RGC Resources, Inc. — FY2016 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended September 30, 2016, with quarterly information for the fourth quarter ended September 30, 2016. RGC Resources is primarily a regulated natural-gas distribution utility serving approximately 59,600 customers in Roanoke, Virginia, and surrounding localities. More than 98% of revenue comes from regulated gas operations. The company also owns a 1% interest in Mountain Valley Pipeline, LLC through RGC Midstream.
Financial performance and key metrics
| Metric | FY2016 | FY2015 | Change |
|---|---|---|---|
| Operating revenue | $59.1 million | $68.2 million | Down 13% |
| Gross margin | $31.6 million | $30.2 million | Up 4% |
| Operating income | $11.2 million | $10.0 million | Up 12% |
| Net income | $5.8 million | $5.1 million | Up 14% |
| Basic EPS | $1.22 | $1.08 | Up 13% |
| Cash flow from operations | $14.9 million | $16.8 million | Down 11% |
FY2016 gross margin was approximately 53.4% of revenue, operating margin approximately 19.0%, and net margin approximately 9.8%. The margin improvement reflected lower gas costs, higher SAVE Plan revenue, and a $1.3 million weather-normalization adjustment that offset unusually warm weather. Interest expense increased 8% to $1.6 million, while the effective tax rate increased modestly to 38.7% from 38.4%.
Natural-gas deliveries declined 10% to 8.84 million DTH, including a 12% decline in residential and commercial volumes. Heating degree-days declined 18% to 3,484, and the average commodity price of gas fell 28% per DTH. Utility gross margin nevertheless increased 5% to $31.1 million. SAVE Plan revenue increased to $2.54 million from $1.31 million, while carrying-cost revenue decreased by $182,000.
Fourth-quarter 2016 revenue was $10.0 million, gross margin was $5.9 million, operating income was $816,000, net income was $146,000, and diluted EPS was $0.03. Fourth-quarter 2015 net income was $36,000 and diluted EPS was $0.01.
Cash flow, capital spending, debt, and liquidity
- Operating cash flow was $14.9 million. Investing used $21.0 million, including $17.9 million of utility capital expenditures and $3.1 million invested in Mountain Valley Pipeline.
- Capital expenditures increased to approximately $18 million from $13.8 million. The company renewed 14.9 miles of main and replaced 684 services.
- Cash and cash equivalents decreased to $643,000 from $985,000.
- Short-term line-of-credit borrowings were $14.6 million at September 30, 2016, against a $24 million available limit. The facility was scheduled to expire March 31, 2017; management expected renewal or replacement but provided no assurance of equivalent terms.
- Long-term debt was $33.9 million, including $30.5 million of 4.26% senior notes due 2034 and $3.4 million of variable-rate Midstream notes due 2020.
- Capitalization was 62.2% equity and 37.8% long-term debt, compared with 63.4% and 36.6%, respectively, in FY2015.
- The company declared dividends of $0.81 per share, up from $0.77. Stockholders’ equity was $55.7 million and total assets were $165.6 million.
Material changes, outlook, risks, and unusual items
- Management expected elevated capital spending for several years. Renewal work shifted from completed cast-iron and bare-steel replacement to approximately 45 miles of pre-1973 plastic pipe, targeted for completion by 2021. The FY2017 capital budget was expected to exceed FY2016 spending by more than $3 million.
- The SCC approved an extension of the SAVE Plan through 2021. The FY2017 SAVE revenue requirement was approximately $4 million, nearly $1 million above the estimated FY2016 amount.
- The company invested approximately $3.5 million in Mountain Valley Pipeline during FY2016 and expected total investment of approximately $35 million over the project. It expected an additional $32 million of investment over the remaining three-year project period, subject to FERC approval. The project targeted an in-service date in the fourth quarter of 2018, but remained exposed to permitting, environmental, construction, cost-overrun, financing, and execution risks.
- On November 1, 2016, Roanoke Gas entered into a $7 million variable-rate note and related interest-rate swap. Proceeds were intended to convert part of the line-of-credit balance into longer-term financing.
- Defined-benefit pension and postretirement liabilities increased to $13.8 million from $10.7 million, primarily because of lower discount rates. The company expected FY2017 contributions of approximately $750,000 to the pension plan and $1.0 million to the postretirement plan. The pension plan was closed to new employees effective January 1, 2017.
- Key risks include dependence on two interstate pipelines, severe weather, natural-gas price volatility, regulatory approval and rate recovery, access to capital, debt-covenant compliance, pipeline safety incidents, cyberattacks, environmental requirements, and the concentrated Roanoke Valley service territory.
- The company reported no known material legal proceedings, no off-balance-sheet arrangements, and no outstanding commodity or interest-rate derivatives at September 30, 2016. Independent auditors issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Confirm the status and economics of the Mountain Valley Pipeline, including FERC approval, remaining capital calls, financing, construction timing, and potential cost overruns.
- Review renewal or replacement terms for the short-term credit facility that expired March 31, 2017, and assess compliance with interest-coverage and leverage covenants.
- Evaluate whether SAVE Plan recoveries and weather-normalization adjustments continue to offset lower volumes and weather-related earnings volatility.
- Monitor the FY2017 capital budget, pipeline-renewal spending, automated meter deployment, and resulting borrowing needs.
- Assess the sensitivity of pension and postretirement liabilities to discount rates, investment returns, health-care costs, and required contributions.
- Verify the sustainability of the $0.81-per-share dividend against operating cash flow, capital expenditures, debt service, and regulatory recovery.