Business Context and Reporting Period
RGC Resources, Inc. is an energy services company primarily engaged in the regulated sale and distribution of natural gas through Roanoke Gas Company to approximately 63,000 customers in Virginia. It also invests in the Mountain Valley Pipeline (MVP) and provides limited unregulated services. This Form 10-Q covers the quarter and six months ended March 31, 2021, the second quarter of fiscal 2021, with comparisons to the corresponding 2020 periods.
The business is highly seasonal, with stronger earnings and cash generation generally occurring during the winter heating season. The filing states that quarterly results are not indicative of the full fiscal year.
Financial Performance and Key Metrics
| Metric | Three months ended March 31, 2021 | Three months ended March 31, 2020 | Six months ended March 31, 2021 | Six months ended March 31, 2020 |
|---|---|---|---|---|
| Total operating revenues | $28.3 million | $22.4 million | $47.8 million | $42.2 million |
| Operating income | $7.1 million | $7.0 million | $12.7 million | $12.1 million |
| Net income | $4.8 million | $5.7 million | $9.5 million | $9.7 million |
| Diluted EPS | $0.58 | $0.70 | $1.16 | $1.19 |
| Dividends declared per share | $0.185 | $0.175 | $0.370 | $0.350 |
- Gross utility margin: $13.8 million for the quarter, up 1%, and $25.6 million for the six-month period, up 2%. Gross utility margin is a non-GAAP measure defined as gas utility revenue less utility gas costs.
- Margins: Quarterly operating margin was approximately 25.1%, compared with 31.2% in the prior-year quarter. Gross utility margin as a percentage of gas utility revenue was approximately 48.8%, compared with 61.1%, primarily reflecting higher pass-through gas costs. Six-month operating margin was approximately 26.5%, compared with 28.6%.
- Operating cash flow: $9.6 million for the six months, down from $11.2 million. The decline primarily reflected higher accounts receivable, customer arrearages, and regulatory working-capital changes.
- Investing cash flow: $11.7 million used in investing activities, including $9.0 million of utility capital expenditures and $2.7 million invested in unconsolidated affiliates.
- Financing cash flow: $2.5 million provided by financing activities, including $3.8 million of unsecured note proceeds, net line-of-credit borrowings of approximately $0.1 million, $1.5 million of stock issuance proceeds, and $2.9 million of dividends paid.
- Cash and liquidity: Cash increased to $0.7 million from $0.3 million at September 30, 2020. Roanoke Gas renewed its $40 million unsecured line of credit through March 31, 2023; available borrowing limits vary from $14 million to $40 million based on seasonal requirements.
- Debt: Total debt principal was approximately $130.0 million, consisting of $118.8 million of notes payable and $9.3 million drawn under the line of credit, before debt issuance costs. A $7.0 million term note is classified as a current maturity and is due November 1, 2021. The company was in compliance with all debt covenants.
- Capital structure: Management reported a long-term capitalization ratio of 43% equity and 57% debt at March 31, 2021. Stockholders’ equity was $97.6 million, compared with $88.9 million at September 30, 2020.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased 26% and six-month revenue increased 13%, driven by higher gas prices, pipeline and storage fees, increased weather-sensitive deliveries, customer growth, and higher SAVE Plan revenue.
- Heating degree days increased 20% for the quarter and 5% for the six-month period. Total delivered volumes increased 12% for the quarter and 3% for the six-month period.
- Transportation and interruptible volumes declined 12% for the quarter and 9% for the six-month period, primarily because one industrial customer switched from natural gas to an alternative fuel.
- Net income declined 16% for the quarter and 2% for the six-month period. The principal cause was the substantial reduction in MVP-related AFUDC earnings after MVP construction activity was delayed and AFUDC accruals were suspended effective January 1, 2021.
- Quarterly equity earnings from unconsolidated affiliates declined to a loss of $3,797 from earnings of $1.2 million. Six-month equity earnings declined 41% to $1.4 million.
- Operating and maintenance expense decreased $0.2 million for the quarter and $0.6 million for the six-month period, partly due to lower compensation and bad debt expense and the absence of prior-year ESAC regulatory-asset write-downs and amortization.
- Interest expense declined despite higher average debt because variable borrowing rates were lower. The effective tax rate increased to 25.2% from 23.9% for the quarter and to 24.8% from 23.8% for the six-month period.
- Quarterly WNA revenue declined $1.4 million because weather was less abnormal than in the prior year, while SAVE Plan revenue increased $0.3 million. Six-month WNA revenue declined $0.6 million and SAVE revenue increased $0.6 million.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- MVP: The project was approximately 92% complete but faced legal, permitting, and regulatory challenges. The project targeted full in-service in summer 2022 at an estimated total cost of approximately $6.2 billion, excluding AFUDC. Required Army Corps, state water-quality, FERC, federal land, and other approvals remain important contingencies.
- AFUDC accruals for MVP and Roanoke Gas’s related gate stations were suspended until construction activity resumes, reducing expected affiliate earnings during the suspension.
- Midstream’s MVP and Southgate funding requirements may exceed available financing. Midstream had approximately $41 million of remaining borrowing capacity, with $29.3 million utilized at March 31, 2021, and management expected additional financing may be required.
- Southgate’s North Carolina permit application was denied again on April 29, 2021, following remand by the Fourth Circuit. The project targeted construction in 2022 and in-service during spring 2023, subject to further approvals.
- COVID-19: Virginia’s residential service-disconnection moratorium was expected to continue at least into summer 2021. Delinquent balances and potential bad-debt expense remained uncertain. The company received $403,000 of CARES Act funds and applied $209,000 to eligible customer accounts.
- The company continued deferring certain COVID-19-related costs for potential future regulatory recovery, although formal SCC recovery guidance had not been provided.
- A February 2021 polar vortex increased the average delivered gas commodity price by nearly 200% month over month and required a PGA rate increase. The company stated that gas prices returned to normal levels in March and the higher PGA factor was approved through April 2021.
- Capital expenditures were $9.0 million for the first six months, and fiscal 2021 capital expenditures were expected to remain consistent with the prior year.
- The company identified no material legal proceedings, no material changes to previously disclosed risk factors, and no material subsequent events not otherwise disclosed. Disclosure controls were determined to be effective.
- LIBOR-based debt and hedging arrangements remain subject to reference-rate reform. Management had not completed its evaluation of the applicable accounting guidance and stated that the transition could materially affect financial position, results, or cash flows.
Most Important Facts for Investors to Verify
- Whether MVP receives all required permits and approvals and achieves the targeted summer 2022 in-service date and estimated cost.
- The potential size and timing of additional financing required for MVP and the effect on RGC Resources’ leverage and capital contributions.
- The duration of the Virginia service moratorium, customer arrearage trends, CARES Act fund utilization, and eventual bad-debt expense.
- The sustainability of earnings after the suspension of MVP and gate-station AFUDC accruals.
- Whether PGA, WNA, SAVE, and other regulatory mechanisms recover gas costs and infrastructure investments as expected.
- The November 2021 $7.0 million debt maturity, subsequent refinancing or repayment, and available line-of-credit capacity.
- The effect of natural gas prices, weather, customer volumes, and the loss of the industrial customer on future utility margins.
- Progress toward resolution of Southgate’s permitting issues and the implications of the April 29, 2021 North Carolina denial.