RGC Resources, Inc. Form 10-Q Summary
Reporting period: Quarter and six months ended March 31, 2015, corresponding to fiscal 2015 second quarter. The filing presents unaudited consolidated results for RGC Resources and its subsidiaries, primarily Roanoke Gas Company, a regulated natural gas distributor serving approximately 60,000 customers in and around Roanoke, Virginia.
Business Context and Reporting Period
The company generates most of its revenue from regulated natural gas sales and distribution. Results are highly seasonal and affected by weather, natural gas prices, storage levels, customer demand, and regulatory rate mechanisms. Unregulated operations account for less than 3% of annual revenue and margin.
Key Financial Metrics
| Metric | Three Months Ended March 31, 2015 | Six Months Ended March 31, 2015 |
|---|---|---|
| Total operating revenues | $26.4 million | $47.7 million |
| Gross margin | $10.2 million | $18.8 million |
| Operating income | $4.9 million | $8.4 million |
| Net income | $2.8 million | $4.7 million |
| Diluted earnings per share | $0.59 | $1.00 |
| Dividends declared per share | $0.1925 | $0.385 |
| Net cash provided by operating activities | Not separately provided | $14.9 million |
| Capital expenditures | Not separately provided | $6.8 million |
Gross margin was approximately 38.6% of revenue for the quarter and 39.5% for the six-month period, based on reported figures. The filing does not identify a formal guidance range for fiscal 2015 earnings or revenue.
Balance Sheet, Debt, and Liquidity
- Cash and cash equivalents were $878,305 at March 31, 2015, compared with $849,757 at September 30, 2014.
- Total assets were $143.6 million, including $113.3 million of net utility plant.
- Accounts receivable increased to $11.1 million from $3.7 million, while gas in storage declined to $2.9 million from $11.4 million as the winter season progressed.
- Borrowings under the line of credit were $2.6 million, down from $9.0 million at September 30, 2014. Long-term debt remained $30.5 million.
- The new unsecured line of credit, effective March 31, 2015, provides seasonal borrowing limits ranging from $6 million to $24 million, bears interest at 30-day LIBOR plus 100 basis points, and expires March 31, 2016 unless extended.
- Equity represented 64% of long-term capitalization; including the line of credit, total capitalization was 62% equity and 38% debt.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue declined 19% to $26.4 million, primarily because natural gas commodity prices fell 26% per unit and deliveries declined 3% as heating degree-days decreased 4%.
- Six-month revenue declined 10% to $47.7 million, while six-month gross margin increased 3% to $18.8 million.
- Quarterly net income decreased 2% to $2.8 million; six-month net income increased 3% to $4.7 million.
- Operating income was essentially unchanged for the six-month period at $8.4 million, although quarterly operating income declined 5% to $4.9 million.
- SAVE Plan revenue increased to $310,000 for the quarter and $549,000 for six months, compared with $108,000 and $127,000, respectively, in the prior-year periods. These increases helped offset lower volumetric margins.
- Operations and maintenance expense increased 6% for the quarter and 4% for six months, driven primarily by higher labor, pension, and postretirement benefit costs.
- Interest expense declined 15% for both the quarter and six-month period following the September 2014 refinancing of higher-rate debt.
- Operating cash flow increased $5.2 million to $14.9 million, primarily because of a higher over-collection of gas costs and lower income tax payments. Financing cash outflows increased because the company repaid more line-of-credit borrowings.
Guidance, Outlook, Risks, and Unusual Items
- Management cautions that quarterly and six-month results are not indicative of the full fiscal year because of seasonality and weather sensitivity.
- The weather normalization adjustment reduced revenue and volumetric margin by approximately $734,000 for the quarter and $843,000 for six months. Approximately $700,000 of cumulative excess margin was subject to refund to customers during the May 2015 billing cycle.
- Management expects capital expenditures to remain elevated as the company completes replacement of remaining bare steel and cast iron pipe, expected in 2016, and then addresses older plastic pipe. Operating cash flow and borrowings are expected to fund the program.
- The company had no derivative instruments outstanding at March 31, 2015. A hypothetical 100-basis-point increase in variable-rate line-of-credit interest rates would have increased current-period interest expense by approximately $56,000.
- The company expects to extend or replace the line of credit when it expires, but states that comparable terms are not guaranteed.
- The company is preparing its 2016 SAVE Plan and had not determined whether to file a non-gas rate increase later in 2015.
- Local franchises in Roanoke, Salem, and Vinton expire January 1, 2016. Management expects renewal or extension, but negotiations were ongoing.
- The company filed an application to expand its authorized natural gas service territory to the remaining uncertificated portions of Franklin County.
- Two civil lawsuits related to a 2009 propane tank explosion were dismissed by March 31 and April 27, 2015. Management stated that the resolution did not materially affect financial position, results, or liquidity.
- Management reported effective disclosure controls as of March 31, 2015 and no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Whether lower gas prices, customer refunds under the weather normalization mechanism, and seasonal working-capital movements materially affect subsequent-quarter cash flow and earnings.
- The timing and outcome of any non-gas rate filing, the 2016 SAVE Plan, and the treatment of SAVE revenues in future rates.
- Progress and total remaining cost of pipeline, LNG plant, and other infrastructure investments.
- Renewal or extension of the $24 million line-of-credit facility before its March 31, 2016 expiration and the company’s planned mix of short- and long-term financing.
- Renewal of the local franchises expiring January 1, 2016 and approval of the Franklin County service-territory application.
- The impact of pension and postretirement obligations, including expected additional fiscal 2015 contributions of $400,000 to the pension plan and $250,000 to the postretirement plan.
- The company’s reliance on two primary pipelines and the potential effect of a disruption to either or both transmission systems.