RGC Resources, Inc. — Form 10-Q Summary
Business Context and Reporting Period
RGC Resources is an energy services company primarily engaged in regulated natural-gas distribution through Roanoke Gas Company, serving approximately 61,600 customers in and around Roanoke, Virginia. It also provides limited non-utility services and owns a 1% interest in Mountain Valley Pipeline, LLC. This filing covers the three months ended December 31, 2018, the first quarter of fiscal 2019. Results are highly seasonal and affected by winter weather.
Key Financial Metrics
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Total operating revenue | $21.2 million | $18.8 million | +13% |
| Operating income | $3.3 million | $3.6 million | -10% |
| Net income | $2.4 million | $2.1 million | +18% |
| Diluted EPS | $0.30 | $0.28 | +$0.02 |
| Operating margin | 15.4% | 19.4% | Down |
| Net margin | 11.5% | 11.0% | Up |
| Gas utility margin | $9.1 million | $9.0 million | +2% |
| Operating cash flow | $(2.3) million | $(2.0) million | More cash used |
| Capital expenditures | $5.7 million | $4.3 million | Higher |
| Cash and equivalents at period-end | $10,809 | $334,278 | Down from September 30, 2018 |
Revenue growth reflected 5% higher delivered volumes, 4% higher heating degree days, higher natural-gas prices, customer growth and increased SAVE Plan revenue. Gas utility revenue increased 14%, while non-utility revenue declined 24%. Cost of gas increased 25%, limiting growth in utility margin. Interest expense increased 33% because of higher average debt and higher variable borrowing rates.
Income tax expense declined to $702,213 from $1.1 million, and the effective tax rate decreased to 22.4% from 35.5%, primarily because of the federal tax-rate reduction under the Tax Cuts and Jobs Act and related regulated-utility deferred-tax amortization.
Cash Flow, Debt and Liquidity
- Operating activities used $2.3 million, reflecting seasonal working-capital needs, higher accounts receivable and gas-cost under-recovery.
- Investing activities used $15.8 million, including $5.7 million for utility and non-utility property and $10.1 million of investment in unconsolidated affiliates, primarily Mountain Valley Pipeline.
- Financing activities provided $17.9 million, including $10.3 million of notes issued and $8.4 million of net line-of-credit borrowings, partly offset by $1.2 million of dividends paid.
- Debt, net of issuance costs, totaled $89.1 million at December 31, 2018, compared with $70.3 million at September 30, 2018. The company reported capitalization of 52.4% equity and 47.6% debt.
- Roanoke Gas had $15.8 million outstanding under its $25 million line of credit, with stated remaining availability ranging from $17 million to $25 million during the facility’s remaining term. Midstream had $28.1 million outstanding under credit facilities with current total borrowing availability of $38 million.
- A $10 million, 12-year fixed-rate note issuance at 4.41% was arranged on January 2, 2019, with closing proposed for March 28, 2019. Proceeds are intended to refinance part of the line-of-credit balance.
Material Changes Versus the Prior Comparable Period
- Net income increased $374,700, driven by higher SAVE Plan revenue, customer growth, increased Mountain Valley Pipeline equity earnings and lower income taxes.
- Equity earnings from unconsolidated affiliates increased to $563,049 from $148,811, primarily due to increased Mountain Valley Pipeline construction activity and associated allowance-for-funds-used-during-construction income.
- Operating expenses increased 19%, exceeding revenue growth, due to higher gas costs, operations and maintenance expense, depreciation, compensation, facility maintenance and bad-debt expense.
- Delivered regulated gas volumes increased 5% to 3.1 million decatherms, and heating degree days increased to 1,560 from 1,497.
- The quarterly dividend increased to $0.165 per share from $0.155 per share.
- The company adopted ASC 606 and ASU 2016-01 with no material financial statement impact. Adoption of ASU 2017-07 changed the presentation of retirement-benefit costs, with no material effect on consolidated results.
Guidance, Outlook, Risks and Unusual Items
- Management expects fiscal 2019 capital expenditures to be near fiscal 2018’s $23.3 million level.
- Management cautions that first-quarter earnings are not indicative of full-year results because of seasonality and weather.
- Roanoke Gas placed new non-gas base rates into effect January 1, 2019, subject to refund pending Virginia State Corporation Commission review. The application requests an annual increase of $10.5 million and incorporates approximately $4.7 million of SAVE Plan revenue.
- The company recorded a $1.9 million estimated liability for excess customer revenues associated with the federal tax-rate reduction. Refunds began with January 2019 billings and are expected to occur over 12 months. The amount remains subject to SCC review and adjustment.
- The company also had approximately $11.3 million of regulatory liability related to excess deferred income taxes, expected to be returned to customers over approximately 28 years.
- Mountain Valley Pipeline’s estimated project cost increased to $4.6 billion, and RGC’s estimated total contribution increased to approximately $46 million. The project continues to face weather, legal, regulatory and permitting delays; the managing partner’s targeted in-service date was the end of calendar 2019, assuming timely resolution.
- Southgate, a planned 70-mile pipeline, has estimated total project costs of $350 million to $500 million, with RGC’s expected contribution of approximately $1.8 million to $2.5 million and a targeted in-service date at the end of calendar 2020.
- Interest-rate exposure remains material: a hypothetical 100-basis-point increase in applicable rates on variable-rate debt would have increased quarterly interest expense by approximately $93,000.
- The business depends on two primary interstate pipelines and an LNG facility. Failure or interruption affecting pipeline supply could materially impair service and results, particularly during winter demand.
- The filing reports no material changes to previously disclosed risk factors and no legal proceedings, defaults or material control deficiencies.
Important Facts for Investors to Verify
- Final SCC decisions on the $10.5 million rate application, tax-related customer refunds, deferred-tax amortization and recovery of regulatory assets.
- Mountain Valley Pipeline construction progress, final project cost, additional capital calls, financing requirements and actual in-service timing.
- Availability and covenant compliance under the line of credit and Midstream financing facilities, including the planned $10 million refinancing.
- Subsequent seasonal cash flows, gas-cost under- or over-recoveries, customer collections and liquidity after the first-quarter cash balance fell to $10,809.
- Actual weather, natural-gas prices and delivered volumes, which can materially affect quarterly revenue and margins.