RGC RESOURCES INC quarterly report, Q2 FY2014

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 to approximately 59,700 customers in and around Roanoke, Virginia. The filing covers the three and six months ended March 31, 2014, the second quarter of fiscal 2014. Results are highly seasonal and are generally stronger during winter months.

Financial Performance and Key Metrics

Metric	Three Months Ended March 31, 2014	Three Months Ended March 31, 2013	Six Months Ended March 31, 2014	Six Months Ended March 31, 2013
Total operating revenues	$32.7 million	$24.2 million	$52.7 million	$42.9 million
Gross margin	$10.2 million	$9.6 million	$18.4 million	$17.5 million
Operating income	$5.1 million	$4.8 million	$8.4 million	$7.8 million
Net income	$2.85 million	$2.70 million	$4.57 million	$4.25 million
Diluted EPS	$0.60	$0.57	$0.97	$0.91
Dividends declared per share	$0.185	$0.180	$0.370	$1.360

Quarterly revenue increased 35%, while six-month revenue increased 23%, primarily from higher gas deliveries, colder weather and higher gas costs.
Quarterly gross margin rose 6% and six-month gross margin rose 5%. Gross margin percentages were approximately 31.1% and 34.8%, respectively, versus 39.7% and 40.8% in the comparable prior periods, reflecting the pass-through nature of higher gas costs.
Quarterly operating margin was approximately 15.7%, compared with 19.9% in the prior-year quarter. Six-month operating margin was approximately 15.9%, compared with 18.1%.
Quarterly net margin was approximately 8.7%, compared with 11.2% previously. Six-month net margin was approximately 8.7%, compared with 9.9%.
Total delivered gas volumes increased 10% in the quarter and 9% for the six months. Heating degree days increased 17% and 11%, respectively.

Liquidity, Cash Flow, Debt and Capital Investment

Cash and cash equivalents were $3.8 million at March 31, 2014, compared with $2.8 million at September 30, 2013.
Six-month operating cash flow was $9.7 million, down from $12.3 million in the prior-year period. The decline primarily reflected higher accounts receivable, smaller increases in over-recovered gas costs and lower growth in accounts payable.
Capital expenditures and other utility-property additions used $7.2 million of cash during the six months, compared with $4.4 million previously. Utility plant, net, increased to $102.8 million from $97.7 million at September 30, 2013.
Financing activities used $1.6 million, compared with $4.6 million in the prior-year period, which included a special $1.00-per-share dividend.
At March 31, 2014, debt consisted of a $15.0 million note payable, $1.6 million of current long-term debt maturities and $11.4 million of long-term debt. The company had no outstanding balance on its revolving line of credit at quarter-end.
A new unsecured line of credit became effective March 31, 2014, with seasonal borrowing limits ranging from $1.0 million to $19.0 million, pricing based on 30-day LIBOR plus 100 basis points and expiration on March 31, 2015 unless extended.
The $15.0 million term note was extended to March 31, 2015. Management expects to renew or replace the credit facilities, but states that comparable terms are not guaranteed.
Management reported capitalization of approximately 65% equity and 35% debt, including the note payable and line of credit.

Material Changes Versus the Prior Comparable Period

Net income increased $148,000 for the quarter and $317,000 for the six months.
Non-gas base rates became effective November 1, 2013. The approved rate case provides approximately $887,000 of additional annual non-gas revenue, below the approximately $1.664 million initially placed into effect subject to refund.
The company accrued approximately $719,000 for a weather normalization adjustment refund because heating degree days for the April 2013–March 2014 period were more than 10% above the 30-year average. No comparable WNA amount was recorded for the prior period.
The SAVE rider became effective January 1, 2014 and supports recovery of pipeline replacement costs and projects involving the LNG boil-off compressor and Gala, Virginia transfer station.
Operations and maintenance expense increased 5% in the quarter but was nearly unchanged for the six months. Higher labor, contracted services, bad debt, insurance and stock-option costs were largely offset by lower pension and postretirement costs.
Other revenue declined 42% for the quarter and 30% for the six months, primarily because of the completion of a one-time contract in the prior year.

Guidance, Outlook, Risks and Unusual Items

Management did not provide formal earnings guidance. It cautioned that interim results are not indicative of fiscal-year results because of seasonality.
Future results are expected to depend on weather, energy costs, local economic conditions, operating and maintenance costs, customer collections and gas storage levels.
The company expects elevated capital expenditures to continue as it replaces aging bare steel and cast-iron pipe and advances the LNG and Gala infrastructure projects. It expects to complete the remaining pipe replacement over approximately four years.
The WNA model changes beginning April 1, 2014: the 3% weather band will be eliminated, with adjustments based directly on the 30-year average.
The Virginia State Corporation Commission final order related to the rate case was pending at the financial statement date; customer refunds, including interest, were expected after the order.
The company is exposed to interest-rate and commodity-price risks. Interest-rate swaps effectively fixed the rates on the $15.0 million note and a $5.0 million variable-rate note at approximately 5.74% and 5.79%, respectively.
The company relies on two primary pipelines; failure of either or both could materially affect operations. The filing also identifies risks related to credit facilities, regulatory approvals, weather, infrastructure projects, pension and postretirement obligations, and forward-looking estimates.
Management expects approximately $200,000 of additional pension contributions and $500,000 of postretirement-plan contributions before fiscal year-end, in addition to $300,000 contributed to the pension plan during the first six months.

Investor Verification Points

Verify the final SCC rate-case order, the timing and amount of customer refunds, and the impact of the revised WNA mechanism.
Monitor operating cash flow, seasonal borrowing and compliance with the March 31, 2015 credit-facility and term-note maturities.
Assess whether elevated capital expenditures and infrastructure projects remain on schedule and within budget.
Track weather, gas prices, delivered volumes and the effect of pass-through gas costs on reported margins.
Review the company’s ability to renew or replace its debt facilities on comparable terms.
Evaluate pipeline reliability, regulatory requirements for meter inspections and remediation, and pension and postretirement funding obligations.