RGC Resources, Inc. — Form 10-Q Summary
Business context and reporting period
RGC Resources is primarily a regulated natural gas distribution company serving approximately 60,500 residential, commercial and industrial customers in and around Roanoke, Virginia. More than 98% of annual revenue is derived from natural gas sales and delivery. The filing covers the three and six months ended March 31, 2016, the second quarter and first half of fiscal 2016. Results are highly seasonal and are not necessarily indicative of full-year performance.
Financial performance and key metrics
| Metric | Three months ended March 31, 2016 | Year-over-year change | Six months ended March 31, 2016 | Year-over-year change |
|---|---|---|---|---|
| Total operating revenues | $21.8 million | Down 18% | $37.8 million | Down 21% |
| Gross margin | $10.6 million; 48.9% of revenue | Up 4%; margin up from 38.6% | $19.4 million; 51.3% of revenue | Up 3%; margin up from 39.5% |
| Operating income | $5.4 million; 25.0% margin | Up 12% | $8.9 million; 23.7% margin | Up 7% |
| Net income | $3.1 million | Up $0.3 million, or 12% | $5.0 million | Up $0.3 million, or 7% |
| Diluted EPS | $0.65 | Up from $0.59 | $1.06 | Up from $1.00 |
| Operating cash flow | Not separately reported | Not applicable | $10.9 million | Down from $14.9 million |
Gross margin improved despite lower revenue because natural gas costs and volumes declined more rapidly than margin-generating regulated revenues. The effective income tax rate was approximately 38% in both comparable periods. Dividends declared were $0.2025 per share for the quarter and $0.4050 per share for the first six months, compared with $0.1925 and $0.3850, respectively, in the prior year.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $0.7 million at March 31, 2016, down from $1.0 million at September 30, 2015.
- Total assets were $152.3 million, compared with $145.8 million at September 30, 2015. Utility plant, net, increased to $124.4 million from $118.6 million.
- Borrowings under the line of credit were $7.5 million, compared with $9.3 million at September 30, 2015 and $2.6 million at March 31, 2015.
- Long-term debt was $32.2 million net of issuance costs, including $30.5 million of fixed-rate senior notes and $1.9 million of variable-rate term notes used to fund the Mountain Valley Pipeline investment.
- The new unsecured line of credit, effective March 31, 2016, provides seasonal borrowing capacity ranging from $10 million to $24 million, bears interest at 30-day LIBOR plus 100 basis points, and expires March 31, 2017 unless extended.
- Consolidated capitalization was 64% equity and 36% long-term debt, or 59% equity and 41% debt including the line of credit.
Material changes versus the prior comparable period
- Warmer weather reduced heating degree days by 14% in the quarter and 20% for the six-month period. Total delivered volumes declined 8% and 15%, respectively.
- Lower commodity prices also reduced revenue; the average unit price of gas in storage was approximately 28% lower for the first six months.
- Weather normalization adjustment income was $0.1 million for the quarter and $1.2 million for the six months, versus accrued refunds of $0.7 million and $0.8 million in the prior-year periods.
- SAVE Plan revenue increased to $0.6 million for the quarter and $1.0 million for the six months, compared with $0.3 million and $0.5 million, respectively, supporting higher margins.
- Operations and maintenance expense declined 7% for the quarter and 3% for the six months, primarily from increased capitalization of overhead and lower bad-debt expense. Pension and postretirement costs increased due partly to higher actuarial losses following adoption of new mortality tables.
- Capital expenditures increased to $8.2 million from $6.8 million in the first six months. The company invested $1.6 million in the Mountain Valley Pipeline project and recognized $55,000 of equity earnings from the investment.
- Operating cash flow decreased by $4.0 million, primarily because prior-year cash flow benefited from larger over-collections of gas costs and greater reductions in gas storage.
Outlook, commentary, risks and unusual items
- Management expects capital expenditures to remain elevated as it completes replacement of remaining bare steel and cast iron pipe, begins replacing older plastic pipe, and prepares to implement automated meter reading in fiscal 2017.
- The company expects to invest approximately $35 million over three years for its 1% interest in Mountain Valley Pipeline. The project requires Federal Energy Regulatory Commission approval, with a decision expected in late 2016 and anticipated service by late 2018 if approved.
- The SAVE Plan filing for 2017 is being prepared. Management had not determined whether to file for a broader non-gas rate increase later in 2016.
- The asset management agreement supporting transportation, storage and gas supply arrangements expires in March 2017.
- Key risks include weather volatility, natural gas commodity prices, customer demand, industrial customer activity, interest rates on variable-rate debt, access to refinancing, regulatory approvals, pipeline reliability and execution of the Mountain Valley Pipeline project.
- A hypothetical 100-basis-point increase in applicable interest rates would have increased current-period interest expense by approximately $69,000. No natural gas derivative instruments were outstanding at March 31, 2016.
- The company renewed local franchise agreements through December 31, 2035. No legal proceedings were reported, and management stated that disclosure controls were effective.
Important facts for investors to verify
- Confirm the status and eventual FERC approval, funding requirements and cost exposure of the Mountain Valley Pipeline project.
- Monitor renewal or replacement of the $10 million to $24 million seasonal credit facility before its March 31, 2017 expiration.
- Assess the sustainability of earnings growth given warmer weather, lower volumes and the contribution from WNA and SAVE Plan mechanisms.
- Track capital spending, pipeline replacement progress and the timing of future rate filings.
- Review changes in regulatory gas-cost over- or under-recoveries, storage balances and working-capital needs, which materially affect cash flow.
- Evaluate exposure to variable interest rates, pipeline supply interruptions and changes in industrial customer demand.