RGC Resources, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended June 30, 2012; filed August 9, 2012. RGC Resources is primarily a regulated natural-gas distribution company serving approximately 58,000 customers in and around Roanoke, Virginia. Results are highly seasonal, with generally higher earnings during winter months.
Financial performance and position
| Metric | Three months ended June 30, 2012 | Three months ended June 30, 2011 | Nine months ended June 30, 2012 | Nine months ended June 30, 2011 |
|---|---|---|---|---|
| Operating revenues | $9.7 million | $11.1 million | $49.5 million | $60.7 million |
| Gross margin | $5.0 million | $5.1 million | $22.2 million | $22.5 million |
| Operating income | $0.5 million | $0.7 million | $8.4 million | $8.9 million |
| Net income | $52,298 | $184,617 | $4.4 million | $4.7 million |
| Diluted EPS | $0.01 | $0.04 | $0.94 | $1.02 |
| Dividends declared per share | $0.175 | $0.170 | $0.525 | $0.510 |
Calculated margins were approximately 51.4% gross, 5.5% operating and 0.5% net for the quarter, and 44.9% gross, 17.0% operating and 8.8% net for the nine-month period.
- Cash flow: Nine-month operating cash flow was $15.9 million, compared with $16.4 million in the prior-year period. Capital expenditures were $6.5 million, versus $5.3 million, and financing activities used $1.6 million, primarily for dividends.
- Cash and liquidity: Cash and cash equivalents were $15.7 million at June 30, 2012, up from $8.0 million at September 30, 2011. The company had no borrowings under its revolving line of credit and reported available borrowing limits ranging from $1.0 million to $5.0 million.
- Debt: Total debt was $28.0 million, consisting of a $15.0 million unsecured term note and $13.0 million of long-term debt. The $15.0 million note was refinanced on March 30, 2012 and matures March 31, 2013. Consolidated capitalization was 65% equity and 35% debt.
- Balance sheet: Total assets were $128.9 million and stockholders’ equity was $51.6 million at June 30, 2012. Utility plant, net, was $89.4 million.
Material changes versus the prior comparable periods
- Third-quarter revenue declined 13%, and nine-month revenue declined 19%, primarily because of lower gas deliveries, lower commodity prices and reduced demand for contract services.
- Nine-month delivered volumes fell 16%; residential and commercial volumes fell 20%, reflecting weather that was approximately 22% warmer than normal. Transportation and interruptible volumes decreased 3%.
- Net income decreased $132,319 for the quarter and $303,278 for the nine-month period. Management cited lower deliveries, higher depreciation, employee benefit costs and property taxes as key factors.
- Gross margin declined only 2% for the quarter and 1% for the nine-month period. The weather normalization adjustment generated approximately $1.74 million of additional revenue for the nine-month period and partially offset lost volumetric margin.
- Operations and maintenance expense increased slightly for the quarter but decreased less than 1% for the nine-month period. Depreciation expense increased approximately 6% in both comparable periods because of higher utility plant investment.
- The company declared a quarterly dividend of $0.175 per share, compared with $0.170 in the prior-year quarter.
Outlook, commentary, risks and unusual items
- Management provided no formal earnings or revenue guidance. It stated that full-year results cannot be inferred from the first nine months because of seasonality and weather sensitivity. Future performance will depend primarily on industrial consumption and operating and maintenance costs.
- The company expects elevated capital expenditures for the next five to seven years to replace remaining bare-steel and cast-iron pipeline. Annual capital budgets are expected to exceed historical levels.
- Management expects minimal line-of-credit needs through the next winter if natural-gas prices remain low, but the revolving credit agreement expires March 31, 2013 and renewal or replacement is not guaranteed on equivalent terms.
- The company filed notice of intent to seek an expedited non-gas rate case; the requested increase had not been determined. It also filed a joint stipulation for a 2013 SAVE Plan, subject to Virginia State Corporation Commission approval.
- New base rates became effective November 1, 2011, subject to refund. The company completed the related refund in June 2012 after the SCC approved a $235,000 annual non-gas rate award.
- Interest-rate swaps had a fair-value liability of $3.0 million at June 30, 2012. Management estimated that approximately $900,000 would be reclassified from accumulated other comprehensive loss into interest expense over the following 12 months, subject to changes in LIBOR.
- The company expects additional fiscal-year contributions of approximately $300,000 to its pension plan and $850,000 to its postretirement plan; elsewhere in the filing, management indicates expected fiscal-year pension funding of $1.1 million.
- Two lawsuits relating to a 2009 West Virginia explosion were re-filed in Greenbrier County in May 2012. Management does not believe an adverse outcome is probable and believes applicable insurance would cover damages if the outcome were adverse. The company also disputes an alleged indemnification obligation to a co-defendant.
- Other risks include weather and natural disasters, natural-gas price and supply volatility, regulatory and environmental requirements, rate-relief timing, interest-rate changes, pension and postretirement costs, customer delinquencies, cyberattacks, access to capital and potential environmental remediation at former manufactured-gas-plant sites.
Investor verification priorities
- Verify the March 31, 2013 maturity and renewal prospects for the $15.0 million term note and revolving credit agreement.
- Monitor weather-normalization adjustments, heating-degree days, delivered volumes and the effect of future weather on margins.
- Assess the planned five- to seven-year pipeline replacement program, capital spending and related financing requirements.
- Track the expedited rate case and 2013 SAVE Plan approval, implementation and customer-rate effects.
- Review the West Virginia litigation, insurance coverage and any potential indemnification exposure.
- Reconcile expected pension funding amounts and monitor actuarial losses, interest rates and postretirement obligations.
- Evaluate the approximately $900,000 expected reclassification of interest-rate hedge losses and sensitivity to LIBOR changes.