Six-month revenue increased 8%, but net income decreased $65,359, or approximately 2%, as higher operations and maintenance and depreciation expenses more than offset the rate increase.
- Second-quarter delivered gas volumes increased 27% and heating degree days increased 36%. Six-month delivered volumes increased 18% and heating degree days increased 25%.
- Last year’s unusually warm weather generated $1.2 million of second-quarter and $1.7 million of six-month weather normalization adjustment revenue. No WNA revenue was recorded for the current six-month period; approximately $182,000 accrued in the prior quarter was reversed when the annual weather result fell within the permitted band.
- The November 1, 2012 base-rate increase was ultimately approved at approximately $649,639 of additional annual non-gas revenue, compared with the approximately $1.84 million of annual revenue initially placed into effect subject to refund. A provision was recorded for customer refunds, including interest.
- Cash flow from operations declined $875,671 year over year because colder weather increased accounts receivable and reduced the decline in gas storage balances. Financing cash use increased largely because of a $1.00 per share special dividend paid in December 2012.
- Natural gas inventory carrying-cost revenue declined by approximately $127,000 in the quarter and $244,000 for the six-month period because of lower average gas inventory prices.
- The company collected an $865,000 note receivable on February 1, 2013. Other service margins declined for the six-month period, although second-quarter other margins increased because of a one-time contract.
Guidance, Outlook, Risks and Unusual Items
- Management did not provide formal earnings guidance. It cautioned that first-half results are not indicative of the full fiscal year because of seasonality. Future results depend primarily on weather, the local economy and operating and maintenance costs.
- The company expects capital expenditures to remain elevated for several years while it completes a five- to seven-year program to replace remaining bare steel and cast-iron pipe. Depreciation is expected to fund approximately 50% of projected current-year capital expenditures, with the balance dependent on operating cash flow, SAVE Plan revenue, available cash and borrowing.
- A new revolving credit agreement became effective March 31, 2013, with availability ranging from $1 million to $7 million, interest at 30-day LIBOR plus 100 basis points, and expiration on March 31, 2014 unless extended. Management expects to extend or replace it, but there is no assurance of comparable terms.
- The $15 million term note was refinanced on March 31, 2013 and now matures March 31, 2014. Management expects to renew it on comparable terms, but refinancing is not assured.
- Interest-rate swaps effectively fixed the $15 million and $5 million variable-rate notes at approximately 5.74% and 5.79%, respectively. The fair value liability for the swaps was $2.5 million at March 31, 2013. Approximately $930,000 was expected to be reclassified from accumulated other comprehensive loss to interest expense over the next 12 months, subject to changes in LIBOR.
- The company relies on two primary pipelines for 100% of customer gas supply; failure of one or both could materially affect operations. Natural gas commodity risk is managed through storage, contracts and other hedging methods, although no commodity derivatives were outstanding at March 31, 2013.
- The asset-management contract that manages transportation, storage and gas supply arrangements expires in October 2013 and is being rebid. Continuation on comparable terms is not stated.
- The company expects additional fiscal-year contributions of approximately $600,000 to its pension plan and $850,000 to its postretirement plan, after contributing $500,000 to the pension plan during the first six months.
- The company had no changes to reported legal proceedings or risk factors, and management concluded that disclosure controls were effective as of March 31, 2013.
Most Important Facts for Investors to Verify
- Whether the $15 million term note and revolving credit facility can be renewed or replaced by their March 31, 2014 maturities and on what terms.
- The timing and final amount of customer rate refunds related to rates billed after November 1, 2012.
- The effect of weather normalization, future heating degree days and the absence of prior-year WNA revenue on subsequent earnings.
- Progress, cost and financing needs associated with the elevated pipeline replacement program and the SAVE Plan.
- The outcome of rebidding the asset-management contract expiring in October 2013.
- Changes in the fair value of interest-rate swaps, related accumulated other comprehensive loss and future reclassifications to interest expense.
- Required pension and postretirement contributions and the sensitivity of liquidity to seasonal working-capital needs.