RGC Resources, Inc. — Fiscal 2015 Form 10-K Summary
Business context and reporting period
Annual report for the fiscal year ended September 30, 2015, with quarterly information for the fourth quarter. RGC Resources is primarily a regulated natural-gas distribution utility serving approximately 59,100 customers in Roanoke, Virginia, and surrounding localities. Roanoke Gas generated approximately 98% of consolidated revenue. Unregulated services contributed less than 3% of revenue and margin.
The company delivered 9.875 million DTH of natural gas through approximately 1,125 miles of pipeline. Residential and commercial customers represented approximately 91% of customers and more than half of revenue and margin. The business is seasonal and weather-sensitive, although purchased-gas adjustment and weather-normalization mechanisms reduce volatility.
Key financial metrics
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Operating revenue | $68.2 million | $75.0 million | Down 9% |
| Gross margin | $30.2 million | $29.3 million | Up 3% |
| Operating income | $10.0 million | $9.7 million | Up 3% |
| Net income | $5.1 million | $4.7 million | Up 8% |
| Basic and diluted EPS | $1.08 | $1.00 | Up 8% |
| Operating cash flow | $16.8 million | $6.8 million | Up $9.9 million |
| Capital expenditures | $13.8 million | $14.7 million | Down $0.9 million |
| Cash and equivalents | $1.0 million | $0.8 million | Up $0.1 million |
- Approximate FY2015 gross margin was 44.3% of revenue, operating margin was 14.7%, and net margin was 7.5%.
- Gas utility revenue declined 9% to $67.1 million, principally because the average natural-gas commodity price declined 21% per DTH and delivered volumes declined 2%.
- Gas utility margin increased 3% to $29.7 million. SAVE Plan revenue rose approximately $1.0 million to $1.3 million, and customer base charges increased $0.2 million; these gains offset lower volumetric margin, weather-normalization adjustments, and carrying-cost revenue.
- Heating degree days declined 2% to 4,253. Residential and commercial deliveries declined 1%; transportation and interruptible volumes declined 5%, partly reflecting lower industrial activity and the loss of a customer.
- Operations and maintenance expense increased 1% to $13.5 million, while depreciation increased 8% to $5.1 million. Interest expense declined 17% to $1.5 million following the 2014 refinancing.
- Cash flow from operations exceeded capital expenditures by approximately $3.0 million. Cash used in investing activities was $13.8 million, and financing activities used $2.9 million.
- Total assets were $148.1 million and stockholders’ equity was $52.8 million at September 30, 2015. Long-term debt was $30.5 million, net of $0.2 million of issuance costs; short-term line-of-credit borrowings were $9.3 million.
- The company declared $0.77 per share of dividends in FY2015, compared with $0.74 in FY2014. The FY2013 comparison included a one-time $1.00 per share special dividend.
Fourth-quarter information
Fiscal fourth-quarter revenue was $9.7 million, gross margin was $5.4 million, operating income was $0.7 million, net income was $35,755, and diluted EPS was $0.01. In the comparable FY2014 fourth quarter, revenue was $10.3 million, gross margin was $5.3 million, operating income was $0.3 million, net income was a loss of $144,337, and diluted EPS was $(0.03).
Material changes versus the prior comparable period
- Lower commodity prices reduced revenue but also reduced gas inventory costs and helped operating cash flow. The average gas-in-storage cost fell to $3.38 per DTH from $4.71.
- The company ended FY2015 with a $1.9 million over-recovery of gas costs, which management stated would be refunded to customers through future billings, reducing the sustainability of the FY2015 cash-flow benefit.
- SAVE Plan revenue increased substantially as infrastructure investment expanded, providing prospective recovery of qualifying depreciation, expenses, and return on rate base.
- The company renewed 10 miles of bare-steel and cast-iron main and replaced 594 services, compared with 13.6 miles and 942 services in FY2014.
- The defined-benefit pension and postretirement plans became more underfunded, with a combined deficit of $10.7 million versus $8.5 million in FY2014. Adoption of updated mortality tables increased estimated liabilities by approximately $2.3 million in total.
- The company formed RGC Midstream, LLC and, effective October 1, 2015, committed to a 1% interest in Mountain Valley Pipeline, LLC. The expected investment is approximately $35 million over three years.
Guidance, outlook, risks, contingencies, and unusual items
- Management expected FY2016 capital spending to exceed FY2015 levels, driven by pipeline replacement and replacement of two transfer stations. The company expects to replace all remaining cast-iron and bare-steel pipe within two years and later replace approximately 40 miles of pre-1973 plastic main, with anticipated completion in 2019.
- Management expected higher FY2016 pension and postretirement expense and projected approximately $500,000 of pension contributions and $500,000 of postretirement-plan contributions.
- The Mountain Valley Pipeline investment is subject to FERC approval, construction timing and cost risks, financing and capital-call requirements, permitting, right-of-way issues, capacity subscriptions, and potential cost overruns. FERC approval was expected in late 2016 and service was projected for late 2018, but no assurance was provided.
- The $24 million revolving credit facility expires March 31, 2016. Management expected to extend or replace it, but stated that equivalent terms were not guaranteed. The facility carries interest at 30-day LIBOR plus 100 basis points and includes financial covenants.
- Natural-gas supply depends on two interstate pipelines that provide 100% of transported supply. Pipeline outages, severe weather, LNG facility disruptions, gas-price volatility, and competing energy sources could affect service, margins, and liquidity.
- Regulatory approval is required for rates, financing, pipeline safety, and certain projects. Delays or failure to obtain timely rate relief could reduce profitability or restrict access to capital.
- The company reported no material pending litigation. Two lawsuits related to a 2009 explosion were dismissed in 2015 without a material financial impact. Potential environmental obligations remain associated with former manufactured-gas-plant sites, although no related liability was recorded.
- Auditors issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management concluded that disclosure controls and internal controls were effective as of September 30, 2015.
Most important facts for an investor to verify
- Whether the revolving credit facility was extended or replaced after its March 31, 2016 expiration and on what pricing, availability, and covenant terms.
- The actual timing, funding requirements, regulatory approvals, construction costs, and expected returns of the Mountain Valley Pipeline investment.
- Whether elevated pipeline-renewal capital spending can be recovered through the SAVE mechanism and future base-rate proceedings without weakening cash coverage or increasing leverage.
- The amount and timing of customer refunds or bill credits associated with the $1.9 million gas-cost over-recovery.
- Actual FY2016 weather, gas prices, industrial demand, pension expense, benefit-plan contributions, and capital expenditures relative to management’s expectations.
- The renewal status and terms of the Roanoke, Salem, and Vinton franchises, which were scheduled to expire January 1, 2016.