RGC Resources, Inc. — Form 10-Q Summary
Business Context and Reporting Period
RGC Resources is primarily a regulated natural gas distribution company serving approximately 62,100 residential, commercial and industrial customers in and around Roanoke, Virginia through Roanoke Gas Company. It also provides limited unregulated services and owns investments in the Mountain Valley Pipeline (MVP) and Southgate projects.
This unaudited Form 10-Q covers the three and nine months ended June 30, 2020, the third quarter and first nine months of fiscal 2020. Results are highly seasonal and are not indicative of full-year performance. The company became a smaller reporting company and non-accelerated filer during the period.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30, 2020 | Year-over-Year | Nine Months Ended June 30, 2020 | Year-over-Year |
|---|---|---|---|---|
| Total operating revenue | $11.1 million | Down 5% | $53.3 million | Down 8% |
| Operating income | $1.34 million | Down 18% | $13.42 million | Up 21% |
| Net income | $1.21 million | Up 6% | $10.89 million | Up 32% |
| Diluted EPS | $0.15 | Up $0.01 | $1.34 | Up $0.32 |
| Operating cash flow | Not separately provided | Not applicable | $12.83 million | Down $3.76 million |
| Capital expenditures | Not separately provided | Not applicable | $16.97 million | Up $0.32 million |
- Gross utility margin, a non-GAAP measure defined as gas utility revenue less utility gas cost, was $7.18 million for the quarter, down 3%, and $32.23 million for the nine-month period, up 12%.
- Gross utility margin was approximately 66.1% of gas utility revenue in the quarter versus 64.2% in the prior-year quarter, and approximately 61.1% for the nine-month period versus 50.0% in the prior year.
- Consolidated operating margin was approximately 12.1% for the quarter versus 14.0% in the prior year, and 25.2% for the nine-month period versus 19.1% in the prior year.
- Equity earnings from unconsolidated affiliates increased to $1.21 million for the quarter and $3.49 million for the nine-month period, up 55% and 71%, respectively, primarily from MVP-related AFUDC.
- Dividends declared were $0.175 per share for the quarter and $0.525 per share for the nine-month period, compared with $0.165 and $0.495, respectively, in the prior-year periods.
Balance Sheet, Debt and Liquidity
- Cash and cash equivalents were $1.20 million at June 30, 2020, compared with $1.63 million at September 30, 2019.
- Total assets increased to $273.3 million from $258.4 million, driven by higher utility plant, construction work in progress and MVP investment balances.
- Utility plant, net increased to $194.0 million from $182.0 million; construction work in progress was $17.8 million versus $11.4 million.
- Long-term debt, net increased to $116.35 million from $103.37 million. Total notes payable were $113.81 million, and the line-of-credit balance was $2.86 million.
- The company renewed Roanoke Gas’s line of credit through March 31, 2022, with maximum borrowing capacity of $28 million. Midstream’s credit facility capacity was increased to $41 million and extended through December 2022.
- Capitalization was approximately 44% equity and 56% debt at June 30, 2020. The company reported compliance with all debt covenants.
- Net cash provided by financing activities was $10.25 million, including $18.30 million of unsecured note proceeds, partially offset by line-of-credit repayments and dividends.
Material Changes Versus the Prior Comparable Period
- The January 2020 Virginia State Corporation Commission order granted an annualized $7.25 million non-gas rate increase. The company also wrote off $317,000 of ESAC regulatory assets and completed a $3.8 million customer rate refund in March 2020.
- Nine-month net income benefited from the full-period effect of the non-gas rate increase, higher MVP earnings and the absence of the prior-year excess-revenue refund adjustment.
- Quarterly revenue and margin were pressured by lower gas prices, COVID-19-related commercial demand effects and a $504,000 WNA revenue reduction. The prior-year quarter included a $461,000 WNA revenue benefit.
- Residential and commercial delivered volumes decreased 8% for the nine-month period, while transportation and interruptible volumes increased 37%, substantially reflecting one industrial customer’s increased natural gas usage.
- Operations and maintenance expense increased 7% for the nine-month period, including higher compensation, professional services and bad-debt expense.
- Operating cash flow declined primarily because the company paid the $3.8 million rate refund and deferred collection of approximately $2.4 million of WNA receivables.
Guidance, Outlook, Risks and Unusual Items
- Management expected fiscal 2020 capital expenditures to be approximately $22 million, near the prior-year level.
- The company expects COVID-19’s economic effects to continue at least through calendar year-end 2020. Commercial consumption has declined in several customer categories, customer delinquencies and bad-debt expense are expected to increase, and the ultimate financial impact remains uncertain.
- Virginia’s moratorium on utility disconnections and late fees was extended through August 31, 2020. The company increased its bad-debt provision and may seek regulatory recovery for certain pandemic-related costs.
- The company began billing the approximately $2.4 million WNA receivable over July through September 2020 after receiving SCC approval to delay collection.
- The 2021 SAVE filing seeks approximately $2.3 million of annual revenue, an increase of approximately $1.2 million over the existing rider, plus a proposed $73,000 customer refund. The application was pending at June 30, 2020.
- MVP construction was approximately 92% complete but remained delayed by legal and regulatory challenges. The targeted in-service date was early calendar 2021, with project costs expected to potentially increase by approximately 5% over the $5.4 billion budget. RGC’s estimated total MVP contribution is $57 million to $59 million.
- MVP earnings currently primarily reflect AFUDC and are expected to decline after the pipeline enters service. Additional financing and further delays may be required if permitting, litigation or COVID-19 restrictions persist.
- Interest-rate exposure remains primarily associated with variable-rate debt. A hypothetical 100-basis-point increase in rates would have increased nine-month interest expense by approximately $187,000.
- The company had fixed-price natural gas purchase commitments for 2.8 million decatherms over the following 12 months at prices ranging from $1.77 to $2.62 per decatherm. No natural-gas derivative instruments were outstanding at quarter-end.
Most Important Facts to Verify
- Progress toward MVP permitting, construction completion, cost estimates and the early-2021 in-service target.
- Actual COVID-19 effects on customer collections, bad-debt reserves, commercial demand and any regulatory recovery approved by the SCC.
- Outcome of the pending SAVE Plan and Rider application and the resulting revenue impact.
- Future cash requirements for utility capital expenditures, MVP and Southgate contributions, debt service and dividends.
- Whether AFUDC-related MVP earnings decline as expected after the project enters service and how that affects recurring earnings.
- Changes in variable interest rates, LIBOR transition arrangements and compliance with debt covenants.