RGC Resources, Inc. Fiscal 2018 Form 10-K Summary
Business Context and Reporting Period
RGC Resources is primarily a regulated natural gas distribution utility serving approximately 60,200 residential, commercial and industrial customers in Roanoke, Virginia, and surrounding localities. Roanoke Gas generated approximately 98% of consolidated revenue. RGC Midstream owns a 1% interest in Mountain Valley Pipeline, LLC; Diversified Energy has no active operations.
The filing reports the fiscal year ended September 30, 2018. Fourth-quarter fiscal 2018 results were also disclosed: revenue of $9.97 million, operating income of $0.74 million, net income of $0.68 million and diluted EPS of $0.09.
Financial Performance and Key Metrics
| Metric | Fiscal 2018 | Fiscal 2017 | Change |
|---|---|---|---|
| Operating revenue | $65.5 million | $62.3 million | 5% |
| Operating income | $11.6 million | $11.7 million | Down slightly |
| Net income | $7.3 million | $6.2 million | 17% |
| Diluted EPS | $0.95 | $0.86 | 10% |
| Operating cash flow | $13.5 million | $13.0 million | 4% |
| Capital expenditures | $23.3 million | $20.8 million | 12% |
| Investment in unconsolidated affiliate | $11.0 million | $2.8 million | Material increase |
| Total assets | $219.6 million | $183.1 million | 20% |
| Long-term debt, net | $70.3 million | $61.3 million | 15% |
| Stockholders’ equity | $79.6 million | $60.0 million | 33% |
Gross utility margin was $32.25 million, essentially unchanged from 2017. Revenue growth reflected colder weather, higher deliveries, customer growth and increased SAVE Plan revenues, but was offset by a $1.32 million reserve for customer refunds related to federal tax reform and a substantially lower weather normalization adjustment.
Operating margin was approximately 17.7%, compared with approximately 18.7% in fiscal 2017. Net margin increased to approximately 11.1% from 10.0%, primarily because the effective income tax rate declined to approximately 28.4% from 37.9% following the Tax Cuts and Jobs Act.
Total delivered gas volumes increased 16% to 9.93 million DTH, including a 22% increase in residential and commercial deliveries. Heating degree-days increased 22% to 3,954, reflecting materially colder weather than in fiscal 2017, although weather was nearly normal for the year.
Cash and cash equivalents were $0.25 million at year-end. Operating cash flow funded only part of $34.2 million in investing outflows, resulting in $20.8 million of financing cash inflows. The company paid $4.65 million in dividends and declared $0.62 per share for the year.
Material Changes Versus the Prior Comparable Period
- Revenue increased 5%, while operating income declined slightly because higher utility volumes and SAVE revenues were offset by the tax-related refund reserve and lower weather normalization revenue.
- Operations and maintenance expense decreased 6%, aided by lower compensation, contracted services and benefit costs.
- Interest expense increased 28% as average debt increased 20%, primarily to fund Mountain Valley Pipeline investment and capital expenditures.
- Equity earnings from Mountain Valley Pipeline increased to $0.94 million from $0.42 million, primarily from allowance for funds used during construction.
- The company issued 700,000 common shares for net proceeds of approximately $15.1 million, strengthening capitalization and funding utility infrastructure investment.
- Capital structure improved to 53.0% equity and 47.0% long-term debt at September 30, 2018, compared with 49.4% equity and 50.6% debt in 2017.
- The company entered into a new two-year utility revolving credit agreement expiring March 31, 2020. Year-end availability was $20.0 million against an outstanding balance of $7.36 million.
Guidance, Outlook, Risks and Unusual Items
- Fiscal 2019 capital expenditures were projected at more than $21 million, with spending focused on replacement of pre-1973 plastic pipe, system reinforcement, industrial-park extensions and interconnection with Mountain Valley Pipeline. Management expected increased borrowing to fund the program.
- Roanoke Gas filed a general rate case requesting $10.5 million of annual additional non-gas revenue. New rates became effective January 1, 2019, subject to refund pending a final SCC order.
- The 2019 SAVE rider was expected to provide approximately $0.36 million of revenue, while approximately $0.16 million of excess 2017 SAVE revenues was expected to be refunded to customers.
- Mountain Valley Pipeline’s estimated project cost increased to $4.6 billion from the initial estimate of approximately $3.5 billion, increasing RGC Midstream’s expected contribution to approximately $46 million. Remaining expected funding at year-end was approximately $28.5 million, including more than $22 million expected in fiscal 2019.
- Mountain Valley Pipeline’s targeted in-service date was delayed to the fourth quarter of calendar 2019 because of legal, regulatory and permitting challenges, including stop-work orders. Further delays, cost overruns, permit losses or a write-off of the investment could materially affect RGC Resources.
- The company also expected to invest approximately $1.8 million to $2.5 million in the proposed MVP Southgate project, subject to project development and approvals.
- Tax reform reduced the federal corporate tax rate to 21%. The company recorded an $11.4 million regulatory liability for excess deferred taxes expected to be refunded or collected through customer rates, plus a $1.32 million rate-refund liability for excess fiscal 2018 billings.
- Key risks include dependence on two interstate pipelines, severe weather, natural gas supply and price volatility, regulatory approval and rate recovery, infrastructure construction risk, cyberattacks, access to capital, debt covenant compliance, pension and post-retirement obligations, and competition from alternative energy sources.
- The company had no known material pending legal proceedings, no off-balance-sheet arrangements and received unqualified audit opinions on its financial statements and internal control over financial reporting.
Important Facts for Investors to Verify
- Confirm the final SCC outcome for the $10.5 million rate case and the treatment and timing of customer refunds.
- Track Mountain Valley Pipeline construction progress, final project cost, in-service timing, remaining capital calls and RGC Resources’ financing plan.
- Assess whether planned capital expenditures and MVP funding can be supported by operating cash flow, available credit and additional borrowing without weakening leverage or covenants.
- Review the sensitivity of earnings to winter weather, customer usage, gas costs and the company’s weather normalization and PGA mechanisms.
- Monitor debt maturities, variable-rate exposure and compliance with the 1.5-to-1 interest coverage and less-than-65% debt-to-capitalization covenants.
- Evaluate the sustainability of earnings growth after the fiscal 2018 tax-rate benefit and unusually favorable year-over-year weather comparison.