RGC RESOURCES INC quarterly report, Q1 FY2015

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 60,000 customers in and around Roanoke, Virginia. The filing covers the quarter ended December 31, 2014, the first quarter of fiscal 2015, with comparative results for the quarter ended December 31, 2013. The business is highly seasonal and weather-sensitive; management cautions that quarterly results are not indicative of full-year performance.

Financial Results and Key Metrics

Metric	Q1 FY2015	Q1 FY2014	Change
Total operating revenues	$21.25 million	$20.01 million	+6%
Gross margin	$8.62 million	$8.20 million	+5%
Operating income	$3.51 million	$3.27 million	+7%
Net income	$1.92 million	$1.72 million	+12%
Diluted EPS	$0.41	$0.37	+$0.04
Dividends declared per share	$0.1925	$0.1850	+4%

Gross margin was approximately 40.6% of revenue versus 41.0% in the prior-year quarter. Operating margin was approximately 16.5% versus 16.4%, and net margin was approximately 9.1% versus 8.6%.
Regulated gas deliveries increased 2% to 2,982,884 decatherms. Residential and commercial deliveries rose 4%, while transportation and interruptible volumes declined 3%. Heating degree-days increased 2%.
Operating and maintenance expense increased 2% to $3.42 million, primarily due to labor, contracted services, health insurance, pension and postretirement costs. Depreciation and amortization increased 7% to $1.28 million.
Interest expense declined 15% to $397,067 following the September 2014 refinancing, which reduced the long-term debt rate from an average of 6.30% to a stated rate of 4.26% and an effective rate of 4.67%.
Cash used in operating activities was $1.42 million, compared with $1.27 million used in the prior-year quarter. Capital expenditures were $4.38 million, compared with $4.08 million.
Financing activities provided $5.64 million, primarily reflecting increased line-of-credit borrowings. Cash and cash equivalents declined by $149,818 to $699,939.
At December 31, 2014, total assets were $148.71 million, accounts receivable were $10.96 million, gas in storage was $9.26 million and utility plant, net, was $111.92 million.
Line-of-credit borrowings were $15.52 million, long-term debt was $30.50 million and stockholders’ equity was $53.09 million. Total debt represented approximately 46% of consolidated capitalization, including the line of credit.

Material Changes Versus the Prior Comparable Period

Revenue increased by $1.24 million, driven by higher natural gas costs, a 2% increase in deliveries, customer growth, higher customer base charges and increased SAVE Plan revenues.
Gross margin increased by $419,151. The principal contributors were approximately $219,000 of additional SAVE Plan margin, $149,672 of higher volumetric margin, $112,976 of higher customer base charges and $19,541 of carrying-cost margin, partly offset by a $109,039 unfavorable weather-normalization adjustment.
SAVE Plan revenue increased to approximately $238,000 from approximately $19,000, reflecting recovery of qualifying infrastructure investment and related costs.
Net income increased $201,588. Lower interest expense and higher operating margins more than offset higher operating, benefit, tax and depreciation costs.
Other comprehensive income declined to $9,340 from $140,886 because the prior-year period included $134,396 of after-tax interest-rate-swap gains; the swaps were terminated upon the September 2014 refinancing.
Accounts receivable increased substantially from $3.73 million at September 30, 2014 to $10.96 million, consistent with higher winter billings. Gas in storage declined from $11.40 million to $9.26 million.

Guidance, Outlook, Risks and Unusual Items

Management did not provide quantified earnings or revenue guidance. It expects capital expenditures to remain elevated as the company completes bare-steel and cast-iron pipeline replacement, upgrades its LNG plant and gate stations, and expands service. Remaining bare-steel and cast-iron replacement was expected to be completed in 2016.
The unsecured line of credit expires March 31, 2015 unless extended. The company expects to extend or replace it, but states that there is no guarantee that comparable terms will be available. The line supports seasonal working capital and bridge financing for capital projects.
The company expects to use operating cash flow and corporate borrowing to fund ongoing capital projects and may convert some line-of-credit borrowings into permanent long-term debt.
The revised weather-normalization mechanism, effective April 1, 2014, eliminates the prior 3% weather band. Colder-than-normal weather in the quarter generated approximately $109,000 of excess margin that was reserved or accrued for customer adjustment. The current WNA year had produced a net accrual of approximately $35,000 through December 31, 2014.
Operating cash flow is expected to fluctuate materially with weather, gas prices, storage levels, customer collections and construction activity. First-quarter cash flow is generally pressured by higher receivables and seasonal working-capital needs.
The company is exposed to interest-rate and commodity-price risks. A hypothetical 100-basis-point increase in rates on the variable-rate line of credit would have increased quarterly interest expense by approximately $33,000. No derivative instruments were outstanding at December 31, 2014.
The company relies on two primary interstate pipelines; failure of one or both could materially impair gas deliveries. Natural gas supply, storage and pipeline-capacity arrangements are also material to operations.
The company contributed $400,000 to its pension plan and $250,000 to its postretirement medical plan during the quarter and expected to contribute an additional $400,000 and $250,000, respectively, during the fiscal year.
Management stated that disclosure controls and procedures were effective as of December 31, 2014, with no material changes in internal control over financial reporting. The filing reported no changes in legal proceedings or risk factors.

Important Facts for Investors to Verify

Whether the line of credit was extended or replaced after its March 31, 2015 expiration and on what pricing, maturity and capacity terms.
The pace and funding of elevated pipeline, LNG and gate-station capital expenditures, including any conversion of short-term borrowings to long-term debt.
The effect of the revised WNA mechanism and actual weather on customer refunds, revenue and margins.
Progress toward completing bare-steel and cast-iron pipe replacement and the timing of subsequent plastic-pipe replacement projects.
Trends in accounts receivable, gas storage balances, seasonal operating cash flow and line-of-credit utilization.
The sustainability of margin contributions from the SAVE Plan, customer growth, customer base charges and unregulated service contracts.
Potential changes in pension and postretirement obligations, benefit costs and required contributions.
The company’s assessment of the forthcoming revenue-recognition standard, which management did not expect to have a material effect but had not completed evaluating.