RGC Resources, Inc. 2014 Fiscal Third-Quarter 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 58,700 customers in and around Roanoke, Virginia. The filing covers the three and nine months ended June 30, 2014, with comparative periods ended June 30, 2013. Results are highly seasonal and are generally stronger during winter months.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2014 | Three Months Ended June 30, 2013 | Nine Months Ended June 30, 2014 | Nine Months Ended June 30, 2013 |
|---|---|---|---|---|
| Total operating revenue | $12.0 million | $11.0 million | $64.7 million | $54.0 million |
| Gross margin | $5.7 million | $5.2 million | $24.1 million | $22.8 million |
| Operating income | $0.9 million | $0.6 million | $9.3 million | $8.4 million |
| Net income | $0.3 million | $0.1 million | $4.9 million | $4.4 million |
| Diluted EPS | $0.06 | $0.02 | $1.03 | $0.93 |
| Dividends declared per share | $0.185 | $0.180 | $0.555 | $1.540 |
- Quarterly gross margin was approximately 47.6% of revenue versus 47.4% in the prior-year quarter. Nine-month gross margin declined to approximately 37.2% from 42.2%, primarily because higher gas commodity costs increased revenue and cost of sales disproportionately.
- Quarterly operating margin improved to approximately 7.8% from 5.9%; nine-month operating margin was approximately 14.4% versus 15.6%.
- Net cash provided by operating activities was $12.3 million for the nine months, down from $14.1 million. Capital expenditures and other investing activity used $10.8 million, compared with $6.9 million in the prior year.
- Cash and cash equivalents were $2.0 million at June 30, 2014, compared with $2.8 million at September 30, 2013. The company reported no outstanding balance under its line of credit at quarter-end.
- Total debt was $28.0 million at June 30, 2014, consisting of $28.0 million classified as long-term debt after reclassification of current maturities and the note payable. Debt represented approximately 35% of consolidated capitalization; equity represented 65%.
- Total assets were $126.9 million and stockholders’ equity was $52.4 million at June 30, 2014.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue increased 9%, while nine-month revenue increased 20%. Regulated gas deliveries rose 3% for the quarter and 8% for the nine-month period.
- Net income increased $173,091 for the quarter and $489,814 for the nine-month period.
- Improved results reflected the November 2013 non-gas rate increase, higher commercial and industrial consumption, colder weather during the nine-month period, and increased SAVE Plan revenues.
- The approved rate increase provides approximately $887,062 of additional annual non-gas revenue. The company refunded customers the excess collected under interim rates, including interest.
- The nine-month period included approximately $707,000 of weather normalization adjustment refunds because heating degree days were approximately 10% above the 30-year normal. Beginning April 1, 2014, the weather normalization mechanism no longer includes a 3% weather band.
- Operations and maintenance expense increased 1% for the nine-month period. Higher labor, contracted services, insurance, bad debt and inspection-related costs were partly offset by lower pension and postretirement benefit costs and increased capitalization of overhead.
- Utility plant investment increased, with net utility plant of $105.4 million at June 30, 2014 versus $97.7 million at September 30, 2013. Capital expenditures increased approximately $3.9 million year over year for the nine-month period.
- Dividends paid declined primarily because the prior-year period included a special $1.00-per-share dividend.
Guidance, Outlook, Risks and Unusual Items
- Management did not provide specific earnings guidance. It cautioned that quarterly and nine-month results are not indicative of full-year results because of seasonality and weather sensitivity.
- Capital expenditures are expected to remain elevated through the remainder of fiscal 2014 and for several years as the company replaces aging bare steel and cast-iron pipe and completes LNG plant and Gala transfer-station projects. The company expects to complete replacement of the remaining aging pipe over approximately four years.
- On July 31, 2014, the company entered into an agreement for $30.5 million of 20-year fixed-rate debt at 4.26%. The proceeds are expected to refinance existing debt, repay the $15.0 million note payable, and fund estimated early-redemption premiums associated with existing debt and interest-rate swaps. Closing and retirement of existing debt were expected in September 2014.
- The new unsecured line of credit has borrowing availability ranging from $1.0 million to $19.0 million, bears interest at 30-day LIBOR plus 100 basis points, and expires March 31, 2015 unless extended or replaced. Management expects to extend or replace it, but provides no assurance that comparable terms will be available.
- Interest-rate swaps had a fair-value liability of $1.34 million at June 30, 2014. Management expected approximately $0.94 million of hedge-related accumulated other comprehensive loss to be reclassified into interest expense over the following 12 months, although the swaps were expected to be retired in connection with the refinancing.
- Key risks include weather, natural gas prices, customer collections, regulatory decisions, capital funding, interest rates, reliance on two primary gas pipelines, and the renewal of certain non-gas service contracts. The company stated that no material changes occurred to the risk factors disclosed in its 2013 Form 10-K.
- The company expects at least $150,000 of additional pension contributions and $500,000 of postretirement plan contributions before the end of fiscal 2014.
- The company’s disclosure controls and procedures were assessed as effective as of June 30, 2014, and no material changes to internal control over financial reporting were reported.
Important Facts for Investors to Verify
- Confirm completion, terms, accounting treatment and interest savings from the $30.5 million debt refinancing announced after quarter-end.
- Assess whether elevated capital expenditures and pipeline, LNG and transfer-station projects remain on schedule and within budget.
- Monitor weather normalization adjustments, rate-case implementation and the effect of the revised weather normalization mechanism on future margins.
- Review liquidity needs during the next winter season, including line-of-credit renewal risk and working-capital requirements for gas storage.
- Evaluate the sustainability of earnings from SAVE Plan revenues and non-gas service contracts, several of which are limited-term or subject to renewal.
- Consider the effect of pension, postretirement, asset-retirement and interest-rate-swap obligations, including any refinancing premiums deferred as regulatory assets.