RGC RESOURCES INC quarterly report, Q1 FY2012

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 58,700 customers in and around Roanoke, Virginia. The filing covers the three months ended December 31, 2011, the first quarter of fiscal 2012. Results are highly seasonal and weather-sensitive, with greater earnings generally occurring during winter months.

Financial Performance and Position

Metric	Q1 FY2012	Q1 FY2011	Change
Total operating revenues	$18.50 million	$22.55 million	Down 18%
Gross margin	$8.13 million	$8.23 million	Down 1%
Operating income	$3.41 million	$3.62 million	Down 6%
Net income	$1.83 million	$1.97 million	Down 7%
Basic and diluted EPS	$0.40	$0.43	Down $0.03
Comprehensive income	$1.96 million	$2.47 million	Down 20%

Gross margin was approximately 44.0% of revenue, compared with 36.5% in the prior-year quarter. Operating margin was approximately 18.4%, compared with 16.0%.
Natural gas utility revenue declined 18% to $18.17 million. Regulated gas deliveries decreased 19%, while heating degree days declined 23%.
Net cash used in operating activities was $1.51 million, compared with $0.50 million used in the prior-year quarter. Capital expenditures were $2.09 million, up from $1.49 million.
Cash and cash equivalents declined from $7.95 million at September 30, 2011 to $3.78 million at December 31, 2011.
Total debt was $28.0 million, consisting of $15.0 million of current maturities and $13.0 million of long-term debt. Management reported capitalization of 64% equity and 36% debt.
Stockholders’ equity increased to $50.09 million from $48.79 million at September 30, 2011. The quarterly dividend declared was $0.175 per share, compared with $0.170 in the prior-year quarter.

Material Changes Versus the Prior Comparable Period

Warmer weather significantly reduced residential and commercial demand. Residential and commercial volumes fell 24%, while transportation and interruptible volumes fell 4%.
The company recorded approximately $577,000 of additional revenue under its weather normalization adjustment mechanism because weather was approximately 16% warmer than the 30-year average. No comparable adjustment was recorded in the prior-year quarter.
New base rates effective November 1, 2011 generated approximately $145,000 of additional margin during the quarter. The rates remain subject to refund pending a Virginia State Corporation Commission decision.
Lower gas prices and reduced storage costs lowered carrying-cost revenue by approximately $3,000 and are expected to reduce such revenue over the balance of the year.
Operations and maintenance expense increased 1%, depreciation and amortization increased 5%, and pension and postretirement costs rose due primarily to higher actuarial-loss amortization and health insurance costs.
The decline in comprehensive income exceeded the decline in net income because other comprehensive income fell to $127,000 from $497,000, primarily reflecting changes in interest-rate swap valuations.

Guidance, Outlook, Risks, Contingencies, and Unusual Items

Management cautioned that first-quarter results are not indicative of the full fiscal year. Future performance will depend primarily on weather, energy costs, local economic conditions, operating costs, and customer demand.
The company expects capital expenditures to remain near an annual budget of approximately $8.2 million for the next several years, focused substantially on replacing remaining bare steel and cast iron pipeline.
Management expects minimal use of its line of credit through the next winter because of projected lower natural gas prices, but the line of credit expires March 31, 2012. Extension or replacement is anticipated but not guaranteed.
A $15.0 million unsecured variable-rate note also matures March 31, 2012. Management expects annual extensions on comparable terms, but no assurance is provided.
The company expects fiscal 2012 contributions of approximately $1.0 million to its pension plan and $850,000 to its postretirement plan; $400,000 had been contributed to the pension plan during the quarter.
Two interest-rate swaps effectively fix rates on variable-rate debt at 5.74% and 5.79%. Approximately $900,000 of hedge losses were expected to be reclassified into interest expense over the next 12 months, subject to changes in LIBOR.
The final amount of the weather normalization surcharge or customer refund may change based on weather during the second fiscal quarter. The final base-rate award may also differ from the amount reflected in the financial statements.
The company relies on two primary pipelines for 100% of customer gas supply; failure of one or both could materially disrupt operations. Other risks include regulatory delays, changing gas prices, interest rates, benefit-plan funding, customer conservation or delinquencies, environmental obligations, and access to capital.
The IRS notified the company in January 2012 of an audit of its September 30, 2010 federal income tax return. The filing does not identify a current estimated exposure.
The company continues to face litigation related to a 2009 West Virginia explosion and fire. It disputes a co-defendant’s indemnification claim, does not consider an adverse outcome probable, and believes applicable insurance would cover damages if necessary.

Important Facts for Investors to Verify

Outcome and effective date of the Virginia SCC rate case, including any required customer refunds.
Final weather normalization adjustment after the second fiscal quarter and its effect on revenue and margin.
Extension or refinancing of the $15.0 million note and the line-of-credit agreement due March 31, 2012.
Actual weather, gas prices, storage balances, and operating cash flow during the remainder of fiscal 2012.
Progress and total cost of the pipeline replacement program relative to the $8.2 million annual capital budget.
Funding status and required contributions for pension and postretirement benefit plans.
Status of the West Virginia litigation, the indemnification claim, and any related insurance recovery.
Results of the IRS tax audit and any resulting tax liabilities or adjustments.