RGC Resources, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended June 30, 2013; fiscal third quarter. The company primarily sells and distributes regulated natural gas through Roanoke Gas Company to approximately 58,300 customers in and around Roanoke, Virginia. Results are highly seasonal and weather-sensitive.
Financial Performance and Position
| Metric | Three months ended June 30, 2013 | Three months ended June 30, 2012 | Nine months ended June 30, 2013 | Nine months ended June 30, 2012 |
|---|---|---|---|---|
| Operating revenue | $11.0 million | $9.7 million | $54.0 million | $49.5 million |
| Gross margin | $5.2 million | $5.0 million | $22.8 million | $22.2 million |
| Operating income | $0.6 million | $0.5 million | $8.4 million | $8.4 million |
| Net income | $0.1 million | $0.1 million | $4.4 million | $4.4 million |
| Diluted EPS | $0.02 | $0.01 | $0.93 | $0.94 |
- Three-month gross margin was approximately 47.4%, compared with 51.4% in the prior-year quarter. Nine-month gross margin was approximately 42.2%, compared with 44.9%.
- Three-month operating margin was approximately 5.9%, compared with 5.5% in the prior-year quarter. Nine-month operating margin was approximately 15.6%, compared with 17.0%.
- Three-month revenue increased 14%, driven by a 38% increase in heating degree days and an 8% increase in delivered natural gas volumes. Nine-month revenue increased 9%, while delivered volumes increased 16% and heating degree days increased 26%.
- Cash provided by operating activities was $14.1 million for the nine months, down from $15.9 million in the prior-year period. Capital expenditures were $6.9 million, compared with $6.5 million.
- Cash and cash equivalents were $10.8 million at June 30, 2013, versus $8.9 million at September 30, 2012. Net cash increased $1.9 million during the nine months.
- Total debt was $28.0 million, consisting of a $15.0 million note payable and $13.0 million of long-term debt. The company reported no balance under its line of credit at quarter-end.
- The line of credit permits borrowings from $1.0 million to $7.0 million, bears interest at 30-day LIBOR plus 100 basis points, and expires March 31, 2014 unless extended.
- At June 30, 2013, capitalization was 64% equity and 36% debt, including notes payable.
- Dividends declared were $0.180 per share for the quarter and $1.540 per share for the nine-month period. The nine-month financing cash outflow included a $1.00 per share special dividend paid in December 2012.
Material Changes Versus the Prior Comparable Period
- Quarterly net income increased $57,805, primarily because of the non-gas rate increase and colder weather, partly offset by higher operating expenses.
- Nine-month net income decreased $7,554 and was essentially unchanged. Higher operating and maintenance costs and depreciation offset the rate increase and higher volumes.
- The Virginia State Corporation Commission approved a $649,639 annual increase in non-gas revenues, effective after the November 2012 interim rates. The company refunded the difference between interim and final rates, including interest, during May 2013.
- Gas utility margin increased $297,727 for the quarter and $592,538 for the nine months. Benefits from higher volumes, base rates, and the SAVE Plan were partly offset by lower inventory carrying-cost revenue.
- Prior-year nine-month results included approximately $1.7 million of weather normalization adjustment revenue; the current period did not trigger the mechanism because weather was within the permitted band.
- Operating and maintenance expense increased 2% for the quarter and 3% for the nine months. Drivers included bad debt, contracted services, insurance, labor, meter inspection activities, and $42,000 of stock-option expense.
- The company paid off an $865,000 note receivable in February 2013, reducing interest income.
Outlook, Risks, Contingencies, and Unusual Items
- Management provided no specific earnings or revenue guidance. It cautioned that interim results are not indicative of the full fiscal year because winter weather generally produces greater earnings.
- The company expects elevated capital expenditures for several years to replace remaining bare steel and cast-iron pipe, with a stated four- to six-year replacement horizon.
- New meter-set inspection protocols are expected to increase expenses beginning in fiscal 2014. The company intends to seek recovery through an expedited rate case and filed notice of its intent to do so on July 16, 2013; the requested rate increase had not yet been determined.
- The asset-management contract for pipeline transportation, storage rights, and gas supply expires in October 2013. The company was evaluating bids for a replacement contract.
- The company relies on two primary pipelines; failure of one or both could materially impair gas deliveries.
- Interest-rate swaps effectively fixed the rates on a $15.0 million note at 5.74% and a $5.0 million variable-rate note at 5.79%. Approximately $930,000 of hedge-related fair value was expected to be reclassified into interest expense over the following 12 months, subject to changes in LIBOR.
- Interest-rate swap liabilities were $2.2 million at June 30, 2013. Natural gas purchase liabilities measured at fair value were $2.0 million. No commodity-price derivatives were outstanding at quarter-end.
- The company expected additional fiscal-year contributions of approximately $300,000 to its pension plan and $850,000 to its postretirement benefit plan after contributing $800,000 to the pension plan during the first nine months.
- Management concluded that disclosure controls and procedures were effective as of June 30, 2013, with no material changes to internal control over financial reporting.
Investor Verification Checklist
- Verify renewal or replacement of the $15.0 million term note and the line-of-credit facility, both scheduled to mature or expire on March 31, 2014.
- Monitor the outcome and timing of the expedited rate case related to meter inspections and remediation.
- Confirm the replacement asset-management contract after the October 2013 expiration.
- Assess the effect of weather normalization, heating degree days, gas volumes, and inventory carrying-cost revenue on future margins.
- Track pipeline replacement capital spending, liquidity usage, and the company’s ability to fund elevated construction expenditures.
- Review pension and postretirement funding requirements and the potential impact of interest-rate swap valuations and reclassifications.