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 three and nine months ended June 30, 2015, within the fiscal year ending September 30, 2015. Results are seasonal, with typically stronger earnings during winter months.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2015 | Three Months Ended June 30, 2014 | Nine Months Ended June 30, 2015 | Nine Months Ended June 30, 2014 |
|---|---|---|---|---|
| Operating revenues | $10.8 million | $12.0 million | $58.5 million | $64.7 million |
| Gross margin | $6.0 million | $5.7 million | $24.8 million | $24.1 million |
| Operating income | $1.0 million | $0.9 million | $9.4 million | $9.3 million |
| Net income | $0.4 million | $0.3 million | $5.1 million | $4.9 million |
| Diluted EPS | $0.07 | $0.06 | $1.07 | $1.03 |
| Dividends declared per share | $0.1925 | $0.1850 | $0.5775 | $0.5550 |
- Gross margin was approximately 55.4% of revenue in the quarter and 42.4% for the nine-month period, compared with approximately 47.6% and 37.2%, respectively, in the prior comparable periods.
- Operating margin was approximately 8.9% for the quarter and 16.0% for the nine months, compared with approximately 7.8% and 14.4% in the prior-year periods.
- Net margin was approximately 3.3% for the quarter and 8.7% for the nine months, compared with approximately 2.4% and 7.5%, respectively, in the prior-year periods.
- Cash provided by operating activities was $20.2 million for the nine months, up from $12.3 million. Capital expenditures were $10.0 million, and financing activities used $9.8 million. Cash increased by $416,000 to $1.3 million.
- At June 30, 2015, total assets were $140.5 million, stockholders’ equity was $54.7 million, long-term debt was $30.5 million, and line-of-credit borrowings were $1.7 million.
- The company reported consolidated capitalization of 64% equity and 36% debt excluding the line of credit, and 63% equity and 37% debt including it.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue declined 10%, primarily because of lower natural gas prices and an 8% reduction in delivered volumes. Nine-month revenue also declined 10%, principally because gas prices were approximately 17% lower.
- Gross margin increased 4% for the quarter and 3% for the nine months. Higher SAVE Plan revenue and customer base charges more than offset lower volumetric margins.
- SAVE Plan revenue increased to approximately $342,000 for the quarter and $890,000 for the nine months, compared with $141,000 and $268,000, respectively, in the prior-year periods.
- Net income increased 25% for the quarter and 4% for the nine months. Lower interest expense following the September 2014 refinancing was a significant benefit.
- Operations and maintenance expense rose 4% for both the quarter and nine months, while depreciation and amortization increased 7% for both periods because of higher utility plant investment and benefit costs increased.
- Transportation and interruptible volumes declined 11% in the quarter and 7% for the nine months, reflecting reduced production at two major customers and the closure of another customer, which represented approximately $132,000 of prior-year quarterly margin.
Outlook, Risks, Contingencies, and Unusual Items
- No formal earnings guidance is provided. Management cautions that nine-month results are not indicative of full-year results because of weather-related seasonality.
- The company expects capital expenditures to remain elevated for several years. Remaining bare steel and cast iron pipe replacements are expected to be completed in 2016, followed by replacement of older plastic pipe and two custody-transfer stations.
- The company proposed more than $9 million of SAVE Plan projects for calendar 2016. The Virginia State Corporation Commission review was pending at the filing date.
- The company was over-recovered on gas costs by more than $4.5 million during the nine-month period. Management expects the benefit to be temporary, with remaining over-collections credited to customers during 2016.
- Lower gas prices reduced inventory carrying-cost revenue and may continue to reduce it in the remainder of fiscal 2015 and the following fiscal year.
- The unsecured line of credit permits available borrowing limits ranging from $6 million to $24 million, carries interest at 30-day LIBOR plus 100 basis points, and expires March 31, 2016. Management expects to extend or replace it, but there is no assurance that comparable terms will be available.
- The company filed an application to renew or extend local franchises expiring January 1, 2016 and stated that negotiations were in progress. Management expects renewal or extension.
- Natural gas supply and delivery depend on two primary pipelines; failure of one or both could materially impair operations. Weather, commodity prices, industrial demand, regulatory approvals, interest rates, benefit costs, and customer collections remain key risks.
- The company had no outstanding derivative instruments at June 30, 2015. A hypothetical 100-basis-point increase in applicable variable-rate debt would have increased current-period interest expense by approximately $56,000.
- No legal proceedings, defaults, or changes in risk factors were reported. Management concluded that disclosure controls were effective as of June 30, 2015.
Facts Investors Should Verify
- Approval and final terms of the proposed SAVE Plan modification and the related rate recovery.
- Renewal or extension of the Roanoke, Salem, and Vinton franchises before their January 1, 2016 expiration.
- Timing and terms of any extension, replacement, or refinancing of the line of credit before March 31, 2016.
- Amount and timing of customer credits associated with the gas-cost over-recovery.
- Execution, cost, and funding of the elevated pipeline, plastic-pipe, LNG, and custody-transfer-station capital program.
- Impact of lower gas prices, reduced industrial demand, weather normalization, and declining inventory carrying-cost revenue on future margins.