RGC RESOURCES INC quarterly report, Q2 FY2018

RGC Resources, Inc. Form 10-Q Summary

Business Context and Reporting Period

RGC Resources is an energy services company primarily engaged in the regulated sale and distribution of natural gas through Roanoke Gas Company, serving approximately 61,200 customers in and around Roanoke, Virginia. The filing covers the quarter and six months ended March 31, 2018, within fiscal 2018. Results are highly seasonal and are generally stronger during winter months.

Financial Performance and Key Metrics

Metric	Three Months Ended March 31, 2018	Prior Year	Six Months Ended March 31, 2018	Prior Year
Total operating revenue	$24.9 million	$21.9 million	$43.7 million	$40.7 million
Gross margin	$11.0 million	$10.8 million	$20.1 million	$20.2 million
Operating income	$5.3 million	$5.6 million	$9.0 million	$9.6 million
Net income	$3.5 million	$3.2 million	$5.5 million	$5.5 million
Diluted EPS	$0.47	$0.45	$0.75	$0.76
Dividends declared per share	$0.1550	$0.1450	$0.3100	$0.2900

Quarterly revenue increased 14%, while six-month revenue increased 7%, primarily from colder weather, higher deliveries, customer growth and increased SAVE Plan revenues.
Quarterly gross margin increased 2%, but the gross margin percentage declined to approximately 44.2% from 49.5%. Six-month gross margin declined 1%, with the margin percentage declining to approximately 46.0% from 49.7%.
Quarterly operating income declined 5% and six-month operating income declined 6%, reflecting higher operations and maintenance costs, depreciation and interest expense.
Quarterly net income increased 7%; six-month net income increased 1%. The improvement benefited from lower income taxes and the timing of customer refunds related to tax reform.
Quarterly diluted EPS increased despite higher average shares outstanding following the March 2018 equity issuance. Six-month diluted EPS declined slightly to $0.75.
Net cash provided by operating activities was $10.6 million, compared with $11.6 million in the prior-year period. Investing cash outflows were $13.9 million, including $10.1 million of utility and other capital expenditures and $3.8 million invested in Mountain Valley Pipeline.
Cash increased to $4.8 million at March 31, 2018, from $69,640 at September 30, 2017.
Long-term debt, net of issuance costs, was $55.5 million at March 31, 2018, compared with $61.3 million at September 30, 2017. The line of credit had no balance at quarter-end, versus $17.8 million at September 30, 2017.
Total assets were $198.5 million, compared with $183.1 million at September 30, 2017. Stockholders’ equity increased to $79.3 million from $60.0 million, substantially reflecting the March common stock issuance.

Material Changes Versus the Prior Comparable Period

Heating degree days increased 27% for the quarter and 22% for the six-month period, resulting in delivered volumes increasing 22% and 18%, respectively.
SAVE Plan revenues increased to approximately $1.2 million for the quarter and $2.2 million for the six months, compared with approximately $0.9 million and $1.8 million, respectively.
Weather normalization reduced quarterly margin by approximately $161,000 because weather was 3.1% colder than normal; the prior-year quarter benefited from approximately $982,000 of weather normalization revenue.
The Company recorded an $821,343 regulatory liability and revenue reduction for estimated excess customer billings associated with the lower federal corporate tax rate. The quarterly component was approximately $358,901.
Interest expense increased 35% for the quarter and 34% for the six months due to higher average debt and rising rates on variable-rate borrowings.
Equity in earnings from the Mountain Valley Pipeline investment increased to $191,513 for the quarter and $340,324 for the six months, reflecting increased construction activity and AFUDC earnings.
In March 2018, the Company issued 700,000 common shares for net proceeds of approximately $15.1 million, primarily to fund Roanoke Gas infrastructure improvements.

Guidance, Outlook, Risks and Unusual Items

Management expects fiscal 2018 capital expenditures to exceed fiscal 2017 levels, although first-half spending was lower because of weather and project timing.
The Company expects to begin using its Roanoke Gas line of credit again by summer to fund seasonal working capital and capital needs. The facility has a maximum borrowing limit of $25 million, with availability varying from $2 million to $25 million.
On April 11, 2018, RGC Midstream’s borrowing capacity for Mountain Valley Pipeline investment increased to $38 million, and the interest rate was reduced to 30-day LIBOR plus 1.35%. The amendment also permits the entire investment to be funded through the amended notes.
Mountain Valley Pipeline construction is underway, with the managing partner targeting an in-service date by the end of calendar 2018. The Company’s expected 1% investment is approximately $35 million. The filing notes that additional capital calls will occur as construction progresses.
The Mountain Valley Pipeline LLC announced the 70-mile Southgate project, targeted for completion by the end of 2020; RGC Midstream is expected to participate.
The Tax Cuts and Jobs Act reduced the federal corporate tax rate to 21%. The Company recorded an estimated $11.5 million reduction in net deferred tax liabilities, with $11.7 million related to regulated operations transferred to a regulatory liability and approximately $208,000 charged to income tax expense for unregulated operations.
The SCC will determine the final method, amount and timing of customer refunds related to excess tax-related billings and deferred taxes. Adjustments to current estimates may affect future revenue, earnings and cash flow.
Key risks include weather variability, natural gas commodity prices, interest-rate exposure, construction and permitting risks related to Mountain Valley Pipeline, dependence on two primary pipelines, regulatory decisions, and the seasonal nature of operating cash flows.
A hypothetical 100-basis-point increase in applicable rates on variable-rate debt outstanding during the period would have increased interest expense by approximately $103,000.
Management stated that disclosure controls and procedures were effective as of March 31, 2018, with no material changes to internal control over financial reporting. No legal proceedings or changes to risk factors were reported.

Important Facts for Investors to Verify

Confirm the SCC’s final orders regarding the $821,343 excess-revenue refund and the $11.7 million regulatory liability for excess deferred taxes.
Track Mountain Valley Pipeline construction progress, total project costs, capital calls, financing usage and the targeted end-of-2018 in-service date.
Assess whether fiscal 2018 capital expenditures exceed the prior year and how the spending is funded between operating cash flow, debt and equity.
Monitor the resumption and utilization of the Roanoke Gas line of credit and RGC Midstream’s amended borrowing facility.
Evaluate the effects of weather normalization, customer demand, gas prices and seasonal working-capital movements on future margins and cash flow.
Review the impact of the new revenue recognition, pension benefit presentation and lease accounting standards when adopted.