RGC Resources, Inc. — Fiscal 2021 First-Quarter 10-Q Summary
Business Context and Reporting Period
RGC Resources is primarily a regulated natural gas distribution utility serving approximately 62,600 residential, commercial and industrial customers in Virginia through Roanoke Gas. The company also invests in the Mountain Valley Pipeline (MVP) and Southgate projects and provides limited unregulated services. This Form 10-Q covers the three months ended December 31, 2020, compared with the three months ended December 31, 2019. Results are highly seasonal, with generally stronger earnings during winter months.
Financial Performance and Position
| Metric | Q1 FY2021 | Q1 FY2020 | Change |
|---|---|---|---|
| Total operating revenues | $19.5 million | $19.8 million | Down 1% |
| Gas utility revenues | $19.5 million | $19.6 million | Down 1% |
| Gross utility margin | $11.8 million | $11.4 million | Up 3% |
| Operating income | $5.6 million | $5.1 million | Up 10% |
| Net income | $4.7 million | $4.0 million | Up 18% |
| Basic EPS | $0.58 | $0.50 | Up $0.08 |
| Diluted EPS | $0.58 | $0.49 | Up $0.09 |
| Dividends declared per share | $0.185 | $0.175 | Up 6% |
Operating margin was approximately 28.6%, compared with 25.7% in the prior-year quarter. Net margin was approximately 24.2%, compared with 20.3%. The gross utility margin increased despite lower volumes because higher SAVE Plan and weather-normalization revenues more than offset lower volumetric and inventory-carrying-cost revenues.
- Delivered natural gas volumes declined 8% to 2.87 million DTH. Residential and commercial volumes declined 9%, while transportation and interruptible volumes declined 6%.
- Heating degree days declined 13%, and weather was approximately 16% warmer than normal. The weather-normalization adjustment generated approximately $947,000 of additional revenue, compared with approximately $167,000 in the prior-year quarter.
- Operations and maintenance expense declined $415,000, primarily because the prior-year period included ESAC regulatory-asset write-down and amortization costs.
- Depreciation and amortization increased 8% to $2.15 million, reflecting higher utility plant balances.
- Equity earnings from unconsolidated affiliates increased 24% to $1.36 million, primarily from the MVP investment.
- The effective income tax rate increased to 24.4% from 23.7%.
Cash Flow, Debt and Liquidity
| Metric | December 31, 2020 | September 30, 2020 |
|---|---|---|
| Cash and cash equivalents | $0.7 million | $0.3 million |
| Total assets | $294.4 million | $281.7 million |
| Utility plant, net | $201.8 million | $198.4 million |
| Investment in unconsolidated affiliates | $60.4 million | $57.5 million |
| Total debt, before debt issuance costs | $133.4 million | $124.1 million |
| Stockholders’ equity | $92.5 million | $88.9 million |
- Operating cash flow was $153,000, down from $818,000, primarily because of working-capital and regulatory-account changes, including higher receivables and weather-normalization effects.
- Investing cash flow used $7.9 million, including $5.3 million of utility-property expenditures and $2.5 million invested in unconsolidated affiliates.
- Financing cash flow provided $8.1 million, including $10.6 million of line-of-credit borrowings, partially offset by $4.2 million of repayments and $1.4 million of dividends paid.
- At December 31, 2020, the company had $15.5 million outstanding under its line of credit and $28.4 million utilized under Midstream’s MVP credit facility. Management reported $41 million of borrowing capacity under the Midstream facility, which matures in December 2022.
- The company’s long-term capitalization was approximately 41% equity and 59% debt. Management believes available operating cash flow, credit facilities, private shelf capacity, the ATM program and potential capital-spending adjustments are sufficient to meet requirements over the next year.
Material Changes and Outlook
- The SAVE Rider became effective in October 2020 and is designed to collect approximately $2.3 million of annual revenue, compared with approximately $1.2 million under the prior rider. SAVE revenue increased $324,000 year over year in the quarter.
- MVP construction is approximately 92% complete but remains delayed by legal and regulatory challenges. The project continues to target a late-2021 in-service date and total cost of $5.8 billion to $6.0 billion, excluding AFUDC.
- Effective January 1, 2021, MVP temporarily ceased accruing AFUDC while pursuing revised Army Corps and FERC approvals for remaining stream and wetland crossings. RGC therefore expects no MVP AFUDC income during the suspension. Roanoke Gas also suspended AFUDC on its related interconnect stations.
- The company recognized $1.36 million of MVP AFUDC income and $56,000 of interconnect-station AFUDC during the reported quarter; these sources of earnings will not continue during the suspension unless construction resumes.
- COVID-19 continues to reduce commercial gas consumption, increase potential customer delinquencies and bad-debt exposure, and create incremental costs. The residential service-disconnection moratorium was expected to continue at least into summer 2021.
- Roanoke Gas received $403,000 of CARES Act funds in December 2020 for customer past-due balances. The company expects to defer certain COVID-related costs and seek future regulatory recovery, although formal SCC guidance was not yet available.
Key Risks, Contingencies and Unusual Items
- MVP completion depends on multiple federal and state permits, water-quality approvals, FERC authorizations, continued validity of prior orders and resolution of legal challenges. Further delays could increase project costs, capital contributions and financing needs.
- COVID-19 could adversely affect customer collections, commercial demand, operating costs and future bad-debt expense. The ultimate financial impact remains uncertain.
- Revenue and cash flow are sensitive to weather, gas prices, storage balances and customer collections. The company cautions that first-quarter results are not indicative of full-year performance.
- Regulatory assets totaled $13.7 million, while regulatory liabilities totaled $31.1 million. Loss of regulated-operations accounting could require write-off of regulatory assets.
- The company has variable-rate debt and interest-rate swaps tied to LIBOR. Changes arising from LIBOR transition could materially affect financial position, results or cash flows, although management had not completed its evaluation.
- The company implemented an unfunded non-qualified deferred compensation plan effective December 1, 2020 and awarded $40,000 during the quarter.
Investor Verification Checklist
- Verify whether MVP permits, litigation and construction milestones support the late-2021 in-service target and $5.8–$6.0 billion cost estimate.
- Assess the earnings and cash-flow effect of the temporary suspension of MVP and interconnect AFUDC.
- Monitor commercial demand, customer arrears, bad-debt provisions, CARES Act assistance and recovery of deferred COVID-19 costs.
- Reconcile debt maturities, line-of-credit availability and additional financing needs associated with MVP and utility capital expenditures.
- Review weather-normalization, SAVE, PGA and other regulatory mechanisms for their effect on margins and future customer rates.
- Confirm the company’s disclosures regarding LIBOR transition, interest-rate swaps and refinancing requirements.