RGC Resources, Inc. — Form 10-Q Summary
Business context and reporting period
RGC Resources is primarily a regulated natural-gas distribution company serving approximately 61,700 customers in and around Roanoke, Virginia. It also provides limited unregulated services and owns a 1% interest in Mountain Valley Pipeline, LLC through RGC Midstream. The filing covers the three and six months ended March 31, 2019, RGC’s fiscal second quarter and first half of fiscal 2019. Results are seasonal and generally stronger during winter months.
Key financial metrics
| Metric | Three months ended March 31 | Six months ended March 31 |
|---|---|---|
| Total operating revenue | $25.3 million, up 1% | $46.5 million, up 6% |
| Operating income | $6.2 million, up 18% | $9.5 million, up 6% |
| Net income | $4.7 million, up 35% | $7.1 million, up 29% |
| Diluted EPS | $0.58, versus $0.47 | $0.88, versus $0.75 |
| Operating margin | Approximately 24.6% | Approximately 20.4% |
| Net margin | Approximately 18.5% | Approximately 15.3% |
| Operating cash flow | Not separately provided | $10.9 million, versus $10.6 million |
| Capital and investment spending | Not separately provided | $24.3 million of investing cash outflows, including $11.0 million of utility and nonutility property additions and $13.3 million invested in affiliates |
At March 31, 2019, cash and cash equivalents were $2.0 million, compared with $0.2 million at September 30, 2018. Total assets were $238.0 million, and stockholders’ equity was $85.0 million. Long-term debt, net of issuance costs, was $86.9 million, compared with $70.3 million at September 30, 2018; the company had no line-of-credit balance at quarter-end. Management reported a capitalization mix of 49.3% equity and 50.7% debt.
Dividends declared were $0.165 per share for the quarter and $0.330 per share for the six-month period, versus $0.155 and $0.310, respectively, in the prior-year periods.
Material changes versus the prior comparable periods
- Quarterly gas utility margin increased 13% to $12.3 million; six-month margin increased 8% to $21.4 million. Higher non-gas base rates and customer growth more than offset lower quarterly delivered volumes and lower gas costs.
- New non-gas base rates became effective January 1, 2019, subject to refund. The rate application requested an annual increase of approximately $10.5 million and incorporated prior SAVE Plan revenues, tax reform effects, infrastructure investment and higher operating costs.
- Equity earnings from the Mountain Valley Pipeline investment increased to $0.7 million for the quarter and $1.3 million for six months, versus $0.2 million and $0.3 million, respectively. The increase primarily reflected higher construction-related allowance for funds used during construction.
- Interest expense increased 41% for the quarter and 37% for six months, reflecting higher average debt and rising variable interest rates. The weighted-average effective debt rate increased to 3.97% for the quarter and 3.92% for six months.
- The effective tax rate declined to 23.8% for the quarter and 23.3% for six months, versus 28.9% and 31.5%, respectively, primarily due to the transition to the 21% federal corporate tax rate and amortization of regulated excess deferred taxes.
- Operating cash flow increased modestly, but investing outflows rose substantially because of increased MVP funding. Financing provided $15.1 million, including $24.0 million of note proceeds and net line-of-credit activity.
Guidance, outlook, risks and unusual items
- Management expects fiscal 2019 capital expenditures to be near the prior year’s $23.3 million level, although the filing does not provide earnings or revenue guidance.
- The Mountain Valley Pipeline managing partner stated that completion during 2019 was unlikely, while continuing to target an in-service date in the fourth quarter of 2019. The project faces weather-related delays, protests, legal challenges, permit issues and FERC stop-work restrictions. Estimated total project cost increased from $3.5 billion to $4.6 billion, increasing RGC Midstream’s estimated contribution to approximately $46 million.
- The SCC is auditing the rate case. New rates are subject to refund, and the final award may be lower or higher than management’s estimate. A staff report was expected by the end of June 2019, with a hearing scheduled for August and a final order expected later in 2019.
- Regulatory liabilities include approximately $11.2 million related to excess deferred income taxes, generally refundable over approximately 28 years, as well as estimated customer refunds for excess tax-related revenue and the new non-gas rates. These estimates remain subject to SCC review and adjustment.
- A new depreciation study was being prepared for filing in June 2019. Any resulting depreciation adjustment was expected to affect the quarter ending September 30, 2019; the potential impact was not known.
- The company is exposed to weather, natural-gas commodity prices, pipeline supply disruptions, variable interest rates, regulatory decisions and construction or financing risks associated with MVP. A hypothetical 100-basis-point increase in applicable variable rates would have increased six-month interest expense by approximately $0.2 million.
- The company adopted ASC 606 and ASU 2016-01 during the period without a material financial statement impact. Adoption of ASU 2017-07 changed the classification of certain retirement benefit costs but did not materially affect consolidated results.
- Management stated that disclosure controls were effective as of March 31, 2019, with no material changes in internal control over financial reporting. No material legal proceedings or changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Progress, final cost and financing requirements for the Mountain Valley Pipeline, including the effect of delays and permitting challenges.
- The SCC’s final decision on the $10.5 million rate request and the resulting customer refund liability.
- The treatment and remaining balance of tax reform-related regulatory liabilities and excess revenue refunds.
- Actual fiscal 2019 capital expenditures, MVP contributions and related debt levels versus management’s expectations.
- Weather normalization, delivered gas volumes, commodity prices and the sustainability of the winter-driven margin improvement.
- Results of the pending depreciation study and any impact on future depreciation expense and regulatory recovery.