RGC Resources, Inc. — Form 10-Q Summary
Business Context and Reporting Period
RGC Resources is an energy services company primarily engaged in regulated natural gas distribution through Roanoke Gas Company, serving approximately 60,700 customers in and around Roanoke, Virginia. The filing covers the three months ended December 31, 2016, the first quarter of fiscal 2017, with comparative results for the three months ended December 31, 2015. The business is highly seasonal, with winter weather generally producing higher earnings and working-capital requirements.
Financial Results and Key Metrics
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Total operating revenue | $18.789 million | $16.010 million | 17% |
| Gross margin | $9.391 million | $8.738 million | 7% |
| Operating income | $3.982 million | $3.498 million | 14% |
| Net income | $2.232 million | $1.923 million | 16% |
| Diluted EPS | $0.46 | $0.40 | 15% |
| Dividends declared per share | $0.2175 | $0.2025 | 7% |
| Operating cash flow | $(2.113) million | $(1.311) million | Greater use of cash |
| Capital expenditures and other investing | $(4.923) million | $(5.297) million | Lower use of cash |
| Cash flow from financing | $6.569 million | $6.511 million | Stable |
Approximate margins were 50.0% gross, 21.2% operating and 11.9% net in the current quarter, compared with 54.6%, 21.8% and 12.0%, respectively, in the prior-year quarter. The lower gross margin percentage primarily reflects the pass-through nature of natural gas costs and higher commodity-related revenue.
- Heating degree days increased 19%, and total delivered gas volumes increased 17% to 2.634 million decatherms. Residential and commercial volumes increased 26%.
- Gas utility margin increased $659,000, led by higher SAVE Plan revenue, customer growth and increased usage. SAVE Plan revenue rose to approximately $881,000 from $461,000.
- Operations and maintenance expense decreased 1%, while depreciation and amortization increased 14% to $1.576 million due to higher utility plant investment.
- Equity earnings from the Mountain Valley Pipeline investment increased to $85,000 from $22,000.
- Interest expense increased 12% to $459,000, reflecting higher average debt outstanding.
Balance Sheet, Debt and Liquidity
| Balance-sheet item | December 31, 2016 | September 30, 2016 |
|---|---|---|
| Cash and cash equivalents | $176,000 | $643,000 |
| Total assets | $175.962 million | $165.553 million |
| Line-of-credit borrowings | $14.325 million | $14.557 million |
| Long-term debt, net | $41.135 million | $33.636 million |
| Total stockholders’ equity | $57.281 million | $55.667 million |
Total debt, including the line of credit, was approximately $55.7 million at December 31, 2016. The company issued a $7.0 million, five-year variable-rate term note in November 2016 and used the proceeds to convert a portion of line-of-credit borrowings into longer-term financing. The line of credit carries variable interest based on 30-day LIBOR plus 100 basis points, has borrowing limits ranging from $10 million to $24 million, and expires March 31, 2017. Management expects to extend or replace it, but states that no assurance exists that comparable terms will be available.
At quarter-end, consolidated capitalization was 58% equity and 42% debt excluding the line of credit, and 51% equity and 49% debt including the line of credit. A hypothetical 100-basis-point increase in applicable variable interest rates would have increased quarterly interest expense by approximately $55,000.
Material Changes, Outlook and Management Commentary
- Revenue growth was driven by colder weather, higher gas deliveries, customer growth, higher natural gas commodity prices and increased SAVE Plan recovery.
- The company’s 2017 SAVE revenue requirement is approximately $4.0 million, nearly $1.0 million above the estimated 2016 level. The SAVE Plan was extended through 2021 and includes additional infrastructure replacement projects.
- Fiscal 2017 capital expenditures are expected to exceed $20 million, including pipeline renewal, replacement of approximately 45 miles of pre-1973 plastic pipe and an automated meter-reading project expected to be completed by fiscal year-end.
- The company invested $486,000 in Mountain Valley Pipeline, LLC during the quarter. Its 1% investment is expected to require approximately $35 million in total contributions if the project proceeds. FERC approval was expected in June 2017, with a targeted in-service date of late calendar 2018, subject to regulatory approval and construction execution.
- Operating cash flow was negative because of seasonal increases in accounts receivable and ongoing working-capital needs. Management expects operating cash flows and borrowings to fund most near-term capital requirements.
- Management cautions that first-quarter results are not indicative of the full fiscal year because of weather sensitivity and seasonality. No changes were reported to risk factors, and management stated that disclosure controls were effective.
Risks, Contingencies and Unusual Items
- Reliance on two primary pipelines creates supply-interruption risk, particularly during the winter heating season.
- Weather, natural gas prices, customer collections, storage levels and regulatory rate mechanisms can materially affect earnings and cash flow.
- The Mountain Valley Pipeline investment remains subject to FERC approval, environmental review, construction execution and additional capital calls.
- Debt agreements contain covenants limiting consolidated long-term indebtedness to 65% of consolidated capitalization and priority indebtedness to 15% of consolidated assets.
- The company expects $1.45 million of additional fiscal-year contributions to its pension and postretirement medical plans after $300,000 contributed year-to-date.
- On January 17, 2017, the board approved a three-for-two stock split, payable around March 1, 2017. The split was not reflected in the quarter-end financial statements.
- No legal proceedings, defaults or material changes to risk factors were reported.
Investor Verification Checklist
- Verify the extension or replacement of the $24 million maximum line-of-credit facility before its March 31, 2017 expiration.
- Monitor actual weather, heating degree days and subsequent-quarter volumes relative to the unusually favorable first-quarter conditions.
- Reconcile fiscal 2017 capital spending with the stated budget exceeding $20 million and assess resulting debt and liquidity needs.
- Track FERC action, construction timing and required capital contributions for the Mountain Valley Pipeline.
- Confirm implementation and share-count effects of the three-for-two stock split.
- Evaluate the effect of variable interest rates on the company’s line of credit and other variable-rate debt.