RGC Resources, Inc. Form 10-Q Summary
Business Context and Reporting Period
RGC Resources is primarily a regulated natural gas distribution company serving approximately 62,200 customers in and around Roanoke, Virginia through Roanoke Gas. It also invests in the Mountain Valley Pipeline (MVP) and Southgate projects and provides limited unregulated services. The filing covers the three and six months ended March 31, 2020, the company’s fiscal second quarter. Results are highly seasonal, with stronger earnings generally occurring during the winter heating season.
Key Financial Metrics
| Metric | Three Months Ended March 31 | Six Months Ended March 31 |
|---|---|---|
| Total operating revenue | $22.4 million, down 11% | $42.2 million, down 9% |
| Operating income | $7.0 million, up 13% | $12.1 million, up 28% |
| Net income | $5.7 million, up 22% | $9.7 million, up 36% |
| Diluted EPS | $0.70, versus $0.58 | $1.19, versus $0.88 |
| Gross utility margin | $13.6 million, up 11% | $25.1 million, up 17% |
| Net cash from operating activities | Not provided for the quarter | $11.2 million, versus $10.9 million |
Operating margin was approximately 31.2% for the quarter and 28.6% for the six-month period, compared with approximately 24.6% and 20.4%, respectively, in the prior-year periods. Net margin was approximately 25.3% for the quarter and 23.0% for the six-month period, compared with approximately 18.5% and 15.3%, respectively.
At March 31, 2020, cash and cash equivalents were $3.8 million, compared with $1.6 million at September 30, 2019. Total assets were $270.6 million and stockholders’ equity was $90.3 million. Long-term debt, net of issuance costs, was $112.2 million, compared with $103.4 million at September 30, 2019; the company had no line-of-credit balance at quarter-end. Long-term capitalization was 45% equity and 55% debt.
Capital expenditures for utility property were $10.4 million during the first six months, while cash investments in unconsolidated affiliates were $5.9 million. Net cash used in investing activities was $16.4 million, financed partly by $7.4 million of net financing cash flow. The company paid $2.8 million of dividends during the period and declared dividends of $0.175 per share per quarter.
Material Changes Versus the Prior Comparable Period
- Revenue declined because delivered gas volumes fell 12% in the quarter and 7% for the six-month period, heating degree days declined 19% and 14%, respectively, and commodity prices were lower.
- Gross utility margin increased despite lower revenue, primarily due to the $7.25 million annualized non-gas rate increase approved by the Virginia State Corporation Commission, revised rate allocation, higher weather normalization revenue and higher volumetric margin.
- Weather normalization revenue was $1.7 million for the quarter and $1.8 million for the six-month period, compared with minimal or negative amounts in the prior-year periods because 2020 weather was substantially warmer than normal.
- Equity earnings from the MVP investment increased 70% for the quarter and 81% for the six-month period, driven by higher MVP construction activity and related AFUDC.
- Operations and maintenance expense increased 11% in both the quarter and six-month period, reflecting higher compensation, professional services, regulatory-asset amortization, insurance and bad-debt expense.
- Interest expense increased 16% for the quarter and 24% for the six-month period due to higher average debt supporting MVP investment and utility capital spending.
- The company completed approximately $3.8 million of customer refunds in March 2020 relating to interim rates collected before the final rate order.
Guidance, Outlook, Risks and Unusual Items
Management expects fiscal 2020 capital expenditures to be approximately $22 million, near the prior year’s level. Management stated that earnings for the remainder of the fiscal year are expected to be below the comparable prior-year period because of lower commercial and industrial gas demand, higher bad-debt expense and additional costs associated with operating during the COVID-19 pandemic.
COVID-19 had limited impact on the quarter ended March 31, 2020, but management expects greater effects in subsequent periods. The Virginia SCC suspended customer service disconnections for nonpayment and prohibited late fees through June 14, 2020. The company therefore expects increased customer delinquencies and bad debts; the ultimate impact is not currently determinable. The SCC subsequently authorized utilities to defer certain prudently incurred pandemic-related costs, and management was evaluating applicability to the company.
The company accrued $2.4 million of weather normalization revenue for the weather year ended March 31, 2020, including $1.8 million attributable to fiscal 2020. The SCC permitted the company to delay billing customers for the weather normalization amounts because of COVID-19-related financial hardship.
The MVP project was approximately 90% complete but remained delayed by Fourth Circuit and FERC actions affecting permits. The managing partner estimated an in-service date in late calendar 2020, subject to permit resolution and construction restrictions. Estimated total project cost increased to $5.3 billion to $5.5 billion, and RGC’s estimated total cash contribution was approximately $55 million to $57 million. Further delays could increase costs, extend the completion date and reduce future returns. Current MVP earnings primarily reflect AFUDC; those earnings will cease when the pipeline enters service and will be replaced by operating capacity-charge earnings.
The company renewed Roanoke Gas’s unsecured line of credit with a maximum borrowing limit of $28 million through March 31, 2022, and Midstream increased its MVP-related borrowing capacity to $41 million through December 2022. The company stated that it had sufficient financing resources to meet expected requirements over the next year and was in compliance with all debt covenants at March 31, 2020.
Other notable items include a $317,000 write-down of ESAC regulatory assets required by the final rate order and $217,000 of AFUDC related to two MVP interconnect stations. The company adopted new lease and hedge-accounting standards without a material effect on the financial statements.
Important Facts for Investors to Verify
- Whether COVID-19 causes commercial and industrial volumes, customer collections and bad-debt expense to deteriorate beyond management’s current estimates.
- The timing and final cost of MVP and Southgate, including RGC’s remaining capital commitments and the transition from AFUDC earnings to operating earnings.
- Whether the $7.25 million rate increase and weather normalization mechanisms produce sustainable margins after the winter heating season.
- The timing of customer billing for the $2.4 million weather normalization balance and any related regulatory treatment.
- The company’s ability to fund approximately $22 million of utility capital expenditures and remaining pipeline investments while maintaining dividends and debt covenant compliance.
- Exposure to variable interest rates, LIBOR-related contract changes and the company’s $2.8 million of fixed-price natural gas purchase commitments over the next 12 months.