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 60,000 customers in and around Roanoke, Virginia. The filing covers the three and nine months ended June 30, 2017, within the fiscal year ending September 30, 2017. Results are seasonal, with generally higher earnings during winter months.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2017 | Year-over-Year Change | Nine Months Ended June 30, 2017 | Year-over-Year Change |
|---|---|---|---|---|
| Operating revenues | $11.4 million | Up 1% | $52.1 million | Up 6% |
| Gross margin | $6.6 million | Up 5% | $26.9 million | Up 4% |
| Operating income | $1.3 million | Down 9% | $10.9 million | Up 5% |
| Net income | $615,562 | Down 2% | $6.1 million | Up 7% |
| Diluted EPS | $0.08 | Down from $0.09 | $0.84 | Up from $0.79 |
| Dividends declared per share | $0.1450 | Up from $0.1350 | $0.4350 | Up from $0.4050 |
For the nine-month period, gross margin was approximately 51.5% of revenue versus 52.4% in the prior-year period. Operating margin was approximately 20.9% versus 21.2%, while net margin increased to approximately 11.7% from 11.5%.
- Net cash provided by operating activities was $15.8 million, compared with $15.5 million in the prior-year period.
- Capital expenditures and other investing activity used $18.2 million, including $16.5 million for utility plant and nonutility property and $1.8 million for the Mountain Valley Pipeline investment.
- Cash and cash equivalents were $763,816 at June 30, 2017, compared with $643,252 at September 30, 2016.
- Total debt, net of issuance costs, was $53.1 million at June 30, 2017, compared with $33.6 million at September 30, 2016. Debt consisted principally of $42.8 million of notes payable and $10.5 million drawn under the line of credit.
- Consolidated long-term capitalization was 53% equity and 47% debt at June 30, 2017.
- Total assets increased to $178.5 million from $165.6 million, driven primarily by higher utility plant, construction work in progress and the Mountain Valley Pipeline investment.
Material Changes Versus the Prior Comparable Period
- Nine-month revenue increased $3.0 million, primarily from higher SAVE Plan revenues and higher natural gas commodity prices passed through to customers under the purchased gas adjustment mechanism.
- SAVE Plan revenue increased to $2.8 million from $1.7 million, reflecting continued infrastructure investment and related recovery.
- Warmer weather reduced heating degree days by 8% and total delivered volumes by 4% for the nine-month period. The weather normalization adjustment provided approximately $1.9 million of additional revenue and margin.
- Gross margin increased despite lower volumes. Nine-month volumetric margin declined, but this was more than offset by higher SAVE Plan revenue, weather normalization revenue and customer base charges.
- Interest expense rose 15% for the nine-month period as average debt outstanding increased 17% to fund capital investments and the Mountain Valley Pipeline investment.
- Utility plant, net, increased to $145.0 million from $132.1 million, while construction work in progress increased to $4.7 million from $2.7 million.
- The Company replaced its prior one-year revolving credit agreement with a two-year agreement expiring March 31, 2019. Amounts drawn under the new agreement are classified as long-term debt.
- Customer support services are being outsourced effective July 21, 2017, resulting in the reduction of 18 employees. Approximately $135,000 of severance-related expense was recorded.
- The Company completed a three-for-two stock split effective March 1, 2017. Prior share and per-share amounts were restated retrospectively.
Guidance, Outlook, Risks and Unusual Items
- The Company filed its 2018 SAVE Plan application with the Virginia State Corporation Commission. The proposed revenue requirement is approximately $5.0 million, nearly $1.0 million above the estimated 2017 SAVE Plan year. The Company expects a decision over the next several months and anticipates implementing approved rates in January 2018.
- The Company expects fiscal 2017 capital expenditures to exceed $20 million, supported primarily by operating cash flow and additional borrowings. Projects include pipeline renewal and an automated meter reading system targeted for completion by fiscal year-end.
- RGC has a 1% interest in Mountain Valley Pipeline, LLC. Its estimated total cash commitment is approximately $35 million, subject to project approval and construction requirements. FERC issued the project’s Final Environmental Impact Statement on June 23, 2017; final approval remained pending at the filing date. The project targets an in-service date by the end of calendar 2018.
- The Company agreed to issue $8.0 million of 10-year notes on October 2, 2017, at a fixed interest rate of 3.58%, with proceeds expected to refinance part of the variable-rate line of credit.
- A 100-basis-point increase in applicable interest rates would have increased current-year interest expense by approximately $158,500 based on variable-rate debt outstanding during the period.
- The Company is exposed to weather, commodity prices, interest rates, pipeline availability, regulatory decisions and access to financing. Failure or interruption of either of its two primary gas supply pipelines could materially affect service and results.
- The current asset management agreement expires in March 2018. Management expects to solicit bids and negotiate a replacement agreement before expiration.
- Management expects the future revenue-recognition standard to have no material effect on financial position, results or cash flows, although related disclosures could be significant. The Company expects the retirement-benefit presentation standard may materially affect the financial statements when adopted.
- No legal proceedings were reported, and the Company stated that there were no changes to its previously disclosed risk factors. Disclosure controls and procedures were assessed as effective as of June 30, 2017.
Important Facts for Investors to Verify
- Whether the SCC approves the 2018 SAVE Plan and the proposed approximately $5.0 million revenue requirement.
- FERC approval, construction timing, total funding requirements and potential returns for the Mountain Valley Pipeline investment.
- Availability and refinancing terms for the revolving credit facility and the planned $8.0 million note issuance.
- The effect of warmer weather, customer volumes and future natural gas prices on margins despite the Company’s regulatory recovery mechanisms.
- Progress and final cost of the automated meter reading and pipeline renewal programs.
- The outcome and cost savings of outsourcing customer support services, including the recorded severance charge.
- Future equity issuance requirements to fund the Mountain Valley Pipeline investment and broader capital program.