RGC Resources, Inc. Form 10-Q Summary
Business Context and Reporting Period
RGC Resources is primarily a regulated natural gas distribution and energy services company serving approximately 58,900 customers in and around Roanoke, Virginia. This filing covers the three and six months ended March 31, 2012, representing the fiscal second quarter and year-to-date period. Results are highly seasonal and are materially affected by weather.
Financial Results and Key Metrics
| Metric | Three Months Ended March 31, 2012 | Three Months Ended March 31, 2011 | Six Months Ended March 31, 2012 | Six Months Ended March 31, 2011 |
|---|---|---|---|---|
| Operating revenues | $21.3 million | $27.1 million | $39.8 million | $49.6 million |
| Gross margin | $9.1 million | $9.2 million | $17.2 million | $17.4 million |
| Operating income | $4.5 million | $4.5 million | $7.9 million | $8.1 million |
| Net income | $2.5 million | $2.5 million | $4.3 million | $4.5 million |
| Diluted EPS | $0.53 | $0.55 | $0.93 | $0.98 |
| Net cash from operating activities | Not separately provided | Not separately provided | $13.2 million | $15.5 million |
- Three-month gross margin was approximately 42.8% of revenue versus 34.0% in the prior-year quarter; six-month gross margin was approximately 43.4% versus 35.1%.
- Three-month operating margin was approximately 20.9%, compared with 16.6% in the prior-year quarter. Six-month operating margin was approximately 19.8%, compared with 16.4%.
- Three-month net margin was approximately 11.7%; six-month net margin was approximately 10.9%.
- Cash and cash equivalents were $16.1 million at March 31, 2012, compared with $8.0 million at September 30, 2011.
- Total debt was $28.0 million at March 31, 2012, consisting of $15.0 million in notes payable and $13.0 million in long-term debt. The company had no outstanding balance under its revolving line of credit.
- Total assets were $130.9 million and stockholders’ equity was $52.1 million at March 31, 2012. Management reported capitalization of approximately 65% equity and 35% debt.
- Capital expenditures were $4.0 million year to date, compared with $2.9 million in the prior-year period. Dividends declared increased to $0.175 per share for the quarter from $0.170.
Material Changes Versus the Prior Comparable Period
- Operating revenue declined 21% for the quarter and 20% year to date, primarily because heating degree days decreased 25% and 24%, respectively, and natural gas commodity prices were lower.
- Total delivered gas volumes decreased 17% for the quarter and 18% year to date. Residential and commercial volumes declined 21% and 22%, respectively.
- The weather normalization adjustment generated approximately $1.2 million of quarterly revenue and $1.7 million of year-to-date revenue, substantially offsetting lost weather-sensitive margin. No WNA revenue was recorded in the prior-year comparable periods.
- Gross margin declined only 1% for both the quarter and year to date despite the significant volume decline, reflecting the WNA, higher non-gas base rates, and lower gas costs.
- Net income decreased approximately $36,500 for the quarter and $171,000 year to date. Higher depreciation, property taxes, employee benefit costs, and professional services offset lower operating and maintenance and bad-debt expenses.
- Operating cash flow decreased $2.3 million year to date, while capital expenditures increased $1.1 million, reflecting an accelerated pipeline renewal program.
- On March 30, 2012, the company refinanced a $15.0 million note with a new one-year term note maturing March 31, 2013, and entered into a new revolving credit agreement expiring March 31, 2013.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management stated that first-half results should not be viewed as indicative of full-year performance because of seasonality. Results for the balance of fiscal 2012 will depend primarily on spring weather and operating and maintenance costs.
- Management expects working-capital borrowing needs to remain minimal through the next winter because natural gas prices are expected to remain low, although the company expects elevated capital spending for the next five to seven years to replace remaining bare steel and cast-iron pipe.
- The company expects fiscal-year contributions of approximately $1.1 million to its pension plan and $850,000 to its postretirement benefit plan; $400,000 had been contributed to the pension plan during the first six months.
- A Virginia State Corporation Commission stipulated agreement provided for approximately $235,000 of annual additional non-gas revenue. The company recorded a provision for refunds, including interest, for amounts billed above the stipulated award; customer refunds await the final SCC order.
- The company’s two primary pipelines deliver 100% of customer gas supply, creating concentration and supply-interruption risk. Other risks include weather, natural gas prices and availability, rate relief, interest rates, regulatory changes, environmental obligations, benefit-plan funding, access to capital, cyberattacks, and customer or industrial demand changes.
- Two lawsuits relating to a 2009 West Virginia explosion were withdrawn from the original court and could be re-filed in Greenbrier County by August 1, 2012. Management did not consider an adverse outcome probable and stated applicable insurance could cover damages if the litigation were re-filed.
- Interest-rate swaps had a March 31, 2012 fair-value liability of $3.0 million. Approximately $900,000 was expected to be reclassified from accumulated other comprehensive loss into interest expense over the following 12 months, subject to changes in LIBOR.
- The company’s public float exceeded $75 million during the quarter; it expected to become an accelerated filer effective after September 30, 2012.
Facts Investors Should Verify
- Final SCC approval of the stipulated rate award and the timing and amount of customer refunds.
- Renewal or replacement of the $15.0 million term note and the revolving credit facility when both mature or expire on March 31, 2013.
- Actual weather normalization billings and the effect of weather on second-half earnings.
- Progress, cost, and financing of the five-to-seven-year pipeline replacement program.
- Potential re-filing, insurance coverage, and financial exposure related to the West Virginia lawsuits.
- Funding requirements and actuarial changes affecting pension and postretirement obligations.