Business Context and Reporting Period
RGC Resources, Inc. is an energy services company primarily engaged in the regulated sale and distribution of natural gas through Roanoke Gas Company, serving approximately 60,100 customers in and around Roanoke, Virginia. The filing covers the three months ended December 31, 2015, the first quarter of fiscal 2016, with comparisons to the three months ended December 31, 2014. Results are highly seasonal and materially affected by winter weather.
Key Financial Metrics
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Total operating revenues | $16.0 million | $21.3 million | Down 25% |
| Gross margin | $8.7 million | $8.6 million | Up 1% |
| Operating income | $3.5 million | $3.5 million | Essentially unchanged |
| Net income | $1.9 million | $1.9 million | Down $1,586 |
| Diluted EPS | $0.40 | $0.41 | Down $0.01 |
| Dividends declared per share | $0.2025 | $0.1925 | Up $0.0100 |
| Cash flow from operations | $(1.3) million | $(1.4) million | Improved $103,867 |
| Capital and investment spending | $5.3 million | $4.4 million | Up $922,283 |
Gross margin was approximately 54.6% of revenue versus 40.6% in the prior-year quarter, while operating margin was approximately 21.8% versus 16.5%. The improved margins primarily reflect lower gas commodity costs and stable margin recovery despite lower volumes.
At December 31, 2015, cash and cash equivalents were $887,442. Current assets were $21.1 million and current liabilities were $27.6 million. Borrowings under the line of credit were $15.0 million, compared with $9.3 million at September 30, 2015. Long-term debt was $32.1 million, net of $257,915 of issuance costs, compared with $30.5 million at fiscal year-end. Total assets were $154.9 million and stockholders’ equity was $54.1 million.
Cash used in operating activities was $1.3 million, and cash used in investing activities was $5.3 million, including $3.9 million of utility and nonutility capital additions and $1.4 million invested in Mountain Valley Pipeline, LLC. Financing activities provided $6.5 million, primarily from line-of-credit borrowings, new term debt, and stock issuance, partly offset by dividends.
Material Changes Versus the Prior Comparable Period
- Revenue declined $5.2 million, or 25%, primarily because delivered natural gas volumes fell 25%, heating degree days declined 30%, and the average commodity price of gas declined approximately 20% per unit.
- Residential and commercial deliveries decreased 28%, while transportation and interruptible deliveries decreased 14%, partly because of reduced production at major industrial customers and the closure of another customer’s operations.
- Gross margin increased $115,973. Higher SAVE Plan revenue of approximately $223,000 and a $1.1 million weather normalization adjustment more than offset lower volumetric margin and an $81,000 decline in inventory carrying-cost revenue.
- Operating expenses increased modestly. Depreciation and amortization rose $107,215, or 8%, reflecting higher utility plant investment; interest expense increased $11,289, or 3%.
- The Company acquired a 1% interest in Mountain Valley Pipeline, LLC, recording a $1.4 million equity-method investment and $21,537 of equity earnings during the quarter.
- Operating cash flow remained negative due primarily to seasonal increases in receivables and working-capital requirements, although the use of cash improved versus the prior year.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- Management cautions that first-quarter results are not indicative of full-year results because the business is seasonal and winter weather generally produces greater earnings.
- Weather was 29% warmer than normal during the quarter. The Weather Normalization Adjustment generated approximately $1.1 million of additional margin; the prior-year period included a $109,000 refund accrual.
- The SAVE Plan and Rider generated approximately $461,000 of revenue, compared with $238,000 in the prior-year quarter. Management expects elevated infrastructure investment and related SAVE recovery to continue.
- The Company expects capital expenditures to remain elevated as it completes replacement of remaining bare steel and cast iron pipe, evaluates station replacements, and shifts toward replacement of older plastic pipe.
- Mountain Valley Pipeline is subject to Federal Energy Regulatory Commission approval, expected in late 2016, with service targeted for late 2018. Total project cost is estimated at approximately $3.5 billion, and RGC expects to contribute approximately $35 million over three years. RGC’s parent guarantees Midstream’s related debt.
- The Company’s unsecured line of credit expires March 31, 2016. Management expects to extend or replace it, but states that there is no guarantee of comparable terms.
- RGC Midstream may borrow up to $25 million under a five-year variable-rate facility at 30-day LIBOR plus 1.60%. The facility had $1.6 million outstanding at quarter-end and is subject to leverage and priority-debt covenants.
- A hypothetical 100-basis-point increase in applicable variable interest rates would have increased quarterly interest expense by approximately $36,000. The Company had no outstanding natural gas derivative instruments at quarter-end.
- The Company renewed its Roanoke, Salem, and Vinton franchise agreements through December 31, 2035. No legal proceedings, defaults, or changes to reported risk factors were disclosed.
- Management concluded that disclosure controls and procedures were effective as of December 31, 2015, with no material changes to internal control over financial reporting.
Important Facts for Investors to Verify
- Confirm extension or replacement of the $15.0 million seasonal line of credit before its March 31, 2016 expiration.
- Monitor FERC approval, construction timing, funding requirements, and potential returns for the Mountain Valley Pipeline investment.
- Assess the sustainability of earnings as weather normalization benefits, SAVE Plan revenue, and seasonal winter demand change.
- Review continued industrial customer weakness, including reduced production and customer closures affecting transportation volumes.
- Track elevated infrastructure spending, future capital funding, leverage, and compliance with Midstream’s debt covenants.
- Evaluate pension and postretirement obligations; the Company expected to contribute at least $500,000 to its pension plan and an additional $250,000 to its postretirement plan before fiscal year-end.