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 to approximately 60,000 customers in and around Roanoke, Virginia. More than 98% of annual revenue is derived from natural gas sales and delivery. The filing covers the three and nine months ended June 30, 2016, compared with the corresponding 2015 periods. Results are highly seasonal and are materially affected by weather.
Financial Performance and Key Metrics
| Metric | Three Months Ended June 30 | Change | Nine Months Ended June 30 | Change |
|---|---|---|---|---|
| Total operating revenues | $11.3 million | Up 5% | $49.1 million | Down 16% |
| Gross margin | $6.3 million | Up 6% | $25.7 million | Up 4% |
| Operating income | $1.5 million | Up 52% | $10.4 million | Up 11% |
| Net income | $627,068 | Up 77% | $5.7 million | Up 12% |
| Diluted EPS | $0.13 | Up from $0.07 | $1.19 | Up from $1.07 |
Gross margin was approximately 55.9% of revenue for the quarter and 52.4% for the nine-month period, compared with approximately 55.3% and 42.4%, respectively, in the prior-year periods. Net margin was approximately 5.6% for the quarter and 11.5% for the nine months.
Operating cash flow was $15.5 million for the nine months, down from $20.2 million in 2015. Investing cash flow used $14.8 million, including $12.6 million of utility plant additions and $2.3 million invested in Mountain Valley Pipeline, LLC. Financing cash flow used $785,308. Cash and cash equivalents declined $80,401 to $904,833.
At June 30, 2016, current assets were $12.6 million and current liabilities were $23.0 million. The company had $8.1 million outstanding under its line of credit and $33.1 million of long-term debt principal, net of debt issuance costs of $32.8 million. Total assets were $155.1 million and stockholders’ equity was $56.5 million. Consolidated capitalization was 63% equity and 37% debt excluding the line of credit, and 58% equity and 42% debt including the line of credit.
Material Changes Versus the Prior Comparable Period
- Quarterly and year-to-date net income improved primarily because of higher SAVE Plan revenues, customer growth, increased capitalized overhead, and lower operations and maintenance expense.
- Nine-month revenue declined primarily because delivered volumes fell 11% and natural gas costs were lower. Heating degree days declined 18% year over year.
- Despite lower volumes, nine-month gross margin increased 4%, supported by higher SAVE Plan revenue and weather normalization benefits. SAVE Plan revenue increased to approximately $1.7 million from $890,000.
- Nine-month operating cash flow declined by $4.7 million, reflecting smaller gas-storage withdrawals, lower increases in gas-cost over-collections, and a larger increase in accounts receivable.
- Utility property, net, increased to $127.9 million from $118.6 million at September 30, 2015, reflecting continued infrastructure investment.
- The company began funding a 1% interest in Mountain Valley Pipeline, LLC. The equity-method investment was $3.4 million at June 30, 2016, and the company had an additional $1.1 million capital contribution payable.
- Long-term debt increased by $2.6 million due to borrowings under Midstream’s variable-rate term facility used to fund the pipeline investment.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- No specific earnings or revenue guidance is provided. Management cautions that nine-month results are not indicative of the full fiscal year because the business is seasonal and winter weather generally produces greater earnings.
- The company filed a modified SAVE Plan and Rider application with the Virginia State Corporation Commission. Management proposed rates expected to provide approximately $1.2 million of additional revenue above current SAVE rates and anticipates implementation beginning in January 2017, subject to regulatory approval.
- Mountain Valley Pipeline remains subject to Federal Energy Regulatory Commission approval. The final environmental impact statement was scheduled for March 10, 2017, with a potential project decision thereafter. Construction was anticipated to begin in mid-2017, with service targeted by the end of 2018. The company estimates total investment of approximately $35 million over three years.
- The company expects elevated capital expenditures as it completes bare-steel pipe replacement, begins replacing older plastic pipe, and implements automated meter reading. Operating cash flow and borrowings are expected to fund most of these projects.
- The unsecured line of credit permits availability ranging from $10 million to $24 million and expires March 31, 2017. Management expects to extend or replace it, but states that comparable terms are not guaranteed.
- Variable-rate debt creates interest-rate exposure. Management estimated that a 100-basis-point increase in applicable rates would increase current-period interest expense by approximately $89,000.
- The company relies on two primary pipelines for delivery of its natural gas supply; failure of one or both could materially affect operations. Commodity prices, weather, customer demand, regulatory decisions, project execution, and customer collections remain key risks.
- The company had no outstanding commodity derivatives at June 30, 2016. Natural gas purchase costs are generally recoverable through the regulatory purchased gas adjustment mechanism.
- The company contributed $250,000 to its pension plan and $375,000 to its postretirement medical plan during the nine months and expects to contribute at least an additional $250,000 and $125,000, respectively, before fiscal year-end.
- Management reported effective disclosure controls as of June 30, 2016. No legal proceedings, defaults, or changes to risk factors were reported.
Important Facts for Investors to Verify
- Whether the SCC approves the modified SAVE Plan rates and the timing and amount of resulting revenue.
- FERC’s decision and the financing, construction, cost, and in-service timetable for Mountain Valley Pipeline.
- The company’s ability to renew or replace the line of credit before its March 31, 2017 expiration.
- Whether warmer or colder weather, natural gas prices, and customer volumes materially change future margins and cash flow.
- The pace and funding requirements of the pipeline replacement, automated meter reading, and other capital programs.
- Future pension and postretirement contributions and the effect of actuarial losses on operating expenses.