RGC Resources, Inc. Form 10-K Summary
Reporting period: Fiscal year ended September 30, 2017; filed December 8, 2017. The company is primarily a regulated natural gas distributor serving approximately 59,800 customers in Roanoke, Virginia, and surrounding areas. More than 98% of revenue is derived from natural gas utility operations. The filing also covers the company’s 1% investment in Mountain Valley Pipeline, LLC.
Financial Performance and Position
| Metric | FY 2017 | FY 2016 | Change |
|---|---|---|---|
| Operating revenue | $62.3 million | $59.1 million | +5% |
| Gross margin | $32.8 million | $31.6 million | +4% |
| Operating income | $11.7 million | $11.2 million | +4% |
| Net income | $6.2 million | $5.8 million | +7% |
| Basic and diluted EPS | $0.86 | $0.81 | +6% |
| Operating cash flow | $13.0 million | $14.9 million | -13% |
| Capital expenditures | $20.8 million | $17.9 million | +16% |
| Long-term debt, net | $61.3 million | $33.6 million | +82% |
| Stockholders’ equity | $60.0 million | $55.7 million | +8% |
- Gross margin was approximately 52.7% of revenue, operating margin approximately 18.7%, and net margin approximately 10.0%.
- Total delivered natural gas volumes declined 3% to 8.6 million DTH. Residential and commercial volumes declined 4%, while heating degree days declined 7%, reflecting warmer weather.
- Revenue growth was driven primarily by higher gas costs and increased SAVE Plan revenue, which more than offset lower volumes. Gas commodity prices increased approximately 11% per DTH sold.
- Net cash decreased by $573,612 to $69,640 at year-end. Investing cash outflows were $23.5 million, including $20.8 million of utility capital expenditures and $2.8 million invested in Mountain Valley Pipeline.
- The company declared dividends of $0.58 per share, compared with $0.54 in fiscal 2016. The March 2017 three-for-two stock split is reflected retrospectively in per-share data.
Material Changes Versus the Prior Period
- Higher regulated margin: Gas utility margin increased 4% to $32.3 million. SAVE Plan revenue increased by approximately $1.3 million to $3.8 million, and weather normalization revenue increased by approximately $522,000 to $1.8 million.
- Weather-related volume pressure: Warmer weather reduced residential and commercial deliveries and volumetric margin by approximately $526,000, substantially offset by the weather normalization adjustment.
- Higher financing leverage: Average total debt increased 24%, raising interest expense 17% to $1.9 million. The company’s capitalization shifted to 49.4% equity and 50.6% long-term debt from 62.2% equity and 37.8% long-term debt.
- Mountain Valley Pipeline: Equity earnings increased to $421,646 from $152,864, primarily from allowance for funds used during construction. The investment balance increased to $7.4 million.
- Operating changes: Customer service, billing, credit and collections were outsourced in July 2017, reducing the workforce by 18 employees. Operations and maintenance expense was essentially unchanged.
- Benefit plans: Pension and postretirement funded deficits improved to $8.2 million from $13.8 million, helped by plan contributions, investment returns and higher discount rates.
Fourth-Quarter Information
| Q4 FY 2017 | Reported amount |
|---|---|
| Operating revenue | $10.2 million |
| Gross margin | $6.0 million |
| Operating income | $766,620 |
| Net income | $159,886 |
| Basic EPS | $0.02 |
Fourth-quarter net income increased from $145,561 in the comparable fiscal 2016 quarter, while operating income declined from $816,376.
Outlook, Financing, Risks, and Unusual Items
- Capital program: Fiscal 2018 capital expenditures were projected at more than $20 million, including approximately $3 million for customer growth and system reliability. The company expects increased borrowing to fund these expenditures.
- SAVE Plan: The SCC approved 2018 SAVE rates designed to provide approximately $5.0 million of revenue, about $1.0 million above the estimated 2017 SAVE Plan year. The company did not expect to file a formal non-gas rate increase at that time.
- Mountain Valley Pipeline: FERC issued the project certificate on October 13, 2017. Subject to remaining permits and a construction notice to proceed, the targeted in-service date was late 2018. Total project cost was estimated at $3.5 billion, with the company’s expected 1% investment approximately $35 million. Remaining projected MVP funding obligations totaled approximately $30.3 million.
- Debt and liquidity: The company had $17.8 million outstanding under its revolving line of credit at September 30, 2017, with $21 million of borrowing capacity then available. The facility expires March 31, 2019 and includes financial covenants. On October 2, 2017, the company issued $8 million of 10-year notes at 3.58% to refinance part of the line-of-credit balance.
- Natural gas supply: The asset management agreement with Sequent Energy Management was scheduled to expire in March 2018, and the company was soliciting replacement proposals. All natural gas transported to the system is supplied through two directly connected interstate pipelines.
- Key risks: Material risks include pipeline or LNG facility disruptions, severe weather, natural gas price volatility, regulatory or rate decisions, cyberattacks, environmental requirements, access to capital, debt covenant compliance, pension funding, and delays or cost overruns in the Mountain Valley Pipeline project.
- Contingencies: The company reported no known material pending legal proceedings. Potential environmental remediation obligations remain associated with former manufactured gas plant sites, although no related liability was recognized.
- Tax and accounting: Bonus depreciation was scheduled to phase down from 50% to 40% in 2018 and 30% in 2019, potentially reversing deferred tax benefits and increasing future cash tax payments. Management did not expect the then-pending revenue recognition standard to materially affect financial position, results, or cash flows, but expected additional disclosures.
Investor Verification Items
- Verify the sustainability of margin growth from SAVE Plan and weather normalization mechanisms, particularly as infrastructure investment and regulatory treatment evolve.
- Assess funding requirements and construction, permitting, cost, and return risks for the Mountain Valley Pipeline investment.
- Review debt maturities, line-of-credit renewal prospects, covenant compliance, variable-rate exposure, and the effect of planned capital spending on leverage.
- Monitor operating cash flow, which declined despite higher net income, and the scheduled reduction in bonus depreciation benefits.
- Evaluate the effect of warmer or colder winters, natural gas prices, customer conservation, and competition from alternative energy sources on volumes and margins.
- Review pension and postretirement assumptions, required contributions, and sensitivity to interest rates, healthcare costs, and investment returns.
- Confirm the October 2017 refinancing and subsequent MVP permitting and construction developments, which occurred after the fiscal year-end balance sheet date.