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, serving approximately 60,500 customers in and around Roanoke, Virginia. The filing reports the unaudited quarter and nine months ended June 30, 2018, within the fiscal year ending September 30, 2018. Results are highly seasonal, with greater earnings generally occurring during winter months.
Financial Highlights
| Metric | Three Months Ended June 30, 2018 | Three Months Ended June 30, 2017 | Nine Months Ended June 30, 2018 | Nine Months Ended June 30, 2017 |
|---|---|---|---|---|
| Total operating revenues | $11.9 million | $11.4 million | $55.6 million | $52.1 million |
| Operating income | $1.9 million | $1.3 million | $10.8 million | $10.9 million |
| Net income | $1.1 million | $0.6 million | $6.6 million | $6.1 million |
| Diluted EPS | $0.14 | $0.08 | $0.87 | $0.84 |
| Dividends declared per share | $0.1550 | $0.1450 | $0.4650 | $0.4350 |
- Quarterly revenue increased 4%; nine-month revenue increased 7%.
- Quarterly operating margin was approximately 15.7%, compared with 11.6% in the prior-year quarter. Nine-month operating margin was approximately 19.5%, compared with 20.9%.
- Gas utility margin increased 3% to $6.7 million in the quarter but was essentially flat at $26.5 million for the nine-month period.
- Quarterly net income increased $471,793, or 77%. Nine-month net income increased $539,767, or 9%.
- Net cash provided by operating activities was $13.9 million, down from $15.8 million. Capital expenditures were $16.1 million, and cash investment in the Mountain Valley Pipeline was $5.3 million.
- Cash and cash equivalents totaled $1.2 million at June 30, 2018, compared with $69,640 at September 30, 2017.
- Long-term debt, net of issuance costs, was $57.1 million, compared with $61.3 million at September 30, 2017. The company had no outstanding balance on its Roanoke Gas line of credit at June 30, 2018.
- Stockholders’ equity increased to $79.4 million from $60.0 million, primarily reflecting the March 2018 issuance of 700,000 common shares and retained earnings.
Material Changes Versus the Prior Comparable Period
- Delivered regulated gas volumes increased 18% in both the quarter and nine-month period, supported by colder weather than the prior year. Nine-month heating degree days increased 23%.
- SAVE Plan revenues increased $274,373 in the quarter and $716,382 year to date as infrastructure investment expanded.
- Operations and maintenance expense declined 16% in the quarter and 4% year to date, reflecting lower benefit costs, reduced compensation expense, and the absence of prior-year severance costs.
- Depreciation and amortization increased 11% in both reported periods because of higher utility plant investment.
- Interest expense increased 24% in the quarter and 31% year to date due to higher average debt and increased variable interest rates.
- Equity earnings from the Mountain Valley Pipeline investment increased to $245,075 for the quarter and $585,399 year to date, primarily reflecting higher construction-related allowance for funds used during construction.
- The company issued 700,000 common shares in March 2018, generating $15.1 million of net proceeds, principally to fund Roanoke Gas infrastructure programs and strengthen capitalization.
Guidance, Outlook, Risks, and Unusual Items
- The company expects fiscal 2018 capital expenditures to exceed fiscal 2017 levels and expects to begin using the Roanoke Gas line of credit again in the fourth quarter to fund capital and working-capital needs.
- Management planned to file a rate application with the Virginia State Corporation Commission in September 2018, with revised rates expected in January 2019, subject to regulatory review and potential refund.
- The Tax Cuts and Jobs Act reduced the federal corporate tax rate. Roanoke Gas recorded an $11.7 million regulatory liability for excess deferred taxes refundable to customers and a $1.1 million liability for estimated excess customer billings during the first nine months.
- The timing and amount of customer refunds remain subject to State Corporation Commission approval and could reduce operating cash flow or increase borrowing needs.
- In June 2018, the State Corporation Commission approved an asset-management incentive mechanism. Customers receive the first $700,000 of utilization-fee benefits; thereafter, 25% is allocated to the company and 75% to customers. Company income recognition was expected to begin in July 2018.
- On August 3, 2018, after the balance-sheet date, FERC ordered an immediate halt to most Mountain Valley Pipeline construction pending further environmental review. The target in-service date moved from the fourth quarter of calendar 2018 to the first quarter of calendar 2019. Project cost estimates increased to $3.5 billion to $3.7 billion, with RGC’s expected 1% investment estimated at $35 million to $37 million.
- Key risks include regulatory and legal delays affecting the Mountain Valley Pipeline, construction cost escalation, weather variability, natural-gas prices, interest-rate exposure, reliance on two primary gas pipelines, and the seasonal nature of cash flows.
- The company’s disclosure controls and procedures were evaluated as effective as of June 30, 2018, and management reported no material changes in internal control over financial reporting.
Important Facts for Investors to Verify
- Resolution, timing, and final amount of the State Corporation Commission’s review of tax-related customer refunds and regulatory liabilities.
- Mountain Valley Pipeline construction status, permitting and litigation developments, revised project costs, funding requirements, and the effect of delays on RGC’s investment returns.
- Future utilization of the $25 million Roanoke Gas revolving facility and the amended $38 million Midstream borrowing capacity.
- Actual fiscal 2018 capital expenditures and resulting debt, liquidity, and dividend coverage.
- Impact of colder or warmer weather, gas commodity prices, and customer demand on future margins and operating cash flow.
- Implementation of the planned rate application and the effect of revised rates and SAVE Plan revenue integration beginning in 2019.