RGC Resources, Inc. — Form 10-Q Summary
Business Context and Reporting Period
RGC Resources is an energy services company primarily engaged in the regulated sale and distribution of natural gas through Roanoke Gas, serving approximately 62,000 customers in and around Roanoke, Virginia. The company also invests in the Mountain Valley Pipeline (MVP) and Southgate projects and provides limited unregulated services.
This filing covers the three months ended December 31, 2019, the first quarter of fiscal 2020, compared with the three months ended December 31, 2018. Results are highly seasonal, with winter weather generally producing greater earnings.
Financial Performance and Key Metrics
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Total operating revenues | $19.8 million | $21.2 million | Down 7% |
| Gas utility revenues | $19.6 million | $21.0 million | Down 7% |
| Gas utility margin | $11.4 million | $9.1 million | Up 25% |
| Operating income | $5.1 million | $3.3 million | Up 56% |
| Equity in affiliate earnings | $1.1 million | $0.6 million | Up 94% |
| Net income | $4.0 million | $2.4 million | Up 65% |
| Diluted EPS | $0.49 | $0.30 | Up $0.19 |
| Dividends declared per share | $0.1750 | $0.1650 | Up 6% |
Reported operating margin increased to approximately 25.7% from 15.4%, while net margin increased to approximately 20.3% from 11.5%. The gross utility margin, a non-GAAP measure defined as utility revenue less gas cost, increased primarily because of higher non-gas base rates and the absence of the prior-year tax-refund accrual.
- Operating expenses declined 18% to $14.7 million, largely because gas costs declined 31% to $8.2 million as average gas prices fell to $2.50 per decatherm from $3.85.
- Operations and maintenance expense increased 11% to $3.9 million, including regulatory-asset amortization and a $317,191 ESAC regulatory-asset write-down directed by the Virginia SCC.
- Interest expense increased 33% to $1.1 million because average debt outstanding increased approximately 34%.
- The effective income tax rate was 23.7%, compared with 22.4% in the prior-year quarter.
Cash Flow, Liquidity, Debt and Capital Resources
- Operating cash flow was $0.8 million, compared with a use of $2.3 million in the prior-year quarter.
- Investing cash flow was a use of $10.9 million, including $5.8 million of utility-property expenditures and $5.0 million invested in unconsolidated affiliates.
- Financing cash flow provided $9.4 million, including $15.7 million of unsecured-note proceeds and net line-of-credit repayments of $5.2 million.
- Cash declined by $0.6 million to $1.0 million at December 31, 2019.
- Total long-term debt, net of issuance costs, was $113.8 million; notes payable were $111.2 million and the line-of-credit balance was $2.9 million.
- Stockholders’ equity was $86.4 million and total assets were $268.2 million at December 31, 2019.
- Management reported a capitalization mix of 43% equity and 57% debt and compliance with all debt covenants.
- Fiscal 2020 capital expenditures were expected to be near fiscal 2019’s $21.9 million level. Total MVP and Southgate investment is expected to exceed $55 million by completion.
Material Changes Versus the Prior Comparable Period
- The SCC’s January 24, 2020 final rate order authorized an annualized $7.25 million increase in non-gas base rates, compared with the company’s original $10.5 million request. The company accrued a cumulative customer rate refund of approximately $3.6 million pending final rate implementation.
- The new rates incorporated prior SAVE Plan investments into base rates. SAVE Plan revenue declined approximately $1.0 million year over year, but this was more than offset by higher base-rate-related margin.
- Weather was 4% warmer than normal in the current quarter, versus 3% colder than normal in the prior-year quarter. The WNA generated approximately $167,000 of additional revenue in the current quarter.
- Delivered volumes were essentially flat overall at 3.12 million decatherms; residential and commercial volumes declined 5%, while transportation and interruptible volumes increased 16%.
- Equity earnings from MVP nearly doubled due to increased construction activity and related allowance for funds used during construction.
- Debt increased following a $10 million fixed-rate note issuance by Roanoke Gas and additional MVP-related borrowing.
Guidance, Outlook, Risks and Unusual Items
- Management indicated that natural-gas futures prices for the remainder of fiscal 2020 were expected to average $1.90 to $2.20 per decatherm, although the filing does not provide formal earnings guidance.
- MVP was approximately 90% complete, but permit issues involving water crossings and Jefferson National Forest lands had suspended portions of construction. The project’s estimated cost increased to $5.3 billion-$5.5 billion, with an anticipated in-service date in late calendar 2020, subject to permit resolution.
- RGC’s estimated MVP cash contribution was $53 million-$55 million, plus approximately $1.6 million from an approved increase in participation. Continued delays could increase costs, extend the in-service date and reduce returns; AFUDC earnings will cease when the pipeline enters service.
- Southgate’s estimated project cost was nearly $500 million, with RGC’s expected investment approximately $2.5 million and a targeted 2021 in-service date, subject to MVP completion.
- Roanoke Gas depends on two primary pipelines and an LNG facility. A disruption to either pipeline could materially impair gas deliveries and operating results.
- Key risks include weather variability, natural-gas prices, regulatory outcomes, pipeline permitting and construction delays, interest-rate exposure, cyberattacks, pension and postretirement obligations, and the company’s ability to recover regulatory assets.
- The company maintains interest-rate swaps on certain variable-rate debt. A hypothetical 100-basis-point increase in applicable rates would have increased quarterly interest expense by approximately $70,000.
- No material legal proceedings or material changes to previously disclosed risk factors were reported.
Important Facts for Investors to Verify
- Approval and implementation of the SCC-authorized $7.25 million annual rate increase and the final amount and timing of customer refunds.
- MVP permit reissuance, final project cost, funding requirements and late-2020 in-service expectations.
- Whether MVP operating earnings after completion replace or exceed current AFUDC-related equity earnings.
- Actual fiscal 2020 capital expenditures and total MVP/Southgate contributions relative to management’s estimates.
- Debt covenant compliance, variable-rate exposure and liquidity given the company’s low cash balance and capital-intensive investment program.
- Future effects of weather, gas prices, SAVE/WNA/PGA mechanisms and regulatory-asset recovery on utility margins.