FORM 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For Quarterly Period Ended June 30, 2012

Commission File Number 000-26591

 

 

RGC Resources, Inc.

(Exact name of Registrant as Specified in its Charter)

 

 

 

VIRGINIA   54-1909697

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification No.)

519 Kimball Ave., N.E., Roanoke, VA   24016
(Address of Principal Executive Offices)   (Zip Code)

(540) 777-4427

(Registrant’s Telephone Number, Including Area Code)

None

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "large accelerated filer," "accelerarted-filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)     Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

 

Class

  

Outstanding at July 31, 2012

Common Stock, $5 Par Value    4,660,452

 

 

 


RGC RESOURCES, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

UNAUDITED

 

     June 30,
2012
    September 30,
2011
 

ASSETS

    

CURRENT ASSETS:

    

Cash and cash equivalents

   $ 15,748,808      $ 7,951,429   

Accounts receivable (less allowance for uncollectibles of $232,519 and and $66,058, respectively)

     2,793,369        3,437,904   

Notes receivable

     1,142,770        277,770   

Materials and supplies

     651,139        583,157   

Gas in storage

     6,844,274        12,890,934   

Prepaid income taxes

     503,025        1,741,349   

Deferred income taxes

     2,924,570        2,870,843   

Other

     1,238,673        1,250,859   
  

 

 

   

 

 

 

Total current assets

     31,846,628        31,004,245   
  

 

 

   

 

 

 

UTILITY PROPERTY:

    

In service

     133,327,831        128,709,183   

Accumulated depreciation and amortization

     (46,273,103     (45,191,684
  

 

 

   

 

 

 

In service, net

     87,054,728        83,517,499   

Construction work in progress

     2,383,234        2,204,957   
  

 

 

   

 

 

 

Utility plant, net

     89,437,962        85,722,456   
  

 

 

   

 

 

 

OTHER ASSETS:

    

Notes receivable

     47,692        1,142,770   

Regulatory assets

     7,430,588        7,547,729   

Other

     163,658        131,849   
  

 

 

   

 

 

 

Total other assets

     7,641,938        8,822,348   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 128,926,528      $ 125,549,049   
  

 

 

   

 

 

 

See notes to condensed consolidated financial statements.


RGC RESOURCES, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

UNAUDITED

 

     June 30,     September 30,  
     2012     2011  

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

CURRENT LIABILITIES:

    

Current maturities of long-term debt

   $ —        $ 15,000,000   

Notes payable

     15,000,000        —     

Dividends payable

     815,579        786,270   

Accounts payable

     4,580,207        5,299,475   

Customer credit balances

     1,642,984        2,525,071   

Customer deposits

     1,637,498        1,607,844   

Accrued expenses

     1,689,663        2,141,132   

Over-recovery of gas costs

     1,672,536        355,476   

Fair value of marked-to-market transactions

     3,016,897        3,312,176   
  

 

 

   

 

 

 

Total current liabilities

     30,055,364        31,027,444   
  

 

 

   

 

 

 

LONG-TERM DEBT

     13,000,000        13,000,000   
  

 

 

   

 

 

 

DEFERRED CREDITS AND OTHER LIABILITIES:

    

Asset retirement obligations

     4,006,699        3,863,933   

Regulatory cost of retirement obligations

     7,949,065        7,596,678   

Benefit plan liabilities

     11,229,281        11,326,909   

Deferred income taxes

     11,065,766        9,927,135   

Deferred investment tax credits

     14,395        21,172   
  

 

 

   

 

 

 

Total deferred credits and other liabilities

     34,265,206        32,735,827   
  

 

 

   

 

 

 

STOCKHOLDERS’ EQUITY:

    

Common stock, $5 par value; authorized 10,000,000 shares; issued and outstanding 4,659,701 and 4,624,682, respectively

     23,298,505        23,123,410   

Preferred stock, no par, authorized 5,000,000 shares; no shares issued and outstanding

     —          —     

Capital in excess of par value

     7,246,817        6,830,395   

Retained earnings

     24,795,748        22,865,311   

Accumulated other comprehensive loss

     (3,735,112     (4,033,338
  

 

 

   

 

 

 

Total stockholders’ equity

     51,605,958        48,785,778   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

   $ 128,926,528      $ 125,549,049   
  

 

 

   

 

 

 


RGC RESOURCES, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

FOR THE THREE-MONTH AND NINE-MONTH PERIODS ENDED JUNE 30, 2012 AND 2011

UNAUDITED

 

    

Three Months Ended

June 30,

   

Nine Months Ended

June 30,

 
     2012      2011     2012      2011  

OPERATING REVENUES:

          

Gas utilities

   $ 9,422,220       $ 10,759,012      $ 48,617,001       $ 59,780,573   

Other

     257,522         348,473        852,144         947,240   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total operating revenues

     9,679,742         11,107,485        49,469,145         60,727,813   
  

 

 

    

 

 

   

 

 

    

 

 

 

COST OF SALES:

          

Gas utilities

     4,543,936         5,842,241        26,793,998         37,717,906   

Other

     160,428         200,257        451,620         513,990   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total cost of sales

     4,704,364         6,042,498        27,245,618         38,231,896   
  

 

 

    

 

 

   

 

 

    

 

 

 

GROSS MARGIN

     4,975,378         5,064,987        22,223,527         22,495,917   
  

 

 

    

 

 

   

 

 

    

 

 

 

OTHER OPERATING EXPENSES:

          

Operations and maintenance

     3,045,010         3,012,695        9,606,730         9,656,044   

General taxes

     336,393         315,557        1,040,125         974,421   

Depreciation and amortization

     1,063,484         1,001,805        3,182,065         3,005,762   
  

 

 

    

 

 

   

 

 

    

 

 

 

Total other operating expenses

     4,444,887         4,330,057        13,828,920         13,636,227   
  

 

 

    

 

 

   

 

 

    

 

 

 

OPERATING INCOME

     530,491         734,930        8,394,607         8,859,690   

OTHER INCOME, Net

     17,025         19,611        33,184         52,359   

INTEREST EXPENSE

     456,313         456,314        1,372,022         1,374,782   
  

 

 

    

 

 

   

 

 

    

 

 

 

INCOME BEFORE INCOME TAXES

     91,203         298,227        7,055,769         7,537,267   

INCOME TAX EXPENSE

     38,905         113,610        2,685,252         2,863,472   
  

 

 

    

 

 

   

 

 

    

 

 

 

NET INCOME

     52,298         184,617        4,370,517         4,673,795   
  

 

 

    

 

 

   

 

 

    

 

 

 

OTHER COMPREHENSIVE INCOME (LOSS) NET OF TAX

     44,265         (174,831     298,226         529,883   
  

 

 

    

 

 

   

 

 

    

 

 

 

COMPREHENSIVE INCOME

   $ 96,563       $ 9,786      $ 4,668,743       $ 5,203,678   
  

 

 

    

 

 

   

 

 

    

 

 

 

BASIC EARNINGS PER COMMON SHARE

   $ 0.01       $ 0.04      $ 0.94       $ 1.02   
  

 

 

    

 

 

   

 

 

    

 

 

 

DILUTED EARNINGS PER COMMON SHARE

   $ 0.01       $ 0.04      $ 0.94       $ 1.02   
  

 

 

    

 

 

   

 

 

    

 

 

 

DIVIDENDS DECLARED PER COMMON SHARE

   $ 0.175       $ 0.170      $ 0.525       $ 0.510   
  

 

 

    

 

 

   

 

 

    

 

 

 

See notes to condensed consolidated financial statements.


RGC RESOURCES, INC. AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE NINE-MONTH PERIODS

ENDED JUNE 30, 2012 AND 2011

UNAUDITED

 

    

Nine Months Ended

June 30,

 
     2012     2011  

CASH FLOWS FROM OPERATING ACTIVITIES:

    

Net income

   $ 4,370,517      $ 4,673,795   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     3,302,626        3,123,379   

Cost of removal of utility plant, net

     (303,546     (298,940

Changes in assets and liabilities which used cash, exclusive of changes and noncash transactions shown separately

     8,495,593        8,852,995   
  

 

 

   

 

 

 

Net cash provided by operating activities

     15,865,190        16,351,229   
  

 

 

   

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES:

    

Additions to utility plant and nonutility property

     (6,492,885     (5,256,744

Proceeds from disposal of equipment

     14,250        —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (6,478,635     (5,256,744
  

 

 

   

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES:

    

Proceeds on collection of note

     230,078        87,000   

Proceeds from issuance of stock (35,019 and 66,568 shares, respectively)

     591,517        1,001,335   

Cash dividends paid

     (2,410,771     (2,309,539
  

 

 

   

 

 

 

Net cash used in financing activities

     (1,589,176     (1,221,204
  

 

 

   

 

 

 

NET INCREASE IN CASH AND CASH EQUIVALENTS

     7,797,379        9,873,281   

BEGINNING CASH AND CASH EQUIVALENTS

     7,951,429        6,745,630   
  

 

 

   

 

 

 

ENDING CASH AND CASH EQUIVALENTS

   $ 15,748,808      $ 16,618,911   
  

 

 

   

 

 

 

SUPPLEMENTAL CASH FLOW INFORMATION:

    

Interest paid

   $ 1,486,815      $ 1,503,314   

Income taxes paid (refunded) net

     525,225        (705,000

SUPPLEMENTAL INFORMATION—NON-CASH TRANSACTION:

    

The Company’s $15,000,000 note due March 31, 2012 was refinanced with the issuance of a $15,000,000 one-year term note on March 30, 2012.

    

See notes to condensed consolidated financial statements.


RGC RESOURCES, INC. AND SUBSIDIARIES

CONDENSED NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS UNAUDITED

 

1. Basis of Presentation

RGC Resources, Inc. is an energy services company primarily engaged in the sale and distribution of natural gas. The consolidated financial statements include the accounts of RGC Resources, Inc. and its wholly owned subsidiaries (“Resources” or the “Company”): Roanoke Gas Company; Diversified Energy Company; and RGC Ventures of Virginia, Inc.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments necessary to present fairly RGC Resources, Inc.’s financial position as of June 30, 2012 and the results of its operations for the three months and nine months ended June 30, 2012 and 2011 and its cash flows for the nine months ended June 30, 2012 and 2011. The results of operations for the three months and nine months ended June 30, 2012 are not indicative of the results to be expected for the fiscal year ending September 30, 2012, as quarterly earnings are affected by the highly seasonal nature of the business and weather conditions, which generally result in greater earnings during the winter months.

The condensed consolidated interim financial statements and condensed notes are presented as permitted by Rule 8-03 of Regulation S-X and the instructions to Form 10-Q and do not contain certain information included in the Company’s annual consolidated financial statements and notes thereto. The condensed consolidated financial statements and condensed notes should be read in conjunction with the financial statements and notes contained in the Company’s Form 10-K. The September 30, 2011 balance sheet was included in the Company’s Form 10-K.

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Prior year share and per share data have been restated to reflect the effect of a two-for-one stock split effected in the form of a 100% share dividend on the Company’s common stock payable to shareholders on September 1, 2011.

The Company’s significant accounting policies are described in Note 1 to the consolidated financial statements in Form 10-K for the year ended September 30, 2011. Newly adopted and newly issued accounting standards are discussed below.


RGC RESOURCES, INC. AND SUBSIDIARIES

 

Recently Issued Accounting Standards

In May 2011, the FASB issued guidance under FASB ASC No. 820 – Fair Value Measurement, which serves to converge guidance between the FASB and the International Accounting Standards Board (“IASB”) for fair value measurements and their related disclosures. This guidance provides for common requirements for measuring fair value and for disclosing information about fair value measurements including the consistency of the meaning of the term “fair value”. This guidance provides clarification about the application of existing fair value measurement and disclosure requirements as well as changes in particular requirements for measuring fair value or for disclosing information about fair value measurements. The new requirements are effective for the current quarter and have been included in the disclosures contained in Note 11 below.

In June 2011, the FASB issued guidance under FASB ASC No. 220 – Comprehensive Income that defines the presentation of Comprehensive Income in the financial statements. According to the guidance, an entity may present a single continuous statement of comprehensive income or two separate statements – a statement of income and a statement of other comprehensive income that immediately follows the statement of income. In either presentation, the entity is required to present on the face of the financial statement the components of other comprehensive income including the reclassification adjustment for items that are reclassified from other comprehensive income to net income. The Company currently provides the information for Comprehensive Income in Note 6. The new requirements are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011.

In December 2011, the FASB issued additional guidance under FASB ASC No. 220 that deferred the effective date of earlier guidance with regard to the presentation of reclassifications of items out of accumulated other comprehensive income. All other provisions of the original guidance remain in effect. Management is currently evaluating the specific requirements of this guidance but does not anticipate these changes to have a material impact on its financial position or cash flows.

In December 2011, the FASB issued disclosure guidance under FASB ASC No. 210 – Balance Sheet that requires an entity to disclose information about offsetting and related arrangements that enable users of its financial statements to understand the effect of those arrangements on its financial position. Management is currently evaluating the requirements of this guidance but does not anticipate these changes to have a material impact on its financial position. The new requirements are effective on a retrospective basis for annual reporting periods, and interim periods within those annual periods, beginning on or after January 1, 2013.

Other accounting standards that have been issued by the FASB or other standard-setting bodies are not currently applicable to the Company or are not expected to have a material impact on the Company’s financial position, results of operations and cash flows.


RGC RESOURCES, INC. AND SUBSIDIARIES

 

2. Rates and Regulatory Matters

The State Corporation Commission of Virginia (“SCC”) exercises regulatory authority over the natural gas operations of Roanoke Gas. Such regulation encompasses terms, conditions, and rates to be charged to customers for natural gas service; safety standards; extension of service; accounting and depreciation.

On November 1, 2011, Roanoke Gas Company placed into effect new base rates, subject to refund, that provide for approximately $1,100,000 in additional annual non-gas revenues. On March 22, 2012, the Company reached a stipulated agreement with the SCC staff for a non-gas rate award in the amount of $235,000. On April 12, 2012, the Hearing Examiner issued his report accepting the stipulated agreement between the Company and SCC staff. On May 2, 2012, the SCC issued a final order accepting the Hearing Examiner’s report. In June 2012, the Company completed its refund for the difference between the rates placed into effect on November 1 and the final rates approved by the SCC.

Roanoke Gas Company has in place a weather normalization adjustment mechanism (“WNA”) based on a weather measurement band around the most recent 30-year temperature average. The WNA provides for a weather band of 3% above or below the 30-year temperature average whereby the Company would recover from its customers the lost margin (excluding gas costs) for the impact of weather that was more than 3% warmer than the 30-year average or refund customers the excess earned for weather that was more than 3% colder than the 30-year average. At the end of the most recent WNA period, April 2011 through March 2012, total heating degree days were approximately 22% less than the 30-year average. As the number of heating degree days fell outside the current 3% weather band, the Company recorded approximately $1,740,000 of revenues during the prior quarters to reflect the estimated impact of the WNA for the difference in margin realized for weather between 22% and 3% warmer than the 30-year average. The Company completed the billing of its customers to recover the approximately $1,740,000 in WNA revenue in its May billing cycle. The Company did not record any WNA revenues during the prior WNA period ended March 31, 2011 as total heating degree days were within the 3% weather band. The Company applied the provisions of FASB ASC No. 980, Regulated Operations, in recording the asset and revenue for the WNA.

 

3. Short-Term Debt

On March 30, 2012, the Company and Wells Fargo Bank entered into a new line-of-credit agreement. The new agreement maintained the same variable interest rate of 30 day LIBOR plus 100 basis points and the availability fee of the prior line-of-credit agreement. The Company continued the multi-tiered borrowing limits to accommodate seasonal borrowing demands and to minimize borrowing costs. The Company’s total available borrowing limits during the remaining term of the line-of-credit agreement range from $1,000,000 to $5,000,000.


RGC RESOURCES, INC. AND SUBSIDIARIES

 

The line-of-credit agreement will expire March 31, 2013, unless extended. The Company anticipates being able to extend or replace the credit line upon expiration. At June 30, 2012, the Company had no outstanding balance under its line-of-credit agreement.

Also on March 30, 2012, the Company executed an unsecured term note in the amount of $15,000,000. This term note extends the maturity date of the original promissory note dated November 28, 2005 and subsequent modification dated October 20, 2010. The term note, which has a maturity date of March 31, 2013, retains all other terms and conditions provided for in the original promissory note. The Company anticipates being able to renew this note until such time the note co-terminates with the corresponding interest rate swap.

 

4. Financing Receivables

Financing receivables represent a contractual right to receive money either on demand or on fixed or determinable dates and are recognized as assets on the entity’s balance sheet. The Company has two primary types of financing receivables: trade accounts receivable, resulting from the sale of natural gas and other services to its customers, and notes receivable. Trade accounts receivable are short-term in nature and a provision for uncollectible balances is included in the financial statements. The Company’s notes receivable represents the balance on a five-year note with a fifteen year amortization for partial payment on the sale of the Bluefield, Virginia natural gas distribution assets to ANGD, LLC in October 2007 and a 24- month note from a customer related to the payment for relocating a portion of a natural gas distribution main. Both notes are performing assets with all payments current. Management evaluates the status of the notes each reporting period to make an assessment on the collectability of the balance. In its most recent evaluation, management concluded that the notes continued to be fully collectible and no loss reserve was required. Either note would be considered past due if either the interest or principal installment were outstanding for more than 30 days after their contractual due date.

 

5. Derivatives and Hedging

The Company’s risk management policy allows management to enter into derivatives for the purpose of managing commodity and financial market risks of its business operations. The Company’s risk management policy specifically prohibits the use of derivatives for speculative purposes. The key market risks that the Company seeks to hedge include the price of natural gas and the cost of borrowed funds.

The Company periodically enters into collars, swaps and caps for the purpose of hedging the price of natural gas in order to provide price stability during the winter months. The fair value of these instruments is recorded in the balance sheet with the offsetting entry to either under-recovery of gas costs or over-recovery of gas costs. Net income and other comprehensive income are not affected by the change in market value as any cost incurred or benefit received from these instruments is recoverable or refunded to customers through the purchased gas adjustment clause (“PGA”) included as part of the Company’s billing rate. During the quarter ended June 30, 2012, the Company had no outstanding derivative arrangements for the purchase of natural gas.


RGC RESOURCES, INC. AND SUBSIDIARIES

 

The Company has two interest rate swaps associated with its variable rate notes. The first swap relates to the $15,000,000 term note originally issued in November 2005 and most recently renewed as a one year term loan as described in Note 3. This swap essentially converts the floating rate note based upon LIBOR into fixed rate debt with a 5.74% effective interest rate. The second swap relates to the $5,000,000 variable rate note issued in October 2008. This swap converts the variable rate note based on LIBOR into a fixed rate debt with a 5.79% effective interest rate. The $15,000,000 swap matures on November 30, 2015 and the $5,000,000 swap matures on December 1, 2015. Both swaps qualify as cash flow hedges with changes in fair value reported in other comprehensive income. No portion of either interest rate swap was deemed ineffective during the periods presented.

The table below reflects the fair values of the derivative instruments and their corresponding classification in the consolidated balance sheets under the current liabilities caption of “Fair value of marked-to-market transactions” as of June 30, 2012 and September 30, 2011:

 

     June 30,      September 30,  
     2012      2011  

Derivatives designated as hedging instruments:

     

Interest rate swaps

   $ 3,016,897       $ 3,312,176   

The table in Note 6 reflects the effect on income and other comprehensive income of the Company’s cash flow hedges.

Based on the current interest rate environment, management estimates that approximately $900,000 of the fair value on the interest rate hedges will be reclassified from other comprehensive loss into interest expense on the income statement over the next 12 months. Changes in LIBOR rates during this period could significantly change the amount estimated to be reclassified to income as well as the fair value of the interest rate hedges.


RGC RESOURCES, INC. AND SUBSIDIARIES

 

6. Other Comprehensive Income

A summary of other comprehensive income and loss is provided below:

 

     Three Months Ended     Nine Months Ended  
     June 30,     June 30,  
     2012     2011     2012     2011  

Interest Rate SWAPs

        

Unrealized losses

   $ (224,189   $ (567,898   $ (407,642   $ (860

Income tax

     85,102        215,574        154,741        328   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net unrealized losses

     (139,087     (352,324     (252,901     (532
  

 

 

   

 

 

   

 

 

   

 

 

 

Transfer of realized losses to interest expense

     233,731        236,922        702,921        707,439   

Income tax

     (88,724     (89,936     (266,829     (268,545
  

 

 

   

 

 

   

 

 

   

 

 

 

Net transfer of realized losses to interest expense

     145,007        146,986        436,092        438,894   
  

 

 

   

 

 

   

 

 

   

 

 

 

Defined Benefit Plans

        

Transfer of realized losses to income

     50,034        37,401        150,102        112,203   

Income tax

     (18,993     (14,198     (56,979     (42,594
  

 

 

   

 

 

   

 

 

   

 

 

 

Net transfer of realized losses to income

     31,041        23,203        93,123        69,609   
  

 

 

   

 

 

   

 

 

   

 

 

 

Amortization of transition obligation

     11,773        11,773        35,319        35,319   

Income tax

     (4,469     (4,469     (13,407     (13,407
  

 

 

   

 

 

   

 

 

   

 

 

 

Net amortization of transition obligation

     7,304        7,304        21,912        21,912   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net other comprehensive income (loss)

   $ 44,265      $ (174,831   $ 298,226      $ 529,883   
  

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated comprehensive loss—beginning of period

     (3,779,377     (3,162,109     (4,033,338     (3,866,823
  

 

 

   

 

 

   

 

 

   

 

 

 

Accumulated comprehensive loss—end of period

   $ (3,735,112   $ (3,336,940   $ (3,735,112   $ (3,336,940
  

 

 

   

 

 

   

 

 

   

 

 

 


RGC RESOURCES, INC. AND SUBSIDIARIES

 

The components of accumulated comprehensive loss as of June 30, 2012 and September 30, 2011 include:

 

     June 30,     September 30,  
     2012     2011  

Interest rate swaps

   $ (1,871,683   $ (2,054,874

Pension plan

     (1,286,006     (1,354,418

Postretirement benefit plan

     (577,423     (624,046
  

 

 

   

 

 

 

Total accumulated comprehensive loss

   $ (3,735,112   $ (4,033,338
  

 

 

   

 

 

 

 

7. Earnings Per Share

Basic earnings per common share for the three and nine months ended June 30, 2012 and 2011 are calculated by dividing net income by the weighted average common shares outstanding during the period. Diluted earnings per common share for the three and nine months ended June 30, 2012 and 2011 are calculated by dividing net income by the weighted average common shares outstanding during the period plus dilutive potential common shares. A reconciliation of basic and diluted earnings per share is presented below:

 

     Three Months Ended      Nine Months Ended  
     June 30,      June 30,  
     2012      2011      2012      2011  

Net Income

   $ 52,298       $ 184,617       $ 4,370,517       $ 4,673,795   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average common shares

     4,654,311         4,604,428         4,641,082         4,582,871   

Effect of dilutive securities:

           

Options to purchase common stock

     2,572         7,533         4,460         8,856   
  

 

 

    

 

 

    

 

 

    

 

 

 

Diluted average common shares

     4,656,883         4,611,961         4,645,542         4,591,727   
  

 

 

    

 

 

    

 

 

    

 

 

 

Earnings Per Share of Common Stock:

           

Basic

   $ 0.01       $ 0.04       $ 0.94       $ 1.02   

Diluted

   $ 0.01       $ 0.04       $ 0.94       $ 1.02   


RGC RESOURCES, INC. AND SUBSIDIARIES

 

8. Commitments and Contingencies

Roanoke Gas currently holds the only franchises and/or certificates of public convenience and necessity to distribute natural gas in its service area. These franchises are effective through January 1, 2016. Certificates of public convenience and necessity in Virginia are exclusive and are intended for perpetual duration.

Due to the nature of the natural gas distribution business, the Company has entered into agreements with both suppliers and pipelines for natural gas commodity purchases, storage capacity and pipeline delivery capacity. The Company obtains most of its regulated natural gas supply from an asset manager. The Company uses an asset manager to assist in optimizing the use of its transportation, storage rights, and gas supply in order to provide a secure and reliable source of natural gas to its customers. The Company also has storage and pipeline capacity contracts to store and deliver natural gas to the Company’s distribution system. Roanoke Gas is served directly by two primary pipelines. These two pipelines deliver all of the natural gas supplied to the Company’s customers. Depending on weather conditions and the level of customer demand, failure of one or both of these transmission pipelines could have a major adverse impact on the Company.

The lawsuits reported in the Annual Report on Form 10-K for the year ended September 30, 2011 were withdrawn from Kanawha County on February 1, 2012 with the agreement of all parties that they could be re-filed in the Circuit Court of Greenbrier County by August 1, 2012. In May 2012, both lawsuits were re-filed in the Circuit Court of Greenbrier County. Management’s assessments regarding these lawsuits remain consistent with those previously reported.

Except to the extent, if any, described above, the Company is not a party to any material pending legal proceedings.

 

9. Employee Benefit Plans

The Company has both a defined benefit pension plan (the “pension plan”) and a postretirement benefit plan (the “postretirement plan”). The pension plan covers substantially all of the Company’s employees and provides retirement income based on years of service and employee compensation. The postretirement plan provides certain healthcare and supplemental life insurance benefits to retired employees who meet specific age and service requirements. Net pension plan and postretirement plan expense recorded by the Company is detailed as follows:


RGC RESOURCES, INC. AND SUBSIDIARIES

 

 

    

Three Months Ended

June 30,

   

Nine Months Ended

June 30,

 
     2012     2011     2012     2011  

Components of net periodic pension cost:

        

Service cost

   $ 130,425      $ 119,809      $ 391,275      $ 359,427   

Interest cost

     238,299        227,219        714,897        681,657   

Expected return on plan assets

     (239,795     (232,052     (719,385     (696,156

Recognized loss

     118,854        81,793        356,562        245,379   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic pension cost

   $ 247,783      $ 196,769      $ 743,349      $ 590,307   
  

 

 

   

 

 

   

 

 

   

 

 

 
    

Three Months Ended

June 30,

   

Nine Months Ended

June 30,

 
     2012     2011     2012     2011  

Components of postretirement benefit cost:

        

Service cost

   $ 48,944      $ 48,711      $ 146,832      $ 146,133   

Interest cost

     148,090        144,994        444,270        434,982   

Expected return on plan assets

     (91,840     (89,320     (275,520     (267,960

Amortization of transition obligation

     47,223        47,223        141,669        141,669   

Recognized loss

     59,847        50,288        179,541        150,864   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net postretirement benefit cost

   $ 212,264      $ 201,896      $ 636,792      $ 605,688   
  

 

 

   

 

 

   

 

 

   

 

 

 

The Company contributed $800,000 to its pension plan during the nine-month period ended June 30, 2012. The Company expects to make an additional contribution of approximately $300,000 to its pension plan and $850,000 to its postretirement benefit plan prior to the end of its current fiscal year.

 

10. Environmental Matters

Both Roanoke Gas Company and a previously owned gas subsidiary operated manufactured gas plants (MGPs) as a source of fuel for lighting and heating until the early 1950s. A by-product of operating MGPs was coal tar, and the potential exists for on-site tar waste contaminants at the former plant sites. Should the Company eventually be required to remediate either site, it will pursue all prudent and reasonable means to recover any related costs, including insurance claims and regulatory approval for rate case recognition of expenses associated with any work required.


RGC RESOURCES, INC. AND SUBSIDIARIES

 

 

11. Fair Value Measurements

FASB ASC No. 820, Fair Value Measurements and Disclosures, established a fair value hierarchy that prioritizes each input to the valuation method used to measure fair value of financial and nonfinancial assets and liabilities that are measured and reported on a fair value basis into one of the following three broad levels:

Level 1 – Unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

Level 2 – Inputs other than quoted prices in Level 1 that are either for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, or inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3 – Unobservable inputs for the asset or liability where there is little, if any, market activity for the asset or liability at the measurement date.

The fair value hierarchy gives the highest priority to unadjusted quoted prices in active markets (Level 1) and the lowest priority to unobservable inputs (Level 3).

The following table summarizes the Company’s financial assets and liabilities that are measured at fair value on a recurring basis as required by existing guidance and the fair value measurements by level within the fair value hierarchy as of June 30, 2012 and September 30, 2011:

 

     Fair Value Measurements - June 30, 2012  
     Fair
Value
     Quoted Prices
in Active
Markets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs
(Level 3)
 

Liabilities:

           

Natural gas purchases

   $ 1,615,938       $ —         $ 1,615,938       $ —     

Interest rate swaps

     3,016,897         —           3,016,897         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,632,835       $ —         $ 4,632,835       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 


RGC RESOURCES, INC. AND SUBSIDIARIES

 

 

    

Fair Value Measurements - September 30, 2011

 
     Fair
Value
     Quoted Prices
in Active
Markets
(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Liabilities:

           

Natural gas purchases

   $ 1,000,121       $ —         $ 1,000,121       $ —     

Interest rate swaps

     3,312,176         —           3,312,176         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 4,312,297       $ —         $ 4,312,297       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Under the asset management contract, a timing difference can exist between the payment for natural gas purchases and the actual receipt of such purchases. Payments are made based on a predetermined monthly volume with the price based on weighted average first of the month index prices corresponding to the month of the scheduled payment. At June 30, 2012 and September 30, 2011, the Company had recorded in accounts payable the estimated fair value of the liability valued at the corresponding first of month index prices for which the liability is expected to be settled.

The fair value of the interest rate swaps, included in the line item “Fair value of marked-to-market transactions”, is determined by using the counterparty’s proprietary models and certain assumptions regarding past, present and future market conditions.

The Company’s nonfinancial assets and liabilities that are measured at fair value on a nonrecurring basis consist of its asset retirement obligations. The asset retirement obligations are measured at fair value at initial recognition based on expected future cash flows to settle the obligation.

The carrying value of cash and cash equivalents, accounts receivable, accounts payable (with the exception of the timing difference under the asset management contract), customer credit balances and customer deposits is a reasonable estimate of fair value due to the short-term nature of these financial instruments. The following table summarizes the fair value of the Company’s financial assets and liabilities that are not adjusted to fair value in the financial statements as of June 30, 2012 and September 30, 2011.


RGC RESOURCES, INC. AND SUBSIDIARIES

 

 

            Fair Value Measurements - June 30, 2012  
     Carrying
Value
     Quoted Prices
in Active
Markets
(Level 1)
     Significant
Other
Observable
Inputs

(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Assets:

           

Notes receivable

   $ 1,190,462       $ —         $ —         $ 1,195,293   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,190,462       $ —         $ —         $ 1,195,293   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Note payable

   $ 15,000,000       $ —         $ —         $ 14,965,270   

Long-term debt

     13,000,000         —           —           14,303,241   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 28,000,000       $ —         $ —         $ 29,268,511   
  

 

 

    

 

 

    

 

 

    

 

 

 
     Fair Value Measurements - September 30, 2011  
     Carrying
Value
     Quoted Prices
in Active
Markets
(Level 1)
     Significant
Other
Observable
Inputs
(Level 2)
     Significant
Unobservable
Inputs

(Level 3)
 

Assets:

           

Notes receivable

   $ 1,420,540       $ —         $ —         $ 1,403,286   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 1,420,540       $ —         $ —         $ 1,403,286   
  

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities:

           

Note payable

   $ —         $ —         $ —         $ —     

Long-term debt

     28,000,000         —           —           29,539,742   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 28,000,000       $ —         $ —         $ 29,539,742   
  

 

 

    

 

 

    

 

 

    

 

 

 

Notes receivable are included in both current assets and other assets on the balance sheet.

The fair value of the notes receivable are estimated by discounting future cash flows based on a range of rates for similar investments adjusted for management’s expectation of credit and other risks. The fair value of the note payable is estimated by using the interest rate under the Company’s line-of-credit agreement which renewed at the same time as the term note. Both the line-of-credit and term note have a term of one year. The fair value of long-term debt is estimated by discounting the future cash flows of the fixed rate debt at rates extrapolated based on current market conditions. The variable rate long-term debt and note

payable have interest rate swaps that effectively convert such debt to a fixed rate. The values of the swap agreements are included in the first table above.


RGC RESOURCES, INC. AND SUBSIDIARIES

 

FASB ASC 825, Financial Instruments, requires disclosures regarding concentrations of credit risk from financial instruments. Cash equivalents are investments in high-grade, short-term securities (original maturity less than three months), placed with financially sound institutions. Accounts receivable are from a diverse group of customers including individuals and small and large companies in various industries. As of June 30, 2012 and September 30, 2011, no single customer accounted for more than 5% of the total accounts receivable balance. The Company maintains certain credit standards with its customers and requires a customer deposit if such evaluation warrants.

 

12. Subsequent Events

The Company has evaluated subsequent events through the date the financials statements were issued. There were no items not otherwise disclosed which would have materially impacted the Company’s condensed consolidated financial statements.


RGC RESOURCES, INC. AND SUBSIDIARIES

 

ITEM 2—MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Forward-Looking Statements

This report contains forward-looking statements that relate to future transactions, events or expectations. In addition, RGC Resources, Inc. (“Resources” or the “Company”) may publish forward-looking statements relating to such matters as anticipated financial performance, business prospects, technological developments, new products, research and development activities and similar matters. These statements are based on management’s current expectations and information available at the time of such statements and are believed to be reasonable and are made in good faith. The Private Securities Litigation Reform Act of 1995 provides a safe harbor for forward-looking statements. In order to comply with the terms of the safe harbor, the Company notes that a variety of factors could cause the Company’s actual results and experience to differ materially from the anticipated results or other expectations expressed in the Company’s forward-looking statements. The risks and uncertainties that may affect the operations, performance, development and results of the Company’s business include, but are not limited to, the following: (i) general economic conditions both locally and nationally; (ii) impact of potential climate change legislation regarding limitations on carbon dioxide emissions; (iii) impact of potential increased regulatory oversight and compliance requirements due to financial, environmental, safety and system integrity laws and regulations; (iv) cyber attacks against the Company’s information systems that could compromise corporate financial information, sensitive customer information or operational integrity; (v) failure to obtain timely rate relief from regulatory authorities for increasing operating or gas costs; (vi) the potential loss of large-volume industrial customers to alternate fuels, facility closings or production changes; (vii) ability to attract and retain professional and technical employees to replace an aging work force; (viii) rising interest rates; (ix) effect of weather conditions and natural disasters on production and distribution facilities and the related effect on supply availability and price; (x) changes in accounting regulations and practices, which could change the accounting treatment for certain transactions and increase the cost of compliance; (xi) access to capital markets and the availability of debt and equity financing to support future capital expenditures; (xii) volatility in actuarially determined benefit costs and plan asset performance; (xiii) increased customer delinquencies and conservation efforts resulting from difficult economic conditions and/or colder weather; (xiv) volatility in the price and availability of natural gas including restrictions on the exploration and development of natural gas reserves, for environmental or other reasons, and the potential effect of lower natural gas prices on such future exploration and development activity; and (xv) effect of the federal budget deficit and its impact on corporate taxes and the economy in general. All of these factors are difficult to predict and many are beyond the Company’s control. Accordingly, while the Company believes its forward-looking statements to be reasonable, there can be no assurance that they will approximate actual experience or that the expectations derived from them will be realized. When used in the Company’s documents or news releases, the words, “anticipate,” “believe,” “intend,” “plan,” “estimate,” “expect,” “objective,” “projection,” “forecast,” “budget,” “assume,” “indicate” or similar words or future or conditional verbs such as “will,” “would,” “should,” “can,” “could” or “may” are intended to identify forward-looking statements.


RGC RESOURCES, INC. AND SUBSIDIARIES

 

Forward-looking statements reflect the Company’s current expectations only as of the date they are made. The Company assumes no duty to update these statements should expectations change or actual results differ from current expectations except as required by applicable laws and regulations.

The three-month and nine-month earnings presented herein should not be considered as reflective of the Company’s consolidated financial results for the fiscal year ending September 30, 2012. The total revenues and margins realized during the first nine months reflect higher billings due to the weather sensitive nature of the gas business. Improvement or decline in earnings for the balance of the fiscal year will depend primarily on non-weather sensitive industrial consumption and the level of operating and maintenance costs during the remainder of the year.

Since 2008, the Company has held the filer status of a “smaller reporting company” under the rules and regulations of the Securities and Exchange Commission (“SEC”). However, at the end of the Company’s second fiscal quarter, the public float associated with the Company’s outstanding common stock exceeded the $75 million threshold for its current status. As a result, the Company will qualify as an “Accelerated Filer” under SEC rules and regulations and begin to report under these rules effective with the end of its fiscal year on September 30, 2012.

Overview

Resources is an energy services company primarily engaged in the regulated sale and distribution of natural gas to approximately 58,000 residential, commercial and industrial customers in Roanoke, Virginia and the surrounding localities through its Roanoke Gas Company (“Roanoke Gas”) subsidiary. Natural gas service is provided at rates and for terms and conditions set by the Virginia State Corporation Commission (“SCC”).

Resources also provides certain unregulated services through Roanoke Gas. Such unregulated operations represent less than 3% of total revenues and margin of Resources on an annual basis.

The Company’s utility operations are regulated by the SCC which oversees the terms, conditions, and rates to be charged to customers for natural gas service, safety standards, extension of service, accounting and depreciation. The Company is also subject to federal regulation from the Department of Transportation in regard to the construction, operation, maintenance, safety and integrity of its transmission and distribution pipelines. The Federal Energy Regulatory Commission regulates the prices for the transportation and delivery of natural gas to the Company’s distribution system and underground storage services. The Company is also subject to other regulations which are not necessarily industry specific.

The SCC authorizes the rates and fees that the Company charges its customers for regulated natural gas service. The Company has in place certain approved rate mechanisms that reduce some of the volatility in earnings associated with variations in winter weather and the cost of natural gas.


RGC RESOURCES, INC. AND SUBSIDIARIES

 

Since 2003, Roanoke Gas has had in place a weather normalization adjustment mechanism (“WNA”) based on a weather measurement band around the most recent 30-year temperature average (“normal’). Because the SCC authorizes billing rates for the utility operations of Roanoke Gas based on normal weather, warmer than normal weather may result in the Company failing to earn its authorized rate of return, thereby limiting the Company’s ability to recover all of its operating costs. The WNA provides the Company with a level of earnings protection when weather is significantly warmer than normal and provides its customers with price protection when the weather is significantly colder than normal. The WNA mechanism provides for a weather band of 3% above and below the 30-year normal, whereby the Company would bill its customers for the lost margin (excluding gas costs) for the impact of weather that was more than 3% warmer than normal or refund customers the excess margin earned for weather that was more than 3% colder than normal. The annual WNA period extends from April to March. For the most recently completed WNA period ending in March 2012, weather was approximately 22% warmer than the 30-year normal with 883 fewer heating degree days (an industry measure by which the average daily temperature falls below 65 degrees Fahrenheit) compared to normal. As a result, the Company recorded approximately $1,740,000 in additional revenues to reflect the impact of the WNA in 2012 for the difference in margin not realized for weather between 3% and 22% of the 30-year average. The Company did not record any WNA revenues during the prior WNA period in 2011 as total heating degree days were within the 3% weather band.

The Company also has an approved rate structure in place that mitigates the impact of financing costs of its natural gas inventory. Under this rate structure, Roanoke Gas recognizes revenue for the financing costs, or “carrying costs”, of its investment in natural gas inventory. The carrying cost revenue factor applied to inventory is based on the Company’s weighted average cost of capital including interest rates on short-term and long-term debt and the Company’s authorized return on equity. During times of rising gas costs and rising inventory levels, the Company recognizes revenues to offset higher financing costs associated with higher inventory balances. Conversely, during times of decreasing gas costs and lower inventory balances, the Company recognizes less carrying cost revenue as financing costs are lower. In April, the Company began to replenish its gas in storage inventory at prices significantly less than in the prior year. As a result, the total investment in gas in storage inventory is declining compared to last year resulting in approximately a $45,000 decline in carrying cost revenues during the quarter compared to the same period last year. With the futures market indicating continued low natural gas prices, the Company expects to continue replacing inventory with lower cost gas, which will result in less inventory carrying cost revenues until such time as gas prices rise.

Generally, as investment in natural gas inventory increases so does the level of borrowing under the Company’s line-of-credit. However, as the carrying cost factor used in determining carrying cost revenues is based on the Company’s weighted average cost of capital, carrying cost revenues do not directly correspond with incremental short-term financing costs. Therefore, when investment in inventory declines due to a reduction in commodity prices, as has taken place, net income will be negatively affected as carrying cost revenues decrease by a greater amount than short-term financing costs decrease. The inverse occurs when inventory costs increase.


RGC RESOURCES, INC. AND SUBSIDIARIES

 

RGC Resources is committed to the safe and reliable delivery of natural gas to its customers. Since 1991, the Company has placed an increased emphasis on the renewal and replacement of its cast iron and bare steel natural gas distribution pipelines. Management anticipates replacing all remaining cast iron and bare steel pipe over the next several years.

Results of Operations

Three Months Ended June 30, 2012:

Net income decreased by $132,319 for the quarter ended June 30, 2012, compared to the same period last year. A combination of lower natural gas deliveries, increased depreciation and employee benefit costs were the primary factors in the decline in net income.

The tables below reflect operating revenues, volume activity and heating degree-days.

 

     Three Months Ended               
     June 30,      Increase/        
     2012      2011      (Decrease)     Percentage  

Operating Revenues

          

Gas Utility

   $ 9,422,220       $ 10,759,012       $ (1,336,792     -12

Other

     257,522         348,473         (90,951     -26
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Operating Revenues

   $ 9,679,742       $ 11,107,485       $ (1,427,743     -13
  

 

 

    

 

 

    

 

 

   

 

 

 

Delivered Volumes

          

Regulated Natural Gas (DTH)

          

Residential and Commercial

     688,798         731,152         (42,354     -6

Transportation and Interruptible

     688,744         704,263         (15,519     -2
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Delivered Volumes

     1,377,542         1,435,415         (57,873     -4
  

 

 

    

 

 

    

 

 

   

 

 

 

Heating Degree Days (Unofficial)

     260         258         2        1

Total operating revenues for the three months ended June 30, 2012, compared to the same period last year, decreased primarily due to a 4% decline in total natural gas deliveries and lower natural gas commodity prices. The per unit cost of natural gas reflected in the cost of sales decreased by more than 17% compared to last year. Contracted services work also contributed to lower gross revenues as the demand for these other services declined during the quarter.


RGC RESOURCES, INC. AND SUBSIDIARIES

 

 

     Three Months Ended               
     June 30,      Increase/        
     2012      2011      (Decrease)     Percentage  

Gross Margin

          

Gas Utility

   $ 4,878,284       $ 4,916,771       $ (38,487     -1

Other

     97,094         148,216         (51,122     -34
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Gross Margin

   $ 4,975,378       $ 5,064,987       $ (89,609     -2
  

 

 

    

 

 

    

 

 

   

 

 

 

Regulated natural gas margins from utility operations decreased from the same period last year primarily as a result of lower total natural gas deliveries for the quarter and lower inventory carrying cost revenues, partially offset by the implementation of a non-gas base rate increase effective for service rendered on and after November 1, 2011. Residential and commercial volumes decreased by nearly 6% from last year’s levels potentially as a result of the carry over effect of a much warmer winter and early spring heating season. Industrial volumes, which tend to be less weather sensitive than residential and commercial volumes, reflected a nominal decrease of approximately 2%.

The components of the gas utility margin decrease are summarized below:

Net Margin Decrease

 

Customer Base Charge

   $ 37,983   

Carrying Cost

     (45,186

Volumetric

     (20,039

Other

     (11,245
  

 

 

 

Total

   $ (38,487
  

 

 

 

Other margins decreased by $51,122 from last year primarily due to reductions in the level of other services contract work. More than half of the revenues and margins included under the caption of “Other” are subject to variations in the level of activity depending on customer needs and generally are associated with service contracts that have a limited duration and are subject to renewal on an annual or semi-annual basis. Current service contracts extend through the remainder of the fiscal year; however, any continuation beyond 2012 is uncertain.

Operation and maintenance expenses increased by $32,315, or 1%, from the same period last year. Higher employee benefit costs more than offset increases in capitalized overheads and reduction in professional services. Employee benefit costs have increased approximately $71,000 over the same period last year primarily due to increased pension and postretirement medical costs related to the amortization of a higher actuarial loss and higher health insurance


RGC RESOURCES, INC. AND SUBSIDIARIES

 

premiums. Increased activity on the pipeline renewal and replacement program combined with a higher capitalization factor resulted in the capitalization of $94,000 more in overheads related to the Company’s utility property; however, due to planned production delays at its liquefied natural gas (LNG) facility, the Company has not liquefied as much natural gas during the current quarter resulting in $87,000 less in capitalized overheads added to the LNG inventory. Professional services declined by approximately $32,000 primarily due to the timing of certain services.

General taxes increased by $20,836, or 7%, primarily due to higher property taxes associated with increases in utility property.

Depreciation expense increased by $61,679, or 6%, on a corresponding increase in utility plant investment primarily due to the distribution pipeline replacement program.

Interest expense remained virtually unchanged as the Company’s total debt position has remained at the $28,000,000 level. The Company has been able to generate sufficient funds from its operations to meet its current cash needs without accessing its line-of-credit.

Income tax expense decreased by $74,705, which corresponds to the decrease in pre-tax income for the quarter. The effective tax rate was 43% for the current period compared to 38% for the corresponding period last year.

Nine Months Ended June 30, 2012:

Net income decreased by $303,278 for the nine months ended June 30, 2012, compared to the same period last year. Significantly lower natural gas deliveries during the winter heating season more than offset the $1,740,000 in WNA revenue and increase in non-gas rates. In addition, increased employee benefit costs, depreciation and property taxes more than offset the effects of a greater level of capitalized overheads.


RGC RESOURCES, INC. AND SUBSIDIARIES

 

The table below reflects operating revenues, volume activity and heating degree days.

 

     Nine Months Ended               
     June 30,      Increase/        
     2012      2011      (Decrease)     Percentage  

Operating Revenues

          

Gas Utilities

   $ 48,617,001       $ 59,780,573       $ (11,163,572     -19

Other

     852,144         947,240         (95,096     -10
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Operating Revenues

   $ 49,469,145       $ 60,727,813       $ (11,258,668     -19
  

 

 

    

 

 

    

 

 

   

 

 

 

Delivered Volumes

          

Regulated Natural Gas (DTH)

          

Residential and Commercial

     4,878,019         6,124,761         (1,246,742     -20

Transportation and Interruptible

     2,218,950         2,279,243         (60,293     -3
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Delivered Volume

     7,096,969         8,404,004         (1,307,035     -16
  

 

 

    

 

 

    

 

 

   

 

 

 

Heating Degree Days (Unofficial)

     3,155         4,058         (903     -22

Total operating revenues for the nine months ended June 30, 2012 compared to the same period last year decreased due to significant reductions in delivered volumes and lower cost of natural gas more than offsetting an increase in the non-gas base rates and accrual for WNA. Residential and commercial volumes decreased by 20% from last year’s levels as the total number of heating degree days for the period declined by 22%. Industrial volumes, which tend to be less weather sensitive than residential and commercial volumes, reflected a decrease of 3% primarily due to warmer weather and planned cutbacks by a few customers. In addition, declining natural gas commodity prices resulted in an 11% per unit reduction in the cost of natural gas reflected in cost of sales. Other revenues decreased by 10% due to reduced demand for contract services during the most recent quarter.

 

     Nine Months Ended               
     June 30,      Increase/        
     2012      2011      (Decrease)     Percentage  

Gross Margin

          

Gas Utilities

   $ 21,823,003       $ 22,062,667       $ (239,664     -1

Other

     400,524         433,250         (32,726     -8
  

 

 

    

 

 

    

 

 

   

 

 

 

Total Gross Margin

   $ 22,223,527       $ 22,495,917       $ (272,390     -1
  

 

 

    

 

 

    

 

 

   

 

 

 


RGC RESOURCES, INC. AND SUBSIDIARIES

 

Regulated natural gas margins from utility operations decreased from the same period last year primarily as a result of significantly less total natural gas deliveries. Much of the margin lost due to the reduction in volumes delivered was recovered through the triggering of the WNA mechanism during the period. The Company accrued approximately $1,740,000 in additional revenues during the period to account for the shortfall in volumetric sales activity attributable to the warmer winter season. The Company also implemented a non-gas base rate increase that provides approximately $235,000 in additional annual revenues. Carrying cost revenues also declined as explained above. The components of the regulated margin decrease are summarized below:

Net Margin Decrease

 

Customer Base Charge

   $ 152,564   

WNA

     1,746,827   

Carrying Cost

     (48,246

Volumetric

     (2,056,910

Other

     (33,899
  

 

 

 

Total

   $ (239,664
  

 

 

 

Other margins decreased by $32,726 primarily due to reductions in the level of other services contract work as discussed above.

Operation and maintenance expenses decreased by $49,314, or less than 1%, for the nine-month period ended June 30, 2012, compared to the same period last year. Greater capitalization of overheads related to increased pipeline replacement activity and lower bad debt costs offset higher employee benefit costs and professional services. The Company capitalized approximately $285,000 more in overheads during the current period related to increases in the level of capital spending and timing of LNG production. In addition, bad debt expense declined by $56,000 for the period due to a corresponding reduction in total customer billings. A $220,000 increase in employee benefit costs, a $37,000 increase in corporate insurance premiums and a $38,000 increase in professional and contract services, primarily related to legal services and costs of additional public-company filing requirements, accounted for most of the remaining difference in expenses.

General taxes increased by $65,704, or 7%, for the nine-month period ended June 30, 2012 compared to the same period last year related to higher property taxes associated with increases in utility property.

Depreciation expense increased by $176,303, or 6%, corresponding to the increase in utility plant investment.

Other income, net, decreased by $19,175 primarily due to a reduction in interest income on short-term cash investments and notes receivable.

Interest expense remained nearly unchanged due to the absence of borrowing under the Company’s line-of-credit.


RGC RESOURCES, INC. AND SUBSIDIARIES

 

Income tax expense declined by $178,220, or 6%, which corresponds to the decrease in pre-tax income. The effective tax rate was 38% for both periods.

Critical Accounting Policies and Estimates

The consolidated financial statements of Resources are prepared in accordance with accounting principles generally accepted in the United States of America. The amounts of assets, liabilities, revenues and expenses reported in the Company’s financial statements are affected by accounting policies, estimates and assumptions that are necessary to comply with generally accepted accounting principles. Estimates used in the financial statements are derived from prior experience, statistical analysis and professional judgments. Actual results may differ significantly from these estimates and assumptions.

The Company considers an estimate to be critical if it is material to the financial statements and it requires assumptions to be made that were uncertain at the time the estimate was made and changes in the estimate are reasonably likely to occur from period to period. The Company considers the following accounting policies and estimates to be critical.

Regulatory accounting – The Company’s regulated operations follow the accounting and reporting requirements of FASB ASC No. 980, Regulated Operations. The economic effects of regulation can result in a regulated company deferring costs that have been or are expected to be recovered from customers in a period different from the period in which the costs would be charged to expense by an unregulated enterprise. When this occurs, costs are deferred as assets in the consolidated balance sheet (regulatory assets) and recorded as expenses when such amounts are reflected in rates. Additionally, regulators can impose liabilities upon a regulated company for amounts previously collected from customers and for current collection in rates of costs that are expected to be incurred in the future (regulatory liabilities).

If, for any reason, the Company ceases to meet the criteria for application of regulatory accounting treatment for all or part of its operations, the Company would remove the regulatory assets or liabilities from the balance sheet related to those elements no longer meeting the criteria and include them in the consolidated statement of income and comprehensive income for the period in which the discontinuance occurred.

Revenue recognition – Regulated utility sales and transportation revenues are based on rates approved by the SCC. The non-gas cost component of rates may not be changed without a formal rate application and corresponding authorization by the SCC; however, the gas cost component of rates may be adjusted periodically through the PGA mechanism with administrative approval from the SCC. When the Company files a request for a non-gas rate increase, the SCC may allow the Company to place such rates into effect subject to refund pending a final order. Under these circumstances, the Company will estimate the amount of rate increase it anticipates will be approved based on the best available information at the time.


RGC RESOURCES, INC. AND SUBSIDIARIES

 

The Company bills its regulated natural gas customers on a monthly cycle. The billing cycle periods for most customers do not coincide with the accounting periods used for financial reporting. The Company accrues estimated revenue for natural gas delivered to customers but not yet billed during the accounting period based on weather during the period and current and historical data. The financial statements included unbilled revenue receivable of $736,820 at June 30, 2012 and $1,088,611 at September 30, 2011.

Allowance for Doubtful Accounts – The Company evaluates the collectibility of its accounts receivable balances based upon a variety of factors including loss history, level of delinquent account balances, collections on previously written off accounts and the general economic climate.

Pension and Postretirement Benefits – The Company offers a defined benefit pension plan (“pension plan”) and a postretirement medical and life insurance plan (“postretirement plan”) to eligible employees. The expenses and liabilities associated with these plans are based on numerous assumptions and factors, including provisions of the plans, employee demographics, contributions made to the plans, return on each plan’s assets and various actuarial calculations, assumptions and accounting requirements. The pension plan’s specific factors include assumptions regarding the discount rate used in determining future benefit obligations, expected long-term rate of return on plan assets, compensation increases and life expectancies. Similarly, the postretirement medical plan also requires the estimation of many of the same factors as the pension plan in addition to assumptions regarding the rate of medical inflation and Medicare availability. Actual results may differ materially from the results expected from the actuarial assumptions due to changing economic conditions, volatility in interest rates and changes in life expectancy. Such differences may result in a material impact on the amount of expense recorded in future periods or the value of the obligations on the balance sheet.

Investment performance has improved since the declines experienced in August and September of 2011, which led to lower discount rate assumptions and an increase in the funded deficit of both plans. If investment returns continue to improve in 2012, the funded position of both plans should improve.

In early July 2012, the President signed into law the “Moving Ahead for Progress in the 21st Century Act” (MAP-21) which provided funding relief for defined benefit pension plans. The requirements of the Employee Retirement Income Security Act of 1974 (ERISA) and the Pension Protection Act of 2006 (PPA) subject defined benefit plans to minimum funding rules. As a result, when interest rates are low, pension plan liabilities increase thereby resulting in higher mandatory contributions to meet minimum funding obligations. The MAP-21 provides funding relief by allowing pension plans to adjust the interest rate used in determining funding requirements so that they are within 10% of the average of interest rates for the 25-year period preceding the current year for funding calculations for 2012 to 30% for funding periods beginning in 2016. MAP-21 also provides for increases in the PBGC (Pension Benefit Guaranty Corporation) premiums paid by sponsors of pension plans to protect participants in the event of default by the employer. Although MAP-21 allows the Company funding relief, management


RGC RESOURCES, INC. AND SUBSIDIARIES

 

expects to fund its pension plan at $1,100,000 and to contribute $850,000 to the postretirement medical plan during the fiscal year. Even with the availability of funding relief for its pension plan, the Company anticipates maintaining contributions at reasonable levels in an effort to improve both plans’ funded position. The Company will continue to evaluate its benefit plan funding levels in light of funding requirements and ongoing investment returns and make adjustments, as necessary, to avoid benefit restrictions.

Derivatives – The Company may hedge certain risks incurred in its operations through the use of derivative instruments. The Company applies the requirements of FASB ASC No. 815, Derivatives and Hedging, which requires the recognition of derivative instruments as assets or liabilities in the Company’s balance sheet at fair value. In most instances, fair value is based upon quoted futures prices for natural gas commodities and interest rate futures for interest rate swaps. Changes in the commodity and futures markets will impact the estimates of fair value in subsequent periods. Furthermore, the actual market value at the point of realization of the derivative may be significantly different from the values used in determining fair value in prior financial statements.

Asset Management

Roanoke Gas uses a third party as an asset manager to manage its pipeline transportation and storage rights and gas supply inventories and deliveries. In return for being able to utilize the excess capacities of the transportation and storage rights, the third party pays Roanoke Gas a monthly utilization fee, which is used to reduce the cost of gas for customers. The current agreement expires in October 2013.

Regulatory

In June 2012, the Company completed its refund of excess non-gas revenues collected for service rendered between November 1, 2011 and bills rendered through the March 2012 billing cycle. On July 10, 2012, the Company filed notice with the SCC of its intent to file an expedited rate case based on the test period ended June 30, 2012. The amount of increase in non-gas rates to be requested has not yet been determined.

On March 15, 2012, Roanoke Gas Company filed an application for approval of a SAVE Plan under the Steps to Advance Virginia’s Energy Plan Act. The SAVE Act provides a mechanism for natural gas utilities to recover prospectively the depreciation, property taxes and carrying cost on average incremental investment in replacement projects which enhance safety or reliability, do not generate incremental revenues, reduce or potentially reduce greenhouse gas emissions and are not included in the Company’s rate base in its most recent rate case filing. If approved by the SCC and the Company elects to implement the SAVE Plan, the Company would bill its customers a monthly amount based on the average level of planned capital investment during the SAVE Plan year. The SAVE Plan is implemented on a year to year basis with an annual true-up mechanism. Once new rates are implemented following the filing of a non-gas rate case, the current SAVE rider would be halted as the investment covered under the SAVE Plan would be included in the rate base of the rate case filing. The Company has filed a joint stipulation to implement a 2013 SAVE Plan, subject to SCC approval.


RGC RESOURCES, INC. AND SUBSIDIARIES

 

Capital Resources and Liquidity

Due to the capital intensive nature of the utility business, as well as the related weather sensitivity, the Company’s primary capital needs are the funding of its continuing construction program, the seasonal funding of its natural gas inventories, accounts receivable and payment of dividends. To meet these needs, the Company relies on its operating cash flows, line-of-credit agreement, long-term debt and capital raised through the Company’s Dividend Reinvestment and Stock Purchase Plan (“DRIP”).

Cash and cash equivalents increased by $7,797,379 for the nine-month period ended June 30, 2012 compared to a $9,873,281 increase for the same period last year. The following table summarizes the categories of uses of cash:

 

     Nine Months Ended  
     June 30,  
     2012     2011  

Cash Flow Summary Nine Months Ended:

    

Provided by operating activities

   $ 15,865,190      $ 16,351,229   

Used in investing activities

     (6,478,635     (5,256,744

Used in financing activities

     (1,589,176     (1,221,204
  

 

 

   

 

 

 

Increase in cash and cash equivalents

   $ 7,797,379      $ 9,873,281   
  

 

 

   

 

 

 

The seasonal nature of the natural gas business causes operating cash flows to fluctuate significantly during the year as well as from year to year. Factors including weather, energy prices, natural gas storage levels and customer collections all contribute to working capital levels and the related cash flows. Generally, operating cash flows are positive during the second and third quarters as a combination of earnings, declining storage gas levels and collections on customer accounts all contribute to higher cash levels. During the first and fourth quarters, operating cash flows generally decrease due to increases in natural gas storage levels, rising customer receivable balances and construction activity.

For the nine months ended June 30, 2012, cash flow provided by operations decreased from the prior year by $486,039, from $16,351,229 to $15,865,190, primarily due to a $303,000 reduction in net income. The remaining net decrease is primarily due to the effects of lower natural gas prices and deferral of income taxes related to bonus depreciation partially offset by items that contributed to an increase in cash provided by operations compared to the prior year, including an increase in over-recovery of gas cost in the current period as last year included significant refunding of previous over-recoveries.


RGC RESOURCES, INC. AND SUBSIDIARIES

 

Investing activities are generally composed of expenditures under the Company’s construction program, which primarily involves replacing aging bare steel and cast iron pipe with new plastic or coated steel pipe and to a lesser degree expanding its natural gas system to meet customer growth. Cash flows used in investing activities increased by approximately $1,222,000 due to an increased level of capital expenditures. Total capital expenditures were $6,492,855 and $5,256,744 for the nine-month periods ended June 30, 2012 and 2011, respectively. The increase in capital expenditures is attributable to acceleration by the Company of its pipeline renewal program. The Company’s current plan includes a five- to seven-year time horizon to finish replacing the remaining bare steel and cast iron pipe within its natural gas distribution system. In order to meet this goal, the Company expects capital expenditures to remain at elevated levels for the next five- to seven-years with annual capital budgets exceeding historical levels. The depreciation add back to operating cash flows is expected to provide approximately 50% of the current year’s projected capital expenditures, with the balance of funding dependent on other sources including net income, available cash and corporate borrowing activity, if necessary.

Financing activities generally consist of long-term and short-term borrowings and repayments, issuance of stock and the payment of dividends. As discussed above, the Company uses its line-of-credit arrangement to fund seasonal working capital needs as well as provide temporary financing for capital projects. Cash flow from financing activities decreased by approximately $368,000, from $1,221,204 to $1,589,176, primarily due to reduced proceeds from the issuance of 31,549 fewer shares of common stock this year compared to the same period last year. The impact of lower natural gas prices and their effect on reducing inventory and accounts receivable levels have generated sufficient levels of cash to avoid accessing the line-of-credit during the current and prior year. With natural gas commodity prices projected to remain at low levels over the next several months, the Company anticipates its need for working capital funding through its line-of-credit agreement to be minimal through next winter even with a greater emphasis on the pipeline replacement program.

On March 30, 2012, the Company entered into a new line-of-credit agreement. The new agreement maintained the same terms and rates as provided for under the expired agreement. The interest rate is based on 30-day LIBOR plus 100 basis points and includes an availability fee of 15 basis points applied to the difference between the face amount of the note and the average outstanding balance during the period. The Company maintained the multi-tiered borrowing limits to accommodate seasonal borrowing demands and minimize overall borrowing costs with available limits ranging from $1,000,000 to $5,000,000 during the term of the agreement. The line-of-credit agreement will expire March 31, 2013, unless extended. The Company anticipates being able to extend or replace the line-of-credit upon expiration; however, there is no guarantee that the line-of-credit will be extended or replaced under the same or equivalent terms currently in place.

Also on March 30, 2012, the Company executed an unsecured term note in the amount of $15,000,000. This term note extends the maturity date of the original promissory note dated November 28, 2005 and subsequent modification dated October 20, 2010. The term note, which has a maturity date of March 31, 2013, retains all other terms and conditions provided for in the original promissory note. The Company anticipates being able to renew this note on comparable terms as currently in place until such time the note co-terminates with the corresponding interest rate swap on November 30, 2015.


RGC RESOURCES, INC. AND SUBSIDIARIES

 

At June 30, 2012, the Company’s consolidated capitalization, including notes payable, was 65% equity and 35% debt.


RGC RESOURCES, INC. AND SUBSIDIARIES

 

ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required.

ITEM 4 – CONTROLS AND PROCEDURES

The Company maintains disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) that are designed to be effective in providing reasonable assurance that information required to be disclosed in reports under the Exchange Act are recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “SEC”), and that such information is accumulated and communicated to management to allow for timely decisions regarding required disclosure.

As of June 30, 2012, the Company completed an evaluation, under the supervision and with the participation of management, including the chief executive officer and the chief financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon that evaluation, the chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were effective at the reasonable assurance level as of June 30, 2012.

There were no changes in the internal controls over financial reporting during the fiscal quarter ended June 30, 2012 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.


RGC RESOURCES, INC. AND SUBSIDIARIES

 

Part II – Other Information

ITEM 1 – LEGAL PROCEEDINGS

As previously disclosed in our Annual Report on Form 10-K for the Company’s fiscal years ended September 30, 2011 and 2010 and Form 10-Q for the period ended March 31, 2012, the Company had been named as a defendant in two civil lawsuits associated with an explosion and fire at a West Virginia residence in November 2009. The suits, filed in the Circuit Court of Kanawha County, West Virginia on June 29, 2010, list Inergy, L.P., RGC Resources, Inc., Inergy Propane, LLC (“Inergy”) d/b/a Highland Propane Company and Otis Cornell as defendants. Furthermore, the Company and its wholly owned subsidiary, Diversified Energy Company (“Diversified”), received notices from Inergy, a co-defendant with the Company in the litigation stating that Inergy believes that certain claims raised in the litigation are subject to indemnification by the Company and Diversified.

On February 1, 2012, a motion was filed to withdraw the lawsuits from the Circuit Court of Kanawha County with the agreement of all parties that the plaintiffs could re-file the lawsuits in Greenbrier County, the locality where the incident occurred, within six months of the date of the motion. In May 2012, both lawsuits were re-filed in the Circuit Court of Greenbrier County.

The Company has not changed its assessment of potential liability and does not believe the likelihood of a negative outcome to the Company is probable, nor does it believe that it would be obligated to indemnify Inergy for any claims arising from the litigation. If the results of the litigation were adverse to the Company, management believes such damages would be covered by the Company’s applicable insurance policies.

ITEM 1A – RISK FACTORS

Not required.

ITEM 2 – UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3 – DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4 – MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5 – OTHER INFORMATION

None.


RGC RESOURCES, INC. AND SUBSIDIARIES

 

ITEM 6 – EXHIBITS

 

Number    Description
10.1    Change in Control Agreement between RGC Resources, Inc. and Paul W. Nester dated and effective May 15, 2012 (incorporated by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on May 17, 2012).
10.2    Termination and Release of the Change in Control Agreement between RGC Resources, Inc. and Howard T. Lyon dated and effective May 15, 2012 (incorporated by reference to Exhibit 10.2 to the Registrant’s Current Report on Form 8-K filed on May 17, 2012).
31.1    Rule 13a–14(a)/15d–14(a) Certification of Principal Executive Officer.
31.2    Rule 13a–14(a)/15d–14(a) Certification of Principal Financial Officer.
32.1*    Section 1350 Certification of Principal Executive Officer.
32.2*    Section 1350 Certification of Principal Financial Officer.


RGC RESOURCES, INC. AND SUBSIDIARIES

 

 

101**   The following materials from the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2012, formatted in XBRL (eXtensible Business Reporting Language); (i) Condensed Consolidated Balance Sheets at June 30, 2012 and September 30, 2011, (ii) Condensed Consolidated Statements of Income and Comprehensive Income for the three months and nine months ended June 30, 2012 and 2011; (iii) Condensed Consolidated Statements of Cash Flows for the nine months ended June 30, 2012 and 2011, and (iv) Condensed Notes to Condensed Consolidated Financial Statements.

 

* These certifications are being furnished solely to accompany this quarterly report pursuant to 18 U.S.C. Section 1350, and are not being filed for purposes of Section 18 of the Securities Exchange Act of 1934 and are not to be incorporated by reference into any filing of the Registrant, whether made before or after the date hereof, regardless of any general incorporation language in such filing.
** Pursuant to Rule 406T or Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.


RGC RESOURCES, INC. AND SUBSIDIARIES

 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned there unto duly authorized.

 

  

RGC Resources, Inc.

Date: August 9, 2012    By:     /s/ Paul W. Nester                                
  

Paul W. Nester

  

Vice President, Treasurer and CFO