RGC RESOURCES INC quarterly report, Q1 FY2014

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 59,300 customers in and around Roanoke, Virginia. The filing covers the three months ended December 31, 2013, compared with the three months ended December 31, 2012. Results are highly seasonal and generally stronger during winter months.

Financial Performance and Position

Metric	Q1 FY2014	Q1 FY2013	Change
Total operating revenues	$20.0 million	$18.7 million	+7%
Gross margin	$8.2 million	$7.9 million	+3%
Operating income	$3.3 million	$3.0 million	+11%
Net income	$1.7 million	$1.6 million	+11%
Basic and diluted EPS	$0.37	$0.33	+$0.04
Dividends declared per share	$0.185	$1.180	Prior period included special dividend

Gross margin was approximately 41.0% of revenue, compared with 42.3% in the prior-year quarter. Operating margin was approximately 16.4%, compared with 15.7%.
Gas utility revenue increased 7% to $19.8 million. Total delivered volumes increased 6% to 2.9 million DTH, while heating degree days increased 4% to 1,533.
Operations and maintenance expense declined 5% to $3.3 million, primarily from lower pension and postretirement benefit costs and increased capitalization of overhead. Depreciation and amortization increased 7% to $1.2 million.
Cash used in operating activities was $1.3 million, compared with $2.2 million used in the prior-year quarter. Capital expenditures resulted in $4.1 million of investing cash outflows, up from $2.5 million.
Financing activities provided $3.0 million, primarily reflecting net line-of-credit borrowings, compared with $3.6 million used in the prior-year period, which included a special dividend.
Cash and cash equivalents declined by $2.3 million to $0.5 million at December 31, 2013.
Total assets were $130.5 million, compared with $124.5 million at September 30, 2013. Stockholders’ equity was $50.5 million.
Debt included a $15.0 million note payable, $13.0 million of current and long-term debt, and $3.8 million outstanding under the line of credit. Management reported capitalization of approximately 61% equity and 39% debt.

Material Changes Versus the Prior Comparable Period

Net income increased $168,635, primarily due to colder weather, higher gas deliveries, and a non-gas rate increase effective November 1, 2013.
The Virginia State Corporation Commission authorized new base rates subject to refund, providing approximately $1.7 million of additional annual non-gas revenue. The final award remained pending.
Prior-year results included approximately $182,000 of weather normalization adjustment revenue because weather was warmer than normal. No such accrual was recorded in the current quarter because heating degree days remained within the permitted weather band.
Transportation and interruptible gas volumes increased 16%, which management attributed partly to improved economic activity.
Capital expenditures rose by approximately $1.6 million, driven by the pipeline renewal program and other infrastructure projects.
The company’s pension and postretirement benefit costs declined materially, benefiting from higher discount rates and strong plan asset returns.
The dividend declared per share fell sharply because the prior-year period included a $1.00-per-share special dividend.

Guidance, Outlook, Risks, Contingencies, and Unusual Items

Management did not provide specific earnings or revenue guidance. It stated that full-year results will depend primarily on weather, energy costs, local economic conditions, and operating and maintenance costs.
Capital expenditures are expected to remain elevated for several years as the company continues replacing aging bare steel and cast iron pipe. Management expects to complete the remaining replacements over approximately four years.
The company expects to complete projects involving an LNG boil-off compressor and the Gala, Virginia transfer station, with recovery supported by the SAVE Rider.
The line-of-credit agreement and the $15.0 million unsecured note were scheduled to mature on March 31, 2014. Management expected to extend or replace both arrangements on comparable terms, but stated there was no guarantee.
Interest-rate swaps effectively fixed the rates on the $15.0 million note and a $5.0 million variable-rate note at approximately 5.74% and 5.79%, respectively. The swaps had a $1.8 million liability fair value at December 31, 2013.
Management estimated that approximately $935,000 of hedge fair value would be reclassified into interest expense over the following 12 months, subject to changes in LIBOR.
The pending base-rate proceeding could result in a final rate award greater or less than the amount reflected in the financial statements; the company recorded an estimated reserve for potentially refundable amounts.
The company had approximately $1.0 million of additional expected fiscal-year contributions to its pension and postretirement plans.
Key operating risks include weather volatility, natural gas prices, interest rates, reliance on two primary transmission pipelines, regulatory decisions, elevated construction spending, and renewal of credit facilities.
The company had no outstanding natural-gas derivative instruments at December 31, 2013. Commodity purchase costs are generally recoverable from customers through the regulatory PGA mechanism.
Management concluded that disclosure controls and procedures were effective as of December 31, 2013, with no material changes to internal control over financial reporting during the quarter.

Important Facts for Investors to Verify

Final outcome and refund exposure associated with the Virginia rate case.
Extension or refinancing of the $15.0 million note and the $8.0 million credit-line capacity before the March 31, 2014 maturities.
Actual weather and heating degree days for the remainder of the WNA period and the resulting effect on margins.
Execution, timing, and total cost of the pipeline, LNG compressor, and transfer-station capital projects.
Future borrowing needs and liquidity as capital spending, gas prices, and seasonal working-capital requirements increase.
Changes in pension and postretirement obligations, required contributions, and related expense.
Final depreciation-study results and any effect on depreciation expense or regulated rates.