RGC Resources, Inc. Form 10-K Summary
Reporting period: Fiscal year ended September 30, 2019. The filing is an annual report, not a quarterly report; the fourth-quarter results are included in the full-year financial statements. RGC Resources primarily operates Roanoke Gas, a regulated natural gas distribution utility serving approximately 60,700 customers in Virginia. It also owns Midstream, which holds an investment in the Mountain Valley Pipeline (MVP), and an inactive Diversified Energy subsidiary.
Financial Performance and Position
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Operating revenue | $68.0 million | $65.5 million | Up 4% |
| Operating income | $11.6 million | $11.5 million | Up 1% |
| Net income | $8.7 million | $7.3 million | Up 19% |
| Basic EPS | $1.08 | $0.95 | Up 14% |
| Operating margin | 17.0% | 17.5% | Down approximately 50 bps |
| Net margin | 12.8% | 11.1% | Improved |
| Cash flow from operations | $14.7 million | $13.5 million | Up $1.2 million |
| Capital expenditures | $21.9 million | $23.3 million | Down 6% |
| Investment in MVP and Southgate | $21.0 million | $11.0 million | Up $9.9 million |
| Long-term debt, net | $103.4 million | $70.3 million | Up 47% |
| Stockholders’ equity | $83.1 million | $79.6 million | Up 4% |
| Cash and cash equivalents | $1.6 million | $0.2 million | Up $1.4 million |
- Utility revenue increased 5% to $67.3 million, primarily from higher non-gas base rates and slightly higher gas costs. Total delivered volume was essentially flat at 9.9 million DTH, while heating degree days declined 4%.
- Gross utility margin increased 8% to $34.9 million. The increase from higher base and volumetric rates, and a larger weather-normalization adjustment, exceeded the decline in SAVE Plan revenue.
- Operations and maintenance expense increased 13% to $14.1 million, reflecting higher compensation, regulatory-asset amortization, insurance, maintenance and bad-debt costs.
- Equity earnings from MVP increased to $3.0 million from $0.9 million, largely from higher allowance for funds used during construction. This earnings contribution is non-cash and will cease when MVP enters service.
- Interest expense increased 47% to $3.6 million as debt funded MVP investment and utility capital expenditures. The average consolidated borrowing rate increased from 3.80% to 3.92%.
- The effective tax rate declined to 23.4% from 28.4%, reflecting the federal corporate tax rate reduction under the Tax Cuts and Jobs Act.
- Cash flow from operations funded approximately 67% of utility capital expenditures; remaining investment and MVP funding were supported primarily by borrowings and equity issuance.
- Dividends declared increased to $0.66 per share from $0.62. The company paid $5.2 million in dividends during fiscal 2019.
Material Changes Versus the Prior Comparable Period
- The company implemented higher non-gas base rates effective January 1, 2019, subject to refund pending a final Virginia State Corporation Commission order. Management recorded a $3.8 million current regulatory liability for estimated rate refunds, including tax-related amounts.
- SAVE Plan revenue fell to $1.6 million from $4.5 million because prior SAVE investments were incorporated into the new base-rate application. The fiscal 2020 SAVE Rider was approved to generate approximately $1.1 million annually.
- The company invested $21.0 million in MVP and Southgate, compared with $11.0 million in the prior year. The MVP carrying value reached $47.1 million at year-end.
- Long-term debt increased by approximately $33.0 million. Midstream issued $24.0 million of unsecured notes, and Roanoke Gas issued $10.0 million of 12-year notes at 4.41%.
- Capitalization shifted to 44.5% equity and 55.5% long-term debt from 53.0% equity and 47.0% debt.
- Other comprehensive loss was $1.6 million, primarily from unfavorable changes in interest-rate swaps and defined-benefit plan actuarial amounts.
- The company adopted new revenue-recognition and retirement-benefit presentation standards. Management reported no significant effect on net income, financial position or cash flows from the revenue-recognition adoption.
Outlook, Risks and Unusual Items
- Management expects fiscal 2020 capital spending to remain at a level consistent with fiscal 2019 and 2018, with spending directed toward pipeline renewal, system reinforcement, new customer connections, MVP interconnection and LNG facility upgrades. Additional borrowing and potentially additional equity are expected to fund these requirements.
- The company expects to complete replacement of remaining pre-1973 first-generation plastic pipe by 2024.
- MVP’s targeted full in-service date was moved to late calendar 2020 after legal and regulatory delays. Estimated total project cost increased to $5.3 billion to $5.5 billion, with Midstream’s expected share increasing to $53 million to $55 million. Management estimated up to $15 million of fiscal 2020 MVP funding at year-end.
- In November 2019, the company approved an additional estimated $1.6 million MVP investment, increasing its expected ownership from 1.00% to approximately 1.03% when the pipeline enters service.
- The MVP project remains exposed to permit litigation, construction delays, cost overruns, potential contractual damages, loss of tax benefits and possible impairment or write-off of the investment.
- The final SCC rate-case order remained pending after fiscal year-end. The hearing examiner’s revised report was more favorable than management’s estimate, but the final refund could be higher or lower than the amount recorded.
- Key operating risks include dependence on two interstate pipelines, severe weather, pipeline or LNG incidents, cybersecurity events, competition from alternative energy sources, regulatory rate decisions, interest-rate increases and access to capital.
- At September 30, 2019, the company had $8.2 million outstanding under its line of credit and $22.0 million of available capacity. The facility expires March 31, 2021 and includes interest-coverage and debt-capitalization covenants.
- Contractual obligations included $103.7 million of recorded long-term debt and approximately $96.0 million of unrecorded contractual commitments, including pipeline and storage capacity, interest, MVP funding and franchise obligations.
- The company reported no material pending legal proceedings, no off-balance-sheet arrangements and effective disclosure and internal controls. The independent auditor issued unqualified opinions.
Most Important Facts for Investors to Verify
- Final SCC approval of the non-gas rate case and the ultimate customer refund relative to the recorded regulatory liability.
- MVP permit reinstatement, construction progress, final project cost, additional capital calls and the revised late-2020 in-service target.
- Availability and renewal of Midstream financing beyond 2020, including compliance with debt covenants and refinancing requirements.
- Whether projected capital spending, debt funding and dividends can be supported by recurring utility operating cash flow rather than MVP-related non-cash earnings.
- The sustainability of fiscal 2019 earnings growth after considering the lower federal tax rate, rate-case effects, weather-normalization revenue and MVP AFUDC earnings.
- Exposure to pipeline concentration, regulatory recovery, pension and postretirement obligations, cybersecurity, severe weather and natural gas supply disruptions.