RGC Resources, Inc. — Form 10-Q Summary
Business Context and Reporting Period
RGC Resources is primarily a regulated natural gas distribution company serving approximately 59,000 residential, commercial and industrial customers in and around Roanoke, Virginia through Roanoke Gas Company. The report covers the three months ended December 31, 2012, the first quarter of fiscal 2013, with comparisons to the three months ended December 31, 2011. Results are highly seasonal, with generally higher earnings during winter months.
Key Financial Metrics
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Total operating revenues | $18.75 million | $18.50 million | Up 1% |
| Gross margin | $7.94 million | $8.13 million | Down 2% |
| Gross margin percentage | Approximately 42.3% | Approximately 43.9% | Down approximately 1.6 percentage points |
| Operating income | $2.95 million | $3.41 million | Down 13% |
| Net income | $1.55 million | $1.83 million | Down $281,000, or 15% |
| Basic and diluted EPS | $0.33 | $0.40 | Down $0.07 |
| Net margin | Approximately 8.3% | Approximately 9.9% | Down approximately 1.6 percentage points |
| Cash flow from operations | $(2.18) million | $(1.51) million | Greater use of $670,000 |
| Capital expenditures | $2.49 million | $2.09 million | Up approximately $407,000 |
| Ending cash and equivalents | $604,000 | $3.78 million | Down from $8.91 million at September 30, 2012 |
At December 31, 2012, total assets were $128.5 million and stockholders’ equity was $47.4 million. Debt included a $15.0 million note payable, $13.0 million of long-term debt and $1.3 million drawn under a seasonal line of credit. Management reported capitalization of approximately 62% equity and 38% debt.
Material Changes Versus the Prior Comparable Period
- Total gas deliveries increased 8%, including an 11% increase in residential and commercial deliveries. Heating degree days increased 11% year over year.
- Revenue increased modestly because of higher deliveries and a non-gas rate increase effective November 1, 2012, partly offset by lower natural gas commodity prices and lower other-service revenue.
- Gross margin declined 2%. The weather normalization adjustment contributed approximately $182,000 in revenue in the current quarter versus approximately $577,000 in the prior-year quarter, a decrease of approximately $395,000.
- Lower gas-storage prices reduced carrying-cost revenue by approximately $117,000. The price of gas in storage was 22% lower than the prior-year period.
- Operations and maintenance expense increased 5%, general taxes increased 6%, and depreciation and amortization increased 6%, primarily reflecting higher labor, contracted services, professional services, insurance, property taxes and utility plant investment.
- The Company paid a special $1.00-per-share dividend on December 17, 2012. Total cash dividends paid were $5.49 million versus $786,000 in the prior-year quarter.
- The Company accessed its line of credit for the first time since February 2009, ending the quarter with $1.28 million outstanding.
Cash Flow, Liquidity and Financing
- Operating activities used $2.18 million of cash, reflecting seasonal working-capital needs, higher receivables and storage-related activity.
- Investing activities used $2.49 million, primarily for pipeline renewal and other utility plant additions. Management expects elevated capital spending for the next several years while replacing remaining bare steel and cast iron pipe over a five- to seven-year program.
- Financing activities used $3.64 million, primarily because of the special dividend, partly offset by net line-of-credit borrowings and stock issuance under the Dividend Reinvestment and Stock Purchase Plan.
- The $5.0 million unsecured line of credit was scheduled to expire March 31, 2013, with availability expected to decline to $1.0 million by that date. The Company anticipated extending or replacing it, but stated there was no guarantee of comparable terms.
- The $15.0 million unsecured variable-rate note was also scheduled to mature March 31, 2013. Management expected annual extensions until the related interest-rate swap matures in 2015.
- Two interest-rate swaps effectively fixed rates on variable-rate debt at 5.74% and 5.79%. The swaps had a combined fair-value liability of $2.68 million at December 31, 2012.
Guidance, Outlook, Risks and Unusual Items
- The Company did not provide formal earnings guidance. Management cautioned that first-quarter results are not indicative of full-year fiscal 2013 results because of seasonality and weather.
- Future results depend primarily on weather, energy costs, local economic conditions, operating costs, customer collections, storage levels and capital spending.
- New base rates effective November 1, 2012 were expected to provide approximately $1.84 million of annual additional non-gas revenue, but were subject to refund pending the Virginia SCC’s final order. A public hearing was scheduled for March 26, 2013.
- The weather normalization adjustment produced approximately $182,000 of additional revenue for the nine-month period ended December 31, 2012. The final surcharge or refund could change based on weather during the second fiscal quarter.
- The SAVE Plan and Rider was approved in July 2012 and began appearing on customer bills in January 2013, providing a mechanism for recovery of qualifying pipeline-replacement investment.
- The asset-management contract supporting transportation, storage and gas supply was scheduled to expire in October 2013. More than half of the Company’s other-service revenue and margin was associated with contracts whose continuation beyond 2013 was uncertain.
- Roanoke Gas relies on two primary pipelines; failure of one or both could have a major adverse effect on operations. The business also faces regulatory, commodity-price, interest-rate, pension and postretirement-benefit risks.
- The Company contributed $500,000 to its pension plan during the quarter and expected additional fiscal-year contributions of approximately $600,000 to the pension plan and $850,000 to the postretirement plan.
- On February 1, 2013, ANGD, LLC paid the $865,000 balance of a note receivable. The filing reported no other material subsequent events.
Important Facts for Investors to Verify
- Confirm renewal or replacement of the $15.0 million note and the seasonal line of credit before their March 31, 2013 maturities.
- Review the Virginia SCC’s final decision on the rate increase and the resulting customer refund or revenue recognition.
- Track second-quarter weather and the final settlement of the weather normalization adjustment.
- Assess whether elevated pipeline-renewal capital expenditures can be funded through operating cash flow, SAVE Plan revenues, equity issuance and borrowing.
- Monitor the effect of lower gas-storage prices and changing commodity prices on carrying-cost revenue and liquidity.
- Evaluate the sustainability of the special dividend and regular dividend obligations relative to seasonal cash flow and planned capital spending.