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 58,000 customers in and around Roanoke, Virginia. The filing covers the three and nine months ended June 30, 2011; the fiscal year ends September 30. Results are highly seasonal and generally stronger during winter months.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2011 | Nine Months Ended June 30, 2011 |
|---|---|---|
| Total operating revenues | $11.1 million | $60.7 million |
| Gross margin | $5.1 million | $22.5 million |
| Operating income | $0.7 million | $8.9 million |
| Net income | $0.2 million | $4.7 million |
| Diluted earnings per share | $0.08 | $2.04 |
| Operating cash flow | Not separately provided | $16.4 million |
| Capital expenditures | Not separately provided | $5.3 million |
At June 30, 2011, cash and cash equivalents were $16.6 million, compared with $6.7 million at September 30, 2010. Total assets were $125.9 million and stockholders’ equity was $50.2 million. Long-term debt, including current maturities, totaled $28.0 million, consisting of $15.0 million due March 31, 2012 and $13.0 million classified as long-term. The company had no borrowings under its $1 million to $5 million seasonal line of credit.
Gross margin was approximately 45.6% of revenue for the quarter and 37.0% for the nine-month period. Net income margin was approximately 1.7% for the quarter and 7.7% for the nine-month period. Dividends declared were $0.34 per share for the quarter and $1.02 per share for the nine months.
Material Changes Versus Prior Comparable Period
- Third-quarter revenue increased 7% to $11.1 million, gross margin increased 8% to $5.1 million, and net income increased to $184,617 from $13,466.
- Quarterly results benefited from colder April weather, a 10% increase in delivered volumes, and the November 2010 non-gas base-rate increase. Heating degree days increased 18% year over year.
- Nine-month revenue declined 7% to $60.7 million because lower natural-gas prices more than offset higher non-gas rates. Average delivered gas cost declined 13%.
- Nine-month total delivered volumes increased 2%; residential and commercial volumes declined 1%, while transportation and interruptible volumes increased 10%.
- Nine-month gross margin increased 3% to $22.5 million despite lower revenue. Utility margin increased $699,026, primarily from rate increases, while other margins declined $76,510 because of reduced unregulated contract services.
- Nine-month operating cash flow increased from $13.4 million to $16.4 million. The increase reflected working-capital changes, higher deferred tax liabilities, and the effect of bonus depreciation provisions.
- Capital expenditures increased from $4.6 million to $5.3 million, primarily because of a downtown Roanoke pipeline renewal project.
Guidance, Outlook, Risks, and Unusual Items
- Management stated that current quarterly and nine-month earnings should not be viewed as indicative of fiscal-year results because of seasonality and weather sensitivity.
- The fiscal 2011 capital budget exceeds $7.5 million. Management expects capital expenditures to remain near these levels for the next several years while replacing remaining cast-iron and bare-steel pipe over approximately 10 years.
- Management expects carrying-cost revenue to be near or slightly below the prior-year level for the balance of fiscal 2011 and expects minimal line-of-credit usage through the next winter if gas prices remain stable.
- Roanoke Gas completed a refund of excess non-gas revenues collected between November 1, 2010 and April 6, 2011. The company filed notice of its intent to pursue an expedited rate case based on the June 30, 2011 test period; the requested increase had not been determined.
- The $15.0 million unsecured variable-rate note and the seasonal line of credit mature or expire March 31, 2012. Management expects to renew or replace them on comparable terms, but states that no assurance exists that equivalent financing will be available.
- Interest-rate swaps effectively fixed the related variable-rate debt at 5.74% and 5.79%; their June 30, 2011 fair value liability was $2.8 million. Management estimated that approximately $910,000 could be reclassified from accumulated other comprehensive loss into interest expense over the next 12 months.
- The company expects fiscal-year contributions of approximately $1.0 million to the pension plan and $0.7 million to the postretirement plan; $600,000 had been contributed to the pension plan during the first nine months.
- Principal risks include weather and natural disasters, gas-price and supply volatility, regulatory or rate-relief delays, pipeline interruptions, industrial customer losses, rising interest rates, benefit-plan funding requirements, environmental remediation at former manufactured-gas sites, and access to capital.
- On July 25, 2011, the board declared a two-for-one stock split in the form of a 100% share dividend, payable September 1, 2011 to shareholders of record August 15, 2011. Reported period earnings per share were not adjusted for the subsequent split.
Facts Investors Should Verify
- Whether the March 31, 2012 debt maturity and credit-line expiration are refinanced on comparable terms.
- The outcome and timing of the proposed expedited rate case and any related regulatory approvals or refunds.
- Actual winter weather, gas prices, storage balances, and customer demand, given the company’s seasonal earnings profile.
- Execution and funding of the pipeline-renewal program and the company’s ability to sustain capital spending near $7.5 million annually.
- Required pension and postretirement contributions and changes in actuarial assumptions or funded status.
- Potential costs or recoveries associated with former manufactured-gas plant environmental liabilities and dependence on two primary gas pipelines.